The Contemporaneous Exchange for New Value Defense

The contemporaneous exchange for new value defense, 11 U.S.C. §547(c)(1), is one of several defenses in the Bankruptcy Code that a creditor may be able to use successfully to defeat the claim of a bankruptcy trustee, or other plaintiff, that the creditor should have to repay money paid to it by the now bankrupt debtor before that debtor filed for bankruptcy.  This defense is applicable to all actions filed in bankruptcy courts located in Nashville or other cities in Tennessee.

This defense allows a creditor, which supplied goods or services, at or near the same time that the debtor paid for those services, to avoid liability for what would otherwise be a preferential payment. The purpose of the contemporaneous exchange for new value defense is to encourage a creditor to keep doing business with a customer which is having financial issues.

Although it is not a case decided by the federal circuit in which bankruptcy courts in Nashville and other parts of Tennessee are located (the 6th Circuit), the case of Payless Cashways, Inc. (8th Cir. 2004) provides a helpful analysis of the defense, and one that any Tennessee bankruptcy court would be expected to apply.

Here are the basic facts of the case:

  • The debtor which had filed bankruptcy (“Debtor”) was a business which sold home improvement products at retail
  • The creditor which was sued by the trustee for the recovery of preference payments (“Creditor”) was a lumber supplier
  • Creditor had supplied lumber to Debtor before it filed its first bankruptcy
  • After Debtor filed its first bankruptcy, Creditor required Debtor to pay for lumber on a cash-in-advance basis by Electronic Fund Transfer (“EFT”)
  • After a while, Creditor somewhat loosened its payment policy
  • Debtor filed a second bankruptcy
  • At the time of the preferential payments at issue, Creditor had agreed to ship all lumber via destination contracts, F.O.B. the Debtor’s facilities. The lumber was shipped via truck or rail, and Creditor’s invoice dates were always the date of shipment.
  • At the time of the preference payments at issue, the Creditor and Debtor had agreed to attempt to match the date the lumber shipments would arrive at Debtor’s facilities with its obligation to pay, and had agreed that all payments would be by EFT.
  • Payment terms were based on whether the lumber would be shipped by truck or rail. Lumber shipped by rail generally took 12-14 days, while lumber shipped by truck generally took 3-5 days.
  • During the relevant period, Debtor paid Creditor for rail shipments within 10.9 days after the date of the invoice, on average, and within 3.2 days, on average, for rail shipments
  • For all shipments, with minor exceptions, Debtor paid Creditor for specific shipments before, or at, the time they arrived at Debtor’s facilities
  • Neither Creditor nor Debtor kept regular records of when shipments arrived at Debtor’s facilities
  • The trustee brought a preference action seeking to recover four transfers made by Debtor

The bankruptcy court held that Creditor had carried its burden of establishing the contemporaneous exchange for new value defense, and the Eighth Circuit affirmed its decision. It found that Creditor had proven all three elements of the defense: (1) That both Debtor and Creditor intended the deliveries of lumber and payments to be contemporaneous exchanges; (2) that the exchanges were, in fact, substantially contemporaneous; and (3) that the exchanges were for new value.


As pointed out by the Eighth Circuit, the “critical inquiry” with respect to the contemporaneous exchange for new value defense is whether the parties “intended such an exchange.”  The court found that four factors established the intent element of the defense. First, prior to the shipments and payments in question, the Debtor and Creditor had a meeting to discuss Creditor’s concerns about its credit exposure. At that meeting, Debtor had agreed to the payment method described above, which the court found was burdensome to it.

Second, the court found that both Debtor and Creditor considered their arrangement to be the same, essentially, as a cash transaction arrangement.

Third, all of the parties’ contracts were destination contracts and not shipment contracts. Because of this fact, the court found that the parties did not intend for Debtor to obtain possession until it had paid for the lumber.

Fourth, the court found that the trustee failed to prove that Debtor ever received a shipment of lumber prior to the time it wired payment for the shipment.



The court found that the proof established that Debtor paid for some shipments of lumber before they arrived and that there was no evidence that any shipments of lumber by rail arrived prior to Debtor having paid for them.  In addition to that evidence related to the shipment, arrival and payment dates, the court concluded that, for all shipments of lumber, the time between shipment and payment by EFT (not considering arrival) was always within 15 days.  It found that amount of time to be substantially contemporaneous given the context of the parties’ agreements.



The trustee argued that Creditor gave no new value because the transactions between Creditor and Debtor were essentially credit transactions whereby Creditor provided goods and issued an invoice for which it expected payment at a later time.  The court concluded that, while, at first blush, the fact that Creditor issued invoices at the times of shipment may have given the appearance of credit transactions, the fact that Creditor shipped via destination contracts, and  the parties’ agreements about the timing of payments, rebutted any conclusion that typical credit transactions were involved.  Under destination contracts, the court pointed out, the Creditor retained title to the lumber until it was delivered.  Thus, the court concluded it “was delivery rather than shipment that was the new value.”


If you are the subject of a preference payment lawsuit arising from a bankruptcy, you should consult with an experienced Nashville commercial litigation attorney to determine your rights and the viability of any defenses you might have.

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