Bankruptcy Court Discretion in Choosing Subjective OCB Defense Test

Section 547 of the Bankruptcy Code empowers certain parties to file lawsuits to claw back "preference payments" made by a debtor to a creditor within the 90-day period before a debtor's bankruptcy filing. However, the Bankruptcy Code provides creditors with certain affirmative defenses to overcome or mitigate preference exposure, to encourage creditors to continue doing business with financially distressed customers.

One such affirmative defense is referred to as the subjective prong of the ordinary course of business defense-the "Subjective OCB Defense." Litigants have asked courts to apply several different tests to determine whether a creditor may avail itself to the Subjective OCB Defense, and, not surprisingly, plaintiffs and defendants alike propose the test(s) that is/are most beneficial to them based on the specific facts and circumstances of a case.