Payment Pressure Can Be Hazardous to Your Ordinary Course of Business Preference Defense

Trade creditors should take notice when any United States Court of Appeals rules on the applicability of a preference defense. Well, the United States Court of Appeals for the Third Circuit is no exception, particularly because the United States Bankruptcy Court in Delaware, where many large commercial Chapter 11 cases are filed, is in the Third Circuit.

The Third Circuit’s recent ruling, in Burtch v. Prudential Real Estate & Relocation Services, Inc., et al., provides important guidance to trade creditors, seeking to mitigate their preference risk, on the applicability of the ordinary course of business (“OCB”) and subsequent new value (“SNV”) defenses. Bottom line: while a creditor’s efforts to collect its past due claim, such as by changing terms, imposing a credit hold, and/or applying other collection pressure, might increase the likelihood of collection, these actions might also have the unintended consequence of frustrating the creditor’s ability to prove the OCB defense (and increasing the creditor’s preference liability) for payments that might have otherwise been regarded as ordinary course transactions.