Aftermath of COVID-19: The Know-How of New Value Analysis
The New Value Defense attempts to lower the creditor’s exposure in the debtor’s bankruptcy. Section 547(c)(4) of the Bankruptcy Code allows a creditor to keep an otherwise avoidable preference if the creditor gave new value to the debtor in exchange for the transfer. The new value law was established to encourage creditors, the parties to whom money is owed, to continue doing business with the debtor, the party who owes money to the creditor. New value provides a dollar-for-dollar reduction in the creditor’s preference liability.
The new value law requires the creditor to prove the following three things:
1. First, the creditor must show that it received a preference payment from the debtor.
2. Second, the creditor must show that after it received the preference payment, it provided the debtor with new value.
3. Third, the creditor must not have been fully compensated by the debtor for new value.
The new value defense needs to prove that the creditor gave unsecured new value (goods or services) to the debtor on similar credit terms after the preference. The new value from the creditor needs to be given/shipped before payment can be received from the debtor. If not, this cannot be accounted for in the new value analysis. The goods must conform to what the debtor had ordered. If the debtor ordered 100 green widgets, the creditor cannot send the debtor 100 pink widgets because the creditor was trying to get rid of that inventory. The new value cannot be defective or damaged goods either. The shipment of new value must match exactly what the debtor ordered.
Each of these goods or services cannot be secured in any way. There cannot be an arrangement where the creditor ships goods to the debtor in exchange for a small amount of equity in the debtor’s company. There cannot be a collateralization on various assets owned by the debtor.
Paid new value is when new value is delivered to the debtor who then pays the creditor for the new value. Unpaid new value is when the debtor never pays the creditor for new value at the time of the analysis. Unpaid new value is always considered in the analysis and reduces creditor’s preference exposure. Courts are mixed on new paid value. Some courts prohibit inclusion of new paid value in the analysis, while some allow it. If debtor pays for the new value provided by creditor, it may not count towards creditor’s exposure.
As an example, the table here shows the payments made to the creditor and new value being provided to the debtor. On January 1, 2020, the debtor pays the creditor $100. On January 5, 2020, the creditor provides $50 worth of goods/services. On January 13, 2020, the debtor pays $65 on account for the latest sale and on January 17, 2020, the creditor provides another $30 for new goods/services.
For the courts that require transfers of new value to remain unpaid, the balance as of January 17, 2020 is $120; however, the balance for courts allowing new value transfer is only $45. The transaction of January 5, 2020 is the difference between the two columns. For the courts that require transfers of new value to remain unpaid, the transfer on January 5, 2020 does not reduce the preference total because it was paid for by the following transaction of January 13, 2020. For the courts that allow transactions of new value to not remain unpaid, then this amount can be deducted from the preference total.
The type of documentation needed to perform a new value analysis includes, but is not limited to, bank statements, general ledgers, copies of checks and invoices, accounts receivable and accounts payable aging reports, purchase orders and inventory reports.
The economic conditions right now are distressed and as we navigate through these challenging times, business will look to survive and avoid bankruptcy. The right expert can consult on these issues and provide an analysis that will provide the information needed to make informed decisions in a bankruptcy situation.
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