Defending Preference Actions: Contemporaneus Exchange for New Value

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

Contemporaneus Exchange for New Value

Previously we addressed the burden of proof placed upon a bankruptcy trustee in order to avoid a preference payment or transfer made by one of your customers 90 days before filing bankruptcy. See 11 U.S.C. Section 547(b). We ended that discussion by noting that even if the trustee proves all of the elements of a preference, there are defenses to a trustee’s preference action. Those defenses are set forth in Section 547(c) of the Bankruptcy Code. If you can successfully prove one of the defenses in this section, then the Trustee cannot avoid the payment or transfer that was made.

The first defense applies when there is a contemporaneous exchange for new value provided to your customer, who is now a bankruptcy debtor. See 11 U.S.C. Section 547(c)(1). Under this section of the Bankruptcy Code, a preference cannot be avoided by the trustee if you can prove that the transfer was intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor and the transfer was in fact a substantially contemporaneous exchange.

This defense only protects preference transfers to the extent that the creditor can prove that the value given to the creditor equals the value the debtor received. For example, you ship $100,000.00 in merchandise to a customer on 30-day terms. The customer pays you $100,000.00 within the 30 days and then files bankruptcy within 90 days of the payment. Under the Code, the payment is considered a contemporaneous exchange for new value and cannot be avoided as a preference.

When asserting this defense, you must prove that the debtor and you intended the transfer to be a contemporaneous exchange for new value given to the customer. Courts have held that transactions that appear on their face to be a contemporaneous exchange for new value will not be considered as such if there is evidence that the parties did not intend the exchange to be contemporaneous. The intent of the parties can be difficult to prove, especially if you have an uncooperative debtor. However, the conduct of the parties and any writings and communications between them can be used to establish intent.

Notwithstanding the intent of the parties, the defense further requires that the exchange was, in fact, contemporaneous. Thus, courts also examined the timing of the purported contemporaneous exchange for new value relative to the type of transaction or circumstances.

With respect to the new value given, you must prove a specific measure of new value was provided to the debtor. The new value provided generally must actually enhance the worth of the debtor’s estate. For example, a creditor’s forbearance from levying on a judgment does not constitute new value.

Courts have rendered some surprising decisions when applying the contemporaneous exchange for new value defense. It is important that you collect all relevant facts to your transaction with the customer and review them with counsel to determine if the defense can be credibly maintained. However, even if you believe that there may be a gap in proving all of the elements of the defense, it should still be asserted because it allows you leverage in dealing with the trustee for purposes of a negotiated settlement.

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