Here is the fourth defense against preference avoidance actions, the so-called net result defense.
Defenses To Preference Avoidance Actions, Part IV:
The Net Result Defense
Suppose you borrowed $10,000 from ABC Bank. After paying back ABC Bank the $10,000, you borrowed another $7,000 from ABC Bank. And suppose you filed for bankruptcy protection less than ninety days after repaying the $10,000 to ABC Bank. Can the trustee assigned to your case avoid the $10,000 payment as a preference? The answer to this question is the point of § 547(c)(4):
The trustee may not avoid under this section a transfer — . . . to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —
(A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
Based on our discussion of § 547(b), we might conclude that the trustee can recover the entire $10,000. However, § 547(c)(4) limits the recover to the net preference, which is $3,000. Thus, while you repaid $10,000, the net benefit that ABC Bank derived from the transaction was only $3,000 because it gave you $7,000 after the repayment.
Put another way, when you paid the bank $10,000, your subsequent bankruptcy estate was diminished by $10,000. When the bank later gave you $7,000, the subsequent bankruptcy estate was replenished by $7,000, leaving a net shortfall of $3,000. Therefore, the trustee would only be able to recover $3,000 rather than the entire $10,000.
Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part IV)