The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”) fundamentally changed the ordinary course of business defense to preference actions. Where before defendant creditors had to prove that the allegedly preferential transfer was made both (1) in the ordinary course of the debtor’s business (the “subjective test”) and (2) according to ordinary business terms for the relevant industry (the “objective test”), BAPCPA made these two tests disjunctive. Now, creditors need only prove the subjective ordinariness or the objective ordinariness of the transfer. In a recent decision, the bankruptcy court for the Southern District of New York further underscored the disjunctive nature of these tests and also established how to determine the appropriate range of days to pay when asserting an objective defense.
I. The Facts
The United Parcel Service of America Inc. (the “Defendant”) provided shipping and related services to Waterford Wedgwood USA, Inc. and Royal Doulton USA, Inc. (collectively, the “Debtors”). Several months after the Debtor’s parent company, Waterford Wedgwood PLC, was placed in receivership in Ireland and later sold to KPS Capital, the Debtors filed petitions for chapter 7 bankruptcy in the United States.
In both the pre-preference and preference periods, the Debtors consistently paid the Defendant’s invoices past the stated terms of 32 days. The debtor’s pre-preference period average was 56 days to pay, while the preference period average was 51 days to pay.
II. The Issues
- Whether a deviation from the parties’ pre-preference payment history precludes the Defendant from asserting an objective ordinary course of business defense.
The Trustee identified three distinct periods, beginning six months before the debtor’s filing, and argued that the average days to pay in the second period (72) was significantly higher than the average days to pay in the first and third periods (49 and 44, respectively). This fluctuation, said the Trustee, is evidence that the Debtors accelerated payments to the Defendant in light of the sale to KPS Capital, thereby constituting a preference.
- Whether the Defendant’s objective ordinary course analysis, which is based on a total range method, represents an appropriate range of days to pay.
For its objective ordinary course defense, the Defendant relies on Credit Risk Monitor data to “rank businesses in the shipping industry according to average DSO per year for both 2008 and 2009.”[i] Then, by eliminating the top 5% and bottom 5% of DSO’s for both years, the Defendant produced a normal industry pay range: 14 to 70 days in 2008 and 16 to 72 days in 2009. Rather than the Defendant’s 90% total range method, the Trustee suggested that a more appropriate range is one standard deviation for the industry mean (here, the mean for the shipping industry during the preference period was 42 days to pay). Using the Trustee’s method, the normal industry range would be 30 to 54 days to pay.
III. The Decision
- First Issue
The court rejected the Trustee’s argument that the deviation from the parties’ past practices precluded the Defendant from asserting an objective defense because the Trustee was conflating the objective and subjective prongs. Echoing the 2nd Circuit’s earlier holding in In re Roblin Industries, Inc., 78 F.3d 30 (2nd Cir. 1996), the court concluded that because “the focus of the objective test is the standard in the industry, the historical experience between the Debtor and UPS should be of little to no import under Subsection (B).”[ii] The court’s decision affirms that the parties’ pre-preference history has no bearing on the objective defense.
- Second Issue
The court rejected the Defendant’s use of the unweighted, total range method, because it found the 90% range to be too broad and because the Defendant failed to cite any case law to substantiate its methodology. Instead, the court supported the Trustee’s suggested range of one standard deviation from the industrial mean, and declared all transfers falling inside the 30 to 54 day range to be within ordinary business terms.
IV. The Takeaway
In light of the court’s decision in In re Waterford Wedgwood, creditors now have a clearer understanding of how to apply the objective ordinary course of business defense when faced with a preference action.