Suppliers Beware: Delaware Bankruptcy Court Rejects Ordinary Course Defense for Preference Payment Within Standard Credit Terms

In furtherance of these policies, the Bankruptcy Code authorizes a debtor or bankruptcy trustee to initiate a lawsuit to claw back a payment made to a vendor within 90 days before the bankruptcy case, if it was made on account of an existing debt and allowed the vendor to receive more than they otherwise would have received in a hypothetical liquidation had the payment not been made. These payments are called “preferences” because they ostensibly prefer certain creditors by providing a higher percentage of recovery than other similarly situated creditors — a result that chafes with the bankruptcy policy of equal treatment within creditor classes. Therefore, creditors who receive such payments are required to return them to the bankruptcy estate for pro rata distribution to the creditor body in accordance with statutory priorities, unless they can establish a defense.

US Congress recognized that creditors faced with the prospect of forfeiting preferential payments were likely to stop doing business with financially troubled customers, thereby impairing the other core bankruptcy policy of facilitating the debtor’s reorganization and fresh start. To blunt this effect and encourage creditors to continue doing business with distressed customers, the Bankruptcy Code establishes defenses for transactions conducted in the ordinary course of business (either subjectively or objectively), or which otherwise provide “new value” to the debtor contemporaneously with or subsequent to the challenged preference. While these concepts may seem relatively straightforward, they have spawned a tangled web of judicial opinions that threaten to undermine the policy of encouraging creditors to continue extending goods and services to customers with heightened bankruptcy risk.

A recent decision from the US Bankruptcy Court for the District of Delaware highlights the increasing uncertainty for trade creditors in this area and the importance of developing proactive strategies for managing preference liability.

The CalPlant Case

CalPlant I Holdco LLC operated a plant that converted rice straw into fiberboard. CalPlant sourced supplies from a company called Industrial Finishes and Systems Inc. under a consignment arrangement in which CalPlant would periodically report usage and based on that usage, Industrial would issue invoices with net 30 payment terms. On September 30, 2021, Industrial issued an invoice for $72,978.53. CalPlant initiated payment in that amount the same day and Industrial recorded the payment on its books as of October 4. CalPlant filed for bankruptcy on October 5.

On October 27, 2025, the Delaware Bankruptcy Court ruled that the payment was a preference recoverable by CalPlant’s liquidating trustee even though the payment was made within the parties’ longstanding contractual terms.

Industrial argued the payment was subjectively ordinary course between the parties because it was within the contractual net-30 payment terms, was in a typical amount, was made using a typical payment form, and was not the product of high-pressure payment tactics. Alternatively, Industrial argued that the payment was objectively made according to ordinary business terms, which it supported with affidavits from employees stating that the contractual arrangement and payment terms with CalPlant were similar to Industrial’s terms with other customers.

The Bankruptcy Court rejected both arguments and granted summary judgment to the liquidating trustee. First, while the payment was made within the contractual 30-day credit terms, the court held it was not subjectively ordinary because CalPlant historically took about 28-30 days to pay (rather than processing payment immediately). Second, the court held that the affidavits from Industrial’s employees were insufficient to establish that the payment was objectively ordinary because they failed to:

1. Demonstrate sufficient industry expertise beyond the employees’ experiences as Industrial employees.
2. Speak to industry practices beyond Industrial.
3. Address whether it was industry standard for a customer to make a payment at the outset of the contractual 30-day payment period.[i]

Takeaways for Vendors

The CalPlant decision has troubling implications for vendors who rely on the ordinary course of business defense to continue extending goods and services to troubled customers on credit. Although there is precedent for an early payment to be deemed a preference, there is typically additional evidence such as pressure by the creditor or favoritism by the debtor. It is remarkable and seemingly contrary to underlying bankruptcy policy that a timely payment made by ordinary methods and in accordance with the parties’ longstanding contract, without evidence of pressure or favoritism, would be deemed outside of the ordinary course of business between the parties solely because the debtor processed the payment earlier within its contractual payment window.

The court’s observations regarding proof of industry standards set a similarly high bar for passing the objective test for ordinary course transactions. Parties should be prepared to present evidence, and likely expert testimony, regarding market business terms rather than relying on their own (even extensive) experiences and practices. However, if a preference defendant establishes that their business terms are market and the payment was made in accordance with those terms, the defendant should receive the benefit of the defense. The Bankruptcy Code asks whether the payment was “made according to ordinary business terms.” It does not ask for a further showing of industry trends regarding the timing of payments within a market 30-day payment window.

The elevation of payment timing over all other considerations threatens to make the ordinary course of business defense too hypertechnical, uncertain, and unreliable to further the policy of inducing creditors to extend goods and services on credit to distressed customers, as even a timely payment made in accordance with a longstanding market contract may be deemed outside of the ordinary course of business. Vendors and other creditors who wish to continue doing business with at-risk customers should take additional steps to protect themselves against preference liability, such as a pledge of collateral, letter of credit, third-party guaranty, or restructuring of payment terms to qualify for a new value defense.

If you have questions about proactive strategies to manage preference risk, please contact Justin Kesselman and the ArentFox Schiff Financial Restructuring & Bankruptcy team.