Page 64 - Bankruptcy Volume 1

3. The creditor gave new value to or for the benefit of the debtor subsequent to the transfer, which
new value was not secured by an otherwise unavoidable security interest and for which new val-
ue the debtor did not make an unavoidable transfer to or for the benefit of the creditor.

4. The transfer created a perfected security interest in inventory or a receivable or the proceeds of
either, except to the extent that the aggregate of all transfers to the transferee caused a reduction
in any deficiency position on the later of the date that new value was first given under the securi-
ty agreement and either 90 days for noninsiders or 1 year for insiders. fn 15

11 USC 547(c)(1) prevents a trustee from avoiding a transfer if it was intended to be and was in fact a
substantially contemporaneous exchange for new value. The intent of 11 USC 547(c)(1) is to encourage
creditors to continue to do business with distressed debtors, even if the creditor will no longer extend
credit. Thus, one of the most common examples of this is cash on delivery at the time that goods or ser-
vices are provided. To evaluate a specific transaction, a practitioner must first consider whether new
value was provided as defined in 11 USC 547(a)(2): "money or money’s worth in goods, services or
new credit or release by a transferee of property previously transferred..." New value is commonly
thought of as goods or services, but as the definition states, it can also include extension of new credit,
settlement of valid claims, and lien releases. Importantly, 11 USC 547(c)(1) considers "intent" and
whether the transfer was substantially contemporaneous. Thus, when evaluating whether the exchange
of new value for consideration was contemporaneous, the practitioner should consider the intent of the
parties and whether the form of payment is considered contemporaneous, as in the case of a check pre-
sented contemporaneously as the new value was received as opposed to the transfer of cash directly.

11 USC 547(c)(2) states that a transfer is not avoidable if the payment is on account of a debt incurred in
the ordinary course of business of the debtor and transferee and found to have been made in the ordinary
course of business of the debtor and transferee or according to ordinary business terms. The Bankruptcy
Code does not define or provide guidelines as to what is considered "ordinary course of business." Thus,
practitioners should consider case law in their local jurisdictions. Most jurisdictions consider similar fac-
tors, but may have different interpretations. The practitioner must first evaluate whether a transfer is on
account of a debt incurred in the ordinary course of business for both the debtor and the transferee. To
do so, factors such as whether it was an arm’s-length transaction and was typical of the business trans-
acted by both the debtor and the creditor or in their industries, are often considered. If the debt is deter-
mined to have been incurred in the ordinary course of business, the transfer must then be evaluated to
determine whether it was made in the ordinary course of business for both the debtor and transferee or
according to ordinary business terms. Evaluation of whether payment was made in the ordinary course
generally considers the historical course of dealings between the parties. For example, if invoices were
historically paid within 45–60 days of receipt by the debtor and the payments that the Trustee is seeking
to avoid were also made within that time frame, then the payments would appear to fall within the ordi-
nary course of business between the parties. Conversely, if the creditor took extraordinary measures to
obtain payment, such as demands or threats, any resulting payments outside of the historical pattern of
dealings may not be considered to have been made in the ordinary course. The actual course of dealings
between the parties may be more important than the stated contractual terms. Evaluation of whether the
payment was made according to ordinary business terms often comes into consideration when the parties
have a limited historical relationship or the transactions at issue do not have the same characteristics as
historical transactions between the parties. This analysis frequently considers standard practices within

fn 15 11 USC 547(b)(4).

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