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A Florida Bankruptcy Court : Threats of legal action are not prerequisites to finding that unusual collection activity is outside the ordinary course of business.

On February 10, 2010, the United States Bankruptcy Court for the Southern District of Florida granted judgment in favor of the trustee and ordered the creditor to turn over the payment in the amount of $ 79,343.35 within ten days.

The trustee for JSL Chemical, Corp (“Debtor”) filed a complaint against Oxyde Chemicals Inc. (“Defendant”) to avoid and recover an alleged preferential payment of $ 79,343.35 made by the Debtor to the Defendant ("Payment"). The Debtor was in the chemical supply business and the Defendant supplied chemicals to the Debtor. The Debtor and the Defendant's business relationship began in January, 2004. During the course of their relationship, the Defendant issued thirty invoices to the Debtor. Of these invoices, twenty-seven were paid during the pre-preference period, one was paid during the preference period, and two remained unpaid as of the Petition Date. Although the Defendant extended credit to the Debtor on payment terms of Net 30 days, the Debtor rarely paid the Defendant within 30 days of invoice. The Defendant asserted that the trustee could not avoid the payment because it was made in the parties' ordinary course of business. Alternatively, the Defendant argued that it was entitled to set off two unpaid invoices in the amount of $ 33,563.80. The Court noted that although the Defendant was a diligent creditor and would often inquire as to the status of payments and request prompt remittance when payments were late, the activity which was carried out by the Defendant during the preference period was not similar to the one carried out during the pre- preference period.

The Defendant provided copies of numerous emails between the parties' accounting departments inquiring about the status of payments. The trustee argued that during the preference period, the Defendant had sent an email to the Debtor stating that the Defendant was placing the Debtor on "credit hold" until it received a response to its inquiry concerning outstanding invoices totaling approximately $ 112,000.00. To this, the Defendant argued that this was not an unusual collection activity. In support of this argument, the Defendant pointed to its pre-preference October 11, 2006 email to the Debtor, which stated that to maintain a credit line with the Defendant and not be placed on prepaid credit status, checks for outstanding invoices would have to arrive the following morning. The Defendant characterized both emails as similar "warnings" and argued that that an element of coercion, such as legal action, is required to render a payment not in the ordinary course of business based upon unusual collection activity.

However, the Court concluded that the emails were substantively different. The October 11, 2006 email might properly be characterized as a warning, whereas the email during the preference period flatly stated: "JSL is currently being placed on credit hold till we hear a response." Although the Defendant's office manager routinely sent emails inquiring about payments, the Defendant's Chief Financial Officer did not routinely send emails to the Debtor's President informing him that the Debtor had been placed on credit hold. The Court finds that the Payment was made in response to this unusual collection activity. Thus, the Defendant's unusual collection activity, evidenced by Mr. Stone's email, took the Payment outside the protection of Section 547(c)(2)(A).

Alternatively, the Defendant argued that the Defendant is equitably entitled to set off for two remaining unpaid invoices totalling $ 33,563.80. However, the Court stated that the Section 547(c)(4) new value defense requires: 1) that the creditor must have extended the new value after receiving the challenged payments, 2) that the new value must have been unsecured, and 3) that the new value must remain unpaid. The Court ruled that the two unpaid invoices for which the Defendant sought set off did not meet the Eleventh Circuit's requirements for Section 547(c)(4) "new value", because this credit was extended before the Debtor made the challenged preference Payment. The Court concluded that there was no basis to set off the amount due by the Defendant to the Debtor's estate. The payment was held to be an avoidable preference, and the creditor was ordered to turn over the payment in the amount of $ 79,343.35 within ten days.