The U.S. Bankruptcy Court for the District of Delaware recently granted a preference defendant's motion for summary judgment based in part on the objective element of the ordinary-course-of-business defense, with potentially far-reaching implications for preference defendants. As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amendments to the Bankruptcy Code, creditors gained a significant advantage in defending preference claims. Pre-BAPCPA, preference defendants seeking to prove the ordinary-course-of-business defense under ' 547(c)(2) of the Bankruptcy Code had to satisfy both the subjective and the objective elements of the defense. The BAPCPA amendments to ' 547(c)(2) made it easier for preference defendants to prove the ordinary-course-of-business defense by satisfying either the subjective or objective elements of the defense.
The bankruptcy court's August 2024 decision in Center City Healthcare LLC v. Medline Indus. Inc. (In re Center City Healthcare LLC)1 discusses the evidence that a creditor must present to successfully assert an objective ordinary-course-ofbusiness defense. Noteworthy is the court's holding that any evidence of a creditor's/defendant's extraordinary or unusual collection actions during the preference period is irrelevant to determining the applicability of the defense. Just a few months before the Center City Healthcare decision, the U.S. Bankruptcy Court for the Southern District of Ohio in ASPC Creditor Trust v. Sturm Ruger & Co. Inc. (In re ASPC Corp.), 2 relying on very similar reasoning, also granted the preference defendant's motion for summary judgment based on the objective ordinary-course-of-business defense.
Preference Claims and the Ordinary-Course Defense
A bankruptcy trustee can avoid and recover a preferential payment or other transfer under ' 547(b) of the Bankruptcy Code. The factors that would need to be proven include the following: (1) the debtor transferred its property to or for the benefit of a creditor; (2) the transfer was made on account of antecedent or existing debt that the debtor owed the creditor; (3) the transfer was made when the debtor was insolvent, based on a balance-sheet definition of liabilities exceeding assets, which is presumed during the 90-day period prior to the debtor's bankruptcy filing date; (4) the transfer was made during the 90-day preference period with respect to a transfer to a noninsider creditor of the debtor, such as a trade creditor; and (5) the transfer enabled the creditor to receive more than the creditor would have received in a chapter 7 liquidation of the debtor's assets.
Once a trustee has proven all of these elements of a preference claim, a creditor then has the burden of proving one or more of the preference defenses contained in ' 547(c) to reduce or eliminate its preference liability. The ordinary-course-of-business defense, contained in ' 547(c)(2), is one such preference defense. Section 547(c)(2) states:
The trustee may not avoid under this section a transfer ... to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was '
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.3
The two types of ordinary-course-of-business defenses ' the objective and subjective tests ' are related, but provide different means for creditors to reduce preference liability. The objective ordinary-course-of-business test analyzes the transfers at issue based on terms used in general practice within the applicable industry.4 By comparison, the subjective ordinary-course-of-business test reviews the challenged transfers in the context of the historical business practices between the debtor and defendant/creditor. The objective component was at issue in Center City Healthcare.
Facts of the Center City Healthcare Case
In June and July 2019, Center City Healthcare LLC and its affiliated debtors (collectively, the "debtors") filed chapter 11 cases.5 The debtors operated St. Christopher's Hospital for Children, Hahnemann University Hospital and several affiliated physician practice groups in Philadelphia. Medline Industries Inc., one of the debtors' largest suppliers, sent invoices or statements on account of goods and services that were sold and delivered to the debtors prior to the chapter 11 filing.6
The debtors commenced an...
