Bankruptcy Update: 11th Circuit Strikes the “Remain Unpaid” Element from the New Value Defense to Preference Action

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On August 14, 2018, Court of Appeals for the Eleventh Circuit (which controls all Florida bankruptcy courts), ruled that certain language in a prior ruling from 1988 was dicta and not binding, and established a new landscape for defending against a preferential transfer claim through a “new value” defense.

In the past, under the authority of Charisma Investment Company, N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th Cir. 1988), the Eleventh Circuit was believed to be of the opinion that an offset against preference liability, for new value provided to a debtor, which were made within the preference period, could only be asserted to the extent that any new value extended to the debtor “remained unpaid” as of the date the bankruptcy petition was filed.

However, under the new Blue Bell decision, the Eleventh Circuit held that the language in Charisma was only dicta, not binding, and not accurate.  Therefore, going forward, new value need not remain unpaid as of the time of the bankruptcy petition.

This decision is important because it will eliminate the disincentive that creditors may have in extending credit to a struggling debtor, which was mentioned in the Blue Bell decision.

ERIC N. ASSOULINE, ESQ.

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