THE 11TH CIRCUIT CLARIFIES THAT NEW VALUE NEED NOT REMAIN UNPAID TO CONSTITUTE A VALID PREFERENCE DEFENSE

By: Jeffrey N. Schatzman
Schatzman & Schatzman, P.A.
Miami, Florida
            In Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 2018 U.S. App. LEXIS 22504 * | __ F.3D __ | 2018 WL 3850101 (11thCir 2018), decided on August 14, 2018, the Eleventh Circuit Court of Appeals made clear that any reliance on its decision in Charisma Investment Company, N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th Cir. 1988), that the new value exception (11 U.S.C. § 547(c)(4)) only applies if any new value given remains unpaid, is misplaced. In Jet Florida System, the Eleventh Circuit was faced with determining whether rent payments made by the debtor to a landlord after the debtor had vacated the premises were subject to the new value exception.  In considering the exception, the court stated that § 547(c)(4) “has generally been read to require: (1) that the creditor must have extended the new value after receiving the challenged payments, (2) that the new value must have been unsecured, and (3) that the new value must remain unpaid.”  In re Jet Fla. Sys., at 1083.  The court ultimately rendered its decision by applying only the first element and found that there was no new value given by the landlord since the debtor had vacated the premises and therefore, no benefit was conferred upon the estate.

            In BFW Liquidation, the chapter 11 liquidating trustee sued Blue Bell to recover preference payments made by the debtor over the 90 days prior to the filing of the debtor’s bankruptcy case.  During that time, Blue Bell received over $563,000.00 in thirteen payments from the debtor and delivered over $435,000.00 worth of ice cream to the Debtor.  The trustee, relying on the court’s pronouncement in Jet Florida that any new value must remain unpaid, argued that nearly the entire $536,000.00 must be repaid because Blue Bell had only delivered approximately $1,000.00 worth of ice cream after the last payment was made by the debtor.  The bankruptcy court agreed and an appeal was taken directly to the Eleventh Circuit.
            The Eleventh Circuit disposed of the trustee’s position by explaining that its recitation in Jet Florida of the third element for establishing a new value exception constituted nonbinding dicta as it was never at issue in the case and played no role in the court’s decision or reasoning.  In determining that it was not bound to the third element, the court analyzed the effect of whether the new value needed to remain unpaid and considered the policy positions that would otherwise make it challenging for creditors to continue providing goods and services to a troubled debtor.  The court sided with the Fourth, Fifth, Eighth and Ninth Circuits in finding that the new value exception did not require the new value to remain unpaid.  In following those circuits, the court concurred that § 547(c)(4) was unambiguous and only requires that the new value not be secured by an otherwise unavoidable security interest and that on account for the new value, the debtor did not make an otherwise unavoidable transfer to or for the benefit of the creditor.  The court, focusing on the legislative history, further noted that the former statute, § 60(c) of the Bankruptcy Act of 1898, definitively stated that credit would be given for the amount of new value remaining unpaid as of the date the bankruptcy case, whereas the current statute is devoid of any language requiring the new value to remain unpaid. 
            From a policy standpoint, the court reasoned that “requiring the new value to remain unpaid would hinder the policy objectives of vendors to continue to extend credit to financially troubled debtors.”  Contrarily, if new value need not remain unpaid, vendors could continue to extend credit without the fear of having clawed-back all of the payments received for its newly delivered goods but would risk only a portion of payments received so long as it continued to supply the debtor.
            Based on the court’s decision, Blue Bell’s exposure was significantly reduced from over $560,000.00 to just over $100,000.00.  Although my experience has been that most trustee’s, for preference settlement purposes, usually agree to a simple mathematical calculation of sums paid during the preference period less new value provided (the “Net Result Rule”), the Eleventh Circuit has now resolved any doubt within its circuit as to how to apply the new value exception.  

Source: CLLA
THE 11TH CIRCUIT CLARIFIES THAT NEW VALUE NEED NOT REMAIN UNPAID TO CONSTITUTE A VALID PREFERENCE DEFENSE

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