Opinion ID: 3027931
Heading Depth: 2
Heading Rank: 1

Heading: The Contemporaneous Exchange Defense

Text: To prove that the transfers were not avoidable because they fell within the contemporaneous exchange defense under § 547(c)(1), UFP had to show that the transfers were (i) intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor; and (ii) in fact a substantially contemporaneous exchange. In re Spada, 903 F.2d 971, 974 -75 (3d Cir. 1990). “The critical inquiry in determining whether there has been a contemporaneous exchange for new value is whether the parties intended such an exchange.” Id. at 975. The Bankruptcy Court found that the disputed transfers were not intended by the parties to be contemporaneous exchanges because the transfers were credit transactions. In reaching this result, the Court relied upon several factually distinguishable cases, none of which stand for the proposition that parties can never intend credit transactions to be contemporaneous exchanges under § 547(c)(1)(A).3 We 3 The Court cited Kallen v. Litas, 47 B.R. 977 (N.D. Ill. 1985), and two later cases that cite Kallen, for the proposition that it is “well established that the § 547(c)(1) defense may not be applied to credit transactions.” In re Hechinger Inv. Co., 326 B.R. at 289. However, this was not the holding in Kallen. The Kallen Court stated that § 547(c)(1) “was meant to apply to cash or quasi-cash transactions,” but did not rely on any distinction between cash and credit transactions in its holding. Kallen, 12 disagree with the Bankruptcy Court’s conclusion. Indeed, it would appear that § 547(c)(1) covers little other than credit transactions. The § 547(c)(1) defense applies only to transfers that the debtor has shown are payments on an “antecedent debt” under § 547(b). See 11 U.S.C. § 547(b)(2) (definition of avoidable transfers). If there is no delay between when the debt arises and payment of the obligation, then the transfer is outside the scope of § 547(b), and § 547(c)(1) is not implicated. The existence of a delay between the creation of a debt and its payment is a hallmark of a credit relationship, which is, by definition, a relationship in which the creditor entrusts the debtor with goods without present payment. OXFORD ENGLISH DICTIONARY (2d ed. 1989) (defining “credit” as “[t]rust or confidence in a buyer’s ability and intention to pay at some future time, exhibited by entrusting him with goods, etc. without present payment.”). We do not think that the District Court’s interpretation of the Bankruptcy Court’s order – namely, as concluding that the parties intended to have a credit relationship – necessarily 47 B.R. at 983 & n.7. The Bankruptcy Court also relied upon In re Contempri Homes, Inc., 269 B.R. 124 (Bankr. M.D. Pa. 2001), in which the court rejected the defendant’s § 547(c)(1) defense based on a finding that both parties intended the debtor’s payments to be applied to old invoices. Id. at 129. The court did not, however, find that the parties lacked the requisite intent based on the fact that the transactions were styled as “credit transactions.” Instead, the court concluded that the parties could not have intended a contemporaneous exchange because the invoices to which the payments were applied were “dated,” “old” and “aged.” Id. at 128. 13 resolves the question. The inquiry still remains: even if a credit relationship was intended, was it nonetheless their intent that the ongoing payments would be contemporaneous exchanges for new value? A court may find the parties intended a contemporaneous exchange for new value even when the transaction is styled as a “credit” transaction. See In re Payless Cashways, Inc., 306 B.R. 243 (8th Cir. BAP 2004), aff’d, 394 F.3d 1082 (8th Cir. 2005). The question is one of intent, and although a delay between the incurrence of the debt and its payment can evidence that the exchange was not intended to be contemporaneous, the passage of time does not necessarily negate intent. In In re Payless Cashways, for example, the debtor generally paid the creditor for specific shipments some time after the goods were shipped, but before or at the time that the shipments arrived at the debtor’s facility. Id. at 247. The court concluded that the parties intended the transfers to be part of a contemporaneous exchange for new value. The court noted that the debtor and creditor agreed to credit terms that would match up the date of the actual delivery of the goods purchased by the debtor with the date of the debtor’s obligation to wire payment for the goods to the creditor. Id. at 246. The court also put great weight on the fact that the contracts were “destination contracts,” meaning that the creditor could have refused to deliver the goods if the debtor had failed to make payment before the delivery arrived. Id. at 250, 254. Similarly, the Bankruptcy Court in In re CCG 1355, Inc., 276 B.R. 377, 386 (Bankr. D.N.J. 2002), found that a debtor’s payment, made seven to eleven days after shipment of the goods but prior to receipt of the creditor’s invoices, was intended by the parties as a “contemporaneous exchange” for new value under § 547(c)(1)(A). The court did not specify whether the debtor had arranged credit terms with the creditor. See also In 14 re Bridge Inform. Sys., Inc., 321 B.R. 247, 256 (Bankr. E.D. Mo. 2005) (finding that parties intended a contemporaneous exchange for new value when they agreed that debtor would pay creditor within one business day following its receipt of invoice for services provided the previous week); In re Anderson-Smith & Assoc., Inc., 188 B.R. 679, 689 (Bankr. N.D. Ala. 1995) (finding that parties intended a contemporaneous exchange for new value when creditor refused to deliver goods without debtor’s assurance of payment). The payments at issue in the present case were, for the most part, made even closer to the date of shipment than the payments in In re Payless Cashways and In re CCG. The parties stipulated that over half of the payments that Hechinger sought to avoid were made within five days of the date of the invoice (which was also the date that the orders were shipped). App. 219. The Bankruptcy Court, however, did not address the evidence that the “outstanding debt” to which the transfers were applied was in most cases less than six days old. Instead, the Court categorized the transfers at issue as credit transactions and then found, as a matter of law, that this finding compelled it to conclude that the debtor did not intend the transfers to be part of a contemporaneous exchange for new value. We conclude that the Bankruptcy Court erred in holding that the fact that the parties had a credit relationship precluded, as a matter of law, a finding that Hechinger intended the transfers to be part of a contemporaneous exchange for new value. We do not opine as to whether there is sufficient evidence in the record for the Bankruptcy Court to have found that UFP failed to prove that the transfers were intended to be 15 contemporaneous exchanges for new value.4 Rather, we conclude only that the Bankruptcy Court did not make the necessary finding as to what the parties intended. Instead, the Court decided that Hechinger did not intend a contemporaneous exchange based on the erroneous legal conclusion that the existence of a credit relationship between the parties was determinative. Whether the parties intended a contemporaneous exchange is a question of fact to be decided in the first instance by the factfinder. In re Spada, 903 F.2d 971, 975 (3d Cir. 1990) (“The determination of such intent is a question of fact.”). We will accordingly remand to the District Court with instructions to remand to the Bankruptcy Court to consider whether Hechinger and UFP intended the transfers at issue to be contemporaneous exchanges for new value, with the understanding that transfers made under “credit” terms are not, as matter of law, categorically excluded from the scope of the § 547(c)(1) defense to avoidance. 4 We do note that Hechinger arguably may have intended that its transfers would be part of a contemporaneous exchange for “new value” in the form of a renewed line of credit, which Hechinger received on the date of the payment and immediately made use of by charging new shipments to its account with UFP. See In re Roemig, 123 B.R. 405, 408 (Bankr. D.N.M. 1991) (finding $41.40 of debtors’ payment to pay down line of credit was intended as a “contemporaneous exchange for new value” because debtors transferred money to pay down their credit card on the same day as they charged a purchase of this amount to their credit card). 16