Preference decisions by the circuit: courts divided.

Every credit executive is familiar with the expression "ordinary course of business". Most credit executives can analyze a preference defense based on "new value" as well as most bankruptcy practitioners. Knowledge of the two-year statute of limitations within which a preference action can be brought is common.

Nevertheless, creditors must constantly be aware of the latest decisions rendered in the particular circuit where the preference action is pending. The circuit courts are often split regarding what is of is not regarded as "ordinary". Sometimes the courts disagree as to the application of "new value". And, in the past few years, there have been several cases on the calculation of the two-year statute of limitations--when it begins and when it ends.

NUMBER AND COMPOSITION OF CIRCUITS: Before anything else, credit executives must know which circuit will be governing a particular bankruptcy case. Below is a quick reference chart of which states and territories ate covered by what circuit. The 13 judicial circuits of the United States are constituted as follows:

The following information provides updated information as to how each circuit has been ruling on preference issues.

FIRST CIRCUIT

In re Healthco International, Inc. (132 F.3d 104-1997). The Bankruptcy Appellate Panel reversed the Bankruptcy Court's decision and found that the payment in question was not made in the "ordinary course of business" and was preferential. The trustee of the Chapter 7 debtor, Healthco International, Inc., ("Healthco") appealed from an order of the Bankruptcy Court of the District of Massachusetts, dismissing its 11 U.S.C. 547 complaint to recover an allegedly preferential transfer of $235,558 to Repco Printers & Lithographics, Inc., ("Repco") on the basis that the payment was a payment in the ordinary course of business and therefore not preferential. Repco's invoices call for payment within 10 days of receipt; however, none of Repco's customers paid according to the invoice terms. Typically, they would pay approximately 60 days after the date of invoice and that was the history of this account during the pre-preference period. The parties agreed that due to the highly competitive nature of the printing business, a 60-day payment practice was standard in the industry. However, the $235,558.64 payment was the first time in the business history of these two entities that a wire transfer was used and the first time that all outstanding invoices were paid, leaving a zero balance. This single payment satisfied 68 Repco invoices that ranged in age from 0 to 200 days old.

Healthco is the only case from the First Circuit Bankruptcy Appellate Panel to rule on this issue. The First Circuit Court of Appeals has not addressed this matter. Most of the First Circuit case law, therefore, stems from the United States District Courts of the Bankruptcy Courts within the First Circuit.