In In re Proliance International, Inc., et al., Judge Sontchi of the United States Bankruptcy Court for the District of Delaware held that a preference defendant’s preference exposure is reduced upon application of paid and unpaid subsequent new value.

Factual Background

After Proliance International, Inc.’s Chapter 11 cases were converted to Chapter 7 proceedings, the Chapter 7 trustee, George L. Miller (Trustee) instituted a preference action against JNJ Logistics, LLC (Defendant and together with the Trustee, Parties) seeking a return of $548,035.66 in allegedly preferential transfers.

The Parties agreed that the Defendant was entitled to a subsequent new value defense in the amount of $49,366.28 resulting from open and unpaid invoices. The Parties disagreed, however, on whether Defendant could assert an additional $222,045.11 in additional paid new value (Paid New Value).

The Defendant and the Trustee each filed motions for partial summary judgment on the Paid New Value issue.

Analysis

    A. Section 547(c)(4)

The Court began its analysis with a review of the plain language Section 547(c)(4). Section 547(c)(4) provides that:

  • (c) The trustee may not avoid under this section a transfer…
  • (4) 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--
  • (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;

11 U.S.C. §547(c)(4). The Bankruptcy Code defines “new value” as:

“new value” means money or money's worth in goods, services or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.

11 U.S.C. §547(a)(2).

The Court also noted the policy considerations behind the enactment of Section 547(c)(4). The Court explained that Section 547(c)(4) “is intended to encourage creditors to work with companies on the verge of insolvency. In addition, it is designed to ameliorate the unfairness of allowing the trustee to avoid all transfers made by a debtor to a creditor during the preference period without giving any corresponding credit for advances of new value that benefitted the debtor.” Friedman’s Inc., Case No. 09-10161, 2011 WL 5975283 at *2.

    B. Split of Authority

The Court next examined the split of authority that has developed regarding whether subsequent new value must remain unpaid.

Courts that have held that new value must remain unpaid have relied upon the Third Circuit’s decision in New York City Shoes, Inc. v. Bently International, Inc., in which the appellate court stated, in dicta, that “the debtor must not have fully compensated the creditor for the ‘new value’ as of the date that it filed its bankruptcy petition.” The Court discussed the holdings in American International Airways, out of the Bankruptcy Court for the Eastern District of Pennsylvania and In re Hancock-Nelson Mercantile Co., Inc., out of the Bankruptcy Court for the District of Minnesota in which each court held that subsequent new value must remain unpaid.

Other courts have held that subsequent new value does not need to remain unpaid. In reaching this conclusion, these courts have focused on the “otherwise unavoidable” phrase contained in Section 547(c)(4)(B). As explained by the court in In re Check Reporting Services, Inc., “if the transfer to the creditor after the new value was given was avoidable, the transfer was effectively the same as no transfer at all, and the creditor should still be able to get credit for the new value.” The bankruptcy court also cited In re Pillowtex Corp., a 2009 decision by Judge Carey, in which the court held that subsequent new value did not need to remain unpaid. The Pillowtex court found that not requiring new value to remain unpaid furthered two purposes set forth by the Third Circuit in New York City Shoes: (i) to encourage trade creditors to continue dealing with a troubled business; and (ii) to treat fairly of creditors that replenish an estate after receiving a preference.

Judge Sontchi concluded with an examination into his own previous jurisprudence and concluded that his opinions in In re Sierra Concrete Design, Inc. and In re Vaso Active Pharmaceuticals, Inc., at lease by inference, held that subsequent new value need not remain unpaid.

    C. Application to the Present Facts

The Court began by determining whether Paid New Value transfers were otherwise avoidable. Because the Paid New Value payments otherwise fit within the elements set forth in Section 547(b), Judge Sontchi held that the Paid New Value was otherwise avoidable. Based upon that conclusion, and the court’s previous decisions in Sierra Concrete and Vaso, the Court went on to find that the Defendant was entitled to assert the Paid New Value as a defense to the Trustee’s preference claim.