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Post Filing Deliveries Do Not Always Provide
"New Value" Defense

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By Sandy Soo
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

As creditors know, the purpose of the affirmative defense of “new value” provided for in 11 U.S.C. § 547(c)(4) is to encourage creditors to continue their commercial arrangements with debtors who are in default. The creditor is rewarded for supplying goods or services, or extending credit voluntarily when it is under no obligation to do so. This is the crux of the “ new value” defense. However, when the item must be shipped as a series of component parts for assembly at the debtor’s premises, and debtor pays according to a schedule, what happens when the last payment is received during the 90-day preference period, and additional shipments are made thereafter?

That was the situation presented to the court in In re Globe Building Materials, Inc., 325 B.R. 253 (2005). Debtor is a manufacturer of roofing shingles and contracted with creditor to purchase a laminating machine in order to produce laminated shingles. The contract requires the debtor to pay the creditor according to a scheduled payment plan, and the creditor was to deliver identifiable component parts of the machine to debtor for assembly at debtor’s premises. The payments however did not correlate with the shipments.

Creditor received debtor’s last payment during the 90-day preference period, and shipped another component part during this time. Additionally, creditor sold and delivered certain spare parts to debtor, which debtor was billed $74,672.65. The trustee conceded that this amount was “new value” and thus not recoverable, but the trustee sought to recover $360,643.63 - the difference between the payments made to creditor during the preference period, $435,316.28, and the invoiced billing for the spare parts.

The question posed to the court was, were the component parts that were delivered during the preference period, subsequent to the preferential payment, afford the debtor “new value”?

The creditor did not dispute that the payments were preferences, but contended that the payments were not recoverable based on 11 U.S.C. § 547(c)(2) and (c)(4). Section (c)(2) provides that the trustee may not avoid a transfer to the extent the transfer was in payment of debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee. To succeed, the creditor must prove by expert testimony that the payment was made in the manner customarily found in the industry. However, there was no evidence on record to sustain this affirmative defense.

Section (c)(4) provides that the trustee may not avoid a transfer to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor which was not secured by an otherwise unavoidable security interest and, on account of which new value, the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor. The burden of proof also falls on the creditor who must show that new value was given. Creditor must prove (1) creditor received a transfer which is otherwise voidable as a preference under § 547(b); (2) after receiving the preferential transfer, the preferred creditor advanced additional credit to the debtor on an unse-cured basis; and (3) the additional postpreference unsecured credit is unpaid, in whole or in part, as of the date of the bankruptcy petition.

Here, the case involved a unitary transaction, unlike most “new value” cases. The contract was for a single machine delivered in its component parts due to industrial manufacturing necessities. The contract did not contain a conditional delivery provision whereby the debtor would have to make certain payments by an assigned delivery date. The creditor only had to make certain that they would not “get ahead” of the debtor in delivering the parts of the machine for the obvious substantial production costs of the component parts.

The component parts delivered by creditor subsequent to the date of the preference payment provided nothing more to the debtor than what was commercially required of the creditor under the terms of the contract. If the creditor did not deliver those component parts, creditor would have been in breach of its commercial contract with debtor. This was a single contract for the purchase and delivery of one machine, not a series of contracts. Thus, creditor did not provide anything more than what was required of it under the contract agreement with debtor.

In conclusion, deliveries stemming from a contract for a single good that requires multiple deliveries of the good’s component parts for assembly at its destination that are made after buyer files bankruptcy, do not constitute “new value” for the seller.

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