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New Value Defense to Preference Adversary Proceeding Filed in the U.S. Bankruptcy Court for the Southern District of New York

This is the second in a three part series of postings in which we examine preference claims in detail. In a prior post (Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?) we discussed what are bankruptcy preference claims. In this post we will examine the new value defense to a preference claim. In a subsequent post we will look at the ordinary course defense.

Elements of the New Value Defense

One of the potential defenses that a creditor/defendant can raise to a preference adversary proceeding commenced by a trustee or debtor in possession in the U.S. Bankruptcy Court for the Southern District of New York is the ordinary course defense. The elements of this defense are:

a) after receipt of what would otherwise be a preferential payment;

b) the creditor extended new value to the debtor in the form of additional goods or services;

c) for which the creditor/defendant has not be paid by an unavoidable transfer.

The way this works is this — imagine a creditor sells machine parts to a debtor and is owed $100,000 on unpaid invoices for goods shipped on credit. On April 1st the debtor pays $40,000 to the creditor. On April 5th the creditor ships another $25,000 worth of machine parts to the debtor on creditor. On April 30th the debtor files for bankruptcy. A preference lawsuit is subsequently brought against the creditor to recover the $40,000 payment made on April 1st. In this example the creditor would get a $25,000 credit for the additional goods that it shipped on credit after it received the $40,000 payment. This “new value” could be offset against the $40,000 to reduce the creditor’s potential exposure on the preference claim to $15,000.

However, if after extending the additional new value (in the form of shipment of $25,000 of machine parts on credit) the creditor was paid by a transfer that was not itself an avoidable preference then the creditor would not get the credit. The reason for this is that the bankruptcy law wants to encourage creditors to continue doing business with financially troubled companies. If a creditor demands that it be paid on a C.O.D. basis or cash in advance basis then it will not be able to claim the credit for payments made on a C.O.D. or cash in advance basis.

New value involves an accounting exercise of examining the payments that the trustee or debtor-in-possession alleges are preferential and whether after each payment additional goods or services were provided to the debtor on credit. The new value defense allows you to offset each subsequent extension of credit to the debtor.

The attorneys of Starr & Starr, PLLC are experienced in representing defendants sued in preference cases in the U.S. Bankruptcy Court for the Southern District of New York and other bankruptcy courts. Please feel free to contact us at 888-867-8165 if you have any questions or to schedule a consultation.

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