Source: https://www.southerncaliforniabankruptcylawblog.com/2014/03/27/preferential-transfers-iv-defenses-to-preference-avoidance-actions-part-iv/
Timestamp: 2019-01-17 03:24:13
Document Index: 441104369

Matched Legal Cases: ['§ 547', '§ 547', '§ 547', '§ 547', '§ 547', '§ 547']

Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part IV) | Southern California Bankruptcy Law Blog
Home > Chapter 11 > Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part IV)
By Nicholas Gebelt on March 27th, 2014 Posted in Chapter 11, Chapter 13, Chapter 7
Put another way, when you paid the bank $10,000, your subsequent bankruptcy estate was diminished by $10,000. When the bank later gave you $7,000, the subsequent bankruptcy estate was replenished by $7,000, leaving a net shortfall of $3,000. Therefore, the trustee would only be able to recover $3,000 rather than the entire $10,000.
There are two key elements in the statutory language of § 547(c)(4): “First, the creditor must give unsecured new value and, second, this new value must be given after the preferential transfer.” In re IRFM, Inc., 52 F. 3d 228, 231 (9th Cir. 1995) (emphasis in original).
In light of § 547(c)(3), the unsecured status requirement avoids turning § 547(c)(4) into vacuity. Otherwise, § 547(c)(3)’s secured interest defense would control. The “after the preferential transfer” requirement reduces the risk to the creditor of making the new transfer, thus encouraging it to continue to do business with a debtor in financial difficulty.
Although it is not explicitly found in the text of § 547(c)(4), the Ninth Circuit Court of Appeals has added an implied third element to the analysis: “We . . . hold that a new value defense is permitted unless the debtor repays the new value by a transfer which is otherwise unavoidable.” Id. at 232. This additional requirement takes into account the phrase “otherwise unavoidable transfer” in the statute. The IRFM Court explained the rationale by quoting Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L. Rev. 713, 788 (1985):
If the debtor has made payments for goods or services that the creditor supplied on unsecured credit after an earlier preference, and if these subsequent payments are themselves voidable as preferences (or on any other ground), then under section 547(c)(4)(B) the creditor should be able to invoke those unsecured credit extensions as a defense to the recovery of the earlier voidable preference. On the other hand, the debtor’s subsequent payments might not be voidable on any other ground and not voidable under section 547, because the goods and services were given C.O.D. rather than on a credit, or because the creditor has a defense under section 547(c)(1), (2), or (3). In this situation, the creditor may keep his payments but has no section 547(c)(4) defense to the trustee’s action to recover the earlier preference. In either event, the creditor gets credit only once for goods and services later supplied.
If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the net result defense to your case, contact a highly skilled bankruptcy attorney to help you.
Tags: § 547(c)(4), In re IRFM, net result defense, preference avoidance action