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When is a Sale a Credit Sale or a Contemporaneous Exchange for New Value?
By Bradley D. Blakeley

If a vendor ships goods with terms requiring payment within 12- 14 days after shipment, does the vendor retain its contemporaneous - exchange defense in a preference action? A recent decision in the Payless Cashways bankruptcy case considers just how far a vendor can take the contemporaneousexchange defense.

Confor Wood Products Marketing was a long-time vendor of lumber to the debtor, Payless Cashways, a large retailer of home improvement products. The debtor filed bankruptcy and the trustee sought to recover four transfers to the vendor totaling $820,564.36. The bankruptcy court found in favor of the vendor on the vendor�s contemporaneous exchange defense, and the trustee appealed the decision to the bankruptcy appellate panel (BAP).

All of the contracts between the parties were destination contracts, Free on Board (F.O.B.) the debtor�s facilities. The payment terms were 12-14 days if shipped by railroad, 3-5 days if shipped by truck. At first impression, it would appear that transactions between the debtor and vendor are credit sales and the vendor would lose its defense that the transactions were contemporaneous exchanges for value.

To prevail on a contemporaneous exchange defense, the vendor has to prove by a preponderance of evidence that (1) both the debtor and the vendor intended the delivery of the goods to the debtor and the payment of money to the vendor to be a contemporaneous, (2) the exchange was in fact substantially contemporaneous, and (3) the exchange was for new value.

The BAP found that the first element was satisfied because both parties intended the transactions to be contemporaneous, notwithstanding testimony by the debtor that it intended the transactions to be credit sales.

The BAP found the vendor wanted to minimize its credit exposure while providing the goods to the debtor. It did so by requiring the debtor to pay for all lumber by wire transfer by the due date. The parties negotiated an agreement that would assure that the vendor received payment prior to or contemporaneously with delivery of the lumber.

It was undisputed that the vendor shipped the goods to the debtor by destination contract. A destination contract is one in which the seller bears the expense and risk of shipment. All the invoices provided that the goods were being shipped F.O.B. When the term is F.O.B., the seller must at his own expense and risk the transport of the goods to that place and there tender delivery of them in the manner provided. Unlike a shipment contract where a vendor�s obligation to a debtor ends at delivery to the carrier, a destination contract requires a vendor to bear the risk of loss, incur the obligation of delivery, and transfer the title at a point designated by the debtor. The BAP found that because the invoices created a destination contract, the parties intended that the right to payment arose upon delivery not upon shipment. Accordingly, the payments were due on or about the time the goods were delivered to the debtor.

As for the second element, a transaction can be substantially contemporaneous even if some separation exists between the time new value is provided and when the payment is received. The bankruptcy court found that there was not a single instance involving any of 25 transactions in which the debtor received goods prior to the time it wired a transfer payment. Based on this examination, the BAP found that the transactions were substantially contemporaneous.

The third element, new value, is defined as money or money's worth in goods, services, or new credit. The BAP considered the issue of when the vendor transferred value to the debtor. Was it when the goods were shipped or when they were delivered? Because the bankruptcy court found that the invoices created a destination contract, rather than the more normal shipment contract, it follows that the new value was given upon delivery not upon shipment. Accordingly, the BAP found that the date of delivery, rather than shipment, is the proper measurement of new value.

In the end the BAP�s decision upholds the policy of the defense of contemporaneous exchange for new value, which is to encourage creditors to continue to deal with financially-distressed debtors, as long as their transactions involve true exchanges of equally-valued consideration. The vendor knew it had a problem customer in the debtor and the debtor needed the vendor�s goods to continue to do business. The agreement the parties reached resulted in the debtor paying the vendor prior to or substantially contemporaneous with receipt of the goods. The parties performed as agreed and the estate was not diminished as a result of the transfers.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Summer 04

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