Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

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Preference Liability “Fixed” As Of The Petition Date: Prepetition Invoices Subsequently Paid Under Critical Vendor Order Are Still “New Value”

In what may end up being a bit of a landmark decision, Judge Christopher S. Sontchi has opined that preference liability is “fixed” as of the petition date, and is not affected by subsequent events in the bankruptcy case.

 In this case, the debtor made about $80,000 worth of preferential payments to the defendant.  Defendant provided approximately $100,000 of new value within the meaning of 547(c)(4) and therefore had no preference liability. However, during the case, pursuant to a critical vendor order authorizing the debtor to pay prepetition debt, the defendant received payment on some of the prepetition invoices that constituted new value. In the subsequently filed preference action, the debtor claimed that any invoices paid under the critical vendor order could not be used as new value. In essence, the debtor contended that the defendant’s preference liability had been increased by virtue of receiving the post-petition payments on prepetition debt.

The Court disagreed. The Court noted that the Third Circuit’s decision in New York City Shoes, Inc. v. Bentley Int’l Inc., 880 F.2d 679 (3d Cir. 1989), while not directly on point, had defined the new value defense has having three parts: (1) the creditor must have received a transfer that is otherwise voidable as a preference under section 547(b); (2) after receiving the preferential transfer, the preferred creditor must advance “new value” to the debtor on a unsecured basis; and (3) the debtor must not have fully compensated the creditor for the “new value” as of the date that it filed its bankruptcy petition. This last point, the Court held, “clearly supports fixing the entirety of the preference analysis on the Petition Date.” Setting preference liability as of the petition date “is consistent with the purpose of the preference law – to reduce damaging, pre-petition opt out behavior and to level the pre-bankruptcy playing field for all creditors. Once the bankruptcy is filed the preference law becomes unnecessary. . . Neither the post-petition provision of new value by the creditor nor the post-petition payment of unpaid pre-petition new value affects the preference calculation.”