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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Eleventh Circuit Strengthens Creditor's Defense to Preference Claim

By Michael L. Cook

A defendant creditor in a preference suit may offset a) the amount of later “new value” (i.e., additional goods) it sold to the Chapter 11 debtor against b) the debtor's earlier preferential payment to the creditor, the U.S. Court of Appeals for the Eleventh Circuit recently held. See, In re BFW Liquidation LLC, 2018 WL 3850101 (11th Cir. Aug. 14, 2018).

Even when the creditor was paid for the new goods, stressed the court, Bankruptcy Code §547(c)(4) does not require new value to remain unpaid.” Id. at 5. Rejecting the bankruptcy trustee's “policy” argument, the court said its holding “promotes one of the 'principal policy objectives underlying the [Code's] preference provisions —' encouraging creditors to continue extending credit to financially troubled debtors.” Id. at 10.

Statutory Perspective

Code §547(b) enables a trustee to avoid “preferential” payments that the debtor made to a creditor within 90 days of the date of bankruptcy. “The trustee may [then] recover the amount of the transfer from the creditor to whom the transfer was made.” Id. at 6.

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