In a previous post (“Defenses to Preference Actions – Part I“), I explained that there are three common defenses to preference actions (also often called “preference lawsuits”) that you can use if you’ve received a demand letter from a bankruptcy trustee, from counsel to a Debtor-In-Possession or counsel to a creditors committee.
“NEW VALUE” DEFENSE
The “New Value” Defense (also known as the “Subsequent Extension of New Value” Defense) is used in situations where a trade creditor was providing goods to a debtor (well, before the debtor was a debtor) on credit on a periodic basis and the debtor made a series of payments to the creditor during the preference period (i.e., the period of 90 days prior to the debtor’s bankruptcy filing).
In other words, you deliver goods to your customer on several different days over the course of a month, and your customer gradually makes several different payments to you over the same period. And each delivery doesn’t necessarily match neatly up with each payment. Then the debtor files for bankruptcy, and a year later you get a letter from the trustee who is suspiciously eying those payments you received during the 90 days prior to your customer’s bankruptcy filing.
The “New Value” Defense simply helps you make the argument that if you received a payment of $10,000 on November 1 for goods previously delivered, and you subsequently delivered $4,000 worth of new goods on November 5, and your customer filed for bankruptcy on November 6 without paying for the new goods, then the “preference payment” in dispute would be reduced to $6,000 rather than $10,000.
Notably, in this situation you could still apply the “Ordinary Course of Business” Defense and dispute the $6,000 “preference payment” claim on that basis.
Most trade relationships, of course, are not as simple as the one described above. There may be multiple transactions and deliveries of goods. And calculating the amount of the “new value” received by the debtor can be complicated, both mathematically and legally, as courts have differed in their interpretations. More on that in a future post.
The key to defending yourself is to have an experienced bankruptcy lawyer, particularly one who knows the ins and outs of preference actions. Rosenberg Musso & Weiner’s experience both representing trustees and representing creditors against trustees gives us unique perspective on how to help our clients deal with preference actions.
If you’re facing a preference action in New York and need a skilled and experienced New York lawyer to help you navigate and figure out the best and most practical strategy, please feel free to contact experienced bankruptcy lawyer Bruce Weiner for a free initial consultation.