All in the Ordinary Course of a Desperate Struggle to Survive

Back in pre-BAPCPA days, creditors defending a preference action using the "ordinary course" exception of 11 USC §547(c)(2) had to show both that: (i) the debt was incurred and the payment was made in the ordinary course of the business or financial affairs of the debtor and the transferee and that (ii) the payment was made according to ordinary business terms.

Creditors defending preference actions in the 9th Circuit got a boost awhile back from In re Jan Weilert, RV, Inc., 315 F.3d 1192 (9th Cir. 2003). Jan Weilert held that the meaning of “ordinary business terms” cannot be limited to “the average transaction.” According to the opinion, such a standard fails to take into account the broad range of terms that encompasses the practices employed by 'similarly situated debtors and creditors facing the same or similar problems. . . ' These were said to include "terms that are ordinary for those under financial distress" i.e., "similarly situated" can mean similarly broke and similarly trying to keep creditors at bay.

Jan Weilert made the "ordinary business terms" prong much easier to assert although still a little difficult in the proof department. Then BAPCPA helped out more by amending the “ordinary course” exception to make it an alternative test – the exception now applies if the defendant can show either "ordinary course of business" or "ordinary business terms."

On April 3, the 9th Circuit decided In re Ahaza Systems, Inc., 2007 WL 968386, still a pre-BAPCPA case, interpreting the first, "ordinary course of business" prong. The specific issue in Ahaza was – Can the "ordinary course of business" prong ever be satisfied in a case where there was only one transaction between the debtor and the creditor? The Court held "when we have no past debt between the parties with which to compare the challenged one, the instant debt should be compared to the debt agreements into which we would expect the debtor and creditor to enter as part of their ordinary business operations. . . . [H]owever, this analysis should be as specific to the actual parties as possible."

To me, the really interesting thing about Ahaza is still this "ordinary distressed debtor" angle. The creditor defendant in Ahaza was a supplier. The Court described the transaction this way:

Stratos threatened to sue Ahaza for breach of contract and other causes of action. Instead of heading to court, Stratos and Ahaza in 2001 entered into a Settlement Agreement . . .[which] provided that Ahaza would pay to Stratos $380,000 immediately, and $35,000 per month for the following year. . . . If Ahaza failed to pay within ten days of receiving notice of payment due, the entire remaining balance would immediately become due.

Ahaza makes clear that delinquent debts that are restructured under threat of lawsuit may still be regarded as having been incurred and paid in the ordinary course of business. Aggressive trade creditors can negotiate draconian payment plans which have the practical effect of preferring their delinquent debts over debts owing to others, and maybe not lose those payments in a later bankruptcy. But there’s still the problem of those recidivist debtors who make their workout payments late!