In the recent decision of FI Liquidating Trust v. The Terminix International Company Limited Partnership, Civ. No. 23-1233 (D. Del. Oct. 29, 2024), the United States District Court for the District of Delaware reversed and remanded a bankruptcy court’s summary judgment ruling in a preference action. The case involved the FI Liquidating Trust (formed after Fred’s, Inc.’s bankruptcy) seeking to recover $129,934 in transfers made to Terminix International during the 90-day period before Fred’s bankruptcy filing on September 9, 2019.
The key issue was whether Terminix could successfully defend against the preference claims using the “ordinary course of business” defense under Section 547(c)(2) of the Bankruptcy Code. This defense allows a creditor to keep payments received during the preference period if they were made in the ordinary course of business between the debtor and creditor.
The bankruptcy court had granted summary judgment largely in Terminix’s favor, finding that $129,348 of the $129,934 in transfers fell within the ordinary course of business because they were within one standard deviation of the mean payment timing during the “base period” (the roughly two-year period before the preference period). The court calculated this range as 20.61 to 179.39 days from invoice date to payment.
The District Court, however, found two major problems with the bankruptcy court’s analysis. First, the standard deviation calculations relied upon by the bankruptcy court were not properly supported by evidence in the record. While Terminix had submitted spreadsheets showing payment data, the actual standard deviation calculations were apparently performed by lawyers rather than statisticians and were presented as “undisputed facts” despite being disputed by the Trust.
More fundamentally, the District Court questioned whether standard deviation analysis was an appropriate statistical tool for analyzing this payment data. The Trust had argued that standard deviation analysis is inappropriate for non-normally distributed data (data that doesn’t follow a bell curve). The court noted that this was a legitimate methodological challenge that required expert testimony to resolve, which was lacking in the record.
The District Court also expressed concern about reducing the “ordinary course of business” defense to a single statistical metric. The court observed that the payment history showed great variability not just in timing but also in invoice amounts and payment amounts, with some payments under $1,000 and others over $60,000. The standard deviation analysis considered only the timing element while ignoring these other potentially relevant factors.
The court acknowledged that the relatively small amount at stake ($129,934) likely explained why the parties relied on lawyer-performed statistical analysis rather than retaining experts. However, it concluded that summary judgment was inappropriate without proper expert testimony establishing both the mathematical accuracy of the calculations and the methodological appropriateness of using standard deviation analysis for this type of data.
The District Court rejected the Trust’s second argument that the standard deviation calculations must be wrong because they encompassed 88% of the data rather than the expected 68% for a normal distribution. The court found this was either just another version of the argument about non-normal distributions or had been forfeited by not being raised in the bankruptcy court.
In remanding the case, the District Court emphasized that while standard deviation analysis might be one useful tool for analyzing payment consistency, it should not be the only consideration in determining whether payments were made in the ordinary course of business. The court suggested that multiple statistical approaches might need to be considered together to paint a complete picture of the parties’ ordinary course of dealings.
This case sounds a clear warning to preference defendants: relying on statistical analysis without proper expert support is risky, even in smaller-dollar cases. While statistical metrics like standard deviation may seem like an objective way to prove ordinary course defenses, the court’s ruling suggests defendants must be prepared to authenticate their calculations through qualified experts, validate their chosen statistical methodology, and consider multiple approaches to demonstrate payment consistency.