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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 37804
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Is there a lawyer or expert in bankruptcy law who could explain

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Is there a lawyer or expert in bankruptcy law who could explain an interrogatory question about "payments made in ordinary business terms as provided by 11 USC 547(c)(2)? I am pro se in this case.
The "ordinary course of business defense" shelters ordinary trade credit transactions from preference avoidance. The bankruptcy trustee may not avoid a preferential transfer to the extent the transfer was in payment of a debt incurred by the debtor in the “ordinary course of business” or financial affairs of the debtor and transferee, and the transfer was made:

  • in the ordinary course of business or financial affairs of the debtor and transferee; or
  • according to ordinary business terms. Bankr. Code § 547(c) (2)(A) & (B).
A defendant can prevail in this defense by showing that, although the transaction was not made according to ordinary business terms generally, it was made according to the ordinary business terms between the parties. However, the defense is still limited to debts incurred in the ordinary course of business or financial affairs of the debtor and the transferee.

In plain English, if the debtor made a payment to a creditor within 90 days of filing bankruptcy, and the payment was part of an regular business transaction, then the trustee cannot recover the payment from the creditor, and add it to the bankruptcy estate.

Note: an important part of this process is the fact that the bankruptcy trustee must sue the creditor to recover the payment. Since the trustee cannot recover attorney's fees from the creditor, the amount of the transfer must be great enough to make legal action warranted. Otherwise, the trustee may end up collecting nothing because the entire claim will end up in the trustee's attorney's pocket. As a practical matter, this tends to limit actions to recover ordinary course transactions to those that are at least $5,000 -- and in many expensive markets where attorneys routinely charge $400 or more for services, $10,000 or more. Otherwise, there is usually little point in trying to sue the creditor, because the net result will be nothing (or less than nothing) to the bankruptcy estate.

Hope this helps.
Customer: replied 3 years ago.

Dear Socrateaser - First of all, I thank you for your quick response, as my interrogatory answers are due tomorrow! Based on your information, do you believe it would be in my favor to offer the fact that this first time client, delivered his first of 4 payments to me 2 months after I began working for him? We had a spoken agreement which I eventually (after his non-payments) put in writing in an email, stating, that since he was already over 2 months late, in order for me to continue I asked that he promise to prepay each month, going forward. I do have another fact in my favor and that is the fact that I delivered added value after his last payment.

If you have already been sued by the trustee, and you are actually trying to answer a formal interrogatory, then I wouldn't offer anything other than direct answers to direct questions. I wouldn't volunteer anything -- and if I could find a proper objection, I would object.

I apologize that I did not realize when you said "interrogatory," you really mean it. I thought you were simply using the term as a formal means of asking your question, and you were looking for an answer explaining the purpose of the ordinary course defense.

With that said, if you give me the exact text of the interrogatory, maybe I will have some other ideas.

Thanks in advance.
Customer: replied 3 years ago.

There are two questions that I'm not sure of and would appreciate your advice.... Thank you!


No 15:
If you contend that any of the transfers identified in Plaintiff's Complaint were not made to you in satisfaction of an antecedent debt, identify each such transfer and state each and every fact in support of your contention.


(The debtor filed on 1/28/10 for Chapter 11 but on 6/1/11 he was granted Chapter 7. The debtors payments to me began on 11/19/09, with 3 more to follow on12/3/09, 12/19/09 & 1/5/10). My work on this client's behalf began in July and by September I was warning that I would walk...But I still wanted to help turn their distressed mall around so I hung in there.)


No: 18

If you contend that any of the transfers identified in Plaintiff's Complaint were made in payment of a debt incurred by the Debtor in the ordinary course of business or financial affairs, and were made according to ordinary business terms as provided by 11 U.S.C. 547(c)(2), state each and every fact upon which you base your assertion. Identify any and all relevant Documents and/or Communications.



Re #15: If the original agreement for payment was due and payable more than 90 days before the petition was originally filed, then the payments could be viewed as in satisfaction of an antecedent debt. The fact that the case was converted to Chapter 7 is irrelevant. The original filing date is the date from which the 90 day avoidance period runs.

Re #18: You may be able to put this matter to rest right here, by explaining that this is how you ordinarily operate your business, that your payment requests are customary in your industry, and that the transaction between yourself and the debtor was not intended to be based upon a sales commission, which was contingent on a future property lease or sale, or on the payment of money from a third party tenant or vendor.

That is, you offered to do X in exchange for Y, which is a customary agreement in your business, and the debtor paid you according to the terms of your agreement.

You could even explain that such agreements are frequently oral, rather than written.

Note that what ever you contend, the trustee will look for you to prove your position, if not now, via documentation, then at trial or summary judgment. This means you may need to hire some other persons in the industry who do the same business as you, and who will testify to the ordinary nature of your transaction.

Also, if you have other landlords with whom you transact business similarly, and they can testify to this, then you could use those sources as witness to the ordinary nature of your business transaction. You don't need to provide sworn affidavits in your interrogatory response -- you just need to assert that it is something that you do routinely in similar transactions.

Note: I can't format your response for you. Violates website rules.

Hope this helps.
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