Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 1 of 26

UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Olga L. Bogdanov, Trustee of Amherst Technologies, LLC, Appellant/Cross-Appellee

v. Case No. 10-cv-543-SM Opinion No.

Avnet, Inc., Appellee/Cross-Appellant

O R D E R

The Trustee in this adversary proceeding seeks to avoid

preferential payments made to Avnet, Inc., Amherst's largest

unsecured creditor. The matter was tried in the bankruptcy

court, which held that Avnet established a subsequent new value

defense under

(c) (4), thereby substantially

limiting the Trustee's recovery of preferential payments. The

Trustee appeals and Avnet cross-appeals.1

Standard of Review

Jurisdiction over appeals from final judgments, orders, and

decrees issued by the bankruptcy court lies in this court.

(a). The bankruptcy court's legal determinations are

1 Avnet's cross-appeal is best described as a "conditional" cross-appeal. Avnet seeks affirmance of the bankruptcy court's decision, and requests consideration of its cross-appeal — in which it contests the bankruptcy court's rejection of Avnet's "ordinary course of business defense" under § 547(c)(2) — only if the court finds merit in the Trustee's appeal. Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 2 of 26

reviewed de novo. See, e.g., Dahar v. Jackson (In re Jackson),

(1st Cir. 2006); Askenaizer v. Seacoast Redimix

Concrete, LLC, Civil No. 06-cv-123-SM,

, at *1

(D.N.H. March 29, 2007). But its findings of fact are accorded

deference and will not be disturbed unless clearly erroneous.

Groman v. Watman (In re Watman),

(1st Cir. 2002);

Brown v. Reifler, Civil No. 08-cv-272-SM,

, at *1

(D.N.H. Oct. 23, 2008) . A factual finding "is 'clearly

erroneous' when although there is evidence to support it, the

reviewing court on the entire evidence is left with the definite

and firm conviction that a mistake has been committed." Anderson

v. Bessemer City,

(1985) (quoting United States

v. United States Gypsum Co.,

(1948)).

Background

I. Transactions Between the Parties

The basic facts are not seriously disputed. Amherst was a

value-added reseller that provided information technology

services to its customers. Avnet, a global distributor of

electronic products, supplied goods, primarily software and

computer components, to Amherst on an unsecured basis for over

nine years.

Before the end of 2004, Amherst had generally been paying

Avnet's invoices within sixty days. Because of a large number of

2 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 3 of 26

orders Amherst received, however, Avnet extended substantial

additional credit to Amherst. Thereafter, Avnet insisted that

Amherst reduce its outstanding credit balances. Over the course

of a few months the parties employed various strategies to reduce

Avnet's credit exposure, including a 2 for 1 payment arrangement

under which Amherst paid Avnet $2 on account for every $1 of new

product Avnet shipped. The parties alternated between the 2 for

1 arrangement and a 1 for 1 arrangement several times during the

first months of 2005. As a result, "from late April through late

June Amherst paid Avnet $1.92 for every $1.00 shipped."

Memorandum Opinion, United States Bankruptcy Court, Adv. No. 07-

1094-JMD (Deasy, J.) (document no. 5-1) at 6. Amherst's payments

through June 24 were applied to nearly 300 invoices, "all but

nine [of which] were for invoices more than sixty days old."

In late June of 2005, Amherst ordered $4 million in software

from Avnet to fill a large order it received from American Honda

(the "Honda Order"). Avnet's credit managers "explored a number

of options to finance the Honda Order," but when those options

proved unavailable, "Avnet ultimately agreed to support the Honda

Order" on a pre-payment basis. Xd. at 7. By the time Avnet

requested pre-payment, however, Amherst had already issued checks

to pay, in large part, Avnet's outstanding invoices. Amherst

directed that $2.9 million be applied toward payment of those

3 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 4 of 26

outstanding invoices, and $1.1 million applied toward pre-payment

of the Honda Order. Xd. at 14.

On July 1, 2005, Avnet shipped $4 million worth of software

related to the Honda Order to Amherst. On July 13, Amherst

"wrote its last prepetition check to Avnet," in the amount of

$400, 202.13, as payment on the Honda Order. I_d. at 7. Between

April 20, 2005, and July 13, 2005, Amherst paid Avnet $8.1

million on outstanding invoices, and Avnet shipped goods worth

over $7 million to Amherst, or to its customers on Amherst's

behalf, on an unsecured basis. I_ci. at 6. On July 20, 2005,

Amherst filed for bankruptcy protection. Avnet claimed that it

was owed over $5.3 million in unpaid invoices. I_ci. at 7-8.

II. The Bankruptcy Court's Decision

In July of 2007, the Trustee initiated this adversary

proceeding against Avnet, seeking to avoid preferential payments

made to Avnet during the ninety-day period preceding Amherst's

bankruptcy petition. Avnet asserted an "ordinary course of

business" defense under

(c)(2), and a "new value"

defense under § 547(c)(4). Following a two-day bench trial, the

bankruptcy court issued its decision. See Doc. No. 5-1.

Although it rejected Avnet's ordinary course of business defense,

the bankruptcy court credited Avnet's subsequent new value

defense, which reduced Avnet's preference liability to $337,521.

4 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 5 of 26

On September 10, 2010, the bankruptcy court entered final

judgment in favor of the Trustee in that reduced amount.

In recognizing Avnet's subsequent new value defense as

valid, the bankruptcy court found that "Avnet provided new value

every time it shipped computer components and software to Amherst

and/or its customers during the preference period." Doc. No. 5-1

at 12. It also determined, as a matter of law, that new value

need not remain "unpaid" for the defense to apply "so long as any

transfer that paid for such new value is not unavoidable but for

§ 547(c)(4)." Xd. at 19 (emphasis added). Finally, the

bankruptcy court found that $2.2 million in payments made on June

29 and 30 were not "made as part of a contemporaneous exchange

for new value in connection with the Honda Order" under §

547(c)(1), because, as a factual matter, neither Amherst nor

Avnet intended to make a contemporaneous exchange of money for

goods. I_d. at 19-21.

The Trustee appeals the bankruptcy court's conclusions and

says she is entitled to recover over $4 million in avoidable

preference payments, rather than the $337,521 allowed by the

bankruptcy court.

5 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 6 of 26

Discussion

I. New Value Defense Generally

Payments by a debtor to a creditor "for or on account of an

antecedent debt" made during the ninety days immediately

preceding the filing of a bankruptcy petition (and that meet

other criteria) are preferential transfers or "preferences."

(b). "In unofficial and general terms, a

preference is 'atransfer of the debtor's property on the eve of

bankruptcy tosatisfy an old debt.'" Epstein, Nickles & White,

Bankruptcy, Practitioner Treatise Series, Vol. 1, §6-3, at 509

(1992) (quoting Orelup, Avoidance of Preferential Transfers Under

the Bankruptcy Reform Act of 1978,

(1979)).

Preferences may be avoidable (i.e., voidable) by the

trustee.

(b). If a preference is avoided, "the

trustee may recover, for the benefit of the estate, the property

transferred . . ."

(a). Avoiding preferences

generally puts creditors on equal footing with each other for the

purpose of distributing the debtor's estate, and discourages

"creditors from hastily forcing troubled businesses into

bankruptcy." Lawson v. Ford Motor Co.,

(2d Cir.

1996).

Section § 547 (c), however, provides some exceptions, or

defenses, designed to prevent avoidance of preferences under some

6 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 7 of 26

circumstances. Those exceptions "are designed to rescue from

attack in bankruptcy those kinds of transactions, otherwise

fitting the definition of a preference, that are essential to

commercial reality and do not offend the purposes of preference

law, or that benefit the ongoing business by helping to keep the

potential bankrupt afloat." Epstein, et al., Bankruptcy § 6-22

at 587 (quotation omitted).

Section 547(c) provides, in relevant part, that the trustee

may not avoid a transfer that (1) was "intended by the debtor and

the creditor . . . to be a contemporaneous exchange for new value

given to the debtor" and "in fact" was a "substantially

contemporaneous exchange" ("contemporaneous exchange defense"),

(c)(1); (2) was "in payment of a debt incurred by

the debtor in the ordinary course of business" ("ordinary course

of business defense"),

(c)(2); or (3) was followed

in time by "new value" given by the creditor "to or for the value

of the debtor" ("subsequent new value defense"),

(c) (4) .

Under the subsequent new value defense, § 547(c) (4), a

creditor will escape preference liability to the extent it

provides new value after the debtor made a preference transfer to

the creditor. In re JKJ Chevrolet, Inc.,

(4th

Cir. 2005). The rationale for protecting the creditor is

7 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 8 of 26

straightforward — "the creditor's provision of the subsequent

goods or services has replenished the estate." In re Bridge

Info. Svs., Inc.,

(E.D. Mo. 2002). The

exception serves the important public policy of "encourag[ing]

creditors to continue to do business with financially troubled

debtors, with an eye toward avoiding bankruptcy altogether." In

re IRFM, Inc.,

(9th Cir. 1995). In particular,

it promotes the continuation of revolving credit relationships,

whereby new value is continually being advanced to the debtor

after payment of old debt. See In re Pillowtex Corp.,

(D. Del. 2009).

On the other hand, the subsequent new value defense will not

apply if the creditor, who has the burden of proof, Howard v.

Bangor Hydro Elec. Co.,

(Bankr. D. Me. 2005),

does not establish that "the debtor did not make an otherwise

unavoidable transfer" "on account of" the new value.

(c) (4) (B) . The double negatives are unnecessarily

complicated, but, essentially, the creditor must show that the

debtor did not later pay for the new value with an "otherwise

unavoidable transfer." Xd. That is, the creditor cannot both

shield a prior preference payment by offsetting it with

subsequent new value, and also keep a subsequent preferential

payment for the new value under some other defense (e.g.,

contemporaneous exchange). Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 9 of 26

II. The Meaning of "Otherwise Unavoidable"

It is undisputed that Amherst made preferential payments to

Avnet from April through the end of June, 2005 (referred to as

"PI"). As noted, the bankruptcy court found that, during that

period, Avnet advanced $2.2 million worth of goods, comprising

"subsequent new value" (referred to as "NV1"). It is also

undisputed that on June 29 and 30 Amherst paid $2.9 million

("P2") on invoices for previous shipments of goods, including

goods provided as NV1. In other words, NV1 was subsequently

"paid" for by P 2 . The bankruptcy court nevertheless allowed NV1

to offset $2.2 million of PI, and further allowed NV2 (the Honda

new value) to offset P2, such that the Trustee was not permitted

to avoid, and Avnet was not required to return, either PI or P2.

It is generally accepted that a creditor's advance of new

value may offset a prior preference where the debtor did not

later pay the creditor for the new value (i.e., the subsequent

new value remains "unpaid"). See Matter of Kroh Bros. Dev. Co.,

, 652 (8th Cir. 1991) (surveying cases). Unpaid new

value "in effect returns the preference to the estate." Id.

(quotation omitted). The issue presented in this case is whether

a creditor can offset a prior preference with subsequent new

value that is later paid for, and if so, under what

circumstances.

9 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 10 of 26

The Court of Appeals for this circuit has yet to address the

issue. Absent the benefit of controlling circuit precedent, the

bankruptcy court ruled that new value need not "remain unpaid,"

as a condition of offsetting it against a prior preference, and

described the circumstances under which the statute permits new

value to offset prior preference payments, even if the

concomitant debt is later paid. Those legal determinations are

reviewed de novo. See Dahar,

.

A. Must New Value Remain Unpaid?

The bankruptcy court ruled that "the new value defense is

not barred altogether anytime new value is repaid." Doc. No. 5-1

at 18 (citing IRFM,

). Looking to "the plain

language of the statute," the court found that "'section

547(c)(4) does not contain any language that even suggests that

the new value . . . is somehow to be limited to unpaid

invoices.'" Xd. at 17 (quoting Valiev Candle Mfg. Co. v.

Stonitsch,

, 653 (Bankr. W.D. Mo. 1984)).

The Trustee challenges that ruling, arguing that only new

value that "remains unpaid" can be used to offset a prior

preference. Fairness to the other creditors, she contends,

requires that a creditor not keep a preferential transfer unless

that creditor comparably "enriched" the estate with goods or

services after the transfer, i.e., where it gave additional value

10 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 11 of 26

to the estate without obtaining reimbursement. Although some

courts have held that new value must "remain unpaid" (see e.g..

New York City Shoes, Inc. v. Bentley Int'l, Inc.,

(3d Cir. 1989); In the matter of Prescott,

, 728

(7th Cir. 1986); In re Jet Florida Svs.,

, 1083-84

(11th Cir. 1988)), the better view is the one adopted by the

bankruptcy court in this case.

"Where a statute is clear on its face the plain meaning of

its language should be applied." In re Check Reporting Svcs.,

(Bkrtcy. W.D. Mich. 1992) (citing United States

v. Ron Pair Enters., Inc.,

(1989). On its

face. Section 547(c)(4) clearly, though conditionally, allows new

value to be paid: the statute anticipates transfers made "on

account of . . . new value," and requires that any such payment

be "not . . . otherwise unavoidable."

(c)(4). As

the bankruptcy court noted, "not . . . otherwise unavoidable"

generally means "otherwise avoidable." Doc. No. 5-1 at 18

(quotation omitted). Given the words used in the statute,

offsetting new value may be paid so long as the payment is

"otherwise avoidable" by the trustee. The double-negative adds

frustrating complexity to the condition's description, but the

statute is unambiguous in allowing new value to be paid so long

as the "otherwise avoidable" condition is met. See Matter of

Toyota of Jefferson, Inc.,

(5th Cir. 1994)

11 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 12 of 26

("plain language" of the statute allows new value to be "paid"

under prescribed circumstances); In re IRFM, Inc.,

(9th Cir. 1995) (same); see also 4 Norton Bankr. L. & Prac.

3d § 66:36 & n.25 (same, collecting cases) ("The focus of the

inquiry is on the avoidability of the debtor's subsequent

payments, and not on whether the new value remains unpaid.")

Furthermore, common sense and principles of fairness

underlie the statutory language. As the court in In re Check

Reporting noted:

[A] creditor should not be able to assert a new value transfer as a defense to a preference if the transfer was paid for by the debtor because the estate was not made whole by the new value transfer. But, . . . by the same token, the trustee should not be able to assert the new value was paid if the trustee is asserting that the paying transaction was in fact a preference which the trustee can avoid.

In re Check Reporting,

. Put another way,

"[t]here is no logical reason to distinguish between a creditor

that was paid by an avoidable transfer and one that was never

paid at all. At the end of the day, in both cases, the creditor

has been wholly uncompensated for his new value." In re Maxwell

Newspapers,

(S.D.N.Y. 1996) .

The bankruptcy court correctly ruled, as a matter of law,

that the subsequent new value defense does not require that the

subsequent new value remain unpaid, but does require that the

12 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 13 of 26

preference payment be avoidable ("not otherwise unavoidable"), so

accessible to the Trustee for replenishing the estate. The court

concurs in, and adopts, the reasoning of In re Check Reporting.

.

B. Under What Circumstances May New Value Be Paid?

The bankruptcy court determined that new value may be paid

when the payment is not protected from avoidance under any theory

other than a § 547(c)(4) (new value) defense. Doc. No. 5-1 at

19. The court interpreted "otherwise" as referring "to all

theories of avoidability other than §547(c)(4)." Xd. That is,

the bankruptcy court determined that a payment for previously

advanced new value will disqualify the new value from offsetting

a prior preference when the payment is unavoidable under defenses

such as the "contemporaneous exchange," or "ordinary course of

business" defenses. However, where a payment for new value is

unavoidable only because the "subsequent new value" defense

applies (new value was later given) (§ 547(c)(4)), it will not

disqualify the new value from offsetting a prior preference. The

bankruptcy court explained:

[SJubsequent shipments by a creditor, which enlarge the debtor's estate, are defenses to a trustee's preference recovery even if the debtor has later paid for those shipments, which reduces the debtor's estate, if the repayment of the subsequent new value would itself be avoidable and recoverable as a preference by the debtor but for the application of the new value defense.

13 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 14 of 26

Doc. No. 5-1 at 18 (emphasis added). In short, the bankruptcy

court allowed "subsequent new value . . . [to] offset a transfer

that pays a previously advanced new value." Xd. The Trustee

claims error in that regard, arguing that "otherwise" refers to

all defenses to avoidability, including a subsequent new value

defense. That is, the Trustee says payment for new value that

has been used to offset a prior preference must not be shielded

from the Trustee's reach by any defense, including a § 547 (c)(4)

defense. The creditor "must concede . . . [P2's] avoidability

for all purposes." Doc. No. 5-1 at 19 (discussing Trustee's

position).

"As in any statutory interpretation case, we start with the

text of the statute." In re BankVest Capital Corp.,

(1st Cir. 2004). Here, the word "otherwise" is somewhat

ambiguous "because it remains unclear, strictly as a matter of

linguistics" what "the term . . . is referring [to]."

Preferential Transfers, the Subsequent New Value Defense, and the

Requirement That the New Value 'Remain Unpaid' (or Not), 30 No. 2

Bankr. L. Ltr. (Feb. 2010). The bankruptcy court plausibly

concluded that "otherwise" should be construed as referring to

all defenses to avoidability other than the subsequent new value

defense described in § 547(c)(4). But, the Trustee's argument

that "otherwise" refers to all defenses to avoidability is not

implausible. See generally id. (discussing differing

14 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 15 of 26

interpretations of "otherwise"). As noted in In re BankVest,

"[i]f the plain language of the Bankruptcy Code required either

of these interpretations, that would end the matter . . . . But

[there is] ... no textual basis for preferring appellants'

interpretation to the one adopted by the bankruptcy court, which

[is] . . . equally consistent with the text. Nothing in the

language or syntax of [the statute] unambiguously requires either

outcome." In re BankVest,

(citation omitted).

Policies underlying the subsequent new value defense, however,

provide solid support for the interpretation adopted by the

bankruptcy court here.

Three cases touch on the issue, but none directly resolves

it. In In re Check Reporting,

, the court

provided an exhaustive analysis of the subsequent new value

defense, which included a hypothetical example relevant to the

issue presented here. See

(hypothetical no. 6). In

discussing the hypothetical, the court noted, albeit in dicta,

that transfers "unavoidable solely because of § 547(c) (4)" are

not "otherwise unavoidable" and do "not decrease the amount of

new value . . . which may be asserted by the creditor." Xd. In

In re Roberds,

(Bankr. S.D. Ohio 2004), the

court, without directly addressing the issue, allowed subsequent

new value to offset a preference that paid for previously

extended new value. I_ci. And, in IRFM,

, the

15 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 16 of 26

Ninth Circuit, without discussion of the precise issue presented

here, found as "correct" a preference analysis that allowed

subsequent new value to offset a transfer that paid a previously

advanced new value.

The approach tacitly adopted by the Roberds and IRFM courts,

and expressly adopted by the bankruptcy court in this case,

better promotes the important policies underlying the subsequent

new value defense than does the approach advocated by the

Trustee. Given the ambiguous use of the word "otherwise,"

consideration of both underlying policies and the statute's

purpose is appropriate in construing the term. See In re

BankVest,

("[T]he Code as written is ambiguous,

so we must divine Congress's intent from other sources) (citing

In re Weinstein,

(1st Cir. 2001) (where the

Bankruptcy Code is ambiguous, courts look to "its historical

context, its legislative history, and the underlying policies

that animate its provisions")).

From one perspective, the bankruptcy court's approach might

appear to be contrary to the policy favoring equality of

treatment among creditors: the creditor who advances subsequent

new value arguably receives a "double dip" because the creditor

ends up keeping both PI and P2. But the bankruptcy court's

approach serves critical values underlying the defense itself:

16 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 17 of 26

(1) providing foundering debtors an opportunity to work their way

back to solvency that they otherwise would not have, by

encouraging continued extension of risky credit, see In re

Pillowtex Corp.,

, and (2) "treat[ing] fairly"

those creditors who continue to extend credit to the debtor, by

preventing an "increas[e] [in their] bankruptcy loss."

(quotation omitted).

By substantially reducing the risk assumed by creditors

willing to continue to do business with a struggling debtor, the

bankruptcy court's construction encourages creditors to stay in

the game, thus, in turn, reducing the debtor's risk of

bankruptcy, and the associated harm likely to be visited upon all

creditors by the debtor's business failure. See IRFM,

. From a broad policy perspective, then, the approach stands

to help all creditors, even those who choose to step to the

sidelines. It is only from a post-petition perspective, when

efforts to stave-off bankruptcy have proven unsuccessful, that

the bankruptcy court's interpretation seems to prejudice other

creditors.

In addition, while the bankruptcy court's construction

reduces the risk for a creditor who continues to do business with

the debtor, it also requires something affirmative and reciprocal

from the creditor that decidedly benefits the estate. A creditor

17 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 18 of 26

who wishes to offset a transfer that paid a previously advanced

new value must advance yet additional new value, and, if that

second extension of new value is paid, must advance yet more new

value or risk having the last payment avoided in the event of

bankruptcy. In other words, the risk to the creditor of

continuing to do business with a struggling debtor is reduced,

but that risk reduction depends upon the creditor continually

replenishing the estate with something of value, such as goods or

services, all to the benefit of both the struggling debtor and

its other creditors. At bottom, that is a fair result.

The bankruptcy court's interpretation is consistent with the

better view, promotes the statutory purposes underlying the

defense, and the benefit to the estate outweighs any potential

unfairness to other creditors. The bankruptcy court did not err

as a matter of law in ruling that, in this case, subsequent new

value may offset a transfer that paid a previously advanced new

value debt, so long as that transfer is "not otherwise

unavoidable."

C. Contemporaneous Exchange

Seeking a different way around the bankruptcy court's

interpretation, the Trustee argues, alternatively, that Amherst's

payments to Avnet on June 29 and 30 are "otherwise unavoidable"

under the contemporaneous exchange defense described in

18 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 19 of 26

§ 547(c)(1). Accordingly, she says, the new value advanced by

Avent (NV1) cannot be used to offset a prior preferential payment

(PI). She argues that, although the June 29 and 30 payments were

applied to outstanding invoices for antecedent debt, the parties

intended the payments to be contemporaneously exchanged for the

Honda software, and that they were so exchanged. If the Trustee

is right, then, under the bankruptcy court's construction of the

subsequent new value defense, those payments are indeed

"otherwise unavoidable." As such, they would be protected from

the Trustee's reach for reasons other than the "subsequent new

value" defense, and, the consequence would be disqualification of

the prior new value, NV1, as an offset against the payments made

to Avnet from April through near the end of June (PI).

Under the contemporaneous exchange defense, § 547(c)(1):

(c) The trustee may not avoid under this section a transfer —

(1) to the extent that such transfer was —

(a) 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

(b) in fact a substantially contemporaneous exchange.

(c) (1) .

"The critical inquiry in determining whether there has been

a contemporaneous exchange for new value is whether the parties

19 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 20 of 26

intended such an exchange." McClendon v. Cal-Wood Door,

(9th Cir. 1983). In determining the parties' intent,

the bankruptcy court noted that Amherst "directed" that $2.9

million of the $4 million it paid on June 29 and 30 be applied to

"receivables other than the Honda Order." Doc. No. 5-1 at 20.

The bankruptcy court noted as well that "'a vendor who conditions

continued deliveries to the buyer on the buyer's payment of old

invoices will not be protected by section 547(c)(1) from attack

by the buyer's trustee, even though the buyer's payment to the

vendor and the vendor's transfer of property to the buyer

occurred contemporaneously.'" I_d. (quoting 5 Collier on

Bankruptcy 5 547.04[1][a], at 547-47 (Alan N. Resnick & Henry J.

Sommer, eds., 16th ed. 2009)). Under such circumstances, the

parties do not, as required by § 547(c) (1), "actually intend [...]

the exchange to be contemporaneous." Id.

In this case, the debtor plainly directed that a substantial

portion of the payment be applied to old invoices for antecedent

debt. The creditor obliged and the debt arising from the Honda

Order remained largely unpaid. Finding, as a factual matter,

that "Amherst intended the payments to cover prior transactions,"

the bankruptcy court necessarily concluded that the requisite

intent (that the debtor and creditor intended the transfer to be

a contemporaneous exchange) was absent, so no contemporaneous

exchange as defined by the statute occurred. Xd. at 20-21. I

20 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 21 of 26

discern no basis in this record to question that finding of fact.

Certainly nothing in this record gives rise to a definite and

firm conviction that a mistake has been made with respect to the

bankruptcy court's factual determination of the debtor's intent.

The Trustee does not challenge the underlying facts, but

says the bankruptcy court erred as a matter of law in limiting

its intent inquiry to Amherst's direction to credit its payment

to past invoices. The court should have, she says, focused on

whether the parties intended to exchange payments (regardless of

how they were to be applied) for new value. Since it was

understood that Avnet would not ship the Honda goods until

Amherst transferred $4 million, the Trustee argues that §

547(c)(1)'s requirement that the debtor and creditor intend a

contemporaneous exchange was necessarily met, as a matter of law.

That is, the Trustee does not directly challenge the bankruptcy

court's factual finding that Amherst intended the June 29 and

June 30 payments to be applied to prior transactions, but neither

does she accept that finding as dispositive of her argument.-

2 The Trustee would have the court recognize the relevant exchange, not as the payment of old debt for the purpose of reducing old debt, but as what one learned treatise aptly calls the "reciprocal inducements" of "new value . . . [for] payment on the old debt." 1 Epstein, et al. Bankruptcy § 6-26 at 602 (1992) .

21 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 22 of 26

As recognized by the court of appeals for this circuit.

Congress intended the contemporaneous exchange defense to protect

transactions which, although intended as contemporaneous

exchanges, technically result in payment of antecedent debt. See

In re Lazarus,

, 19 (1st Cir. 2007) . A typical

contemporaneous exchange transaction consists of a payment for

goods by check. See id. ("The contemporaneous test was added

late in the day to address a much broader generic problem —

ordinary exchange of goods for check or credit payment . . .).

The appellate court explained:

Section 547(c)(1) was aimed, as its legislative history shows, at a generic problem: those on the verge of bankruptcy still need to buy things (e.g., groceries or household items) and the fact that checks are used (with a brief gap between purchase and payment) ought not render the payment avoidable as one made for an antecedent debt. H.R. Rep. No. 95-595, at 373 (1977).

Id. at 18. See also Richard B. Levin, An Introduction to the

Trustee's Avoiding Powers,

, 186 (1979)

("Though strictly speaking the transaction may be a credit

transaction because the seller does not receive payment until the

check is cleared through the debtor's bank, it is generally

considered and intended to be a contemporaneous transaction

The contemporaneous exchange defense, generally speaking,

protects transactions in which the debtor's transfer (i.e.

22 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 23 of 26

payment) is on account of what might be technically described as

"antecedent debt," but debt that arises from the new value for

which payment is being made. Payments on already outstanding

accounts receivable, that in turn trigger the extension of new

credit with respect to new value generally cannot be claimed by a

creditor to be a "contemporaneous exchange," beyond a Trustee's

avoidance power. In determining whether the transaction at issue

here falls within the intended scope of § 547(c) (1), the

bankruptcy court properly evaluated the parties' actual intent by

looking at which debt(s) Amherst intended to, and did, pay.

Notwithstanding some authority to the contrary, see e.g. In re

Jannel Indus., Inc.,

(Bankr. D. Mass. 2000),

courts, as well as leading commentary in the field, generally

support the bankruptcy court's approach here. See, e.g.. In re

Dooley Plastics Co.,

(Bankr. D. Mass. 1995); In

re Pearson Indus., Inc.,

(Bankr. C.D. 111.

1992); 5 Collier on Bankruptcy 5 547.04[l][a], at 547-47 (Alan N.

Resnick & Henry J. Sommer, eds., 16th ed. 2009) .

A debtor who, as in this case, intends to pay old invoices

and a creditor who accepts the debtors' payment and applies it to

resolve old invoices, and then gives new value on a credit basis,

certainly cannot be said to have "intended" a contemporaneous

exchange as a matter of law, and will not, generally, succeed in

preventing avoidance of the preferential payment by the debtor's

23 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 24 of 26

trustee under that defense. That is not to say, of course, that

under different factual circumstances, a court could not find, as

a factual matter, that although the parties seemingly allocated a

preferential payment to resolve outstanding invoices relative to

antecedent debt, their actual intent, as a factual matter, was to

contemporaneously exchange payments (however allocated) for

goods. But that was not the bankruptcy court's factual finding

here, and its finding is supported by the evidence of record.

For these reasons, the bankruptcy court's factual conclusion

that the transaction was not intended to be, and so was not, a

contemporaneous exchange, is affirmed.

III. New Value as Actual Value of Goods Shipped

The Bankruptcy Code defines new value as "money or money's

worth in goods, services, or new credit . . . ."

(a)(2). Whether something is new value presents a "question

[...] of fact." In re Lewellvn & Co.,

(8th Cir.

1991). In this case, the bankruptcy court found that the

products Avnet shipped on credit "in connection with the Honda

Order" constituted "new value" under § 547(c)(4). Doc. No. 5-1

at 16-17. "Avnet provided new value every time it shipped

computer components and software to Amherst and/or its customers

during the preference period, an amount that the parties agree

totals $7,019,112.33." Xd. at 17. The court rejected the

24 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 25 of 26

Trustee's contention that the goods shipped under the 2 for 1

arrangement (which diminished the value of the estate) conferred

no net "material benefit" on the estate. Instead, the court

accepted Avnet's position that a creditor "must simply provide

actual value, i.e., 'money's worth in goods, services, or new

credit.'" Xd. at 16. The court held that "the Bankruptcy Code

contains 'no material benefit' test. Rather, new value i_s

money's worth in goods, services, or new credit." I_ci. at 17

(emphasis in original). The Trustee appeals the bankruptcy

court's conclusion.

The Trustee urges the court to look beyond the actual value

of the goods shipped and determine if the estate — on balance,

after considering all of the circumstances — was "benefitted."

But that approach seems unwarranted, at least in this case. The

goods advanced on credit by Avnet benefitted the estate in the

ordinary sense that "money's worth" was provided to the estate.

There is no apparent reason to read more into the statutory

language beyond the requirement that new value be comprised of

money or money's worth in goods, services, or new credit. See

H.R. Rep. No. 595, 95th Cong., 1st Sess. 177, 372 (1977) ("new

value" is to be "defined in [its] ordinary sense [...]") . The

bankruptcy court found that the actual value of the goods shipped

was established by the amount invoiced. Doc. No. 5-1 at 17; Tr.

Ex. 108. Accordingly, the bankruptcy court's factual

25 Case l:10-cv-00543-SM Document 29 Filed 09/30/11 Page 26 of 26

determination that $7 million worth of goods shipped to Amherst

or its customers constituted new value is supported by the

evidence of record, is not clearly erroneous, and is affirmed.

The bankruptcy court's construction of the statutory term "new

value" was correct.

Conclusion

For the reasons set forth above, the decision of the

bankruptcy court dated September 3, 2010, is affirmed.

SO ORDERED.

Steeven J./McAuliffe Chief Judge

September 30, 2011

cc: Olga L. Bogdanov, Esq. Taruna Garg, Esq. Geraldine L. Karonis, Esq. Dennis Meloro, Esq. Annapoorni Sankaran, Esq. Daniel W. Sklar, Esq. Mary F. Stewart, Esq. Peter N. Tamposi, Esq. Robert A. White, Esq.

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