Page 12 - NBIZ Magazine April 2024

Preferences in

Bankruptcy

By Angeline Vachris Kell and Ayinde I. Ashford

ften businesses must be wary of prepetition days or 1 year, in the case of an insider; 7) resulting in the
payments by insolvent or troubled companies. creditor receiving more than it would have in a hypotheti-
Those insolvent or troubled companies could file cal Chapter 7 distribution. 11 U.S.C. §547.
Obankruptcy and the business could find itself on Creditors that do receive preference payments have some
the defensive side of a preference lawsuit. A preference defenses including those discussed below. Those defenses
lawsuit is usually brought by the Trustee or a debtor may allow the creditor to maintain the prepetition payment.
in possession against a creditor that has received a
prepetition payment from a debtor. There is hope as there Defenses to Preference Actions
are defenses to preference actions. Including the recent 1. New Value-
Fifth Circuit decision, holding that avoidance actions, or One defense is the “new value” exception. A creditor
lawsuits in the bankruptcy arena may be bought and sold may argue that it “gave new value to or for the benefit of
to interested third parties to provide value to the estate. the debtor (A) not secured by an otherwise avoidable secu-
rity interest; and (B) on account of which new value the
Preferences in Bankruptcy debtor did not make an otherwise avoidable transfer to
A preference action allows a debtor in possession or a or for the benefit of such creditor.” 11 U.S.C. § 547(c)(4);
trustee to recover any prepetition transfers made to the See G.H. Leidenheimer Baking Co. v. Sharp (In re SGSM
debtor within ninety (90) days prior to filing bankruptcy. Acquisition Co.), 439 F.3d 233, 241-42. (5th Cir. 2006).
11 U.S.C. §547; In re S. Coast Supply Co. (“South Coast”), Section 547(a)(2) defines “new value” as “money or
91 F.4th 376 (5th Cir. 2024). Under 11 U.S.C. §547, the ele- money's worth in goods, services, or new credit. . .” 11
ments of a prima facie preference action are, 1) a transfer, U.S.C. § 547(a)(2); Leidenheimer Baking Co., LLC v. Sharp
2) of an interest of the debtor, 3) made to or for the benefit (In re SGSM Acquisition Co., LLC), 439 F.3d 233, 241 (5th
of a creditor, 4) for or on account of antecedent debt, 5) Cir. 2006). A creditor that provides new services may claim
made while the debtor was insolvent or, 6) made within 90 the new value defense.
In Lauter v. Citgo, Citgo provided new value to Gas-
Mart via new unpaid fuel after the contested transfers.
Lauter v. Citgo Petrol. Corp., No. 17-2028, 2018 U.S. Dist.
LEXIS 21065, 2018 WL 801601, at *7 (S.D. Tex. Feb. 8,
2018). An alleged transfer occurred to Citgo on June 9,
2015. Lauter v. Citgo Petrol Corp., 2018 U.S. Dist. LEXIS
21065, at *7. Subsequently, from June 10, 2015 to July
1, 2015, Citgo provided additional fuel to Gas-Mart that
remained unpaid. Id. at *7. Citgo could prove it met all the
elements under 11 U.S.C. § 547(c)(4). Id. The Citgo case
establishes the new value defense.
In another case, In re Black Elk Energy Offshore
Operations, LLC, 605 B.R. 138, 148 (Bankr. S.D. Tex.
2019), the Trustee and the Defendant stipulated that the
Defendant provided additional uncompensated services
after the questioned transfer in May 2015. Id., 605 B.R.
138, 148. The Court found that the services provided after
the transfer were protected under the “new value” defense.
Id., 605 B.R. 138, 148.

12 NBIZ ■ APRIL 2024