When is a Sale a Credit Sale or a Contemporaneous Exchange for New
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
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
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