During the last week of October, the liquidating trustee of the Radio Shack liquidating trust filed lawsuits in the United States Bankruptcy Court for the District of Delaware. The lawsuits were seeking to avoid “preferential” payments made by Radio Shack to its creditors within 90 days of the filing of its bankruptcy petition (the “Preference Period”), which took place on February 15, 2015.

There were approximately 200 creditors sued for allegedly being “preferred” by Radio Shack, including commercial landlords, utility providers, banks, logistics companies and providers of electronic goods, among other trade creditors. It is important that the creditors receiving these complaints understand that there are defenses to these actions.

One of the strongest defenses for a creditor being sued is the ordinary course of business defense. To prove this defense, evidence of business custom and practice is considered. Under 11 U.S.C. 547(c)(2), the obligation being paid must be incurred in the ordinary course of business or financial affairs of the debtor, and the payment must have been made in the ordinary course of business of both the debtor and creditor (subjective test) or the payment was made under “ordinary business terms” (objective test). Thus, there are two standards that can be proved by a creditor to successfully defend a preference action under this defense. Providing either one will allow the creditor to prevail in its defense.
Continue Reading Radio Shack Preference Lawsuit – Ordinary Course Defense