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A New Look at Section 547(c)(4): Is “Paid Subsequent New Value” Non-Exclusive of Other Defenses?

Miller v. JNJ Logistics LLC (In re Proliance Int’l, Inc.), No. 11-52514 (CSS), 2014 WL 3956485 (Bankr. D. Del. Aug 14, 2014)

Following precedent, Judge Christopher S. Sontchi held in this Opinion that “paid subsequent new value” (“Paid SNV”) may offset a creditor’s preference exposure under section 547(c)(4) of the Bankruptcy Code.  However, in a potentially significant departure from the Court’s earlier decision in Pillowtex, Judge Sontchi ruled that, as long a trustee states a prima facie claim for an “otherwise avoidable” transfer under section 547(b),  the amount of a creditor’s Paid SNV defense may be determined without regard to a creditor’s other potential defenses.

Under the facts of the case, the chapter 7 trustee (the “Trustee”) sought avoidance and recovery of $548,035.66 of allegedly preferential transfers from defendant, JNJ Logistics LLC (“JNJ”).  JNJ sought partial summary judgment based on a subsequent new value defense comprised of $49,366.28 unpaid subsequent new value (“Unpaid SNV”) and $222,045.11 of Paid SNV.  Notably, JNJ sought a determination of its subsequent new value under section 547(c)(4) prior to determination of its other defenses under section 547(c).

The facts asserted by JNJ are comparable to those asserted by the defendant in Wahoski v. Xymid, LLC (In re Pillowtex Corp.), in which the defendant also sought a determination of Paid SNV by the Delaware Bankruptcy Court under section 547(c)(4) at the summary judgment stage.  416 B.R. 123 (Bankr. D. Del. 2009).  In that case, the Court ruled that the exact amount of subsequent new value could not be established before the application of other defenses. Id. at 131.  The Court explained “until it is determined whether the Debtors’ payments to Xymid are otherwise unavoidable, the exact amount subject to the subsequent new value defense cannot be determined.” Id.

In this case, the Trustee did not dispute JNJ’s subsequent new value defense per se.  However, he did contest whether JNJ could assert a Paid SNV defense without conceding that the related transfers were avoidable.  He argued that the statutory language in section 547(c)(4) mandated that the successful assertion of Paid SNV necessarily excludes application of other defenses.  In particular, he pointed to the statutory requirement under section 547(c)(4) that the “debtor did not make an otherwise unavoidable transfer.” (emphasis added).  In accordance with his position, the Trustee included a cross motion for partial summary judgment in his opposition to JNJ’s motion.  In the event the Court ruled in JNJ’s favor, the Trustee requested that the Court enter judgment in his favor in the amount of the Paid SNV asserted by JNJ (i.e., $222,045.11).

Against this backdrop, Judge Sontchi issued his ruling.  With respect to JNJ’s motion, he followed (and further solidified) earlier holdings in cases such as Sierra Concrete Design in ruling that Paid SNV may be used to offset preference claims under section 547(c)(4).  See Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), 463 B.R. 302 (Bankr. D. Del. 2012).  However, he departed from the holding of Pillowtex that Paid SNV may only be determined after applying the creditor’s other defenses and establishing that the related payments are “not otherwise unavoidable.”

In contrast, Judge Sontchi held that if a trustee states a prima facie claim under section 547(b)—and thus establishes that claims are “otherwise avoidable”—this provides sufficient basis under section 547(c)(4) for the Court to determine subsequent new value without regard to, or exclusion of, a defendant’s other defenses.

Judge Sontchi found the Trustee had sufficiently stated a prima facie claim under section 547(b), and also that JNJ had met its burden in showing it was entitled to a full credit for both Paid and Unpaid SNV.  Accordingly, he granted JNJ’s motion, denied the Trustee’s cross motion, and entered an order offsetting JNJ’s subsequent new value against its preference exposure, thus reducing the Trustee’s claim to $276,624.27.  He further noted that the Trustee’s remaining claim “may be subject to other defenses by Defendant.”

The distinction between Pillowtex and this case is potentially significant.  It hinges on whether section 547(c)(4) requires a showing that Paid SNV must be related to an “otherwise avoidable” (i.e., potentially avoidable) payment under section 547(b), or a showing that payment that is “not otherwise unavoidable” (i.e., is not protected from avoidance under other defenses).  Under the Pillowtex standard, successful assertion of the Paid SNV defense excludes application of other defenses; a defendant may credit Paid SNV against preference liability, but in doing so must establish and/or concede that the related payment is not subject to other defenses.

Conversely, under the standard enunciated by Judge Sontchi, as long as a claim has been stated under section 547(b) with respect to a transfer, a defendant may assert Paid SNV defense for goods or services related to the payment, but is not precluded by doing so from asserting other defenses (ordinary course, contemporaneous exchange for new value, etc.) with respect to the remaining claim.  The case does not elucidate exactly how this would work or its ultimate impact on a defendant’s potential preference liability; Judge Sontchi expressly reserved judgment in his Opinion on the Trustee’s remaining claim.  However, it appears that this decision adds a new wrinkle to subsequent new value analysis in the District of Delaware.  How it is resolved will bear watching.