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

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?