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Preference Defendant Establishes Ordinary Course Of Business Defense Despite Ruling To The Contrary On Summary Judgment

Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), Adv. No. 10-52667 (CSS), 2015 WL 4381571 (Bankr. D. Del. July 16, 2015)

After a trial on the merits, the Bankruptcy Court issued an Opinion and entered judgment for defendant Revchem Composites, Inc. (“Revchem”), finding that Revchem established that all of the transactions in question were made in the ordinary course of business, thereby protected from avoidance as a preference.  The ruling came after the Court’s previous Opinion whereby Judge Sontchi held, on summary judgment, that “the parties’ pre-preference relationship was insufficient to establish the existence of an ordinary course of business.”  Burtch v. Revchem Composites, Inc., 463 B.R. 302, 306 (Bankr. D. Del. 2012).  Moreover, the Court found, again at the summary judgment stage, that “[t]he activity between the parties in the 90 day preference period was inconsistent but generally showed a tightening of credit terms throughout the period and a modification of the parties’ pre-preference communications and method of delivering payments, i.e., the creditors were providing more and more pressure on the debtor to accelerate its payments.  This is exactly the type of opt-out behavior the preference law is intended to thwart.”  Id.

Why such a stark turnaround now on the merits?  The Court made clear that Revchem submitted a much more extensive record than it did on summary judgment, including a more in-depth review of Revchem’s relationship with Sierra Concrete Design, Inc. and its affiliates (the “Debtors”) during the historical period and the preference period, and providing the testimony of its CEO, Mr. Dennis.  Mr. Dennis testified that Revchem established a credit limit during the historical period that remained consistent through the preference period.  Revchem’s policy was not to take a hard line on customers who were either late on payments or over the credit limit.  He testified that Revchem never engaged in aggressive collection actions and only let the Debtors know when they were at or near the credit limit.  Most importantly, Mr. Dennis was able to explain why the Debtors were paying invoices at a faster rate during the preference period, a significant deviation of 27.9 days, and still acting within the ordinary course of business.  He testified, unrebutted by the chapter 7 trustee, that the Debtors were engaged in a construction project with tight timelines and needed product at a faster rate than normal.  Because the Debtors were at their credit limit and had to pay previous invoices before receiving new product, the Debtors were paying at a faster rate during the preference period.  Because historically, the Debtors paid old invoices to bring their account below the credit limit, the Court found that the accelerated payments during the preference period were made in the ordinary course of business and granted judgment for Revchem.