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The Seventh Circuit affirmed. The court rejected the reseller's argument that the debtor's continued use of the products qualified under the 'new value' exception to the prohibition against preferential transfers. The reseller cited decisions outside the Seventh Circuit, which held that a debtor's continued use of leased real property in one case and trademarks in another constituted new value. The court disagreed, noting that the reseller did not have the right to interfere with debtor's continued use of Microsoft's software and moreover, under the purchase agreement, could not revoke the licenses upon default, unlike the landlord of the real estate or the licensor of trademarks in the cases cited by the reseller. The purchase agreement between the debtor and reseller granted Microsoft, not the reseller, the exclusive option to terminate, revoke or cancel.

The court further rejected the proposition that the debtor received new value for its payments by virtue of the reseller's forbearance from reporting a breach to Microsoft.

Citing a D.C. Circuit court decision, Drabkin v. A.I. Credit Corp., 800 F.2d 1153, 1159 (1986), the court agreed that 'a payment to an unsecured creditor in return for that creditor's agreement not to force the debtor into bankruptcy can never be treated as new value. Otherwise the preference provisions of the bankruptcy code would be nullified, because all creditors could extract payments within the preference period under that exception.”

Forbearance Agreement Does Not Create New Value

The Seventh Circuit has ruled that a Microsoft software reseller's forbearance from reporting missed payments to Microsoft does not create new value pursuant to ' 547(c)(4) and that payments made to the reseller within the preference period must be returned to the bankruptcy estate. In re ABC-Naco Inc., No. 06-1719 (April 9).

Unsecured creditors sought the return of nearly $1 million in payments made by the debtor during the preference period for Microsoft products purchased from a reseller. The purchase agreement with the reseller called for the debtor to make quarterly payments for three years. As per Microsoft's policy, the debtor had signed two agreements that provided Microsoft with the right to revoke the licenses if the debtor failed to pay the reseller (who was not a signatory to these agreements). The debtor made regular payments until the third year, when it made payments late and ultimately made four payments within 90 days of its bankruptcy filing. The bankruptcy court held that the payments were not preferential and the district court reversed.

The Seventh Circuit affirmed. The court rejected the reseller's argument that the debtor's continued use of the products qualified under the 'new value' exception to the prohibition against preferential transfers. The reseller cited decisions outside the Seventh Circuit, which held that a debtor's continued use of leased real property in one case and trademarks in another constituted new value. The court disagreed, noting that the reseller did not have the right to interfere with debtor's continued use of Microsoft's software and moreover, under the purchase agreement, could not revoke the licenses upon default, unlike the landlord of the real estate or the licensor of trademarks in the cases cited by the reseller. The purchase agreement between the debtor and reseller granted Microsoft, not the reseller, the exclusive option to terminate, revoke or cancel.

The court further rejected the proposition that the debtor received new value for its payments by virtue of the reseller's forbearance from reporting a breach to Microsoft.

Citing a D.C. Circuit court decision, Drabkin v. A.I. Credit Corp., 800 F.2d 1153, 1159 (1986), the court agreed that 'a payment to an unsecured creditor in return for that creditor's agreement not to force the debtor into bankruptcy can never be treated as new value. Otherwise the preference provisions of the bankruptcy code would be nullified, because all creditors could extract payments within the preference period under that exception.”