Authors: Charles M. Oellermann and Mark G. Douglas
A bankruptcy trustee or chapter 11 debtor-in-possession has the power under section 547 of the Bankruptcy Code to avoid a transfer made immediately prior to bankruptcy if the transfer unfairly prefers one or more creditors over the rest of the creditor body. However, not every payment made by a debtor on the eve of bankruptcy can be avoided merely because it appears to be preferential. Indeed, section 547 provides several statutory defenses to preference liability. The Eighth Circuit Court of Appeals recently addressed one such defense to preference avoidance—the “subsequent new value” exception. In Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.), 746 F.3d 350 ( (8th Cir. 2014), the court, in a matter of first impression, ruled that “new value” (either contemporaneous or subsequent) for purposes of section 547(c) can be provided by an entity other than the transferee.
LGI Energy is a positive development for those doing business with financially troubled entities because it expands the scope of the subsequent new value defense to encompass payment relationships involving multiple parties. In one sense, the ruling can be viewed as an instance of judicial activism directed at harmonizing the Bankruptcy Code with the realities of complex financial transactions. However, it could be argued that the Eighth Circuit’s decision was motivated more by equitable and policy considerations than by a careful examination of the plain meaning of section 547(c)(4).
The full-length article can be found here.