Desperate Times and Desperate Measures: The Troubled State of the Ordinary Course of Business Defense—and What to Do about It

The ordinary course of business defense to the bankruptcy trustee's preference avoiding power has been controversial since its enactment in 1978. Burdened with a cryptic legislative history concerning its underlying goals, this preference exception has gone through multiple reinterpretations at the hands of Congress and the U.S. Supreme Court. In recent years, faced with a potentially expansive reading of the ordinary course defense that threatened to eclipse the rule, courts have used the "ordinary business terms" element of the defense to engraft an objective requirement that the party asserting the defense establish conformity of the challenged transfer with prevailing industry standards. Although deeply concerned about the expansive application of section 547(c)(2), the authors are critical of the industry terms requirement, concluding that it is incompatible with the goals of the ordinary course of business defense.

Focusing on what they contend is the most defensible justification for an ordinary course defense, namely, to encourage creditors to continue to do business with a financially beleaguered debtor, the authors offer a practical proposal for rewriting section 547(c)(2). By deliberately reorienting the focus to the specific debtor/creditor relationship, and reintroducing a temporal requirement into the analysis, the authors maintain that this proposal cures the weaknesses in the statute as presently applied and harmonizes the scope of the exception with its primary purposive objective and preference policy in general.