United States: Ordinary Course Of Business Defense Further Examined – Burtch v. Revchem Composites, Inc.

In the recent opinion of Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), Adv. No. 10-52667 (CSS), 2015 WL 4381571 (Bankr. D. Del. July 16, 2015), the Delaware Bankruptcy Court issued a memorandum opinion following trial on claims asserted by Jeoffrey Burtch, Chapter 7 Trustee of Sierra Concrete Design, Inc. ("Sierra" or "Debtors"), seeking recovery against Defendant Revchem Composites, Inc. ("Revchem") for alleged preferential transfers under Sections 547 and 550 of the Bankruptcy Code.

In the memorandum opinion, the Court found that Revchem successfully established at trial that each of the payments received by Revchem from Sierra during the 90 day preference period were made in the "ordinary course" of the parties' business relationship, and were thus shielded from recovery pursuant to Section 547(c)(2) of the Bankruptcy Code.

This opinion is notable because Revchem was able to establish this defense even though it received payments from Sierra during the preference period at a much faster rate (a standard deviation of 27.9 days) than during the pre-preference period.

This is so because, as testified by Revchem, Sierra was engaged in a construction project with tight timelines and needed product at a faster rate than normal.  Because the Debtors were at their credit limit and had to pay previous invoices before receiving new product, the Debtors were paying at a faster rate during the preference period.  Thus, the Court found that the accelerated payments during the preference period were made in the ordinary course of business and granted judgment for Revchem.

This decision is a "must-read" for preference action defendants, as it dispels the notion that transfers made at a faster rate during the preference period (as compared to the pre-preference period) cannot be protected by the ordinary course of business defense.  It is clear that the Court will examine and consider circumstances between the parties which lead to changes in rates of payment in determining whether such transfers can be shielded by Section 547(c)(2).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.