January 1, 2019, Northern District of Georgia – The Debtors Clayton General, Inc. f/k/a Southern Regional Health System, Inc. d/b/a Southern Regional Medical Center, et al., were a family of healthcare providers servicing residents of Clayton County, Georgia and others throughout the Atlanta metro area through hospital, outpatient clinic, and ambulatory care services. Defendant Atlas Health Care Linen Servs, Co., LLC is a provider of linen related products and services to medical facilities, including physician offices, surgery centers, clinics, healthcare centers, and nursing homes, across the United States.
During their business, the Debtors entered into an agreement with the Defendant for the Defendant to provide linen products to the Debtors facilities and to deliver, pick up, and launder the linens. The Debtors were generally invoiced on a weekly basis, on the last day of a particular week, for which services were provided. The payment terms were Net 30 from the date of the invoice.
During the ninety days before the petition date (the “Preference Period”), the Debtors made ten payments to the Defendant between May 26, 2015, and July 28, 2015, totaling $183,083.33. These transfers were made by checks payable to the Defendant for various invoices for services provided by the Defendant. Subsequently, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code and then brought a complaint against the Debtors asserting that the alleged transfers constitute preferential transfers under section 547 of the Bankruptcy Code. The Defendant contended that, even if the alleged transfers were preferential, they were made in the ordinary course of business and, therefore, were not avoidable according to section 547(c)(2)(B). The Defendant also asserted that it supplied subsequent new value to the Debtors after receiving the alleged transfers and thus the transfers were not avoidable under section 547(c)(4).
The Plaintiff opposed and asserted that the Defendant engaged in unusual collection activity during the preference period, which precludes a finding that the payments were in the ordinary course of business, and also disputed the Defendant’s calculation of new value.
The Court found disputed issues of fact remain including whether the alleged transfers were made similarly to transfers made before the preference period, whether the transfers were made in response to unusual collection activity. The Court ruled that even if transfers fail under the subjective test, a defendant can still prevail–if the debt had been incurred in the ordinary course–by showing the ability to pass the objective test. However, the Court found that the Defendant had not established it was entitled to judgment as a matter of law on the objective prong. Thus the Court denied the summary judgment on the new value defense until the court determined whether the ordinary course of business defense applied.