Section 6.14 Contemporaneous Exchange for New Value

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

1. (§6.14) Contemporaneous Exchange for New Value

Under 11 U.S.C. § 547(c)(1), there is a defense to avoidance of a preferential transfer when the transfer was intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor and was a contemporaneous exchange. The purpose of this defense is to encourage creditors to continue to deal with financially distressed debtors as long as their transactions involve true exchanges of equally valued consideration. In re Jones Truck Lines, Inc., 130 F.3d 323, 326
(8^th Cir. 1997). Other creditors are not adversely affected by such an exchange because the debtor has received new value. In re Dorholt, Inc., 224 F.3d 871, 873 (8^th Cir. 2000). This exception protects transactions that were meant to be cash transactions but that unavoidably involve a brief extension of credit, for instance, when payment is made by check. See 4 James J. White & Robert S. Summers, James J. White & Robert S. Summers, Uniform Commercial Code § 32–5, at 238 (5^th ed. 2002).

To qualify for the contemporaneous exchange for new value defense, the creditor must establish that:

· both parties intended a contemporaneous exchange;

· the transaction was in fact contemporaneous; and

· the exchange was for new value.

In re Armstrong, 291 F.3d 517, 525 (8^th Cir. 2002); In re Gateway Pac. Corp., 153 F.3d 915, 918 (8^th Cir. 1998).

The determination of whether the exchange was contemporaneous
is a flexible one. Dorholt, 224 F.3d at 874 (the transfer of a nonpurchase-money security interest may be substantially contemporaneous even if it is not perfected within ten days after it was granted). The analysis includes not only an examination of the proximity in time between when the debtor remitted the challenged payment and when the creditor provided the new value, but also whether the exchange occurred within the time frame established by the parties’ agreement. In re Lewellyn & Co.,929 F.2d 424, 428 (8^th...