The Ability of Creditor to Offset Preferential Transfers By New Value

The Ability of Creditor to Offset Preferential Transfers By New Value

The circuits are split as to whether the "subsequent new value" defense in 11 U.S.C. § 547(c)(4) may be invoked by a creditor only when new value was unpaid at the end of the preference period, or only so long as the debtor does not make an otherwise unavoidable transfer on account of the new value. This commentary reviews the law and suggests that the "subsequent advance" approach is a preferable interpretation of Section 547(c)(4)(B).

Excerpt:

Section 547(c)(4)(B) of the Bankruptcy Code has been interpreted by the Third, Seventh, and Eleventh Circuits to require that "new value" remain unpaid at the end of the preference period to be used by a creditor to offset its preference liability. The Fourth, Fifth, and Ninth Circuits, however, have held that Section 547(c)(4)(B) does not require that the "new value" remain unpaid. Rather, these latter circuits have interpreted the statute to focus only on whether or not the "new value" has been paid for by an otherwise unavoidable transfer, and if it has not, then those courts have allowed the creditor to invoke the "subsequent new value" defense. Although more circuits have employed the "remains unpaid" test, the "subsequent advance" approach used in the Fourth, Fifth, and Ninth Circuits is more consistent with the wording and intention of the statute.

The Statute

Section 547(c)(4) provides that a trustee may not avoid an otherwise avoidable transfer, "to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor--(A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value, the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor."

The legislative history of the section indicates that when "the creditor and debtor have more than one exchange during the 90-day period, the exchanges are netted out according to the formula in paragraph (4). Any new value that the creditor advances must be unsecured in order for it to qualify under this subsection."

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