Must New Value Remain Unpaid to Serve As a Defense to a Preference Action?

Analyzing Section 547(c)(4)

Section 547(c)(4) states that:

• The trustee may not avoid under this section a transfer;
• To or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor; (A)not secured by an otherwise unavoidable security interest; and (B)on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor[.]

11 U.S.C. ' 547(c)(4). Section 547(c)(4) represents a substantial revision of section 60(c) of the Bankruptcy Act. See Thomas W. Garland, Inc. v. Union Elec. Co. (In re Thomas W. Garland, Inc.), 19 B.R. 920, 925 (Bankr. E.D. Mo. 1982). Significantly, section 547(c)(4) omits language from section 60(c) requiring that new value remain unpaid. See Quinn, 24 Mem. St. U.L. Rev. at 673. Despite these changes, the subsequent new value defense continues to promote the prime policy of the Bankruptcy Code — equality of distribution among creditors. The ability to avoid payments made by the debtor within the 90 days preceding the petition date discourages creditors from outmaneuvering each other by pressuring the insolvent debtor for payments, and prevents the debtor from making payments that prefer one creditor to the detriment of all others. Likewise, the new value defense allows a creditor to keep an otherwise preferential payment in recognition of the fact it continued doing business with the debtor in the ordinary course of business and used credit terms with an eye towards avoiding bankruptcy altogether. See Chrysler Credit Corp. v. Hall, 312 B.R. 797, 802 (E.D. Va. 2004); Phoenix Rest. Group v. Ajilon Prof. Staffing LLC (In re Phoenix Rest. Group), 317 B.R. 491, 495 (Bankr. M.D.Tenn. 2004).

Applying the 'Plain Meaning' of Section 547(c)(4)

From the divergence of court decisions, it is clear that the arguably simple policy justifying the subsequent new value defense has proven less than simple in its application. Fortunately, some courts are getting it right. A good example is Roberds, Inc. v. Broyhill Furntr. (In re Roberds, Inc.), 315 B.R. 443, 468-73 (Bankr. S.D. Ohio 2004), in which the Bankruptcy Court for the Southern District of Ohio summarized the current case law on the subject. In Roberds, the debtor brought an adversary proceeding to recover prepetition payments made to its supplier. The court stated that it was bound to follow the plain meaning of the statute unless the application would produce a result demonstrably at odds with the purpose of the statute. See Id., 315 B.R. at 468 citing United States v. Ron Pair Enters, Inc., 489 I.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989). The court noted that the word “paid” was not present in section 547(c)(4), and that decisions focusing on the narrow issue of whether the new value remains unpaid were incomplete and inaccurate. See Roberds, 315 B.R. at 469-70. According to the court, the proper inquiry is whether the subsequent new value has been repaid by an otherwise unavoidable transfer. See Id.; Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1093 n.2 (5th Cir 1994). This approach, which tracks the language of section 547(c)(4)(B), allows a creditor to successfully assert the new value defense if the trustee can recover the repayment by some other means.

Similarly, the United States District Court for the Eastern District of Virginia held the proper inquiry was not whether the creditor asserting the new value defense had been paid for the new value but whether it had been paid by a transfer not subject to avoidance by the trustee or debtor-in-possession. See Chrysler Credit, 312 B.R. at 803. The court found the plain meaning of the section was coherent, and, by adhering to the plain meaning, promotes the policy of encouraging creditors to do business with financially troubled debtors. See Id. at 805. According to the court, if it were to require that new value remain unpaid, creditors would be discouraged from supplying new value. If creditors were not entitled to receive some benefit from supplying new value, those that did supply new value would be penalized and in a worse position than those who did not. See Id., Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 232 (9th Cir. 1995).

Following this logic, the Bankruptcy Court for the District of Delaware recently stated that the “clear import of the statute would be defeated if it is held that the new value must remain unpaid” and, in so doing, “distinguished” (in reality questioned the logic behind) the opinion of the Court of Appeals for the Third Circuit in New York City Shoes and adopted the reasoning of Check Reporting Services. See Hechinger Invest. Co. of Delaware v. Univ. Forest Prod., Inc. (In re Hechinger Invest. Co.), No. 99-02261, 2004 WL 3113718, at *5 (Bankr. D. Del. 2004).

Postpetition Payment of Prepetition New Value

Extending the logic, recent cases go an additional step in analyzing the plain meaning of section 547(c)(4). By concentrating on the words used in section 547(c), particularly “trustee” and “debtor,” these courts will also allow the subsequent new value defense to be asserted by creditors who receive payment postpetition for any unpaid new value supplied prepetition.

In In re Phoenix Rest. Group, the plan administrator commenced a preference action against a creditor who provided temporary staffing services to the debtor. Phoenix Rest. Group, supra. Several payments were received by the creditor from the debtor during the preference period and a large payment was received postpetition. The creditor argued that its continual supply of staffing services to the debtor, for which as of the petition date it was unpaid, constituted new value. The plan administrator argued that the postpetition payments to the creditor should reduce the amount of “subsequent new value” defense the creditor was entitled to claim. The court found that the plain language of section 547 closes the preference window analysis at the petition date. See Phoenix Rest. Group, 317 B.R. at 496.

“Throughout section 547 the 'debtor' refers to the prepetition entity. Had Congress intended ' 547(c)(4)(B) to account for payments made post petition, the section would have included something like 'an otherwise unavoidable transfer of an interest of the estate in property to or for the benefit of such creditor.'”

In reaching its conclusion, the court was persuaded by cases that had not allowed postpetition advances of new value by a creditor to reduce prepetition preference exposure. See Berquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir. 1988) (postpetition goods or services provided to a debtor in possession do not qualify as new value because any postposition advances are given to the debtor's estate not to the debtor)(emphasis in original); Clark v. Frank B. Hall & Co. of Colo. (In re Sharoff Food Serv., Inc.), 179 B.R. 669, 678 (Bankr. D.Colo. 1995).

Therefore, if a creditor has received a postpetition payment by the trustee or debtor-in-possession pursuant to a critical vendor order or as a result of a debtor-in-possession not wanting the creditor to exercise reclamation rights, these payments or transfers are not made by the debtor, so the creditor is still entitled to the defense under the plain meaning section 547(c)(4).

Bad Habits Die Hard: The 'Replenishment Theory' Remains Alive and Well

Finding comfort in policy-based arguments and shorthanded tests, some courts are once again attempting to write in an “unpaid” requirement into the section 547(c)(4). See GGSI Liquidation, Inc. v. Quad-tech, Inc. (In re GGSI Liquidation, Inc.), 313 B.R. 770, 777 (Bankr. N.D. Ill. 2004), Accessair, Inc. v. Airline Software, Inc. (In re Accessair, Inc.), 314 B.R. 386, 395 (B.A.P. 8th Cir 2004), Teligent, Inc. v. Level(3) Communications (In re Teligent, Inc.), 315 B.R. 308, 315. Paying little, if any, deference to the volumes of analysis in case law, commentary and legislative history on section 547(c)(4), these courts conclude in a summary fashion that if the new value is subsequently paid, the estate remains depleted, not replenished, by the new value and, therefore, the creditor should not be entitled to a defense to the preference action. Compare Kroh Bros. Dev. Co. v. Continental Constr. Engineers, Inc. (In re Kroh Bros. Dev. Co.), 930 F.2d 648, 652-53 (8th Cir. 1991) (new value must remain unpaid); New York City Shoes v. Bentley Int'l Inc. (In re New York City Shoes, Inc.), 880 F.2d 679, 680 (3d Cir. 1989); Charisma Inv. Co. v. Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082, 1083 (11th Cir. 1988); In re Prescott, 805 F.2d 719, 728 (7th Cir. 1986); Pettigrew v. Trust Co. (In re Bishop), 17 B.R. 180 (Bankr. N.D. Ga. 1982) with IRFM, 52 F.3d 228, Toyota of Jefferson, Inc., 14 F.3d at 1093 n.2 (pursuant to plain language of statute, new value need not remain unpaid); Crichton v. Wheeling Nat'l Bank (In re Meredith Manor, Inc.), 902 F. 2d 257 (4th Cir. 1990); Isis Foods, 39 B.R. at 653; Boyd v. Water Doctor (In re Check Reporting Servs., Inc.), 140 B.R. 425 (Bankr. W.D. Mich. 1992).

Recently, in GGSI, the Bankruptcy Court for the Northern District of Illinois stated that, for the subsequent new value defense to apply, the following sequence of events must occur: 1) the creditor must have received a preference otherwise voidable under section 547(b); 2) after receiving the preferential transfer, the creditor must advance additional unsecured credit to the debtor; and 3) the additional credit must be unpaid. See GGSI, 313 B.R. at 777 citing Prescott, 805 F.2d at 728 and Kroh Bros., 930 F.2d at 652. The creditor in GGSI attempted to assert the subsequent new value defense to a preference action brought by the Chapter 7 trustee. During the preference period, the creditor/subcontractor had received partial payments from the debtor/general contractor for some of the new value it supplied. In addition, a third-party customer of the debtor was authorized to pay the subcontractor/creditor postpetition and offset the amounts paid to the creditor/subcontractor against amounts owed to the debtor. The creditor/subcontractor in arguing entitlement to the subsequent new value defense correctly asserted that recent cases have approached the “unpaid” question differently in analyzing a section 547(c)(4) defense and argued that this approach is more in tune with the statutory language and legislative history. See GGSI, 313 B.R. at 778 citing IRFM, Inc., 52 F.3d at 231. In addition, the creditor argued that, because a third party, not the debtor, had repaid some of the new value, the debtor had not been depleted. Therefore, the policy reasons promoted by the courts requiring new value to remain unpaid were not served.

Despite the creditor/subcontractor's argument, the GGSI court reiterated the “requirement” that the new value must remain unpaid in order to be a defense to a preference action, and the policy justification that, by remaining unpaid, the new value supplied, in effect returns the preference to the estate. See Id. The Bankruptcy Court for the Northern District of Illinois stated that it was bound by the Seventh Circuit decision in Prescott and dismissed the creditor's argument without discussing its merit. See Prescott, 805 F.2d at 728 (new value must remain unpaid). As to the third party payments, the court noted that, because the third party creditor was permitted to offset amounts owed to the debtor by amounts it paid to the creditor, the estate had been depleted and not replenished by the repayment of the new value to the extent of the offset.

In addition to the GGSI case, the Bankruptcy Appellate Panel of the Eighth Circuit in In re Accessair, Inc., and the Bankruptcy Court for the Southern District of New York in In re Teligent, Inc., recently stated, in dicta, that the relevant inquiry in analyzing a subsequent new value defense is whether the new value replenished the bankruptcy estate and the new value remained unpaid. See Accessair 314 B.R. at 394 citing Kroh Bros.; Teligent, Inc., 315 B.R. at 315 citing Jet Florida Sys. and Kroh Bros. After restating the policy reasons behind requiring that new value remain unpaid, the Teligent court concluded the new value exception encourages creditors to deal with troubled businesses and recognizes that the new value effectively repays the earlier preference. See Teligent, Inc., 315 B.R. at 315.

The rationale underlying these courts' holdings appears to be the “replenishment theory” — ie, that the preference should only be unavoidable to the extent the creditor replenished the estate with new value. See GGSI, 313 B.R. at 777; Chrysler Credit Corp., 312 B.R. at 803. Since the facts of these cases did not require an in-depth analysis of subsection 547(c)(4)(B), their restatement of the “requirement” that subsequent new value must remain unpaid highlights the extent to which these courts have applied a judicial gloss to section 547(c)(4) rather than focusing on the plain language in the statute. See Toyota of Jefferson, Inc., 14 F.3d at 1093 n.2; Check Reporting Servs., 140 B.R. at 433 (noting the superficial nature with which the courts have dealt with the requirement of section 547(c)(4)(B)); Successor Comm. of Creditors Holding Unsec. Claims v. Bergen Brunswig Drug Co. (In re Ladera Heights Community Hosp., Inc.), 152 B.R. 964, 968 (Bankr. C.D. Cal. 1993) (none of the cases provide a detailed analysis of the issue, instead they simply treat the proposition as well established).

Conclusion

Again, the plain meaning of the language in section 547(c)(4) does not require that the new value remain unpaid. The requirement that does exist, as stated in a double negative in section 547(c)(4)(B), is that to qualify for the defense, the “new value” cannot be repaid with an otherwise unavoidable transfer. New value can be repaid provided that the payment is an unavoidable prepetition payment or court authorized postpetition payment because those payments are not “unavoidable transfers” made by the debtor. The proper inquiry is not whether the new value has been repaid but whether the new value has been repaid by the debtor, prepetition, or debtor-in-possession, postpetition, with an unavoidable transfer.

Does subsequent new value need to be unpaid to constitute a defense to a preferential transfer under section 547(c)(4)? The issue arises when a creditor asserts the subsequent new value defense to a preference action, on the basis that additional credit (goods or services) was extended after the preferential transfer occurred, even if the subsequent new value was paid for by the debtor.

With every decade comes a new wrinkle in the discussion on whether the subsequent new value provided must remain unpaid. The issue has been resurrected recently due to the frequency of critical vendor orders authorizing the post-petition payment of pre-petition debt and debtors-in-possession agreeing to pay reclamation claims in exchange for keeping the goods. What was once previously unpaid “new value” has now been paid, albeit postpetition. Can the creditor still maintain the defense it provided subsequent new value when the new value has been repaid? Focusing on the plain language of the statute reveals the answer is yes. No matter how hard or how many times they try, courts cannot rewrite the precise language of the statute. Put simply, there is no requirement in section 547(c)(4) that in order to qualify for the subsequent new value exception the “new value” must remain unpaid.

Recognizing the inherent risk, one bankruptcy court early on admonished future courts from shorthandedly glossing over the requirements of section 547(c)(4). See Valley Candle Mfg. Co. v. Stonitsch (In re Isis Foods, Inc.), 39 B.R. 645 (Bankr. W.D.Mo. 1984). Ten years later, apparently frustrated by the continued conflict in various circuits and attempting to highlight the error of many courts' ways in their repeated use of a shorthanded test to state the requirements of section 547(c)(4), one commentator summarized the entire body of case law and policy back to the Bankruptcy Act. See Quinn HP: The Subsequent New Value Exception under Section 547(c)(4) of the Bankruptcy Code-Judicial Gloss is Creditors' Loss. 24 Mem. St.U.L. Rev. 667, 695 (1994). Yet, despite admonitions and wishful thinking, some courts continue to ignore the plain language of section 547(c)(4) and instead rely on cases hiding behind the public policy concept that new value should replenish the debtor. In what appears to be a decennial debate, the defense has undergone recent, but conflicting, analysis in several courts. Are we really having this discussion, again?

Analyzing Section 547(c)(4)

Section 547(c)(4) states that:

• The trustee may not avoid under this section a transfer;
• To or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor; (A)not secured by an otherwise unavoidable security interest; and (B)on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor[.]

11 U.S.C. ' 547(c)(4). Section 547(c)(4) represents a substantial revision of section 60(c) of the Bankruptcy Act. See Thomas W. Garland, Inc. v. Union Elec. Co. (In re Thomas W. Garland, Inc.), 19 B.R. 920, 925 (Bankr. E.D. Mo. 1982). Significantly, section 547(c)(4) omits language from section 60(c) requiring that new value remain unpaid. See Quinn, 24 Mem. St. U.L. Rev. at 673. Despite these changes, the subsequent new value defense continues to promote the prime policy of the Bankruptcy Code — equality of distribution among creditors. The ability to avoid payments made by the debtor within the 90 days preceding the petition date discourages creditors from outmaneuvering each other by pressuring the insolvent debtor for payments, and prevents the debtor from making payments that prefer one creditor to the detriment of all others. Likewise, the new value defense allows a creditor to keep an otherwise preferential payment in recognition of the fact it continued doing business with the debtor in the ordinary course of business and used credit terms with an eye towards avoiding bankruptcy altogether. See Chrysler Credit Corp. v. Hall , 312 B.R. 797, 802 (E.D. Va. 2004); Phoenix Rest. Group v. Ajilon Prof. Staffing LLC (In re Phoenix Rest. Group), 317 B.R. 491, 495 (Bankr. M.D.Tenn. 2004).

Applying the 'Plain Meaning' of Section 547(c)(4)

From the divergence of court decisions, it is clear that the arguably simple policy justifying the subsequent new value defense has proven less than simple in its application. Fortunately, some courts are getting it right. A good example is Roberds, Inc. v. Broyhill Furntr. (In re Roberds, Inc.), 315 B.R. 443, 468-73 (Bankr. S.D. Ohio 2004), in which the Bankruptcy Court for the Southern District of Ohio summarized the current case law on the subject. In Roberds, the debtor brought an adversary proceeding to recover prepetition payments made to its supplier. The court stated that it was bound to follow the plain meaning of the statute unless the application would produce a result demonstrably at odds with the purpose of the statute. See Id. , 315 B.R. at 468 citing United States v. Ron Pair Enters, Inc. , 489 I.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989). The court noted that the word “paid” was not present in section 547(c)(4), and that decisions focusing on the narrow issue of whether the new value remains unpaid were incomplete and inaccurate. See Roberds, 315 B.R. at 469-70. According to the court, the proper inquiry is whether the subsequent new value has been repaid by an otherwise unavoidable transfer. See Id.; Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1093 n.2 (5th Cir 1994). This approach, which tracks the language of section 547(c)(4)(B), allows a creditor to successfully assert the new value defense if the trustee can recover the repayment by some other means.

Similarly, the United States District Court for the Eastern District of Virginia held the proper inquiry was not whether the creditor asserting the new value defense had been paid for the new value but whether it had been paid by a transfer not subject to avoidance by the trustee or debtor-in-possession. See Chrysler Credit, 312 B.R. at 803. The court found the plain meaning of the section was coherent, and, by adhering to the plain meaning, promotes the policy of encouraging creditors to do business with financially troubled debtors. See Id. at 805. According to the court, if it were to require that new value remain unpaid, creditors would be discouraged from supplying new value. If creditors were not entitled to receive some benefit from supplying new value, those that did supply new value would be penalized and in a worse position than those who did not. See Id., Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 232 (9th Cir. 1995).

Following this logic, the Bankruptcy Court for the District of Delaware recently stated that the “clear import of the statute would be defeated if it is held that the new value must remain unpaid” and, in so doing, “distinguished” (in reality questioned the logic behind) the opinion of the Court of Appeals for the Third Circuit in New York City Shoes and adopted the reasoning of Check Reporting Services. See Hechinger Invest. Co. of Delaware v. Univ. Forest Prod., Inc. (In re Hechinger Invest. Co.), No. 99-02261, 2004 WL 3113718, at *5 (Bankr. D. Del. 2004).

Postpetition Payment of Prepetition New Value

Extending the logic, recent cases go an additional step in analyzing the plain meaning of section 547(c)(4). By concentrating on the words used in section 547(c), particularly “trustee” and “debtor,” these courts will also allow the subsequent new value defense to be asserted by creditors who receive payment postpetition for any unpaid new value supplied prepetition.

In In re Phoenix Rest. Group, the plan administrator commenced a preference action against a creditor who provided temporary staffing services to the debtor. Phoenix Rest. Group, supra. Several payments were received by the creditor from the debtor during the preference period and a large payment was received postpetition. The creditor argued that its continual supply of staffing services to the debtor, for which as of the petition date it was unpaid, constituted new value. The plan administrator argued that the postpetition payments to the creditor should reduce the amount of “subsequent new value” defense the creditor was entitled to claim. The court found that the plain language of section 547 closes the preference window analysis at the petition date. See Phoenix Rest. Group, 317 B.R. at 496.

“Throughout section 547 the 'debtor' refers to the prepetition entity. Had Congress intended ' 547(c)(4)(B) to account for payments made post petition, the section would have included something like 'an otherwise unavoidable transfer of an interest of the estate in property to or for the benefit of such creditor.'”

In reaching its conclusion, the court was persuaded by cases that had not allowed postpetition advances of new value by a creditor to reduce prepetition preference exposure. See Berquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir. 1988) (postpetition goods or services provided to a debtor in possession do not qualify as new value because any postposition advances are given to the debtor's estate not to the debtor)(emphasis in original); Clark v. Frank B. Hall & Co. of Colo. (In re Sharoff Food Serv., Inc.), 179 B.R. 669, 678 (Bankr. D.Colo. 1995).

Therefore, if a creditor has received a postpetition payment by the trustee or debtor-in-possession pursuant to a critical vendor order or as a result of a debtor-in-possession not wanting the creditor to exercise reclamation rights, these payments or transfers are not made by the debtor, so the creditor is still entitled to the defense under the plain meaning section 547(c)(4).

Bad Habits Die Hard: The 'Replenishment Theory' Remains Alive and Well

Finding comfort in policy-based arguments and shorthanded tests, some courts are once again attempting to write in an “unpaid” requirement into the section 547(c)(4). See GGSI Liquidation, Inc. v. Quad-tech, Inc. (In re GGSI Liquidation, Inc.), 313 B.R. 770, 777 (Bankr. N.D. Ill. 2004), Accessair, Inc. v. Airline Software, Inc. (In re Accessair, Inc.), 314 B.R. 386, 395 (B.A.P. 8th Cir 2004), Teligent, Inc. v. Level(3) Communications (In re Teligent, Inc.), 315 B.R. 308, 315. Paying little, if any, deference to the volumes of analysis in case law, commentary and legislative history on section 547(c)(4), these courts conclude in a summary fashion that if the new value is subsequently paid, the estate remains depleted, not replenished, by the new value and, therefore, the creditor should not be entitled to a defense to the preference action. Compare Kroh Bros. Dev. Co. v. Continental Constr. Engineers, Inc. (In re Kroh Bros. Dev. Co.), 930 F.2d 648, 652-53 (8th Cir. 1991) (new value must remain unpaid); New York City Shoes v. Bentley Int'l Inc. (In re New York City Shoes, Inc.), 880 F.2d 679, 680 (3d Cir. 1989); Charisma Inv. Co. v. Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082, 1083 (11th Cir. 1988); In re Prescott, 805 F.2d 719, 728 (7th Cir. 1986); Pettigrew v. Trust Co. (In re Bishop), 17 B.R. 180 (Bankr. N.D. Ga. 1982) with IRFM, 52 F.3d 228, Toyota of Jefferson, Inc., 14 F.3d at 1093 n.2 (pursuant to plain language of statute, new value need not remain unpaid); Crichton v. Wheeling Nat'l Bank (In re Meredith Manor, Inc.), 902 F. 2d 257 (4th Cir. 1990); Isis Foods, 39 B.R. at 653; Boyd v. Water Doctor (In re Check Reporting Servs., Inc.), 140 B.R. 425 (Bankr. W.D. Mich. 1992).

Recently, in GGSI, the Bankruptcy Court for the Northern District of Illinois stated that, for the subsequent new value defense to apply, the following sequence of events must occur: 1) the creditor must have received a preference otherwise voidable under section 547(b); 2) after receiving the preferential transfer, the creditor must advance additional unsecured credit to the debtor; and 3) the additional credit must be unpaid. See GGSI, 313 B.R. at 777 citing Prescott, 805 F.2d at 728 and Kroh Bros., 930 F.2d at 652. The creditor in GGSI attempted to assert the subsequent new value defense to a preference action brought by the Chapter 7 trustee. During the preference period, the creditor/subcontractor had received partial payments from the debtor/general contractor for some of the new value it supplied. In addition, a third-party customer of the debtor was authorized to pay the subcontractor/creditor postpetition and offset the amounts paid to the creditor/subcontractor against amounts owed to the debtor. The creditor/subcontractor in arguing entitlement to the subsequent new value defense correctly asserted that recent cases have approached the “unpaid” question differently in analyzing a section 547(c)(4) defense and argued that this approach is more in tune with the statutory language and legislative history. See GGSI, 313 B.R. at 778 citing IRFM, Inc., 52 F.3d at 231. In addition, the creditor argued that, because a third party, not the debtor, had repaid some of the new value, the debtor had not been depleted. Therefore, the policy reasons promoted by the courts requiring new value to remain unpaid were not served.

Despite the creditor/subcontractor's argument, the GGSI court reiterated the “requirement” that the new value must remain unpaid in order to be a defense to a preference action, and the policy justification that, by remaining unpaid, the new value supplied, in effect returns the preference to the estate. See Id. The Bankruptcy Court for the Northern District of Illinois stated that it was bound by the Seventh Circuit decision in Prescott and dismissed the creditor's argument without discussing its merit. See Prescott, 805 F.2d at 728 (new value must remain unpaid). As to the third party payments, the court noted that, because the third party creditor was permitted to offset amounts owed to the debtor by amounts it paid to the creditor, the estate had been depleted and not replenished by the repayment of the new value to the extent of the offset.

In addition to the GGSI case, the Bankruptcy Appellate Panel of the Eighth Circuit in In re Accessair, Inc., and the Bankruptcy Court for the Southern District of New York in In re Teligent, Inc., recently stated, in dicta, that the relevant inquiry in analyzing a subsequent new value defense is whether the new value replenished the bankruptcy estate and the new value remained unpaid. See Accessair 314 B.R. at 394 citing Kroh Bros.; Teligent, Inc., 315 B.R. at 315 citing Jet Florida Sys. and Kroh Bros. After restating the policy reasons behind requiring that new value remain unpaid, the Teligent court concluded the new value exception encourages creditors to deal with troubled businesses and recognizes that the new value effectively repays the earlier preference. See Teligent, Inc., 315 B.R. at 315.

The rationale underlying these courts' holdings appears to be the “replenishment theory” — ie, that the preference should only be unavoidable to the extent the creditor replenished the estate with new value. See GGSI, 313 B.R. at 777; Chrysler Credit Corp., 312 B.R. at 803. Since the facts of these cases did not require an in-depth analysis of subsection 547(c)(4)(B), their restatement of the “requirement” that subsequent new value must remain unpaid highlights the extent to which these courts have applied a judicial gloss to section 547(c)(4) rather than focusing on the plain language in the statute. See Toyota of Jefferson, Inc., 14 F.3d at 1093 n.2; Check Reporting Servs., 140 B.R. at 433 (noting the superficial nature with which the courts have dealt with the requirement of section 547(c)(4)(B)); Successor Comm. of Creditors Holding Unsec. Claims v. Bergen Brunswig Drug Co. (In re Ladera Heights Community Hosp., Inc.), 152 B.R. 964, 968 (Bankr. C.D. Cal. 1993) (none of the cases provide a detailed analysis of the issue, instead they simply treat the proposition as well established).

Conclusion

Again, the plain meaning of the language in section 547(c)(4) does not require that the new value remain unpaid. The requirement that does exist, as stated in a double negative in section 547(c)(4)(B), is that to qualify for the defense, the “new value” cannot be repaid with an otherwise unavoidable transfer. New value can be repaid provided that the payment is an unavoidable prepetition payment or court authorized postpetition payment because those payments are not “unavoidable transfers” made by the debtor. The proper inquiry is not whether the new value has been repaid but whether the new value has been repaid by the debtor, prepetition, or debtor-in-possession, postpetition, with an unavoidable transfer.