In Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018), the U.S. Court of Appeals for the Eleventh Circuit broadened the scope of section 547(c)(4) of the Bankruptcy Code’s "subsequent new value" defense against preference actions by holding that the provision applies to all new value supplied by the creditor during the preference period and not merely to new value that remains unpaid on the bankruptcy petition date. In adopting this approach, the Eleventh Circuit joined the Fourth, Fifth, Eighth, and Ninth Circuits in applying a more expansive reading of section 547(c)(4).

The Subsequent New Value Defense to Preferential Transfer Avoidance

Section 547(b) of the Bankruptcy Code provides that a bankruptcy trustee or chapter 11 debtor-in-possession may avoid transfers made by an insolvent debtor within 90 days of a bankruptcy petition filing (or up to one year, if the transferee is an insider) to a creditor if the creditor, by reason of the transfer, receives more than it would have received in a chapter 7 liquidation and the transfer had not been made.

Section 547(c) sets forth nine defenses or exceptions to preference avoidance. One of those is the "subsequent new value" defense in section 547(c)(4), which provides as follows:

The trustee may not avoid under this section 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— (A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor[.]

11 U.S.C. § 547(c)(4). "New value" is defined as:

[m]oney or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation[.]

11 U.S.C. § 547(a)(2).

Under the section 547(c)(4) exception, even if a creditor receives a preferential transfer, any subsequent unsecured credit provided to the debtor by the creditor may be offset against the creditor’s preference liability. The exception encourages trade creditors—who may fear nonpayment or payment clawback by distressed companies—to continue providing goods and services to such companies by narrowing the circumstances under which a trustee can avoid payment on those goods and services. See Jones Truck Lines, Inc. v. Full Serv. Leasing Corp., 83 F.3d 253, 257 n.3 (8th Cir. 1996).

Two Interpretations of Section 547(c)(4)

If "new value" is paid with a transfer that is avoidable (or that would be avoidable but for the application of the subsequent new value exception), it still qualifies as "new value." See Collier on Bankruptcy ¶ 547.04[e] (16th ed. 2019) (citing cases). However, courts are divided on whether a payment following the delivery of "subsequent new value" will preclude the section 547(c)(4) defense from reducing a creditor’s preference exposure in an amount equal to the amount of the newly conferred value. The two approaches to this issue are known as the "remain unpaid" approach and the "subsequent advance" approach.

The "remain unpaid" approach provides that a payment to a creditor in exchange for previously delivered new value will forfeit the defense as to that payment. Only delivery of new value that is not subsequently paid off by the debtor—in other words, value that "remain[s] unpaid"—is available to reduce the creditor’s preference exposure for previously received payments.

In contrast, the "subsequent advance" approach provides that a payment for "subsequent new value" will not prevent such new value from reducing a creditor’s overall preference exposure. In other words, a debtor’s subsequent payment to the creditor for "subsequent new value" will not obviate the defense as to such payment, allowing it to reduce the creditor’s preference liability.

A growing number of circuit courts of appeals have concluded that there is no "remain unpaid" requirement in section 547(c)(4). The Fourth, Fifth, Eighth, and Ninth Circuits have embraced this approach. Adopting a plain text reading of section 547(c)(4)(B), these courts reason that the statutory language "otherwise unavoidable transfer" indicates that, so long as the debtor has not made an avoidable transfer in respect of a "new value" delivery of goods or services, the "subsequent new value" defense is available. See Hall v. Chrysler Credit Corp. (In re JKJ Chevrolet, Inc.), 412 F.3d 545, 551–52 (4th Cir. 2005); Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1090–93, 1093 n.2 (5th Cir. 1994); Jones Truck Lines, Inc. v. Cent. States, Se. & Sw. Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 329 (8th Cir. 1997); Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 230–33 (9th Cir. 1995).

By contrast, the Third and Seventh Circuits require new value to "remain unpaid" in order for the section 547(c)(4) defense to apply. See N.Y.C. Shoes Inc. v. Bentley Int’l Inc. (In re N.Y.C. Shoes Inc.), 880 F.2d 679, 680 (3d Cir. 1989); In re Prescott, 805 F.2d 719, 731 (7th Cir. 1986). Prior to Blue Bell Creameries, the Eleventh Circuit similarly suggested that the section 547(c)(4) defense is restricted to cases in which the new value supplied by the creditor was not paid for by the debtor prior to the bankruptcy. See Charisma Inv. Co., N.V. v. Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082, 1083 (11th Cir. 1988) (noting that stated section 547(c)(4) has "generally been read to require . . . that the new value must remain unpaid").

Blue Bell Creameries

Bruno’s Supermarkets, LLC (the "debtor") was a grocery-store chain that operated in Alabama and Florida. Blue Bell Creameries, Inc. ("Blue Bell") sold ice cream and related products to the debtor on credit. When the debtor began experiencing liquidity problems, it reduced the number of checks it wrote to Blue Bell from two per week to one per week and began "stretching" payments by holding checks for a period of time before delivering them. This new "slow pay" policy delayed the time it took the debtor to pay Blue Bell during the 90-day preference period preceding the debtor’s February 2009 bankruptcy filing in the Northern District of Alabama. During that period, the debtor paid Blue Bell approximately $564,000 for product deliveries.

The bankruptcy court confirmed a liquidating chapter 11 plan for Blue Bell in September 2009. In January 2011, the liquidating trustee under the plan sued Blue Bell to avoid the $564,000 in payments as preferences.

Although Blue Bell acknowledged that the payments were otherwise preferential, it asserted that, under section 547(c)(4), its preference liability should be reduced by the subsequent new value it contributed to the debtor and that this amount should reflect both deliveries that had been paid for prepetition and those that remained unpaid. Because Blue Bell received payments at irregular intervals during the preference period owing to the debtor’s slow-pay policy and delivered goods on short-term credit, Blue Bell could not rely on the other preference defenses set forth in section 547(c).

Citing Jet Florida, the bankruptcy court applied the "remain unpaid" approach and held that the trustee could claw back approximately $438,000 as a preference. In calculating the amount that Blue Bell’s preference liability would be reduced under the subsequent new value defense, the court excluded all new value based on deliveries to the debtor for which payment was made during the preference period. Accordingly, only the last of Blue Bell’s deliveries, for which the debtor had not yet paid, was available to reduce Blue Bell’s preference liability under section 547(c)(4).

The Eleventh Circuit authorized a direct appeal of the ruling by Blue Bell.

The Eleventh Circuit’s Ruling

The Eleventh Circuit first noted that its statement on this issue in Jet Florida represented nonbinding dictum.

The court then stated its conclusion that the plain language of section 547(c)(4) does not limit the subsequent new value defense to situations in which new value was not paid for by the debtor prior to filing for bankruptcy. Instead, the court held that the section provides only that the defense cannot be used if the debtor made an "otherwise unavoidable transfer" to the creditor on account of that new value. In other words, the subsequent new value defense is available to reduce a creditor’s preference liability so long as any payment in respect of the subsequent new value is otherwise unavoidable.

The Eleventh Circuit also clarified that the term "otherwise unavoidable transfer," as used in section 547(c)(4)(B), refers to transfers that are unavoidable for reasons other than that provision’s subsequent new value defense.

According to the Eleventh Circuit, section 547(c)(4)’s legislative history supports this interpretation. The predecessor to section 547(c)(4) is section 60(c) of the Bankruptcy Act of 1898, which limited the "subsequent new value" defense to new value that had not been paid for at the time of a bankruptcy filing. The court inferred that the replacement of this provision in 1978 with a provision omitting the "remain unpaid" language indicates that Congress intended to eliminate section 60(c)’s requirement that new value must remain unpaid by the debtor. The court found further support for this inference in a specific recommendation in the 1973 Report of the Commission on the Bankruptcy Laws of the United States that the "remain unpaid" requirement be eliminated.

The Eleventh Circuit also explained that its conclusion is supported by the avoidance provisions’ policy objective of encouraging vendors to continue dealing with distressed companies. A "remain unpaid" requirement, the court reasoned, would discourage vendors from providing goods and services to companies experiencing financial difficulties by increasing the likelihood that payments in respect of such goods or services would be clawed back in connection with a subsequent bankruptcy filing. Inevitably, the court concluded, vendors in such a position would be more likely to cut off distressed companies when they are most in need of supplies, accelerating their financial downturn.

The Eleventh Circuit dismissed the concern that its ruling would undermine the policy goal of promoting equality of treatment between "short-term" creditors paid during the preference period and "long-term" creditors who remain unpaid as of the petition date. According to the court, a "remain unpaid" requirement would discourage short-term creditors from shipping goods to distressed companies altogether, leaving the bankruptcy estate—as well as long-term creditors—worse off because of the debtor’s hastened financial distress and diminished assets for satisfying all creditors.

Outlook

In Blue Bell Creameries, the Eleventh Circuit joined the Fourth, Fifth, Eighth, and Ninth Circuits in holding that there is no "remain unpaid " requirement in section 547(c)(4)—thereby adding to the majority approach on this issue. This approach broadens the scope of transactions into which vendors can safely enter because it diminishes the risk that payments for their goods or services will be clawed back in subsequent preference actions. However, the minority approach on this issue is still alive and well. See In re Calumet Photographic, Inc., 2019 WL 220229, at *1 (Bankr. N.D. Ill. Jan. 9, 2019) ("At issue before the court is the purely legal question of whether the law of [the Seventh Circuit] still holds that only unpaid new value can be used by a creditor to reduce preference liability under 11 U.S.C. § 547(c)(4)(B). . . . [T]he court concludes the answer to that question is yes."). Therefore, it may be left to the U.S. Supreme Court or legislative action to resolve the dispute.