Eleventh Circuit Strengthens Creditor's Defense to Preference Claim

Even when the creditor was paid for the new goods, stressed the court, Bankruptcy Code §547(c)(4) does not require new value to remain unpaid.” Id. at 5. Rejecting the bankruptcy trustee's “policy” argument, the court said its holding “promotes one of the 'principal policy objectives underlying the [Code's] preference provisions —' encouraging creditors to continue extending credit to financially troubled debtors.” Id. at 10.

Statutory Perspective

Code §547(b) enables a trustee to avoid “preferential” payments that the debtor made to a creditor within 90 days of the date of bankruptcy. “The trustee may [then] recover the amount of the transfer from the creditor to whom the transfer was made.” Id. at 6.

Once the trustee proves the requisite elements of a preferential transfer, the Code provides important exceptions or “safe harbor” defenses to the preference recipient. Among them is Code § 547(c)(4), which insulates the creditor to the extent that, after the debtor's payment, the creditor gave new value to the debtor on an unsecured basis. A creditor who extends further credit in reliance on the debtor's past payments is thus protected. In short, the creditor's preference liability can be effectively reduced to the extent the creditor gave value to the debtor after receiving a preference. The rationale for the statutory exception turns on the replenishment of the debtor's estate to the extent of the new value, minimizing harm to other creditors.

Relevance

The Circuits are split on the extent of the new value defense. Although the Fourth, Fifth, Eighth and Ninth Circuits agree with the Eleventh Circuit's approach in BFW, the “Seventh Circuit held, without much discussion, that §547(c)(4) does require new value to remain unpaid.” Id. at 6, n.9, citing In re Prescott, 805 F.2d 719, 727-28 (7th Cir. 1986) and In re P.A. Bergner & Co., 140 F.3d 1111, 1121 (7th Cir. 1998). The Third Circuit “also stated in a conclusory fashion that §547(c)(4) requires new value to remain unpaid.” Id. 2018 WL 385 0101, at 6 n.9, citing In re N.Y.C. Shoes, Inc., 880 F.2d 679, 680 (3d Cir. 1989).

Facts

The grocery-store chain debtor bought dairy products from the defendant creditor. Within the 90-day period preceding bankruptcy, the debtor had paid the creditor roughly $564,000 in thirteen separate admittedly preferential payments. Id. at 2. During the same time period, however, after receiving the preferential payments, the creditor delivered roughly $434,000 worth of new product to the debtor. Because the debtor had paid the creditor for most of the new product, the bankruptcy court only permitted the creditor an offset against its preference liability “to the extent that any new value it extended to the debtor … remained unpaid' as of the 'date of bankruptcy'”. Id. at 3. Relying on dicta in a prior Eleventh Circuit decision, the bankruptcy court stressed that “the new value must remain unpaid.” Id. For that reason, it held that the trustee could recover roughly $434,000 of the $564,000 paid to the creditor during the preference period. Specifically, the bankruptcy court had “excluded from the amount of new value that [the creditor] could use to offset its preference liability” any “invoice the debtor had paid ….” Id.