The final installment in this series on preferences discusses the new value defense. The premise behind the new value defense is to encourage vendors to extend unsecured credit to debtors that may be on the verge of or deeply rooted in financial distress.
As with the other defenses discussed in this series, accurate and complete records including the dates on which goods are provided or services are rendered are invaluable to establishing the new value defense. The new value defense applies to preference payments received within 90 days prior to the bankruptcy filing and unpaid unsecured credit extended to the debtor during that 90 day period. Often called subsequent new value, the defense applies when a creditor receives a preferential payment and subsequently provides goods or services on an unsecured basis but does not receive payment from the debtor. For example, if a creditor receives a preferential payment for $10,000 on April 4, and on April 10 provides $5,000 worth of goods that the debtor does not pay for, and the debtor then files bankruptcy on April 12, the preference liability would be reduced by the amount of $5,000, the subsequent new value.
Successfully arguing new value generally results in a dollar for dollar reduction in preference liability and is not as subjective or fact determinative as the ordinary course defense. The above example is extremely simplified as there are generally a series of transactions between a supplier and a debtor during the 90 days prior to a bankruptcy filing. Not all subsequent new value contributions are deductible from outstanding preference liability and different courts apply different standards. Timing of payments is important and whether or not the debtor made the payment is important depending on the jurisdiction in which the court sits.