Delaware Bankruptcy Court Adopts "Subsequent Advance” Approach Regarding New Value Exception to Avoidance of Preferential Transfers
In its August 14, 2014 opinion the Bankruptcy Court for the District of Delaware (The Honorable Christopher S. Sontchi presiding) expressly adopted the “subsequent advance” approach to the application of the Subsequent New Value (SNV) exception to the Trustee’s power to avoid Preferential Transfers in George L. Miller as Chapter 7 Trustee for Proliance International Inc., et al., v. JNJ Logistics LLC, B.R. , 2014 WL 3956485 (Del. Bankr., August 14, 2014).
Prior to the Petition Date, defendant JNJ Logistics LLC (JNJ), provided freight transport services to Debtor Proliance International Inc. The Proliance Trustee filed an Adversary Proceeding against JNJ to recover twelve payments received from debtor within 90 days of the Petition Date as avoidable preferential transfers pursuant to 11 U.S.C. § 547(b) of the bankruptcy code.
The parties filed Cross-Motions for Partial Summary Judgment regarding the extent of the deduction from the Trustee’s total claim based on JNJ’s SNV defense under 11 U.S.C. § 547(c)(4). The question before the bankruptcy court was (i) should a preferential transfer avoidance claim be reduced by subsequent new value regardless of whether such new value was ‘paid’ or ‘unpaid’ prior to the Petition Date, or (ii) should the SNV defense only apply to new value that remained ‘unpaid’ prior to the Petition Date?
It was undisputed that JNJ is entitled to a SNV discount for subsequent new value in the form of goods or services provided to debtor which remained unpaid (i.e., open invoices) as of the Petition Date (“Unpaid SNV”). The parties disagreed over the validity of JNJ’s asserted SNV defense as to invoices for new value that were paid prior to the Petition Date (“Paid SNV”). The bankruptcy court found in favor of JNJ, adopting the “subsequent advance” approach and finding that JNJ’s preference exposure was reduced by the application of both Unpaid SNV and Paid SNV.
A Trustee’s power to avoid preferential transfers is conferred by § 547(b). The subsequent new value exception to the Trustee’s avoidance power is set forth in § 547(c)(4) and most obviously applies to revolving credit relationships. To establish a successful subsequent new value defense a defendant creditor must prove two elements: (1) after receiving the preferential transfer, the creditor must have advanced ‘new value’ to the debtor on an unsecured basis; and (2) the debtor must not have fully compensated the creditor for the ‘new value’ as of the date that it filed its bankruptcy petition.
The Proliance Trustee argued that the bankruptcy court should adopt the “remains unpaid” approach, which only reduces a preference claim by the amount of Unpaid SNV. Under the “remains unpaid” approach, new value that has been paid by the debtor prior to the petition date is not eligible for offset under § 547(c)(4) on the grounds that paid new value does not represent the return of a preferential transfer to the estate. In other words, since the defendant was already ‘paid’ for the goods/services provided to debtor, it should not also be entitled to a reduction under the SNV defense of its liability to return avoidable preferential transfers to the Trustee.
The “subsequent advance” approach advocated by JNJ focuses on the language of § 547(c)(4) which provides that: “[t]he trustee may not avoid... a transfer ... to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor ... on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” The statute’s language is difficult to decipher containing, among other things, a double negative. Nonetheless, § 547(c)(4) invokes an important underlying economic principle. Namely, the creditor made subsequent shipment of goods only because the debtor was paying for the earlier shipments. Therefore, one must look at the net result—the extent to which the creditor was preferred—taking account of the new value the creditor extended to the debtor after repayment on older invoices. In making this analysis one need not link specific invoices to specific payments. Rather, one need only track the debits and credits generally. The subsequent advance approach to calculating the § 547(c)(4) SNV discount not only comports with the plain language of the statute but also furthers its two interrelated purposes of (i) encouraging trade creditors to continue dealing with troubled businesses; and (ii) fairly treating a creditor who has replenished the estate after having received a preference.
When a defendant creditor receives a preferential payment and then provides goods/services to the debtor, followed by a second preferential payment, the defendant’s preference exposure is: (i) the value of transfer #1; less (ii) the value of the goods/services provided (i.e., new value); plus (iii) the value of transfer #2; or as otherwise stated: [(value of transfer #1) - (new value provided) + (value of transfer #2)].
So long as the application of the net result of the preferential transfers and subsequent new value (paid and unpaid) never results in a defendant’s preference exposure falling below $0.00, a defendant is entitled to full credit for all subsequent new value it provided to a debtor.
White and Williams LLP is defense counsel for JNJ Logistics LLC in the above referenced matter. Given that the appeal period for the ruling in Proliance Trustee v. JNJ Logistics is still pending, we will update this alert with any further developments.
For additional information, please contact James S. Yoder, 302-467-4524, firstname.lastname@example.org.