Eleventh Circuit's Ruling Strengthens Creditors' New Value Defense to Preference.

Author:Underwood, Scott

The 11th Circuit in Kaye v. Blue Bell Creameries Inc. (In re BFW Liquidation LLC), 2018 WL 3850101, 17-13588 (11th Cir. Aug. 14, 2018), joined the majority of circuit courts in ruling that the new value defense to a preference action is not limited to value that remains unpaid at the time of filing. This decision, issued August 14, 2018, is welcome news to creditors as it should result in a significant reduction in preference exposure when dealing with financially troubled debtors that ultimately file for bankruptcy protection.

Before discussing the decision, a brief overview of preference actions is helpful for context. A preference action is a lawsuit typically brought by a trustee (or a debtor in possession) of a bankruptcy estate to recover payments made by the debtor to a creditor during the 90 days immediately preceding the date of filing a bankruptcy petition, which is referred to as the preference period. The policy reason behind allowing a trustee to "claw back" these preferential payments is to promote equality of creditor treatment by reducing the incentive of aggressive collection actions by creditors who are concerned about the financial stability of their debtor, which can often force the debtor into bankruptcy, and to avoid debtors preferring certain creditors over others and selectively making payments.

While there are a number of potential defenses to a preference action, the 11th Circuit's recent opinion focuses on the "new value" defense. A new value defense may be available if a creditor can show that it provided goods or services to the debtor after a preference payment was made by the debtor (i.e., a payment within 90 days of filing). The value of the new goods or services provided by the creditor can then be used to offset the amount of re-payment that the creditor is liable for in a preference action.

Prior to the decision in Kaye, the 11th Circuit had three basic requirements in order for a creditor to have a valid new value defense to a preference action: 1) the creditor provided new value to the debtor subsequent to the preference payment; 2) the new value was unsecured by collateral of the debtor; and 3) the new value remained unpaid at the time of filing. The Kaye decision revisited the third requirement and determined that, based on the plain language of the Bankruptcy Code, as well as relevant policy considerations, the new value defense is not limited to subsequent advances of credit that remain unpaid on the...

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