The 547(c)(4) New Value Defense: Paid or Unpaid

It will come as no surprise that there is a long-standing split of authorities among the courts concerning whether or not subsequent new value must remain unpaid for the purposes of ' 547(c)(4). The courts that have addressed the issue over the years have generally fallen into three categories: 1) those that steadfastly require that any new value advanced remain unpaid; 2) those that apply a plain-meaning approach to ' 547(c)(4) and thus believe that the only consideration should be whether the new value is subsequently paid by the debtor by a subsequent avoidable transfer; and 3) those that analyze the effect of the transfers and the new value on the estate to determine if the estate has actually been replenished by the asserted new value, regardless of whether the new value remains unpaid. Currently, those courts requiring that new value remain unpaid are in the majority. More recently, however, an increasing number of decisions, many of which actually analyze the issue rather than summarily reach a decision without analysis or explanation, favor the plain-meaning or replenishment approaches. The importance of the approach used by the court in which a preference defendant finds itself is emphasized by the divergent outcomes that could result under the three approaches. This article briefly reviews the three approaches and makes the case that the replenishment approach is both true to the plain language of ' 547(c)(4), and the most effective approach to accomplish the purposes underlying both ' 547 avoidance actions and the statutory defenses thereto.