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Legal Update : Shumaker Wins Key Preference Decision For Clients
1. bankruptcylaw update
Shumaker Wins Key Preference Case
Practice Areas David Conaway Bio Publications Firm Background
In October, 2009, in connection with the Pillowtex Chapter 11 case, the Delaware
Bankruptcy Court issued one of the most significant preference rulings in recent
years. Specifically, the Court ruled that a preference defendant may rely on paid
new value as part of the new value defense.
We are pleased to note that Shumaker was lead counsel to two of the preference
defendants, and my partner David Grogan wrote the winning legal brief. We have
noted recent articles about the Pillowtex preference cases in NACM’s Business
Credit (January, 2010) and the American Bankruptcy Institute Journal
(December/January, 2010), which underscore the importance of this ruling. For
years preference defendants have been haunted by the “New York City Shoes” case
where the court in an off‐handed comment (known as “dicta”) stated that “new
value” provided by a vendor must remain unpaid to qualify for the new value
defense set forth in Section 547 of the Bankruptcy Code.
The “new value” defense to a preference claim is generally the most valuable of all
preference defenses. Simply put, if after receiving the preference payment at issue
the vendor provides subsequent goods or services, the invoices for such goods or
services give rise to the “new value” defense, which is normally a dollar for dollar
credit against potential preference exposure. The question squarely arose in the
Pillowtex case of whether the subsequent invoices must remain unpaid to qualify
for the new value defense, or whether “paid new value” can qualify.
As an example, if after the preference payment under attack, the vendor sells more
goods or services, but the invoices for such goods are themselves paid within the
90 day period, can the shipments count as new value? Let’s suppose that 60 days
prior to bankruptcy, the vendor receives a payment for $10,000. However 10 days
later, the vendor ships $10,000 worth of goods on 30 day terms, which the debtor
in turn pays on the due date. The question is whether the $10,000 shipment
counts as new value as an offset against the first $10,000 payment. New York City
Shoes indicated “no” since the subsequent shipment was paid. In Pillowtex we
