Paid New Value Does Not Count as a Preference Defense – The Last Frontier

Trade creditors dealing with a financially distressed customer must be vigilant when deciding whether to sell product or provide services on unsecured credit terms. There is obviously a material risk of nonpayment if the customer defaults and files bankruptcy. However, perhaps even more concerning, a bankruptcy trustee may seek to recover, as a preference, sums that the creditor had received from the customer during the 90 days prior to the bankruptcy filing.

Fortunately, trade creditors can assert numerous defenses to reduce their preference liability. These defenses include the “subsequent new value” defense, which has received renewed attention by the courts over the last several years. The courts have grappled over whether the subsequent new value defense includes both paid and unpaid new value, or is limited to just unpaid new value. Bottom line, the extent of a trade creditor’s preference exposure depends on whether a court allows both paid and unpaid new value or just unpaid new value, which in turn, can vary based on where its customer files its bankruptcy case.