Trade creditors recently scored a major win from the U.S. District Court for the District of Delaware. In Center City Healthcare LLC v. Medline Industries Inc., the Delaware District Court upheld summary judgment for creditor-defendant Medline Industries Inc. In doing so, the district court confirmed that pre-petition collection activity alone does not defeat the objective, industry-based prong of the ordinary-course-of-business (OCB) defense. The decision is particularly notable, since it comes on the heels of another recent ruling by the Delaware Bankruptcy Court in FI Liquidating Trust v. C.H. Robinson Co. Inc. (In re Fred’s Inc), in which the court held that collection pressure resulted in the loss of the objective OCB defense.
The Center City court also held that Risk Management Association (RMA) industry data is admissible and sufficient to prove the objective OCB defense through a days-to-pay analysis. Taken together, the Center City decision offers trade creditors a clearer path in mitigating risk and defending against preference claims under §547 of the Bankruptcy Code. The decision identifies the industry evidence needed to prove the objective OCB defense and limits the significance of collection efforts when payment timing aligns with industry standards for healthy business relationships between the debtor and trade creditors.
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