The Ordinary Course of Business Defense In Chapter 11 Bankruptcy Preference Actions: Methods of Comparison
Joseph M. Mulvihill
One of the most uncertain and undefined sections of the Bankruptcy Code is Section 547(c)(2), dealing with the ordinary course of business defense. Section 547 of the Bankruptcy Code allows courts to review certain payments made by the debtor within ninety days prior to a debtor filing for bankruptcy. This period is called the preference period. A preference action seeks to claw back the payments made by the debtor during the preference period, however, a creditor can defeat a preference action by raising one of the avoidance defenses enumerated in Section 547(c).
Specifically, the uncertainty surrounding the ordinary course of business defense stems from which method of comparison should be used, and the circuits are split as to the use of either the average approach or the range approach. The average approach compares the average of the transactions made in the preference period to the average of the transactions in the pre-preference period to determine if the payments were consistent. In comparison, the range approach compares the range of the transactions made during the preference period to the range of transactions in the pre-preference period.
This Note provides an in-depth analysis and comparison of the average and range approach, specifying the strengths and weaknesses of each. This Author then advances a new embellishment to the range approach that will help eliminate ambiguity in the ordinary course of business defense. Briefly, this Author argues that a statistical method known as “trimming” should be used to eliminate aberrant transactions, and that the pre-preference period range should be computed without these transactions. This will result in a more accurate depiction of the business relationship between the debtor and creditor, while also providing clarity and certainty in the ordinary course of business defense.