On August 14, 2018, in Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), the US Court of Appeals for the Eleventh Circuit ruled that a creditor who had received preferential payments from a debtor, but then provided unsecured new value to the debtor, could assert a new value defense to avoid preferential payments. The defense was applicable to all preferential payments and not restricted in amount to the new value that remained unpaid by the debtor as of the bankruptcy petition date. (899 F.3d 1178 (11th Cir., 2018)).

Debtor Bruno's Supermarkets (BFW Liquidation) was a Birmingham, Alabama-based grocery store chain. Blue Bell Creameries manufactures ice cream and related products and supplied those products to BFW. BFW filed for Chapter 11 bankruptcy in the US Bankruptcy Court for the Northern District of Alabama on February 5, 2009.

In the 90 days prior to the bankruptcy filing, BFW made 13 payments to Blue Bell and, in between those payments, Blue Bell continued to deliver its products on credit to BFW. In January 2011, the liquidating trustee appointed under the debtor's liquidating plan filed an adversary complaint asserting that these 13 payments were preferential transfers and avoidable under section 547(b) of the Bankruptcy Code.

Blue Bell conceded that the transfers satisfied the elements of a preference under section 547(b), in that during the 90-day period prior to the bankruptcy it received 12 payments from BFW totaling $563,869.37. However, Blue Bell asserted a subsequent new value defense to avoidance under section 547(c)(4) in that it provided BFW with product to sell to its customers during that time period.

The liquidating trustee cited In re Jet Florida System, Inc., 841 F.2d 1082 (11th Cir. 1988), as circuit precedent holding that a creditor can only offset its preference liability with new value to the extent that the new value remains unpaid by the debtor as of the date the debtor filed for bankruptcy. The Bankruptcy Court agreed with the liquidating trustee and ruled that approximately $125,000 of new value remained unpaid, meaning over $438,000 of the preferential payments could be clawed back by the trustee for the estate.

Blue Bell appealed.

The Eleventh Circuit panel determined that the holding in Jet Florida – that only unpaid new value could be offset against preference liability – was dictum. The court was therefore free to give fresh consideration to the matter.

On that fresh consideration, the court sided entirely with Blue Bell and concluded that:

Creditors advancing a new value defense against avoidance of preferential payments in the Eleventh Circuit are no longer limited to an offset of new value that remains unpaid. This helps protect those creditors that continue to extend credit and do business with financially troubled companies prior to their Chapter 11 bankruptcy filings.

The BFW ruling brings the Eleventh Circuit into line with prior rulings on the same issue in the Fourth, Fifth, Eighth and Ninth Circuits. Because an uneven circuit split on this issue remains, creditors with a potential new value defense outside of the Fourth, Fifth, Eighth, and Ninth Circuits will have the additional reasoning of the Eleventh Circuit's BFW ruling to support the idea that new value need not be unpaid in order to provide a preference defense.

For more information on preferences in general, see Practice Note, Preferential Transfers: Overview and Strategies for Lenders and Other Creditors and Practice Note, Bankruptcy Litigation: Preferences and Fraudulent Transfers.