You have fresh goods delivered to your largest customer daily, as has been the case for as long as you can remember. You noticed over the last few months that payments have become less frequent—weekly instead of twice weekly—and occasionally have been paid over a week late. On top of that, rumor in the industry is that your customer is suffering liquidity problems and may ultimately file bankruptcy. So, what do you do? Stop deliveries, despite the fact that you are still receiving timely payments, and possibly exacerbate your customer’s cash flow problems? Or, do you continue delivering goods and accepting payments, which, if your customer ends up filing for bankruptcy, runs the risk of having a bankruptcy trustee seek to claw back any payments you received for an entire 90-day period before the bankruptcy was filed?
It is a scenario that is all too common in the insolvency world, which, thankfully, has been addressed with vendors in mind by the courts. The facts in the recent Eleventh Circuit case of Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018) are not unlike our hypothetical. Blue Bell delivered fresh ice cream daily to Bruno’s Supermarkets, a 60-store grocery chain located in Alabama and Florida. Bruno’s payments to Blue Bell began to slip, going from twice weekly to weekly, but Blue Bell continued its deliveries up until the point that Bruno’s filed for bankruptcy. After the filing, Blue Bell found itself in the unfortunate position of being on the receiving end of a lawsuit from the bankruptcy trustee to recover all payments made to Blue Bell during the 90-day pre-bankruptcy period as “preferences” under 11 U.S.C. § 547.
Congress—recognizing that vendors should be encouraged, rather than discouraged, to extend credit to financially troubled entities—included in the Bankruptcy Code what is known as the “new value” defense, which is found in 11 U.S.C. § 547(c)(4). In short, the new value defense prevents a trustee from clawing back payments made to the vendor when the vendor has provided subsequent “new value” to the bankrupt customer (e.g. in the case of Blue Bell, new ice cream deliveries).