Possible double-counting “new value” in bankruptcy preference actions

A creditor-friendly, minority view comes from a First Circuit District Court. If this rationale catches on, this could have a significant impact on bankruptcy preference litigation.

Generally speaking, a “preference” under Section 547 of the Bankruptcy Code is a payment of an old (or “antecedent”) debt. The Bankruptcy Code allows a bankrupt company to recover its payments to creditors made during the 90 days before the bankruptcy filing, subject to certain defenses. Providing “new value” is one of the more important defenses for creditors. Section 547(c)(4) of the Bankruptcy Code effectively allows creditors to reduce or net out any preference liability against the value of goods or services subsequently provided to the debtor.

In Bogdanov v. Avnet Inc. (D.N.H., No. 10-CV-543, September 30, 2011), the Court chose an interpretation of the new value defense that encourages creditors to continue to do business with the debtor, which the Court concluded would be in the best public policy. The Court found that new value could reduce what might otherwise be a preference, even if the new value had itself been paid. In contrast, the more common interpretation of new value pertains only to additional credit extension that remains unpaid as of the bankruptcy filing. Under the Avnet ruling, the creditor would get double credit for an extension of credit that is itself repaid.

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