Opinion ID: 18275
Heading Depth: 2
Heading Rank: 1

Heading: Subsequent Advance

Text: 5 The bankruptcy code allows a trustee to recover certain payments made by the debtor in the ninety-day pre-filing period as preferences. A recipient of such payments may invoke several defenses to block the trustee from recovery, however. One of these defenses has become known as the subsequent advance rule. See 11 U.S.C. 547(c)(4). 2 In In re Toyota of Jefferson, Inc., 14 F.3d 1088, 1091 (5th Cir. 1994), we examined section 547(c)(4). The creditor in In re Toyota, over the course of several months, extended three loans to the debtor. Each loan was repaid. The bankruptcy trustee for the debtor then attempted to recover as avoidable preferences each of the three loan repayments. We rejected this attempt, but allowed the trustee to recapture the last repayment as a preference. We reasoned that the first two repayments had been followed by the extension of new value, in the form of new and separate loans, of greater value than the repayment they followed. The last repayment, however, wasnot followed by the extension of a new loan, and thus new value. There was therefore no subsequent advance of new value available for offset of the last repayment, and that repayment was fully recoverable. 6 In re Toyota involved a credit transaction. To be more precise, it involved a revolving credit arrangement in which new loans were extended after the old loans were paid off. We noted there that it was precisely these kinds of arrangements that the Bankruptcy Code seeks to protect. Two policy justifications lie behind this result. First, by limiting the risk of loss incurred by suppliers who continue ordinary credit arrangements with troubled companies, the rule encourages transactions that may allow the debtor to stave off bankruptcy. Second, the protection provided by the section does not materially harm the other creditors, since the requirement that an advance be followed by an extension of new value insures that any injury to the estate is followed by a subsequent addition to the estate. See In re Toyota, 14 F.3d at 1091. See also In re Kroh Brothers Development Co., 930 F.2d 648, 651, 654 (8th Cir. 1991). 7 Here, the parties also engaged in a series of credit transactions. Agama shipped components to MIC, knowing that payment for those goods would be received later (if at all). The trustee maintains, and the courts below agreed, that in and of itself this structure defeats the application of section 547(c)(4). They argue that in every individual transaction, the new value (the components) was received before making the payment (which occurred when the post-dated checks cleared the drawee bank) matched to those particular goods. The extension of new value thus always preceded the individual preference transfer, rather than being after such transfer as the section 547(c)(4) exception requires. This argument, while ingeniously simple, is directly contradictory to our reasoning in In re Toyota. Looked at as individual, separate transactions, each loan in In re Toyota preceded the repayment of that particular loan. The fact that the new loan extended after such transfer was part of an entirely different loan transaction did not prevent us from shielding the prior repayment from recovery by matching it with the new value provided by the next, unconnected loan. Other circuits have similarly assumed that an extension of new value need not be directly connected to the preceding preference in order to shelter it. See In re Meredith Manor, Inc., 902 F.2d 257, 258-59 (4th Cir. 1990) (string of advances under line of credit allowed to shield prior repayment preferences without discussing lack of any apparent link between the amounts); In re IRFM, Inc., 52 F.3d 228, 229, 233 (9th Cir. 1995) (supplier entitled to retain all preferences even though payment for a particular shipment followed that shipment). 8 It could hardly be otherwise, since if we applied the trustee's reasoning to the facts of In re Toyota we would be left with the odd result that a creditor could only retain a loan repayment made by a financially troubled debtor if he received repayment of the loan prior to actually extending the loan. Only then would the new value loan, on a single transaction basis, be received after such transfer in the manner the trustee maintains section 547(c)(4) requires. But a loan that one must prepay or repay simultaneously is of little apparent utility. Applied generally, the trustee's rule would have only slightly less odd results. Creditors would be protected from preference recovery only to the extent that they eschewed credit transactions entirely. If they dared to ship goods before receiving cash in hand, they would run the risk of a court breaking their transactions down as was done below, and thus deciding that the very extension of revolving credit that courts have unanimously found is thechief intended recipient of the statute's protection is fatal to its case. This would hardly encourage suppliers to engage in a significant type of ordinary business credit transactions that might help troubled companies avoid bankruptcy, which we have identified as a primary goal of the statute. Neither the courts below nor the trustee have cited any authority for this novel and counterintuitive reading of the statute, and we reject it. 9 Our rejection of the trustee's proposed reading of the statute does not resurrect the old net result rule, as he claims. Under the net result rule, any and all extensions of value during the preference period were available to be offset against all of the preferences. Thus in In re Toyota under the net result rule we would have simply totaled the new value and subtracted it from the total loan repayments. Instead we looked at each individual repayment preference to see if it was followed by the extension of a new loan. Since the last repayment was not, that repayment could be avoided regardless of excess new value the creditor had advanced prior to that repayment. Similarly, here Agama does not-and cannot-argue that it may retain any portion of the preference payments represented by checks that cleared after the last shipment of new value was received, although under the old rule such payments might have been offset againstany sufficient prior extensions of value. All that we have done here is read the plain language of the statute in light of its manifest purpose, shielding payments to the extent that thereafter Agama extended new value to the estate. 10 In order to avoid the obvious implications of In re Toyota, the trustee attempts to focus our attention on the fact that post-dated checks were used in the transactions. In particular, he focuses on two cases that have discussed post-dated checks in the avoidance context. Both are readily distinguishable. In In re New York City Shoes, 880 F.2d 679 (3d Cir. 1989), a company with a standard revolving credit arrangement with the debtor refused to ship more goods until payment. The debtor then paid for the prior shipment with a post-dated check. Before this check cleared or the date that it bore was reached, the company shipped more goods. That was its last shipment. No other payments were involved and the last shipment was never paid for. The debtor then attempted to recover the amount of the post-dated check as a preference. The City Shoes court held that section 547(c)(4) did not shield the payment, since payment of the post-dated check should be considered as occurring when the check actually cleared or when the date which it bore arrived, not when the check was received by the creditor. Accordingly, there was no extension of new value that followed the challenged payment and thus nothing that could be set off against it under the statute. Id. at 685. In substantially similar circumstances, a supplier released a shipment of goods upon receipt of a series of post-dated checks that covered a prior shipment. Following City Shoes, the court found that when the date the checks bore arrived and the checks cleared after the extension of new value was received, the new value could not be applied against the last sequence of checks under section 547(c)(4). See In re Samar Fashions, Inc., 109 B.R. 136, 138 (Bank. E.D. Pa. 1990). 11 Both City Shoes and Samar are fully in keeping with our approach to section 547(c)(4) here. Once those courts clarified that the post-dated check payment fell on the date the check bore or cleared, and not on its delivery, it was clear that the challenged preferences followed the last possible new value that the creditor might seek to use to shield what would otherwise be an avoidable preference. Just as we did not allow the creditor in In re Toyota to retain the last loan repayment, and just as Agama here does not claim that it is entitled to retain the last series of payments it received, the City Shoes and Samar courts merely insured that the final payment by the debtor could be recovered. These cases do not establish some unique rule barring invocation of section 547(c)(4) by those creditors who accept post-dated checks. Rather, they establish when a post-dated check can be considered paid for the purposes of applying the standard statutory analysis. Since under this rule the check payments followed the new value, section 547(c)(4) could not be invoked. Here, in contrast, several extensions of new value occurred after the post-dated check payments were made, the payment dates all being based on the stipulation of the parties (note 1, supra). It is fully consistent with these cases' reasoning and our precedent to allow the new value to be applied against such preceding preferences. 12 The City Shoes court did state that postdating checks is not business as usual. City Shoes, 880 F.2d at 683. This statement, however, was made in the context of the court's assumption that where the debtor pays by a currently dated check the debtor's payment for purposes of section 547(c)(4) is made when the check is delivered to the creditor, and only as a basis for the court's holding that, in contrast, when the debtor pays by post-dated check payment is not made when the check is delivered but rather when the date on the face of the check arrives orwhen the check clears the drawee bank. Id. at 683-84. 3 That is not at issue here, as the parties have stipulated that the relevant transfers or payments by MIC occurred, with respect to each check, when that check cleared the drawee bank (see note 1, supra). We attach no other significance to the not business as usual language of City Shoes. 13 Here, Agama, by accepting post-dated checks, exposed itself to the risk that the check would be dishonored and thus that at least its current shipment would not be paid for. To be sure, by the way it actually operated under this credit structure-on several occasions multiple shipments were delivered before a check given for an earlier shipment had cleared-Agama in fact some times exposed itself to the risk of more than one shipment. However, as part of an ongoing, prudent credit arrangement such an exposure is not unusual, or preclusive of the application of section 547(c)(4). See Meredith Manor, 902 F.2d at 258-59 (applying section 547(c)(4) to a line of credit arrangement in which several independent advances followed each periodic payment). Here, Agama used the post-dated check mechanism to limit its risk to a set window in time, rather than a single shipment. Since shipments would presumably stop as soon as a check was dishonored, its risk was limited to the number of shipments made during the post-dating delay. Nothing in this credit structure takes the creditor out of the protection of section 547(c)(4). 4 14