District Court OK’s Bankruptcy Court’s Ordinary Course Holding
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August 10, 2022, US District Court for Eastern New York – The Eastern New York District Court affirmed the Bankruptcy Court’s judgment that allowed the “ordinary course of business” defense to the Defendants against the preference claims made by Bryan Ryniker (“Plaintiff”), in his capacity as the Litigation Administrator of the post-confirmation estates of Decor Holdings, Inc., et al. (“Debtor”).
Plaintiff commenced preference actions against Bravo Fabrics; Swavelle/Mill Creek Fabrics, Inc.; Rosenthal & Rosenthal, Inc.; and P. Kauffman, Inc. (“Defendants”). The Bankruptcy Court, in its order, determined that the payments made to the Defendants during the preference period were within the parties’ ordinary course of business.
The test for the ordinary course of business defense generally involves using the debtor’s payment history to calculate a baseline for the companies’ dealings and then comparing preference period payments to that baseline to see if they differ substantially. Bankruptcy courts typically calculate the baseline payment practice between a creditor and debtor in one of two ways: the Average Lateness Test or the Total Range Test. The Bankruptcy Court has the sole discretion to determine which test or methodology to apply when analyzing the payments during the period.
The Bankruptcy Court in this case found that the preference period payments were within the parties’ ordinary course of business under both the Average Lateness Test and Total Range Test. Plaintiff appealed before the District Court, claiming that the Bankruptcy Court failed to address Plaintiff’s substantive arguments and legal authority that the Average Lateness Test was inapplicable given the alleged “outlier” transfers which allegedly skewed the analysis. Plaintiff argued that their charts show that there is no meaningful baseline for the preference payments to be consistent with and as such, the Average Lateness Test is unreliable.
The District Court agreed with the Bankruptcy Court’s ruling that the charts show the payments made during the preference period sitting between the “acceptable range” of:
- 26 to 65 days for Defendants Bravo Fabrics;
- 36 to 60 days for Defendants Swavelle / Mill Creek Fabrics, Inc.; and
- over 94% of the payments occurred between 31 to 45 days for Defendant P. Kaufmann, Inc. and Rosenthal & Rosenthal, Inc.
The District Court found that Chart 2 shows the payments made during the preference period occurring in a tight cluster around the historic average. The Court held that the alleged “inconsistencies” in the baseline are in and of themselves reflective of the payment practices between the parties and further suggested that the payments made during the preference period were made in the ordinary course of business.
In order to address the plaintiff’s claim that the averages are skewed by “outliers”, the Bankruptcy Court applied a refined version of the Total Range Test, known as bucketing analysis. Under the bucketing analysis, the Court reviews the payments made during the baseline period and groups them into buckets by age, then applies an appropriately sized bucket to the preference period payments to determine what is ordinary and what is not. A range from the baseline period that captures around 80% of the payments would be an appropriately sized bucket. The District Court affirmed the Bankruptcy Court’s finding.
The Bankruptcy Court concluded that a bucketing analysis encompassing 82% of the payments made in the baseline periods for each of the cases would capture all of the preference period payments in all the three adversary proceedings against the Defendants but one payment in the amount of $1,937.03. Thus, the Bankruptcy Court found that under the bucketing test, payments during the preference period were made in the ordinary course of business. The District Court concluded that the Bankruptcy Court did not err in finding that the transfers in question were made in the ordinary course of business.
Ryniker v. Bravo Fabrics & Rosenthal & Rosenthal, Inc., 2022 U.S. Dist. LEXIS 142577