How Valuable Is "New Value" In Preference Litigation?

It is not uncommon for a supplier of goods or services to receive a demand letter or adversary complaint alleging that it received avoidable transfers - commonly known as "preferential payments" or "preferences" - during the 90 days preceding a customer's bankruptcy filing. Such claims arise under section 547 of the Bankruptcy Code, and can result in a supplier having to return certain payments made during the 90-day preference period.

One of the most common defenses to an alleged preference is the "new value" defense.¹ Simply stated, the "new value" defense provides that, to the extent a creditor gives "new value" (usually in the form of additional goods or services provided on credit) to the debtor after receiving preferential payments, the creditor is entitled to reduce its preference exposure by offsetting the new value against the preferential payments. See 11 U.S.C. §§ 547(a)(2) and (c)(4).