Opinion ID: 40581
Heading Depth: 2
Heading Rank: 2

Heading: Subsequent Advance Defense

Text: 22 Having failed to substantiate SGSM's payments as within the ordinary course of business defense, Leidenheimer and Patton resort to the subsequent advance defense. This defense aims to protect creditors who have furnished and been paid for ongoing supplies or revolving credit to a debtor in distress, because such transactions fortify the debtor's business and may avert bankruptcy. At worst, the extensions of new value do not harm existing creditors. Accordingly, the trustee in bankruptcy may not avoid a transfer: 23 to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor — (A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor. 24 11 U.S.C. § 547(c)(4). Interpreting this provision, the court in Laker v. Vallette ( In re Toyota of Jefferson, Inc. ), 14 F.3d 1088 (5th Cir.1994), rejected the pre-Code net result rule, whereby all new value from subsequent advances was totaled and deducted from all eligible preference payments. The court approved a transfer-by-transfer approach that asks whether the (1) new value was extended after the preferential payment sought to be avoided, (2) the new value is not secured with an otherwise unavoidable security interest, and (3) the new value has not been repaid with an otherwise unavoidable transfer. Id. at 1093 n. 2. Later, in Williams v. Agama Sys. ( In re Micro Innovations Corp. ), 185 F.3d 329 (5th Cir.1999), this court adopted the rule articulated in In re Thomas Garland, 19 B.R. 920 (Bankr. E.D.Mo.1982), which allows a given extension of new value to be applied against any preceding preference. In re Micro Innovations, 185 F.3d at 336. Thus, as long as new value meets the Toyota of Jefferson test, it can be applied against any preceding payment in the preference period. 25 This set of tables, based upon the evidence in the record, illustrates how the new value defense was utilized by the lower courts: 6 26 Table 1: Leidenheimer Date SGSM Subsequent Preference Payment New Value Exposure ------------------------------------------------------- 1/15/99 $ 8,472.22 $ 6,606.97 $ 1,865.25 1/27/99 11,924.52 9,256.63 4,533.14 2/12/99 16,007.70 4,063.65 16,477.19 2/19/99 5,518.73 3,867.45 18,128.47 2/26/99 2,886.81 10,307.73 10,707.55 3/12/99 4,228.04 6,921.50 8,014.09 Table 2: Patton Date SGSM Subsequent Preference Payment New Value Exposure ------------------------------------------------------- 12/30/98 $13,098.00 >$13,098.00 $ 0 1/15/99 10,925.77 > 10,925.77 0 1/27/99 9,281.42 6,812.03 2,469.39 2/3/99 34,975.45 8,458.06 28,986.78 2/11/99 22,955.68 13,650.01 38,292.45 2/19/99 15,074.62 22,927.33 30,439.74 3/9/99 18,295.89 6,452.97 42,282.66 3/15/99 15,555.73 10,404.08 47,434.31 27 In both cases, payments made by SGSM during the preference period were followed by subsequent product deliveries. The Garland approach, which allowed excess new value to cancel out prior payments still exposed as preferences, was followed by the lower courts and confirms that subsequent new value was applied to each of the payments at issue. As the ordinary course of business defense was inapplicable to the suppliers, the lower courts properly applied the subsequent advances defense to Leidenheimer and Patton. 7 28 On a minor note, Leidenheimer asserts that $352.29 credited to SGSM for returned goods should be deducted from its preference exposure as being a negative transfer. A bankruptcy appellate panel for the Tenth Circuit held, in Gonzales v. Nabisco Div. of Kraft Foods, Inc. ( In re Furr's Supermarkets, Inc. ), 317 B.R. 423 (10th Cir. B.A.P. 2004), that transfers of baked goods which were damaged, out of date, or were overstocked items should not be included in the new value calculation, because, lacking value, they were not a potentially avoidable transfer. Id. at 425, 428-29. The return of worthless goods does not dilute the new value provided by Leidenheimer. Id. at 429. The total exposure of Leidenheimer should be decreased to $7,761.50.