A Victory for the Trade: Décor Holdings Decisions Uphold Applicability of Subjective Ordinary Course of Business Defense to Preference Liability

A trade creditor dealing with a financially distressed customer faces not only the risk of nonpayment, but also the risk of preference liability if the customer ends up in bankruptcy. Fortunately, the Bankruptcy Code provides a number of defenses that a creditor can invoke to limit preference liability. One of the most prominent defenses is the subjective component of the ordinary course of business (OCB) defense, where a preference defendant can limit its preference liability by proving that the payments made during the 90 days before the bankruptcy filing (i.e., the “preference period”) were consistent with the debtor’s history of payments to the creditor before the preference period. Recent decisions by the United States Bankruptcy Court and District Court for the Eastern District of New York in the Chapter 11 cases of Décor Holdings, Inc. illustrate that there are various methodologies that creditors can assert, and courts can apply, to prove the subjective OCB defense.