Liability For Preferential Transfer May Be Reduced By Subsequent New Value

Originally published by Delaware Business Court Insider

In a preference action, one of the most common defenses is the so-called subsequent new value (SNV) defense under 11 U.S.C. Section 547(c)(4). Under Section 547(c)(4), to the extent that a creditor gives to the debtor new value subsequent to an avoidable transfer, the defendant's liability is reduced in the amount of such SNV. The policy behind the defense is clear. Creditors should be encouraged to continue to provide goods and services to a struggling company. Further, the defense avoids the harsh result that would arise if a debtor were permitted to recover all preferential transfers without giving credit for SNV, which the creditor provided to the debtor.