In an 11 page decision signed March 29, 2016, Judge Walrath of the Delaware Bankruptcy Court revised a calculation of new value pursuant to an order from the District Court remanding the case. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here.  PREFERENCE OPINION POSTS.

This matter was remanded from the District Court on the appeal of the Bankruptcy Court’s decision dated July 17, 2013.  In that opinion, Judge Walrath had ruled that (i) $781,702.61 of pre-petition transfers to Prudential (the Defendant) were preferential; (ii) Prudential had a new value defense totaling $128,379.40; and (iii) the Trustee was not entitled to prejudgment interest.

After both parties appealed, the District Court ruled that post-petition new value was not protected and that the Plaintiff was entitled to pre-judgment interest.  Both parties rested after argument and without presenting any additional All that was left for Judge Walrath to do in this Opinion was to determine the total transfers protected pursuant to the new value defense and how much interest to award the Plaintiff.

This Opinion illustrates the careful deference that the District Court and Bankruptcy Court pay to the Opinions of the Third Circuit.  In particular in this case, the Bankruptcy Court cites to Hechinger Investment v. Universal Forest Products (In re Hechinger), 489 F.3d 568, 580-81 (3d Cir. 2007).  For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.  As expected, we have paid particular attention in the Preference Reference to the opinions of the Third Circuit.

From April 22 – 24, 2014, Jeoffrey L. Burtch, Chapter 7 Trustee of the Capitol Infrastructure, LLC bankruptcy estates, filed approximately 71 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, and to disallow claims of the defendants pursuant to Section 502(d).

Capitol Infrastructure, LLC and various affiliated entities (the “Debtors”) filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware on April 26, 2012. By way of background, on October 15, 2012, the Court entered an Order converting the Debtors’ cases from Chapter 11 proceedings to Chapter 7 proceedings (the “Conversion Order”). One day after the Conversion Order was entered, Jeoffrey L. Burtch was appointed as the Chapter 7 Trustee of the Debtors’ estates.

The law firm of Cooch & Taylor represents the Chapter 7 Trustee in these various preference cases. The pretrial conference has not been scheduled. These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Kevin Gross. To review one of the complaints filed in these actions, click here.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at


It’s your worst nightmare: you provided goods and services to a financially struggling company, only to find out that it filed for bankruptcy, leaving your company with a large unpaid balance.  Worst yet, after the debtor filed for bankruptcy, you receive a demand letter in the mail threatening a lawsuit if you do not return payments that you received from the debtor, even though you earned that money by providing goods or services to that entity.  What sense does that make?

Unfortunately, this is the reality that many companies face when transacting business with an entity in the months prior to its bankruptcy filing.  Section 547 of the Bankruptcy Code allows a debtor to avoid and recover transfers that it made in the 90 days prior to its bankruptcy filing, regardless of whether it received anything in return. This section was enacted to preclude a debtor from paying off its favorite creditor(s), while leaving nothing for the rest of the debtor’s creditors.  Hence the term preference payment.

Where does this leave your company after receiving a demand letter or complaint in the mail for the return of such alleged preferential transfers?  Rest assured, the Bankruptcy Code also provides numerous defenses that you can raise in response to such a demand.  This post provides a brief summary of the elements of, and common defenses to, preference claims.

Elements of a Preference Claim

To establish that a defendant received a preferential transfer under Section 547 of the Bankruptcy Code, plaintiff must prove the elements of 11 U.S.C. §547(b).  These elements include that payments were received by a creditor on account of an “antecedent debt”, and that the preferential payments must be made (i) while the debtor was “insolvent”, (ii) made within 90 days before the debtor filed for bankruptcy, and (iii) the payments provide the creditor with more payments than it would receive if the debtor had liquidated under a chapter 7 liquidation.  11 U.S.C. § 547(b).

An antecedent debt arises when a party receives a right to payment from the debtor for goods or services provided to the debtor.  This means that transfers which were “prepayments” do not qualify as preferential transfers under Section 547. To determine whether a payment falls within the 90 day preference period,  count back ninety days from the date the debtor filed for bankruptcy (the petition date).  For preference claims against “insiders” of the debtor, the preference period extends back one year prior to the petition date.

Finally, the plaintiff must show that the creditor received more than it would have received had it not received the payment, but instead received a distribution in a chapter 7 liquidation. This means that in order to show that a creditor received “preferential” treatment by the debtor,  the plaintiff must prove that the creditor’s payment was greater than what the creditor would have received had the debtor liquidated its assets under chapter 7 of the Bankruptcy Code.

Affirmative Defenses to Preference Litigation: Ordinary Course of Business, New Value and Contemporaneous Exchange

Even if the plaintiff can establish that the debtor made a preferential transfer as defined under the Bankruptcy Code, there are several affirmative defenses available to creditors under Section 547(c).  The more common defenses include the subsequent new value defense, ordinary course of business defense, and the contemporaneous exchange of new value defense, which are discussed below.

  • Ordinary Course of Business Defense – Section 547(c)(2)

The party receiving the payment may still avoid returning the money by proving the payment was made in the “ordinary course of business.” The ordinary course of business defense is the most widely used defense to a preference claim. Congress created the ordinary course defense in order to protect recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor’s customers.

Under the 2005 amendments to the Bankruptcy Code, it is now easier for creditors to prove payments were made in the ordinary course of business. Under the amended provisions of the Code, a creditor that receives preferential payments must prove that payment was received in the ordinary of business of the debtor and creditor (the “subjective test”). Alternatively, if the creditor cannot prove that the payments were made according to ordinary business terms between the parties, it can still prevail by showing that the payments were made according to ordinary business terms (the “objective test”). Prior to the 2005 amendments, the creditor had to satisfy both the subjective and objective tests in order to satisfy the ordinary course of business defense.

  • Subsequent New Value Defense – Section 547(c)(4)

Exposure to a preference action can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the preferential payment. To establish a new value defense, the creditor must show that it received a preference payment, the creditor then provided the debtor with new value in the form of subsequent goods or services.

  • Contemporaneous Exchange of New Value Defense – Section 547(c)(1)

Creditors can also defend against a preference claim by showing that the payment(s) received from the debtor were contemporaneous exchanges for subsequent new value.  The contemporaneous exchange defense requires the creditor who received the payments from the debtor provide the debtor with “new value” after receiving payment, which can include the value of goods or services.  Additionally, the creditor and debtor must intend for the payments to be a contemporaneous exchange.  Finally, the payments received by the creditor and the exchange of new value must actually be substantially contemporaneous.


The above is a brief introduction to the elements and core defenses of Section 547 preference actions.  Subsequent posts will explore in greater detail the various components of preference claims.  Besides looking at substantive legal issues, however, it is also important to understand the Local Rules and General Orders that govern the procedural flow of these cases from beginning to end.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at


In an opinion issued March 16, 2012, Judge Sontchi of the Delaware Bankruptcy Court ruled that unpaid debts subject to a judicial lien are dischargeable in bankruptcy. Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion, like all those published by Judge Sontchi, walks readers through the relevant law in making its final ruling; in this case determining what liens are dischargeable pursuant to the bankruptcy code.


Tracey Chambers Coleman (the “Debtor”) had debts of $12,381 arising from unpaid attorney fees, awarded in three separate orders (the “Orders”), which were incurred in the course of a custody dispute.  This Orders were issued from 2008 through 2010.  Opinion at *4-7.  The Debtor filed a Motion to Avoid Judicial Lien (the “Motion”) to which her former spouse objected.  The Opinion was issued to decide the Motion.

Judge Sontchi’s Opinion

Judge Sontchi began his the Opinion with a discussion of Section 522(f)(1) as follows:

a debtor “may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under [section 522(b)], if such lien is – (A) a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5).” Section 523(a), in turn, provides that a debtor’s discharge does not apply to any debt that is for a “domestic support obligation” which is defined in section 101(14A). “The elements that must be satisfied for a domestic support obligation to arise are as follows: (i) the payee of the obligation must be either a governmental unit or a person with a particular relationship to the debtor or a child of the debtor; (ii) the nature of the obligation must be support; (iii) the source of the obligation must be an agreement, court order, or other determination; and (iv) the assignment status of the obligation must be consistent with paragraph (D).” In re Anthony, 453 B.R. 782, 786 (Bankr. D. N. J. 2011)

Opinion at *2.  In this case, Judge Sontchi held that the initial reasoning for the first two orders was insufficient to rule that they were support obligations.  Opinion at *8-9.  The final of the three Orders, however, “set forth a thorough basis for the Court’s action in 2011.”  Opinion at *9.  Judge Sontchi thus held that the third Order was thus a non-dischargeable domestic support obligation.

Judge Sontchi then analyzed the extent of the Debtor’s non-exempt personal property, and determined it to be worth $4,355.  As this is greater than the $3,000 that was non-dischargeable, the dischargeable portion of the judicial lien survives such that the entire $4,355 of non-exempt property was subject to the judicial liens established in the three prior Orders, with the remainder of the judicial liens being avoidable.  Opinion at *10-11.

The Delaware Bankruptcy Court consistently issues thorough, well reasoned opinions.  While the opinions of the Delaware Bankruptcy Court could be shorter, they are more likely to be upheld than opinions with less detail.  This consistency and quality are not unique to the Delaware Bankruptcy Court, but they are qualities that are attractive for parties who desire final rulings that will be upheld in subsequent litigation.


In an opinion issued January 4, 2012, Judge Sontchi of the Delaware Bankruptcy Court provided an easy to follow primer in preference law in the course of granting in part and denying in part a preference defendant’s motion for summary judgment. Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion provides an excellent framework for all preference defendants to understand why preference laws are in place and the reasoning behind their existence. The first half of the Opinion would make a fantastic introduction to any discussion of two of the most common preference defenses, the “ordinary course of business” and “new value” defenses. Please bear in mind, however, that the Opinion was issued in response to a motion for summary judgment, which applies different standards than an opinion written following a complete trial. The below blog posts address other opinions written in response to motions for summary judgment:

SemCrude Decision Delineates the Process for Analyzing Motions for Continuance vs. Motions for Summary Judgment

Decision in DBSI Delays Motion for Summary Judgment

Decision in New Century TRS Holdings, Inc. Holds That Publication in 2 Newspapers is Insufficient to Grant a Motion for Summary Judgment


In 2008, Sierra Concrete Design, Inc. and Trevi Architectural, Inc. (the “Debtors”) filed for bankruptcy in the District of Delaware. As a part of their bankruptcy proceedings, the Trustee who was appointed to handle their bankruptcy proceedings, Jeoffrey L. Burtch, filed a number of preference actions against entities which had been paid by the Debtors within the ninety-day period prior to the Debtors’ bankruptcy filings. In one of these preference cases, Revchem Composites, Inc. was a named defendant. Revchem eventually filed a motion for summary judgment, arguing that the payments made to it were protected from recovery by exceptions built into the Bankruptcy Code – the “ordinary course of business” and “subsequent new value” defenses. Opinion at *4.

Judge Sontchi’s Opinion

Judge Sontchi begins the Opinion by asking, “Why is there a preference law?” Opinion at *1. He then spends the next several pages explaining what would happen in the absence of preference laws and how the ensuing strong-arm tactics and efforts by creditors to collect payment would harm businesses in general.

The two preference defenses discussed in the Opinion are (1) the ordinary course of business defense and (2) the subsequent new value defense. The ordinary course of business defense has two ways in which in can be applied. First, did you treat the Debtor the same way you always did, and did the Debtor pay you the same way they always did? If you can answer this two-part question yes, and you have a history of working with this company, you are likely protected. In this case, Judge Sontchi opines that “17 checks covering approximately 68 invoices over an 11 month period” is “insufficient evidence….” Opinion at *7. The second way in which the ordinary course of business defense can apply, is if your interactions with the Debtor were ordinary for your industry. This requires a defendant to present evidence relating to standard industry practice. This evidence will normally be provided by an expert witness who has studied the preference defendant’s industry and who testifies in court, under oath, that the interactions were ordinary. Take note, however, that “a one-paragraph, conclusory allegation” is insufficient evidence to uphold the ordinary course of business defense. Opinion at *7.

The new value defense allows a creditor to limit their preference exposure before a bankruptcy occurs. If, for example, a debtor has a line of credit for $1,000 that it maxes out and repays four times in the ninety-day period before declaring bankruptcy, it would make no sense for the creditor to be liable for $4,000 of preferences. On page 9 of the Opinion, Judge Sontchi provides an example of how the new value defense is applied, and I have recreated the chart here:

Date Preference Payment New Value Preference Exposure
1/1/2010 $1,000 $1,000
1/5/2010 $1,000 $0
1/10/2010 $1,000 $1,000
1/15/2010 $2,000 $0 (not -$1,000)
1/30/2010 $3,000 $3,000
2/5/2010 $1,000 $2,000
2/10/2010 $1,500 $3,500
Net Result $3,500

As illustrated by the chart, any value provided after a payment will reduce (or eliminate) the preference exposure. However, this defense only tracks new value, so any new value provided will not be applied to later payments. Applying the new value analysis is an exercise based entirely on the record of payments to the preference defendant and the record of goods/services provided to the debtor by the preference defendant. In the Opinion, Judge Sontchi applied this analysis to limit the maximum preference liability of the defendant. Opinion at *10. Thus, this motion for summary judgment was allowed in part and denied in part.

The preference discussion in the Opinion is comparatively easy to follow, and I highly recommend anyone with an interest in preference actions review this decision. Not only is it an explanation suited to attorneys, but its marked lack of technical jargon makes this an opinion accessible to those who would consider themselves legal novices. Ultimately, it comes down to this – If you do business and get paid the same way you always have, you may not have to repay the preference. Or, if you provide the Debtor with some value after you get paid, you may not have to repay all of the preference. Just remember, every situation is different, and getting a professional’s help early in a preference case may save you money in the end.


On October 31, 2008, VeraSun Energy Corporation (“VeraSun”), and 24 of its affiliates or subsidiaries filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Nine months after VeraSun filed for bankruptcy, the company filed its Joint Plan of Liquidation.  Thereafter, in October of 2009, VeraSun filed a modified Plan of Liquidation which was confirmed by the Bankruptcy Court on October 23, 2009.  Pursuant to VeraSun’s Plan, KDW Restructuring and Liquidating Services LLC (“KDW”) is authorized to pursue, litigate and/or settle various pieces of litigation, including avoidance actions.  See VeraSun’s Motion Establishing Procedures Governing Adversary Proceedings, pp. 2-3.  It was these avoidance actions that were commenced on behalf of the Debtors recently in the Bankruptcy Court.


In November of 2008, I wrote a post about the VeraSun bankruptcy.  My prior post looked at VeraSun’s business, why the company filed for bankruptcy and who some of the larger creditor constituencies are in the bankruptcy proceeding.  A copy of my prior post regarding VeraSun is available here for review.  Below is an excerpt from my 2008 post discussing the company’s business and some of the factors leading to bankruptcy:

Based in Sioux Falls, South Dakota, VeraSun Energy Corporation (“VeraSun” or the “Debtor”), grew in its seven year history to become the leading producer of ethanol. As stated in a declaration of VeraSun’s chief financial officer in support of its “first day” bankruptcy motions (VeraSun declaration), VeraSun has fourteen production facilities in eight states producing over 1.4 billion gallons of ethanol annually. VeraSun employs approximately 932 employees, over one third of whom are salaried employees. The Debtor’s annual payroll expenses totals approximately $60 million, including payroll taxes.

Given that ethanol is a blend component used in gasoline, VeraSun’s sales are influenced to a large degree by fuel prices. VeraSun produces corn-based ethanol, which means that the price of its largest commodity, corn, is tied to factors such as crop production, government regulation and annual rainfall. The high volatility in the price of corn and gasoline in 2008, combined with a unfavorable hedging strategy on the price of corn, led to VeraSun sustaining significant third quarter losses in 2008. VeraSun’s hedging strategy on corn was based on the assumption that corn prices would continue to rise in 2008. Instead, the price of a bushel of corn fell by 63% by August of 2008, resulting in third quarter losses estimated between $60 and $100 million.

In addition to fluctuations in corn and gas, VeraSun’s bankruptcy was also the result of its inability to service its debt. In 2007, VeraSun purchased ASA Opco Holdings, LLC for $405.6 million. To purchase ASA, VeraSun borrowed $233.4 million. In April of 208, VeraSun purchased US BioEnergy Corporation for $756.9 million, borrowing $525.1 million to fund its second acquisition. Both acquisitions represented VeraSun’s growth strategy in ethanol production. However, the unexpected shifts in fuel and corn prices meant VeraSun needed to raise cash in order to sustain its operations. A failed equity offering, coupled with the recent freeze on lending, gave VeraSun no other choice than to file for bankruptcy protection.

The Avoidance Actions

Many, if not most, of the VeraSun avoidance actions were filed earlier this month.  Like the bankruptcy proceeding, the avoidance actions are before the Honorable Brendan L. Shannon.  On November 12, 2010, VeraSun filed its Motion for Order Establishing Procedures Governing Adversary Proceedings (the “Procedures Motion”).  A copy of the Procedures Motion is available here for review.  VeraSun is represented in these proceedings by The Rosner Law Group and Kelley Drye & Warren LLP.


In January, Mortgage Lenders Network commenced over 65 adversary actions against various defendants, seeking the avoidance and recovery of preferential transfers (read one of the preference complaints here).  As reflected in its complaints,  Mortgage Lenders filed a chapter 11 bankruptcy petition in the Delaware Bankruptcy Court on February 5, 2007. During the ten years prior to its bankruptcy, Mortgage Lenders grew from a small mortgage company with seven employees, to a residential mortgage provider serving 47 states with over 1,700 employees. 

Given the commencement of Mortgage Lenders’ preference program, this post provides a brief summary of the elements and common defenses to preference claims.

Elements to a Preference Claim

In order to establish that a party received a preferential transfer, the plaintiff must prove that payments were received by a creditor on account of an “antecedent debt.” Further, the preferential payments must be made (i.) while the debtor was “insolvent”, (ii.) made within 90 days before the debtor filed for bankruptcy, and (iii.) the payments provide the creditor with more payments than it would receive if the debtor had liquidated under a chapter 7 liquidation.


Continue Reading Mortgage Lenders Network Files Preference Actions


When considering defenses to avoidance actions, ordinary course, new value and contemporaneous exchange often come to mind. A less common defense arises under 11 U.S.C. § 546(e), excluding from avoidance actions "settlement payments" as defined under the Bankruptcy Code. A recent decision in the United States Bankruptcy Court for the District of Delaware, Elway Company, LLP v. Miller, (In re Elrod Holdings), highlights the expansive scope courts in Delaware, as well as the Third Circuit, apply when deciding whether payments from a debtor constitute settlement payments and are therefore sheltered from avoidance actions.

Jack K. Elrod Company, Inc. designed, installed and serviced spectator seating. In 2005, the Elrod family sold the business to Champlain Capital Partners, L.P.. As part of the transaction, the parties executed a stock purchase agreement whereby the family sold all of its interest in the company in exchange for cash and secured notes. The holding company Champlain created after it purchased Elrod filed for Chapter 7 liquidation in October of 2006. Approximately eleven months after filing for bankruptcy, the former owners of the debtor (the "Elrods") filed an adversary action in the debtor’s bankruptcy seeking a determination of the validity of their liens and an allowance of their claims.

In responding to the Elrods’ adversary action, the bankruptcy trustee claimed that $21 million in wire transfers to the Elrods in 2005 and 2006 were fraudulent conveyances and therefore subject to avoidance under the Bankruptcy Code. In response, the Elrods filed a motion for summary judgment seeking a finding that the wire transfers were "settlement payments" to "financial institutions" as defined under the Code. Disagreeing with the Elrods, the bankruptcy trustee argued that the term "settlement payments" applies only to publicly-traded securities, not the privately held securities involved in the Elrod bankruptcy.  Whether the transfers were settlement payments under the Code was significant to both parties, as section 546(e) excepts settlement payments from avoidance actions.

Judge Brendan L. Shannon, the bankruptcy judge assigned to the case, agreed with the Elrods and rejected the bankruptcy trustee’s narrow definition of settlement payment. The court began its analysis looking at the Bankruptcy Code’s definition of a "settlement payment" under § 741(8). Pursuant to the Code, settlement payments include "a preliminary settlement payment … a final settlement payment, or any other similar payment used in the securities trade." The court found the trustee’s argument limiting settlement payments to public securities "unconvincing" especially given that the securities trade includes a "robust trade or market for non-publicly traded securities."

In ruling against the chapter 7 trustee, the Bankruptcy Court also relied on the Third Circuit’s decision in Lowenschuss v. Resorts Int’l, Inc. (In re Resorts Int’l Inc.), 181 F.3d 505, 515 (3rd Cir. 1999). In Lowenschuss, the appellate court found that a settlement payment "is generally the transfer of cash or securities made to complete a securities transaction." Judge Shannon noted that the Lowenschuss definition of settlement payment was an "expansive one" citing the appellate court’s finding that "settlement payments" under the Bankruptcy Code "includes almost all securities transactions."

Elrod is helpful as it reaffirms the wide brush court’s use when applying the Bankruptcy Code’s definition of a settlement payment. Where appropriate, creditors should consider the settlement payment defense when faced with an avoidance action. Creditors who were a party to security transactions will therefore appreciate Elrod’s finding that the settlement payment safe harbor applies to both public and privately held securities.



Courts are split on whether new value must remain unpaid in order to constitute a valid defense to a preference claim. The United States Bankruptcy Court for the District of Delaware addressed this issue a couple of years ago in Waccamaw’s Homeplace, et. al., v. Salton Inc. (In re Waccamaw’s Homeplace). Judge Walsh’s decision in Waccamaw is helpful in many respects. Besides addressing whether new value must remain paid or unpaid, the opinion provides a general overview of the elements of a preference claim, the presumption of insolvency, plus a discussion of the ordinary course defense.

Under Waccamaw, in order to establish a new value defense, a creditor (i.) must have received a transfer that is otherwise avoidable under § 547(b); (ii.) after receiving the transfer, the creditor must provide new value “to the debtor on an unsecured basis;” and, (iii.) the debtor must not have fully compensated the creditor for the new value as of the petition date. Like courts before it, Waccamaw relied upon the Third Circuit’s decision in New York City Shoes, Inc. v. Bentley Int’l, Inc. (In re New York City Shoes), 880 F.2d 679, 880 (3d Cir. 1989), for the holding that in order for a creditor to establish a new value defense, “the debtor must not have fully compensated the creditor for the ‘new value’ as of the date that it filed its bankruptcy petition.”

Not all preference cases before the Bankruptcy Court for the District of Delaware embrace New York City Shoes. For example, in Hechinger Investment Co. of Delaware Inc., v. Universal Forest Products, Inc. (In re Hechinger Investment Co.), the court declined to follow New York City Shoes finding that the decision was “distinguishable on its facts” and instead adopted the reasoning of Check Reporting Services v. The Water Doctor (In re Check Reporting Services, Inc.), 140 B.R. 425 (Bankr.W.D.Mich. 1992). In Check Reporting Services, the United States Bankruptcy Court for the Western District of Michigan ruled that a “subsequent advance of new value does not have to remain unpaid to satisfy [the] new value exception to the avoidance of preferential transfers …”

The preference claim in Check Reporting Services arose from a “stereotypical [] creditor dealing with a debtor on a running account basis during the preference period.” Citing several cases that addressed this issue before it, the court in Check Reporting recognized that § 547(c)(4) does not contain any language to suggest that new value must remain unpaid. Further, the court noted that its holding, “though in the minority … is more firmly rooted in the statutory language” of the Bankruptcy Code.

In Hechinger, the creditor who argued that new value could remain unpaid also had a “running account” payment history similar to the creditor in Check Reporting Services. In contrast, the creditor in New York City Shoes received “just one transfer” during the preference period. Judge Lindsey thought this distinction significant enough to find that the new value provided by the creditor in Hechinger did not have to remain unpaid in order to qualify as a defense and setoff to a preference claim.

It is worth noting that Judge Walsh’s decision in Waccamaw’s Homeplace, finding that new value must remain unpaid, did not involve the “stereotypical running account” found in Hechinger and Check Reporting Services. Instead, the two preference payments at issue in Waccamaw were each in excess of $1 million and part of the debtor’s “Big Buy” program that extended invoice terms for larger purchases by the debtor.

 Given the Third Circuit’s holding in New York City Shoes, new value must remain unpaid in order to receive the new value set off. Hechinger stands for the proposition that New York City Shoes does not apply when the payments at issue are on a “running account or rolling account” basis, instead of cases concerning just one or two payments. The question that emerges, then, is why would payments made on a “rolling” basis, instead of just one or two single payments, result in two different holdings. The court in Hechinger supported its split from the Third Circuit “based on language of § 547(c)(4)(B) and the policy reasons of the code section …” It will be interesting to see whether this split in opinion is resolved as this area of the law develops.