The Section 547(c)(4) “subsequent new value” defense often represents a straightforward, yet powerful weapon against a debtor or trustee seeking to recover allegedly preferential payments. To the delight of creditors, this defense was further strengthened through a recent decision by the U.S. Court of Appeals for the Eighth Circuit in Stoebner v. San Diego Gas & Electric (In re LGI Energy Solutions), 2014 U.S. App. LEXIS 5227 (8th Cir. Mar. 20, 2014). In LGI, the court found that two defendant utility providers could defeat the attempted avoidance of payments received by them from the debtor within 90 days of the bankruptcy filing by asserting as subsequent new value payments made by third-party utility customers to the debtor. In so doing, the LGI court recognized that subsequent new value need not always come directly from the immediate transferee to qualify for the Section 547(c)(4) defense.
The debtor in LGI performed bill payment services for its clients, which included large utility customers such as the restaurant chains operated by Buffets Inc. and Wendy’s International Inc. In accordance with the contracts between the debtor and its clients, the defendants that supplied utility services to Buffets and Wendy’s sent their invoices directly to LGI Energy Solutions, rather than to its customers. LGI would periodically send the customers a spreadsheet summarizing their payment obligations under invoices LGI had received. The utility customers then sent payment to LGI for the aggregate amount due, which LGI deposited in its own commingled bank account. LGI subsequently sent payment on behalf of Buffets and Wendy’s directly to the utilities. Since LGI did not have a contract with the utilities, payment from LGI was received only by reason of LGI’s contractual obligations with Buffets and Wendy’s.
