Understanding the Subsequent New Value Defense (Bankruptcy) in Depth
Definition & Meaning
The subsequent new value defense is a legal protection available to creditors who have received payments from a debtor before the debtor files for bankruptcy. This defense allows creditors to retain those payments if they provided new value to the debtor after receiving the payment. Essentially, it encourages creditors to continue supplying goods or services to businesses in financial trouble, with the hope that these businesses can recover.
Legal Use & context
This term is primarily used in bankruptcy law. It applies when a trustee of a bankruptcy estate or a debtor in possession seeks to recover payments made to creditors prior to the bankruptcy filing. The subsequent new value defense is significant in preference actions, where creditors may be required to return payments made shortly before bankruptcy. Users can manage related legal documents and forms through platforms like US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A supplier delivers goods worth $10,000 to a retailer and receives a payment of $5,000 shortly before the retailer files for bankruptcy. If the supplier then delivers additional goods worth $7,000 after the payment, they may invoke the subsequent new value defense to retain the $5,000 payment.
Example 2: A contractor completes a job for a client and is paid $3,000. After the payment, the contractor provides additional services worth $2,000. If the client files for bankruptcy, the contractor can argue that they are entitled to keep the initial payment due to the new value provided. (hypothetical example)
Relevant laws & statutes
The primary statute governing the subsequent new value defense is 11 USCS § 547(c)(4). This section outlines the conditions under which a creditor may avoid relinquishing a transfer for which they provided new value.