In a 9 page decision signed March 3, 2016 in the AES Thames bankruptcy, Judge Carey of the Delaware Bankruptcy Court held that the recipient of allegedly preferential transfers had received the transfers from the Debtor in the ordinary course of business. He thus concluded that the Trustee could not avoid and recover the transfers at issue. Judge Carey’s opinion is available here.
On January 23, 2012, the Court entered an order converting the Debtor’s case to chapter 7. On January 24, 2012, the Charles M. Forman was appointed as the Chapter 7 Trustee. As the Trustee, he was obligated to maximize the assets of the Debtor available for distribution to creditors. He filed a preference action against Moran Towing Corp. (“Moran”) alleging that the payments made in the 90-day preference period were made outside of the ordinary course of business. The parties agreed on all the facts, disputing only the legal implications.
As Judge Carey stated, “The dispute boils down to whether the Transfers during the Preference Period are similar to the transfers made during the Historical Period.” Opinion at *6. The agreed facts were as follows: Moran provided the Debtor with services during the preference period in an identical manner as it had for the three years prior. The real dispute was how to calculate the timing of the payments from the Debtor. Under their Agreement, the Debtor would pay Moran for all cargoes loaded during the previous calendar month on the 25th day of each month. The Trustee argued that it is appropriate in this case to analyze only whether the Debtor consistently paid Moran on the Due Date or, if thereafter, to calculate the number of days the payment was made after the Due Date, and Judge Carey agreed. Opinion at *7.
The Trustee argued that during the Historical Period the Debtor paid Moran on average 2.45 days after the Due Date, while during the Preference Period the Debtor paid Moran on average 15.63 days after the Due Date. The Trustee also points out that during the lengthy Historical Period, only 4 of 164 invoices (or 2.44%) were paid 10 days or later after the Due Date. Moran argues in response that during the Historical Period, payments ranged between -28 (i.e., 28 days before the Due Date) and 35 days after the Due Date. Therefore, the range of payments during the Preference Period (10-19 days) falls within the Historical Period range. Opinion at *7-8.
Judge Carey’s Opinion
“The determination of whether a creditor has met its burden under section 547(c)(2)(A) is a subjective test involving the consistency of transactions between the creditor and the debtor before and during the preference period.” Opinion at *5.
Judge Carey ruled against the Trustee, holding that “When reviewing the parties’ payment history, a late payment of 10 or 19 days, although infrequent, is not unprecedented in the parties’ relationship.” Opinion at *8. Judge Carey held that “the business relationship between Moran and the Debtor falls within the type of relationship the ordinary course of business defense is intended to protect.” Opinion at *9.
Of most interest to me in reviewing this case was Judge Carey’s opinion that “The Trustee’s reliance on the average payment statistics are countered by Moran’s reliance on the range of payment statistics.” Opinion at *8. Often parties in a preference action rely entirely on average days to payment and standard deviation. It is interesting to note that the Court takes a far less statistical and far more defendant-friendly view of the issue.