Chicago Case May Resolve the Circuit Split on the New Value Defense

A case gestating in the Chicago bankruptcy court may lead to a petition for certiorari and a definitive ruling from the Supreme Court to say whether new value must remain unpaid on the filing date to qualify as a defense to a preference.

The Circuit Split

In August, the Eleventh Circuit said that its prior decision on the new value defense was dicta. Therefore, the three-judge panel had the ability to override the appeals court’s previous statement and hold that new value need not remain unpaid to qualify as a defense to a preference. Kaye v. Blue Bell Creameries Inc. (In re BFW Liquidation LLC), 899 F.3d 1178 (11th Cir. Aug. 14, 2018). For ABI’s discussion of BFW, click here.

In BFW, the Eleventh Circuit joined the Fourth, Fifth, Eighth and Ninth Circuits, which do not limit the new value defense to subsequent advances of credit remaining unpaid on the filing date. In her opinion for the Atlanta-based appeals court, Circuit Judge Julie E. Carnes said that “the Seventh Circuit held, without much discussion, that Section 547(c)(4) does require new value to remain unpaid.”

The Chicago Case

Situated in the Seventh Circuit, Bankruptcy Judge LaShonda A. Hunt of Chicago faced the unenviable task of ruling on a case where her circuit is in the minority.

A chapter 7 trustee sued a creditor to recover a $3 million preference. The parties agreed that the creditor had a valid new value defense for about $1.4 million, representing sequent advances that were unpaid. However, they disagreed on allowing the creditor an additional defense arising from some $800,000 in other new value that the debtor did pay before filing.

The case before Judge Hunt turned on the new value defense in Section 547(c)(4)(B), which allows a creditor to offset “new value” given after a preferential transfer that was “(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.”

Judge Hunt acknowledged that the Seventh Circuit is in the minority on the circuit split. Naturally, she said, “this court must follow the decisions of that higher court,” meaning the Seventh Circuit.

Judge Hunt therefore followed In re Prescott, 805 F.2d 719 (7th Cir. 1986), by granting the trustee partial summary judgment on the applicable law and holding that the creditor was not entitled to the new value defense for subsequent advances that the debtor paid before filing.

Still, Judge Hunt seemed less than enthusiastic about her decision. She said that the “statutory language . . . plausibly could be read as the majority of the Circuits have done . . . .” She also identified “interesting policy considerations” supporting the majority’s conclusions. She was alluding to the notion that the new value defense is intended to encourage creditors to continue advancing credit to financially distressed customers.

The decision is not a final order and not yet appealable, because Judge Hunt only granted partial summary judgment.

Big bucks are involved. The creditor is the U.S. branch of a huge multinational corporation able to afford an appeal to the Seventh Circuit and a subsequent petition for rehearing en banc or certiorari. Let’s hope there’s no settlement, so the Supreme Court can resolve the circuit split by drawing the boundaries of the new value defense.