The ordinary course of business defense requires that either (1) the payment have been made in the ordinary course of business of both the supplier and the customer; OR (2) the payment was made under “ordinary business terms.” Please note this is an either/or test. Prior to 2006 the test was an “AND” test and both elements had to be proven. This was very difficult to do.
We have posted a video on this website that reviews the “ordinary course of business” defense.
- The “Zone of Information” that applies to this defense
- The basic elements of the defense
- A simple example of the application of the defense
Click here to see the video on ORDINARY COURSE OF BUSINESS DEFENSE.
As discussed in the video, the “zone of information” for the ordinary course of business defense extends from the date of the payment back in time for a period of more than 1 year. This extended period is necessary to establish the historical timing of payments between the parties. For this reason, of all the defenses, the ordinary course of business defense is the most demanding in terms of the books and records the supplier is required to maintain.
In defending preference claims, you may see that the customer’s bankruptcy representative says it has considered the defense. However, the sophistication of the customer’s bankruptcy representative may have tilted the analysis in its favor. Experienced bankruptcy preference counsel will be able to tell.