A New Approach to Bankruptcy Payments

Bankruptcy Code Section 547(b) allows a Trustee in Bankruptcy to attempt recovery of any payments received by a creditor for an “antecedent debt” within the 90-day period before a bankruptcy is filed. This strikes many creditors as unfair, particularly if they are still owed a significant amount of money in spite of having received a so-called “preferential payment” during the 90-day period. There are three traditional defenses to preference claims in bankruptcy: 

  1. ordinary course[1]
  2. contemporaneous exchange[2]
  3. subsequent new value[3]

The ordinary course defense is often problematic because “ordinary” can be subjective; and because the creditor has the burden of proving its defense to a preference claim, Trustees can argue at length over what constitutes “ordinary course.” The contemporaneous exchange defense arises in situations, such as where the creditor has compromised its claims with the debtor, perhaps for a reduced final payment, thereby constituting a “contemporaneous exchange.”

This leaves us with the subsequent new value defense. Its advantage is that it is purely mathematical and involves no subjectivity. One hypothetical subsequent new value defense would go as follows: 

Creditor receives $100,000 from the Debtor during the 90-day preference period, but it also shipped $80,000 of product to the Debtor during that same 90-day window, arguably reducing the preference claim by $80,000. The subsequent new value defense traditionally required that the shipment of goods on account had to be made subsequent to any preferential payment received during the 90-day window. In this scenario, if all the shipments had been made by the Creditor on the 90thday before bankruptcy, followed by payments that were received within just a matter of days prior to filing bankruptcy, there would be no subsequent new value defense.

However, in recent years a growing number of circuit courts of appeals have concluded that there is no “remain unpaid” requirement in section 547(c)(4). The Fourth Circuit[4], Fifth Circuit[5], Eighth Circuit[6], and Ninth Circuit[7] Courts of Appeals have embraced this approach, and now so has the Eleventh Circuit[8]. On August 14, 2018, the Eleventh Circuit held that subsequent new value can be asserted as a defense to shipments made by a trade creditor at any time during the 90-day voidable preference period, EVEN IF payment for the shipment is received. In re BFW Liquidation, LLC, 899 F.3d 1178 (11th Cir. 2018).

The policy reason given by the Eleventh Circuit was as follows: “Under the interpretation the Trustee gives the new-value defense, the vendor would have to return all of the payments it subsequently received for the new value it provided the debtor. Were this the rule, a prudent vendor, sensing financial problems by the debtor, would be foolish to continue delivering goods to the debtor following Transfer.” BFW Liquidation, 899 F.3d at 1195.

Tom Rosseland and others at the firm have successfully handled the defense of Bankruptcy Trustees’ preference claims and actions on behalf of affected creditors across the country, including jurisdictions that have not yet adopted this latest interpretation of Bankruptcy Code Section 547. If we can be a resource for any preference claims asserted against your company or your clients in any jurisdiction, please let us know.

[1]11 U.S.C.§ 547(c)(2)

[2]11 U.S.C. § 547(c)(1)

[3]11 U.S.C. § 547(c)(4)

[4]Maryland, Virginia, West Virginia, North Carolina, South Carolina

[5]Louisiana, Mississippi, Texas

[6]Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota

[7]Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, Mariana Islands

[8]Alabama, Florida, Georgia