April 20, 2014

Keeping It Ordinary: The Ordinary Course Defense

Pay day is a very happy day. However, the opposite is true of the day  a court orders you to pay back money to the trustee in bankruptcy because the customer filed for bankruptcy shortly after you received payment. As discussed in the previous post, it is important to be careful when dealing with cash-strapped businesses. Payments that are out of the ordinary may very well be classified as preferences subject to recovery by the trustee. By following the guidelines below, you may be able to identify problems early and prevent a preference classification.

Keeping it ordinary

The first issue is timing. If a debtor's payments being arriving earlier or later than normal, it is possible that a bankruptcy court may determine that these payments were made outside of the ordinary course of business. Therefore, if your debtor's payment schedule starts to change, it would be wise to find out why and address related issues early.

The second issue is the method of payment. A change in the debtor's method of paying may also signal to the bankruptcy court that payments fall outside the ordinary course. For example, if the debtor usually pays by check but suddenly begins paying by cash, or vice versa, that may provide grounds for denying the ordinary course defense.

The third issue is the amount of the payments. In essence, a court may consider whether the debtor is paying invoices in whole or in part when determining ordinary course status. Beware when a debtor who usually pays invoices in full beings paying only part of the balance. These payments may be deemed outside the ordinary course and thus subject to recovery by the trustee.

The fourth issue is terms of payment. A change in payment terms may indicate to a court that payments are outside the ordinary course. If the debtor requests a change in the terms of repayment, determine why it is requesting the change. If the debtor is seeking the change because of financial difficulty, then this may be grounds for the court to deny the ordinary course defense.

The fifth and final issue is regarding collection practices. In deciding whether paymets are in ordinary course, the bankruptcy court will also look to the collections methods used. Changes in collection practice could put payments outside the ordinary course. Although it may sound counterintuitive, you should thus avoid using extreme or "unusual" debt collection practices when dealing with a troubled company. Doing so could put whatever payments you do receive outside the ordinary course, thus subjective them to recovery as preference.

As more companies file for bankruptcy due to the depressed economy, actions to recover preferential payments will rise accordingly. There are no quick or easy fixes that would restore the economy to the prosperity of the late 1990s and early 2000s, but following the above guidelines when dealing with troubled companies will help your business preserve a defense against potential preference actions.

The idea is to make sure that someone else doesn't get to leave the playground with your toy.

© 2014 Varnum LLP

About the Author

David M. Moss, Varnum Law Firm, Litigation Attorney

David is a litigation and trial law attorney who is currently focusing his practice on commercial litigation.


Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.