The Subjective Ordinary Course of Business Preference Defense: Tie Goes to the Plaintiff

A trade creditor dealing with a financially distressed customer confronts an unfortunate Catch-22. The creditor will certainly want to take steps to protect itself from the risk of nonpayment, whether by tightening payment terms, reducing credit limits, threatening to withhold shipments, following up on payment of open invoices or engaging in other collection efforts.

However, as many trade creditors are aware, actions taken to reduce or prevent credit risk may cost the creditor its ordinary course of business defense if its customer files bankruptcy and a lawsuit is commenced to recover, as preferences, the payments made to the creditor in the 90 days leading up to the bankruptcy filing.