In the event of a company filing for bankruptcy, creditors often face the risk of preference exposure, where the company may seek to reclaim funds paid to the creditor prior to the bankruptcy filing. However, the Bankruptcy Code offers affirmative defenses that can help creditors reduce their preference exposure or liability. One such defense is the new value defense, also known as the subsequent new value defense. This defense, outlined in 11 U.S.C. § 547(c)(4), is designed to encourage creditors to continue their engagement with financially distressed companies.

The new value defense requires the creditor to demonstrate that they provided new value to the debtor after the alleged preferential payment, that this new value was not secured by an unavoidable security interest, and that the new value remains unpaid at the time of the bankruptcy filing. For instance, if a company pays a creditor $20,000 and then receives goods worth $10,000 from the creditor before filing for bankruptcy, the creditor could reduce their preference exposure by the value of the goods provided.

However, the application of the new value defense is not always straightforward. Courts may differ on its application, and other factors may affect its availability. For example, some jurisdictions allow a creditor to offset new value against only the immediately preceding preferential payment, while others allow offsetting against all prior preference payments. Determining when new value was provided can also be challenging, and courts have varying views on the impact of post-petition events on the new value defense.

Despite its complexities, the new value defense can be a valuable tool for creditors to reduce or eliminate their preference liability, and it is advisable for creditors to seek competent legal counsel to navigate these complexities. Read the full article here.

Photo of David Fournier David Fournier

David represents various interests in complex bankruptcy proceedings in the District of Delaware and other jurisdictions. His clients include corporate debtors, secured and unsecured creditors, official creditors’ committees, foreign representatives, and others. David also has extensive experience as a mediator in bankruptcy litigation.

Photo of Evelyn Meltzer Evelyn Meltzer

Evelyn focuses her practice on corporate bankruptcy, insolvency, distressed M&A, and creditors’ rights. With more than 20 years of experience, Evelyn understands all facets of a problem or opportunity, strategically devising insightful, innovative, and practical solutions that protect and advance her clients’ interests.

Photo of Kenneth Listwak Kenneth Listwak

Ken has broad experience in bankruptcy and reorganization matters, including adversary proceedings and contested matters in complex bankruptcy cases, and advising and guiding clients through complex issues involving bankruptcy law and Delaware legal practice.

Photo of Tori Lynn Remington Tori Lynn Remington

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also…

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also has experience in the Court of Chancery representing assignees in Delaware ABCs.