Section 547(c) of the Code provides for several affirmative defenses to a preference action brought by a trustee or debtor-in-possession.

This series of articles will discuss only four of the seven affirmative defenses to a preference action contained in §547: contemporaneous exchange (§547(c)(1)), ordinary course of business (§547(c)(2)), enabling loan (§547(c) (3)) and subsequent new value (§547(c)(4)). This paper will also discuss the earmarking doctrine and the affirmative defense of statute of limitations provided in §546(a).

The defenses of contemporaneous exchange, ordinary course of business, enabling loan and subsequent new value are affirmative defenses that must be pled by the defendant. Rule 7008, Rules of Bankruptcy Procedure, U.S. v. Continental Illinois Nat. Bank & Trust, 889 F.2d 1248, 1253 (2nd Cir. 1989). Otherwise, these statutory defenses are waived. In re National Lumber and Supply Inc., 184 B.R. 74, 78 (9th Cir. BAP 1995).

Contemporaneous Exchange for New Value

"Contemporaneous new value exchanges are not preferential because they encourage creditors to deal with troubled debtors and because other creditors are not adversely affected if the debtor's estate receives new value." In re Jones Truck Lines Inc., 130 F.3d 323, 326 (8th Cir. 1997), citing Pine Top Ins. Co. v. Bank of Amer. Nat'l Trust & Sav. Ass'n, 969 F.2d 321, 324 (7th Cir. 1992).

A creditor can invoke the affirmative defense of contemporaneous exchange by proving (1) the preferred creditor extended new value to the debtor, (2) the creditor and the debtor intended this exchange to be contemporaneous and (3) the exchange was, in fact, contemporaneous. In re Shelton Harrison Chevrolet Inc., 202 F.3d 834, 837 (6th Cir. 2000).

"New value" is defined to mean "money or money's worth in goods, services, or new credit or release by a transferee of property previously transferred to such transferees in a transaction that is neither void or voidable." §547(a)(2). In In re Grand Chevrolet Inc., 25 F.3d 728 (9th Cir. 1994), the debtor, Grand Motors, was in the business of buying new cars from dealers. One of the dealers was Pacific Suzuki. The trustee sought to avoid three transfers from the debtor to Pacific Suzuki as preferences. The Ninth Circuit affirmed the district court's holding that the first transfer was protected by an ordinary-course-of-business defense. The Ninth Circuit then had to consider transfers two and three. Thirty days after delivery of two vehicles, the debtor paid for them by sending two checks directly to the seller. Pacific Suzuki, upon receipt of the two checks, released the title documents and security interests on the two vehicles involved in transfers two and three. The defendant urged the contemporaneous exchange defense in connection with transfers two and three. The Ninth Circuit found that Pacific Suzuki conferred new value on the debtor for the purposes of the contemporaneous exchange exception to the preference rule by releasing the title documents and security interests in connection with transfers two and three. Grand Chevrolet at 733. The Ninth Circuit remanded that part of the case concerning transfers two and three to the district court to determine the amount of new value conferred by the seller.

Value should be measured at the time of the transfer. Grand Chevrolet at 733 and In re NuCorp Energy Inc., 902 F.2d 729, 733 (9th Cir. 1990).

It is not necessary that the new value go directly to the debtor. The only requirement is that the "new value" benefits the debtor. In re Jones Truck Lines Inc., 130 F.3d at 326-327. In Jones Truck Lines, the debtor brought a preference action to recover nearly $6 million in employee benefit payments paid to Central States, which managed the debtor's employee benefit funds. The debtor paid the benefit funds to Central States (transfers) on a past-due basis. Even though the debtor was delinquent in making its payments, Central States continued to administer the various employee benefit trusts. The defendant, Central States, argued that the debtor received new value in exchange for the employee benefits in the form of continued employee service. The Eighth Circuit reversed the holding of the lower courts that the transfer was a preference because new value did not flow directly from the pension funds. The Eighth Circuit stated that the word "directly" does not appear in §547(c)(1). The fact that the new value came from the employees who continued to work for the debtor because Central States continued to administer their benefit funds and not directly from Central States did not negate the contemporaneous exchange defense. Jones Truck Lines Inc. at 327.

The Fifth Circuit reached the same conclusion in Matter of Fuel Oil Supply & Terminaling Inc., 837 F.2d 224 (5th Cir. 1988). In Fuel Oil Supply, (1) the debtor paid the creditor; (2) as a result, the creditor released letters of credit securing the loan; and (3) the bank that had issued the letters of credit then released its lien on the debtor's collateral given to the bank. The Fifth Circuit held that new value did not have to come directly from the creditor that received the preference, but may be provided by a fully secured third party. Fuel Oil Supply at 231. The Fifth Circuit further held that the bank conferred new value on the debtor by releasing its lien on debtor's collateral, and the debtor-in-possession was not entitled to recover the transfers.

A preference defendant must prove the specific valuation of the new value given by the defendant to the debtor. Section 547(c)(1) protects preferential transfers only to the extent of the amount of new value. In re Jet Florida Systems Inc., 861 F.2d 1555, 1559 (11th Cir. 1988).

The second element of a contemporaneous exchange is the intent of the debtor and creditor that the transaction be a substantially contemporaneous exchange. This rule was first established in National City Bank of New York v. Hotchkiss, 231 U.S. 50, 34 S.Ct. 20 (1913). In the Hotchkiss case, the bank made an unsecured loan in the morning and then learned later in the day that the borrower was having financial difficulties. During the afternoon of the same day, the bank requested and got from the borrower a security interest in property to secure the loan. The court found that the transfer of the security interest was not a contemporaneous exchange because the lender did not originally intend the loan to be secured. The Hotchkiss case was decided in 1913, but "intent" is still a necessary element in proving a contemporaneous exchange defense to a preference action.

The court In re Wadsworth Bldg. Components Inc., 711 F.2d 122, 124 (9th Cir. 1983), stated on page 124: "The critical inquiry in determining whether there has been a contemporaneous exchange for new value is whether the parties intended such an exchange." See, also, In re Spada, 903 F.2d 971, 975 (3rd Cir. 1990), and Matter of Prescott, 805 F.2d 719, 727 (7th Cir.1986); In re Gateway Pacific Corp., 153 F.3d 915, 918 (8th Cir. 1998). In Wadsworth, the debtor was required to pay past debts before the creditor would receive further credit. The court held that since the creditor conditioned the future shipment of goods on payment by the debtor, the parties lacked the intent of a contemporaneous exchange, even though the actual transaction was contemporaneous. Wadsworth, 711 F.3d at 124. In In re Filter Corp. Inc., 163 F.3d 570 (9th Cir. 1998), the creditor loaned money to the debtor during the 90-day preference period, but did not file its financing statement until five days after the date of security interest agreement. The Ninth Circuit affirmed the bankruptcy court's finding that the parties intended a contemporaneous exchange, and the transfer took effect at the same time as the loan because the financing statement was filed within 10 days as provided in §547(e)(2)(A); In re Filter Corp., 163 F.3d at 584-590.

The third element is that the exchange must be in fact a contemporaneous exchange. Dean v. Davis, 242 U.S. 438, 37 S.Ct. 130 (1917). In Dean v. Davis, the parties intended to make a secured loan, but the mortgage on the debtor's real property was not signed until one week after the note was signed. The Supreme Court found that the parties intended a contemporaneous exchange, and that the interval of one week did not preclude an actual contemporaneous exchange. The Fifth Circuit in Matter of Lockin, 101 F.3d 435, 443 Fn. 10 (5th Cir. 1996), held that the time difference between the date the creditor receives a check and the date the check clears the debtor's bank does not defeat the defense of contemporaneous exchange—assuming the check is promptly deposited and cleared.

The existence of intent, contemporaneous of the exchange and new value, are questions of fact. In re Lewellyn & Co. Inc., 929 F.2d 424, 426 (8th Cir. 1991); In re Spada, 903 F.2d at 975.