Suppliers and vendors sometimes find themselves unpleasantly surprised by the bankruptcy of a customer, leaving a trail of unpaid invoices and little hope of recovery. To make matters worse, after licking their wounds and recovering from the write-off, they may receive an even less welcome surprise—a letter from the bankruptcy trustee demanding money back for the bills that actually did get paid within 90 days prior to the customer’s bankruptcy. The only good news is that there are some defenses to such a claim. In a recent decision, The Unsecured Creditors Comm. of Sparrer Sausage, Inc. v. Jason Foods, Inc.,No. 15-2356 (7th Cir. Jun. 10, 2016), the United States Court of Appeals for the Seventh Circuit eliminated most of the exposure faced by the supplier, who had been sued for a preference, when it concluded that lower courts had misapplied the ordinary course of business defense the supplier had raised below.
Preference claims are a popular source of recovery in bankruptcy cases, and a complaint is often filed against any vendor who received payments from a debtor in the 90 days preceding a bankruptcy filing. Generally speaking, these payments can be recovered to permit a pro rata distribution to include creditors who were not “preferred” by payment during the 90-day window. But preferential payments may not be recoverable by a debtor at all if the payments it received fit into the ordinary course of business defense. That’s not as simple as it sounds, and timing can be everything when analyzing the availability of the defense. The court will review how long it took to pay the invoices during the 90 days to decide whether the payments fit into the ordinary practices and experience of the supplier and the customer during better times. If they do fit, they probably will not be recovered, but if the time it took to pay them differed significantly from prior practice, the ordinary course of business defense likely will not work.
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