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A New 11th Circuit Ruling Clarifies the Rules to Analyzing a ‘Subsequent New Value’ Defense and Offers Good News to Creditors

In an important new ruling, the 11th Circuit Court of Appeals clarified the process for analyzing a creditor’s subsequent new value defense to a preferential transfer under Section 547(c)(4) in a debtor’s Chapter 11 case. The court rejected the “remains unpaid” standard, which is good news for creditors who desire to continue doing business with financially troubled entities, as the ruling gives them an even more robust subsequent new value defense and reduces the amount that a bankruptcy trustee can claw back. If you are a creditor of a business that has filed for Chapter 11 bankruptcy, you obviously want to keep all payments to which you are entitled, so you should be sure to put experienced South Florida bankruptcy counsel on your side to protect your interests.

The case that spawned the ruling involved a struggling chain of supermarkets with locations in Florida and Alabama, and the well-known ice cream maker that sold its products to the supermarket on credit. In 2008, amid liquidity problems, the supermarket began paying the ice cream vendor only once a week instead of twice and began delaying some payments by a week or more.

The supermarket was not successful in addressing its liquidity problems and filed for Chapter 11 on February 5, 2009. The bankruptcy trustee filed an adversary action against the ice cream company, seeking to avoid certain payments the supermarket had made to the ice cream vendor. The $563,000 sum the trustee sought represented the total amount that the supermarket paid to the vendor during the 90 days immediately preceding the bankruptcy filing. During that same 90-day period, the vendor made $435,000 worth of new deliveries on credit.

The vendor asserted two defenses. Its “ordinary course of business” was entirely unsuccessful. The vendor’s other defense – the “subsequent new value” defense under Section 547(c)(4) of the Bankruptcy Code – was more successful, but only slightly. The court concluded that the bankruptcy trustee could claw back $438,000. The vendor was only entitled to an offset for amounts that constituted new value and that remained unpaid as of the filing.

The 11th Circuit reversed that ruling. In joining with several other federal appeals courts, the court rejected the “remains unpaid” standard. An amount does not have to remain unpaid in order to qualify under a “subsequent new value” defense. As the court explained in this recent opinion, the way that it was interpreting Section 547(c)(4) was necessary to advance the policy objectives of the bankruptcy law. Vendors should be encouraged to continue making shipments on credit to their clients, even if the client is financially troubled. Otherwise, vendors might simply stop making deliveries because they know that the payments they receive stand at risk of being clawed back in bankruptcy. Issuing this ruling in favor of this creditor should give creditors more confidence in dealing with business partners who are experiencing difficult financial straits.

What did this decision mean, in the immediate sense, for the vendor? It meant that it was entitled to a remand to the lower court, where the “remains unpaid” would no longer apply and, therefore, the amount that the trustee would be entitled to claim back would be substantially smaller.

For the helpful advice and the determined advocacy you need in your bankruptcy-related legal matters, talk to the skilled South Florida bankruptcy attorneys at Stok Kon + Braverman. Our experienced team has been skillfully helping clients protect their business interests for many years.

Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you.

More blog posts:

Eleventh Circuit Issues Ruling Approving Judge’s Issuance of Bar Order in Bankruptcy Case, Florida Business Lawyers Blog, July 6, 2018

Penalties for a Bad Faith Chapter 11 Bankruptcy Filing in Florida, Florida Business Lawyers Blog, Aug. 9, 2017