A Matter of Preference: Court of Appeals for the Eleventh Circuit Holds That the Bankruptcy Code Does Not Require New Value to Remain Unpaid for a Creditor to Avail Itself of the Defense

by Shearman & Sterling LLP

On August 14, 2018, the United States Court of Appeals for the Eleventh Circuit issued a decision holding that section 547(c)(4) of the Bankruptcy Code, which provides a defense to the avoidance of preferential transfers to the extent the transferee provided new value to the debtor,[1] does not require new value to remain unpaid as of the date the bankruptcy petition was filed. In so holding, the Eleventh Circuit aligned itself with the Fourth, Fifth, Eighth and Ninth Circuits in refusing to read a requirement into the plain language of the statute that the new value extended to the debtor “remain unpaid.”


Bruno’s Supermarkets, LLC filed for chapter 11 relief in February of 2009. Pursuant to the debtor’s plan of liquidation, a liquidating trustee was responsible for enforcing any avoidance actions. In January of 2011, the trustee filed an adversary proceeding against Blue Bell Creameries, Inc. to recover over $500,000 in a series of payments that Blue Bell had received from the debtor during the preference period (the 90 days prior to the bankruptcy filing).[2]

In the ordinary course of business, Blue Bell sold ice cream and related products to the debtor on credit. The debtor traditionally paid Blue Bell twice weekly, thus remaining current on its payments to Blue Bell. Once the debtor began suffering from liquidity problems, however, it hired an advisory firm, which recommended that the debtor adopt a “slow-pay” protocol. This resulted in the debtor’s taking longer to pay Blue Bell for the products it had delivered, and for such payments to be received by Blue Bell at irregular intervals, particularly during the preference period.

Blue Bell acknowledged that the payments it received from the debtor during the 90 days prior to the debtor’s bankruptcy filing constituted preferences under section 547(b) of the Bankruptcy Code, which meant that absent a valid defense, the trustee could require Blue Bell to return the money it had been paid by the debtor for goods it had actually delivered. Blue Bell argued, however, that the payments were protected from being clawed back by section 547(c) of the Bankruptcy Code, which prohibits avoidance to the extent that the recipient of payments during the preference period provided new value to the debtor during that same period.[3]

Relying on Eleventh Circuit precedent,[4] the Bankruptcy Court held that Blue Bell only was entitled to an offset against its preference liability to the extent that any new value it extended “remained unpaid” as of the bankruptcy filing. Because Blue Bell was paid for many of the products it had delivered, the Bankruptcy Court concluded that Blue Bell was prevented from using the new value defense to defeat avoidance. Blue Bell appealed.[5]


The Court of Appeals for the Eleventh Circuit reversed. First, the Court of Appeals agreed with Blue Bell that the statement in Jet Florida Systems indicating that new value must remain unpaid, which statement was relied on by the Bankruptcy Court in reaching its conclusion, is dictum and therefore is not binding on the Court of Appeals. Because the statement in Jet Florida Systems was not necessary to the holding in that case, the Court of Appeals found that it was free to give fresh consideration to the question of whether section 547(c)(4) requires new value to remain unpaid.

Turning to that question, the Court of Appeals held that section 547(c)(4) does not require new value to remain unpaid in order for a transferee to avail itself of the defense to preference liability. First, nothing in the plain language of the statute indicates that an offset to a creditor’s preference liability is available only for new value that remains unpaid. By its terms, the statute only excludes new value that is paid for with an “otherwise unavoidable transfer.” The Court of Appeals reasoned that because the payments made by the debtor on account of the new value were avoidable under section 547(b) but for the operation of section 547(c), the “otherwise unavoidable transfer” exclusion did not apply.[6] Therefore, the unambiguous language of the statute does not require that new value remain unpaid.

The Court of Appeals also found that statutory history –– specifically, a review of section 60(c) of the Bankruptcy Act of 1898, which is the predecessor statute to section 547(c)(4) of the Bankruptcy Code –– supports its conclusion that new value need not remain unpaid. The corollary Bankruptcy Act provision included the “remaining unpaid” language; however, when Congress repealed section 60(c) in 1978 and replaced it with the current statute, the “remaining unpaid” language was replaced with the requirement that the debtor “not make an otherwise unavoidable transfer to or for the benefit of” the creditor who gave new value. The Court of Appeals stated that absent any evidence to the contrary, one can plausibly infer that by replacing section 60(c)’s “remaining unpaid” language with section 547(c)(4)’s language referencing unavoidable transfers, Congress intended to eliminate the requirement that new value remain unpaid.[7]

Finally, the Court of Appeals found that policy considerations supported its conclusion. The Court of Appeals described a hypothetical where a creditor ships $1,000 worth of goods to the debtor every other week for ten weeks during the preference period, and the debtor pays for those goods one week after delivery. In other words, during week one, the creditor transfers to the debtor $1,000 in goods; during week two, the debtor transfers to the creditor $1,000 in cash; the creditor transfers to the debtor $1,000 in goods in week three; the debtor transfers to the creditor $1,000 in cash in week four; and so on for ten weeks.

Under Blue Bell’s position, the $4,000 in new goods shipped during weeks 3, 5, 7 and 9 would wash $4,000 of the previous payments made by the debtor during weeks 2, 4, 6 and 8 for purposes of avoidance. The creditor would be protected by the new value defense as to those payments because, after each payment, the vendor provided new value to the debtor in the form of new goods shipped.[8] Yet under the trustee’s position, the creditor would lose the new value defense because transfer 4 paid off transfer 3; transfer 6 paid off transfer 5; and so on (in other words, a subsequent payment by the debtor to the creditor for new value that previously was provided negates the defense as to the particular new value in question). In siding with Blue Bell, the Court of Appeals noted that were the creditor to lose the new value defense entirely, the creditor would be in the same situation had it simply stopped doing business with the debtor after transfer 2. Yet, importantly, the debtor and the estate it leaves behind would be in a worse position because the estate would not have received the $4,000 worth of future goods shipped, which it could then sell to its customers and potentially increase the size of the bankruptcy estate for the benefit of all creditors.


In reaching its conclusion, the Court of Appeals relied on both the plain language of the statute as well as statutory history and policy considerations. As the Court stated, if new value must remain unpaid in order for a transferee to avail itself of the new value preference defense, vendors will have an incentive to stop delivering goods to a debtor in financial difficulty, potentially hastening the troubled company’s ensuing bankruptcy. On the other hand, if new value need not remain unpaid, a vendor can confidently continue extending credit to the debtor without fearing that all the payments it receives for its newly delivered goods will be avoided. This decision should give comfort to vendors to continue delivering to suppliers, which hopefully will assist in helping debtors to avoid bankruptcy entirely, an outcome that should benefit creditors as well.


[1] Section 547(c)(4) of the Bankruptcy Code provides, in part, that a trustee is prohibited from avoiding a transfer to a creditor if, after the transfer, the creditor gave new value to the debtor that was not secured by an otherwise unavoidable interest, and on account of which new value the debtor did not make an otherwise unavoidable transfer to the debtor.

[2] Section 547 of the Bankruptcy Code defines a preference as any transfer made by the debtor within 90 days of the petition date if that transfer was made “for or on account of” an antecedent debt, was made while the debtor was insolvent and enabled the creditor who received it to receive more than it would have otherwise received in a Chapter 7 liquidation. 11 U.S.C. § 547(b).

[3] Blue Bell also asserted an ordinary course of business defense pursuant to section 547(c)(2) of the Bankruptcy Code, which defense was rejected by the Bankruptcy Court (presumably as a result of the “slow pay” protocol) and was not challenged by Blue Bell on appeal.

[4] Charisma Investment Company, N.V. v. Airport Systems, Inc. (In re Jet Florida Systems, Inc.), 841 F.2d 1082 (11th Cir. 1988). In Jet Florida Systems, the Eleventh Circuit stated that section 547(c)(4) generally had been read to require: (1) that the creditor must have extended the new value after receiving the challenged payments; (2) that the new value must have been unsecured; and (3) that the new value must remain unpaid. Id. at 1083.

[5] Blue Bell filed a notice of appeal to the District Court. Thereafter, Blue Bell and the trustee jointly certified that an immediate appeal to the Court of Appeals would materially advance the progress of the case. Blue Bell filed a petition for permission to appeal the Bankruptcy Court’s order directly to the Court of Appeals, which petition was granted by a panel of the Court of Appeals for the Eleventh Circuit.

[6] In other words, in order for the “otherwise unavoidable transfer” exclusion to apply, the payments must be unavoidable for reasons other than the exception set out in section 547(c)(4), which is the “new value” exception applicable to Blue Bell under the facts of this case.

[7] The Court of Appeals also noted that the substantive change in the way new value may be used to offset preference liability is suggested by the history leading to the enactment of section 547(c)(4), where the Commission on the Bankruptcy Laws of the United States specifically recommended eliminating the requirement that new value remain unpaid on the petition date.

[8] Only the last payment of $1,000 would be avoidable by the trustee because the vender did not deliver goods after this payment, meaning the vendor provided no subsequent new value.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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