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)