Summary of a Recent
Judicial Development in
Secured Transactions

Release of Security Interest Constitutes "New Value" for Purposes of
11 U.S.C. § 547(c) Exception to Avoidable Transfers

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Velde v. Reinhardt, 366 B.R. 894 (D. Minn. 2007), the United States District Court for the District of Minnesota held that the "contemporaneous-exchange-for-new-value exception" of 11 U.S.C. § 547(c) applied where a pre-petition debtor's payments were otherwise avoidable transfers because the checks resulted in the release of security interests by third parties.

Background

An involuntary Chapter 7 petition was filed against the Debtor in February 2004, and the appointed Trustee commenced several adversary proceedings seeking to recover the value of several checks that the Debtor issued in the 90-day period prior to the filing of the petition. Id. at 896. The Defendants demanded jury trials and did not consent to jury trials before the Bankruptcy Court, so the actions were transferred to District Court. Id. at 896-97.

Arguments

The Trustee argued that the Defendants were required to repay to the bankruptcy estate the value of the replacement checks because they constituted avoidable transfers under 11 U.S.C. § 547(b). Id. at 897.

Defendants argued that exceptions to 11 U.S.C. § 547(b) applied, so the transfers were not avoidable. Id.

Analysis and Holdings

"A bankruptcy trustee may 'avoid' a transfer made to or on behalf of a creditor, on or within 90 days of the filing of a bankruptcy petition, if (1) the debtor was insolvent on the date of the transfer, (2) the transfer was for an antecedent debt, and (3) the transfer allowed the creditor to receive more than it would have received in a Chapter 7 liquidation." Id. at 897-98 (citing 11 U.S.C. § 547(b)). The court found that the Trustee had satisfied all of the prerequisites to avoidability. Id. at 898. However, the court concluded that the 11 U.S.C. § 547(c) "contemporaneous-exchange-for-new-value exception" applied. Id. at 898-99. The court noted that it had previously held that a third-party's release of its security interest in items purchased by a debtor may constitute a contemporaneous exchange for new value under § 547(c). Id. at 899. The checks were issued to pay for commodities and were made payable to both the Defendants and to the banks, in order to extinguish the banks' security interests. Id. The court concluded that the checks constituted a contemporaneous exchange for new value, with the "new value" being the release of the banks' security interests. Id. The court held that the Trustee could not avoid the transfers and denied his motion for summary judgment. Id. at 901.

The case was decided on January 25, 2007.