Radnor Holdings Corp. v. PPT Consulting, LLC (In re Radnor Holdings, Corp.), Case No. 08-51184, 2009 WL 2004226 (Bankr. D. Del. July 9, 2009)

 The debtor, Radnor Holdings Corporation, brought an adversary proceeding to avoid and recover pre-petition payments totaling $35,000 as preferences under section 547 of the Bankruptcy Code.  Section 547 of the Bankruptcy Code permits the debtor to recover certain transfers of its property that were made within 90 days of filing its bankruptcy petition, or one year for transfers to “insiders.” 

 The four payments at issue were made 146, 168, 95 and 103 days after the invoice date, averaging 112 days after the invoice date.  They were also made exclusively in multiples of $5,000 and in partial payment of the amounts due.  The bankruptcy court found that during the pre-preference period such payments were made on average 61 days after invoice.  In addition, historically, no payments were made in multiples of $5,000 and almost all invoices were paid in full. 

 The defendant, while acknowledging that the payments met the requirements of section 547(b) for preferential transfers, argued that they fell within the “ordinary course of business” exception set forth in section 547(c)(2)(A) of the Bankruptcy Code.  Section 547(c)(2)(A) provides that a transfer that could otherwise be recovered as a preferential transfer is protected to the extent that 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 the transferee …”

 In Radnor, the bankruptcy court looked to several factors to determine whether the payments at issue were made in the “ordinary course,” such as: (1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were a higher amount than that usually paid; (3) whether the payments were tendered in a different manner than usual; (4) whether there appeared any unusual action by either party to collect or pay the debt; and (5) whether the creditor did anything to gain an advantage in light of the debtor’s deteriorating financial condition.

 In determining whether the delay in paying the subject transfers was significant enough to take them out of the ordinary course of business, the bankruptcy court considered various cases, including In re Parkview Hospital, 213 B.R. 509 (Bankr. N.D. Ohio 1997).  In Parkview, the court  found that where payments were historically made within 23-32 days after invoice during the pre-preference period, payments made more than 50 days after invoice during the preference period were considered within the ordinary course of business, but those made after 72 days from the invoice date were not.  In Radnor, the average number of days to payment during the preference period was 112 days, which was nearly double the 61-day average days to payment during the pre-preference period.  Although the bankruptcy court noted that other courts, including the Parkview court, have found that a deviation of double the average number of days was not so significant as to take the payments out of the ordinary course of business, the difference in the average number of days was, in those cases, approximately 18-27 days.  The bankruptcy court found that this difference, in conjunction with the discrepancy in the amounts paid (partial payments in multiples of $5,000 versus formerly paying the entire invoice in full), rendered the payments at issue out of the ordinary course of business.  The transfers were therefore avoided.

 Commentary: Some variation in the time between invoice and payment is normal in most industries.  Radnor illustrates that there are limits to how much variation a bankruptcy court will accept.  It also shows that other factors, such as changes in the amount and manner of payment, may be highly significant in a bankruptcy court’s analysis.