Eleventh Circuit Holds that Paid “New Value” can Still Support a Preference Defense

Joining the Fourth, Fifth, Eighth and Ninth Circuit Courts of Appeal, the Eleventh Circuit recently held that new value does not need to remain unpaid in order to support the subsequent new value defense in a preference action. See Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), Case No. 17-13588, 2018 WL 3850101 (11th Cir. August 14, 2018). According to the Eleventh Circuit, “[s]o long as the transfer that pays for the new value is itself avoidable, that transfer is not a barrier to assertion of § 547(c)(4)’s subsequent-new-value defense.” Id. at *6.

In BFW Liquidation, a liquidating trustee appointed under a confirmed plan sought to avoid 13 transfers, in the amount of $563,869.37, from the recipient, a wholesale distributor of ice cream. The trustee and recipient stipulated that the transfers met all the elements of a preference under section 547(b) of the Code. Id. at *3. But, the recipient argued that it was entitled to a substantial amount of setoff against the avoidable transfers on account of significant “new value” that the recipient had delivered to the debtor (a supermarket chain) during the preference period, including 1,700 ice cream deliveries. Id.

The Bankruptcy Court held that the recipient was entitled to some offset against its preference liability but only to the extent that the new value provided to the debtor remained unpaid as of the debtor’s bankruptcy filing. Id. at *3.  In doing so, the Bankruptcy Court relied primarily on its interpretation of the Eleventh Circuit’s finding in Charisma Investment Company, N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th 1988).

Excluding all the new value for which the debtor had previously paid the recipient, the Bankruptcy Court concluded that the trustee could claw back $438,496.47 of the transfers made during the preference period.  BFW Liquidation at *3.

On direct appeal to Eleventh Circuit, the Circuit Court was asked to tackle several arguments made by the parties, including whether the finding in Jet Florida was dicta; whether the plain language in section 547(c)(4) requires unpaid new value; whether the legislative history supports the recipient’s interpretation of section 547(c)(4); and whether there existed any policy reasons in favor of the trustee’s position?

In all respects, the Eleventh Circuit sided with the recipient. First, the Court held that the contrary finding in Jet Florida was merely dicta and therefore not binding precedent. BFW Liquidation at *4-5.

The Court then went on to hold that nothing in section 547(c)(4) requires new value to remain unpaid. Id. at *6. Rather, the plain language in section 547(c) (4) only provides that subsequent new value may not be used as a defense if the debtor made an “otherwise unavoidable transfer” to the creditor on account of such new value. Id. at *6. In this respect, the Court held that the fact that subsequent new value may shield a transfer from avoidance does not make such transfer an “otherwise unavoidable transfer” for purposes of the exception found in section 547(c)(4)(B). Id. at *12-14.

The Eleventh Circuit further held that the legislative history of the subsequent new value defense under section 547(c)(4) showed that Congress changed the language in the statute specifically to break away from the prior requirement under the Bankruptcy Act of 1898 that new value must remain unpaid in order for it to provide a defense. Id. at *7-9.

The Court finally found that policy considerations did not favor the trustee’s interpretation of the statute, because requiring subsequent new value to remain unpaid does not (a) encourage creditors to continue to do business with the debtor during the preference period and (b) promote equality amongst short-term and long-term creditors. Id. at *9-12.

Takeaway

The crux of the Eleventh Circuit’s opinion is that section 547(c)(4), itself, cannot be used to fall within the exception to the subsequent new value defense. According to the Eleventh Circuit, the trustee could not both argue that the subject transfers were avoidable under section 547(b) and then turnaround and argue that they were “otherwise unavoidable” after the application of the new value defense. Thus, according to the Eleventh Circuit, in order for a transfer to be considered “otherwise unavoidable,” as the term is used in section 547(c)(4)(B) (the exception), it must be unavoidable for reasons outside of section 547(c)(4)’s new value defense. For example, the list of other preference defenses in section 547(c) could constitute “unavoidable transfers” that fall within the exception to 547(c)(4).

There are still several jurisdictions, like the Third and Seventh Circuits, that do not agree with this interpretation. So, the ability to use paid “new value” to shield a preference will still depend on the jurisdiction where the underlying bankruptcy case is filed.



Categories: Preferences, Recent Case Law

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