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2. Ordinary Course of Business- F.4th 376 (5th Cir. 2024). Traditionally, only a trustee,
Another defense is that the transaction occurred under debtor in possession or a fiduciary would file a preference
the ordinary course of business. A creditor may plead 11 avoidance action to collect a pre-petition payment made
USC §547( c) (2) as an affirmative defense. Section 547(c ) to a creditor 90 days prior to filing bankruptcy. In that
(2) sets forth this defense. case, the Debtor issued $320,000.00 in checks to the CFO
“to the extent that such transfer was in payment of a resulting in prepetition transfers of $316,000.00. In re S.
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debt incurred by the debtor in the ordinary course of Coast Supply Co., 91 F.4 376-377.
business or financial affairs of the debtor and The modified plan allowed the secured creditor to
the transferee, and such transfer was-- prosecute the preference action against the CFO. Id., at
(A) made in the ordinary course of business or 381. The CFO contested it by filing a motion to dismiss. Id.,
financial affairs of the debtor and the transferee; or at 381. As a result of the plan, the case was appealed and
(B) made according to ordinary business terms....” the Court looked at the issues of 1) How avoidance actions
11 USC 547 (c ) (2). became property of the estate and 2) Whether third parties
A creditor could demonstrate ordinary course of business must represent the estate to litigate an avoidance action.
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of the alleged transfers that the alleged transfers were Id. at 385-386.
“made in the ordinary course or business or financial affairs The Fifth Circuit decided that a preference action may
of the debtor and the transferee.” 11 U.S.C. § 547(c)(2)(A); be prosecuted by a third party that is not the trustee,
Ogle v. Advent, Inc. (In re HDD Rotary Sales, LLC), 2013 debtor or on behalf of the estate. The Court also ruled that
Bankr. LEXIS 1447, *13-14 (Bankr. S.D. Tex. Apr. 1, 2013). avoidance actions including preference actions may be sold
to maximize estate value. Id,. at 383-384.
Contemporaneous Exchange A business creditor that was paid 90 days prior to the
Another defense is a substantially contemporaneous bankruptcy filing may have more options to combat a
exchange for new value. 11 U.S.C. § 547(c)(1). The Trustee preference avoidance lawsuit. These include the defenses
may not avoid certain payments “(1) to the extent that such to preference actions discussed above including ordinary
transfer was- (A) intended by the debtor and the creditor to course of business, new value and contemporaneous
or for whose benefit such transfer was made to be a contem- exchange. Letters of credit may also provide some respite
poraneous exchange for new value given to the debtor; and as they are outside of the bankruptcy estate. Lastly, the
(B) in fact a substantially contemporaneous exchange. 11 Fifth Circuit’s recent opinion regarding selling an avoid-
U.S.C. § 547(c)(1). The Fifth Circuit has held that a release of ance action, including preferences to interested third
a letter of credit may establish contemporaneous new value parties may also be an option. The Fifth Circuit held that
as a defense to a preference payment. In Matter of Fuel Oil the sale of the avoidance actions may provide value to
Supply & Terminaling, Inc., 837 F.2d 224 (5th Cir. 1988). the bankruptcy estate. This more marketable option may
Letters of credit often provide protection to commercial also assist a business creditor who received a prepetition
landlords against bankruptcy filings. Letters of credit can payment as well. N
provide payment while a tenant is deciding to assume or
reject a lease. They can also provide a defense to a prefer- 1. Previously, the Fifth Circuit has announced: “It is well-established in this circuit that
ence payment. The Fifth Circuit has held that a release of a letters of credit and the proceeds therefrom are not property of the debtor's bankruptcy
letter of credit may establish contemporaneous new value estate. In re Stonebridge Technologies, Inc., 430 F.3d 260, 269 (5th Cir. 2005)(citing
Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 589 (5th Cir.1987)).
as a defense to a preference payment. Fuel Oil Supply, 837
F.2d 224 (5th Cir. 1988). Letters of credit are outside of the 2. A great article that analyzes the opinion is Preferences for Sale? Analyzing the Fifth
Circuit’s South Coast Supply Coast Co. Opinion by Patrick Hughes, Martha Wyrick
automatic stay due to the fact that they are not part of the and Thomas J. Zavala can be found at https://www.haynesboone.com/-/media/
bankruptcy estate. project/haynesboone/haynesboone/pdfs/alert-pdfs/2024/south-coastsupply.
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In fact, release of liens and letters of credit are common
examples of contemporaneous exchange of new value. Lovett
v. Homrich, Inc. (In re Phillip Servs. Corp.), 359 B. R. 616, 633- Angeline Vachris Kell is an Attorney at HooverSlovacek
634; (S.D. Tex. 2006); In Matter of Fuel Oil Supply, 837 F.2d LLP. She received her J. D. from South Texas College of
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224. Additionally, the Court in Lovett also referenced the 11 Law and a Bachelor of Arts with a major in Spanish from
Circuit opinion of In re Standard Ford Serv., Inc., agreeing that the University of Texas. Mrs. Kell is the Past President of
food delivery services performed after a dishonored check and the Hon. Arthur L. Moller/David B. Foltz, Jr. American Inn
before a cashier’s check also constituted contemporaneous of Court. Information about Mrs. Kell is available https://
exchange of new value. Id., at 359 B. R. 616, 633-635; In re hooverslovacek.com/attorneys/angeline-angie-kell/. Mrs.
Standard Ford Serv., Inc., 723 F.2d 820, 821 (11 Cir, 1984). Kell may be contacted by email at kell@hooverslovacek.com.
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South Coast Ayinde I. Ashford is an associate in the HooverSlovacek
Recently, the Fifth Circuit found that a “preference” Landlord/Tenant practice. He received his J.D. from Drake
avoidance action may be sold to a third party under 11 University Law School and a Bachelors of Arts with a major
USC 363. In re S. Coast Supply Co. (“South Coast”), 91 in Communications from Saginaw Valley State University.

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