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Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005

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By Bradley D. Blakeley Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

The winds of change from Congress

The winds of change from Congress seem to be having an effect on the preference horizon, even before enactment of the new preference laws. In the recent decision rendered in the case of U.S. Interactive in the District of Delaware, Chief Judge Mary F. Walrath determined that due to the debtorsí and creditorís short-term history, the creditor was required to prove a definite industry standard. Judge Walrathís decision is a precursor of the changes ahead under the proposed preference revisions.

Under current bankruptcy law, all payments made by a debtor to creditors within 90 days of a bankruptcy filing must be returned to the debtor's estate, unless the creditor can prove that the payment was made in the ordinary course of business or subject to another available defense. The ordinary course of business defense currently includes three elements. The first element, which is rarely contested, is whether the transfer was in payment of a debt incurred by the debtor in the ordinary course of business of the debtor and the transferee. The second element, the subjective standard, requires that the transfer was made in the ordinary course of business of the debtor and the creditor. The third element, the objective standard, requires that the transfer was made within the industry standard.

The Senate has approved the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which is on its way to becoming law. The BAPCPA modifies the ordinary course of business defense using a disjunctive term between the second and third elements, therefore requiring the creditor to prove either the subjective prong or objective prong, but not both.

In U.S. Interactive, the Delaware bankruptcy court focused exclusively on the objective standard between the parties. The court stated that where there are a limited number of transactions between the parties (the particular aspect of the partiesí relationship only began six months before the bankruptcy filing), the objective standard plays a more prominent role in the analysis than the subjective standard. The court went on to find that a definitive standard was required under the circumstances, and that the creditorís evidence failed to establish a definitive industry standard.

Under the BAPCPA, the proposed preference provision seeks to have the court look to the pre-petition history between the debtor and creditor as a definition of ordinary course of business. This would allow the creditor to avoid the expense of employing an expert as some courts require to prove up the industry standard ñ a clear advantage over the current law. On the other hand, should there be an insufficient history between the debtor and creditor, then the courts can look to industry norms to determine ordinary course of business. This would require the creditor to prove a definitive industry standard as outlined in U.S Interactive a high standard that may be difficult to overcome.

Reprinted by permission from The Trade Vendor Quarterly Blakeley & Blakeley LLP
Spring 05

 
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