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Alabama Court Upholds “Remains Unpaid” Approach to Shield Preference Transfers While Applying Subsequent New Value Defense

Kaye v. Barber Milk, LLC (In re BFW Liquidation, LLC), Nos. 09-00634-TOM-11, 11-00062, 11-00071, 2016 Bankr. LEXIS 4378 (U.S. Bankr. N.D. Ala. Dec. 20, 2016)

Debtor Bruno Supermarket, LLC was a grocery store chain with stores in Alabama and Florida. Trustee William S. Kaye brought an adversary proceeding against Defendants Barber Milk, LLC and Southern Foods Group, LLC to recover $636,018.97 in transfers under §§547 and 550 of the Bankruptcy Code. Before the filing of the adversary proceeding, the Trustee stipulated with the Defendants that they would have an allowed claim under §503(b)(9) for goods provided during the twenty days before the petition date. According to the pre-trial brief filed by the Trustee, §503(b)(9) claims of Barber and Southern were paid. After the adversary proceedings had been initiated, the Defendants asserted a subsequent new value defense under section 547(c)(4) of the Bankruptcy Code. The Trustee and the Defendants disagreed over how this defense should be applied. The Trustee contended that only subsequent new value that remains “unpaid” could be used to shield preferential transfers, while the Defendants asserted that they should be given credit for new value whether it remains “paid” or “unpaid.”

The Court strictly relied upon the three-part test identified by the Eleventh Circuit for determining whether the new value defense applied to the facts of the case. The three-part test included – that the creditor must have extended the new value after receiving the challenged payments; that the new value must have been unsecured, and that the new value must remain unpaid. The Court stated that to allow a debtor to both avoid the preference and recover the payment for the new value provided by a creditor (from which the debtor materially benefitted) while denying the creditor the new value defense would not further the principal policy objections underlying the preference provisions of the Bankruptcy Code. The Court added that the utility of defense is limited to the extent to which the estate was enhanced by the creditor’s subsequent advances during the preference period. Thus, the Court concluded that the Defendants were entitled to the new value defense only to the extent that the new value they extended remains unpaid.