How The Contemporaneous Exchange Defense May Save Your Bottom Line

How The Contemporaneous Exchange Defense May Save Your Bottom Line

By |March 29th, 2012|

Bankruptcy Preferences Contemporaneous Exchange DefenseYou’re a vendor to businesses, getting paid and making deliveries day in and day out. When the music stops and one of your customers files for bankruptcy, the trustee may come calling.

In a business bankruptcy case, transfers of more than $5,000 in the 90 days prior to the filing of the case are not uncommon.

Vendors submit bills and need to get paid in order for commerce to continue.  That’s the way it goes.

Until your customer’s case is filed and in steps the trustee, hand outstretched to avoid the preference.

Not so fast.

As a vendor subject to an avoidance action, you’ve got some defenses. One such defense is where the payment has been made as part of a contemporaneous exchange for new value.

Pursuant to 11 U.S.C. § 547(c)(1), the contemporaneous exchange for new value defense precludes recovery where the transfer was:

  • intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
  • in fact a substantially contemporaneous exchange;

Intent And Action

To raise a defense of contemporaneous exchange, you’ve got to prove that the intent at the time of payment was that the money was given not for payment of the old debt, but for the new goods or services.

Let’s say you sell office supplies. Your customer owes you a lot of money and places a new order. You have two choices: you could demand payment of all old invoices before making a new delivery, or you could demand payment for the new supplies at the time of delivery.

Lots of vendors will insist on the former, reasoning that they would rather get the books cleared up before selling anything else. That’s a mistake in the context of bankruptcy and how preferences can arise. In this scenario, your customer who pays you $10,000 would be subjecting you to an avoidance action for which there would be no defense.

In the alternative, look at the vendor who decided to go with COD – pay for the new stuff when it’s delivered. If you’re working with customers who may have shaky financials, this is the way to go because there is a contemporaneous exchange of new value (goods for money).

Let your customer pay off the old balance over time, ideally in small enough chunks that they would not be considered preferences. In this way you’ll preserve your defense as a contemporaneous exchange for new value rather than having to give up a substantial sum of cash.

Image credit:  Mysterious Photographer

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.