Richards Layton & Finger
 

Course of Business Defense Path to Preference Dismissal

November 19, 2012

In Gellert v. Coltec Indus., Inc., the Delaware Bankruptcy Court held that the ordinary course of business defense under 11 U.S.C. § 547(c)(2)(A) can be applied on a motion to dismiss, and that a transfer cannot be constructively fraudulent when payment of the transfer resulted in a dollar-for-dollar satisfaction of an antecedent debt.

Crucible Materials Corporation was obligated under a project financing lease to pay periodic interest on bonds and purchase the project for the outstanding full principal amount of the bonds at maturity. Defendant Coltec Industries, Inc.—Crucible’s former parent company—was a guarantor under the bonds. Crucible made payments on the bonds pursuant to its financing agreement for many years prior to its bankruptcy filing. In bankruptcy, the underlying project was sold and Crucible was required to pay off the bonds in full. The liquidating trustee later brought an action against Coltec seeking, among other things, to avoid and recover a periodic interest payment as preferential and to avoid payments made under the financing lease in the two years prior to Crucible’s bankruptcy as constructively fraudulent, under the theory that Coltec was the party for whom the transfers had been made or that the transfers were made for its benefit.