American Bankruptcy Institute | News & Views/Unsecured Trade Creditor Committee Newsletter/Vol. 9, No. 2

New Co-chairs Appointed for the UTC Committee

Lynnette R. Warman (Jenkens & Gilchrist PC; Dallas) and Douglas G. Fox, CCE (Bosch Rexroth Corp.; Lehigh Valley, Pa.) have been named by ABI President Richardo I. Kilpatrick as the new co-chairs of the UTC Committee. Ms. Warman and Mr. Fox have indicated that they look forward to meeting the high standards Ms. Thompson and Ms. Schirmang have set by continuing the tradition of excellent growth and leadership in the UTCC.

By way of introduction, Co-chair Doug Fox is a representative from the trade members of the UTCC. He brings to the committee more than 25 years of business credit management experience, including bankruptcy and insolvency issues, and has served as chairman of many official unsecured creditors' committees. He has been a member of the UTCC for about five years and served as one of the credit manager members of the UTCC's Task Force on Preferences several years ago, and continues to serve on the present Task Force on Reclamation. In his new role, Mr. Fox is interested in continuing the UTCC's efforts to explore and develop working relationships with individuals and organizations in related professions, such as those in the business credit community.

Ms. Warman is a representative from the attorney members of the UTCC. She is a shareholder in the law firm of Jenkens & Gilchrist, a professional corporation. She has practiced primarily in the areas of debtor and creditors' rights for the past 15 years. During that time, Ms. Warman was active in ABI and has been a member of the UTCC for most of that time. Ms. Warman is also active in the National Association of Credit Management (NACM) and is a frequent speaker at NACM and ABI functions. Her service to the UTCC began by writing articles for News & Views when John Penn (Haynes and Boone LLP; Fort Worth, Texas), ABI's Vice President-Publications, was the publications director of the UTCC. For the past four years, she has served as publications director, publishing News & Views. Now that she has been named co-chair of the UTCC, she is anxious to find a replacement publications director. Please let her know if you are interested in serving the UTCC in that position.

Former UTCC Co-chairs Transition Into New Positions

by Lynnette R. Warman
Jenkens & Gilchrist PC; Dallas

Sandra Schirmang (Kraft Foods Inc.; Northfield, Ill.) and Judy Thompson (Poyner & Spruill LLP; Charlotte, N.C.) have stepped down as co-chairs of the UTC Committee. Ms. Schirmang had been a co-chair since 1997. During her tenure, she worked with Joseph S.U. Bodoff (Bodoff & Associates; Boston) and then Ms. Thompson as co-chairs. Together, Ms. Thompson and Ms. Schirmang have guided the committee for the past three years, and have continued the tradition of actively encouraging participation in the committee and by producing timely and useful publications, such as General Assignments for the Benefit of Creditors and the Reclamation Manual.

Ms. Thompson is now ABI's Vice President-Education. She is responsible for coordinating the two annual ABI meetings and has oversight over the regional program chairs for the regional conferences. Ms. Schirmang is maintaining her usual busy schedule, made more hectic by the present economic conditions. We wish them well on their future endeavors, and ask them to remain active in the committee for a long time to come.

On behalf of the UTCC, I would like to thank Judy and Sandy for their exemplary service as committee co-chairs. Both of them have been tremendous assets to the committee and the success it has enjoyed and leave a legacy that will be a challenge to meet.

Minutes of the UTC Committee Meeting at the 2001 Annual Spring Meeting

We had an excellent committee meeting at the Annual Spring Meeting in April and now have a lot of work to do to follow up on the great suggestions for committee activity that were discussed.

Tom Grace (Locke Liddell & Sapp LLP; Houston) chairs a subcommittee that is working to get greater involvement from unsecured trade creditors in ABI and with our committee. His report included a number of suggestions for actions that could be taken to further our goals:

Arrange for broader distribution of News & Views or at least articles out of the newsletter that might be appropriate for inclusion in National Association of Credit Management (NACM) newsletters or web sites.
Ensure that NACM credit managers, perhaps those senior persons who are NACM credentialed, receive a copy of News & Views.
Obtain a list of all the NACM regional seminars and aggressively offer to provide ABI speakers on topics of interest at these programs.

In the area of reclamation, our Reclamation Manual is complete and ready for publication. We thank Bruce Nathan (Davidoff & Mailito; New York) for his outstanding work on this product.

Our goal is to identify other written projects that the committee might undertake as well as to focus on other action items. Here are some of the suggestions:

Prepare a small handbook on proofs of claim that includes detailed instructions on how to fill out every part of the form. As we all know, there are some subtleties that are not readily apparent from the actual form instructions.
Visit each of the major regional ABI conferences and hand out copies of the General Assignments for the Benefit of Creditors manual along with a presentation on the use of assignments.
Draft a publication on claims litigation.
Develop a program to be offered at regional ABI meetings titled "Top 10 Issues for Credit Managers" and use it as a marketing piece to encourage credit people from various companies in the region to attend.
Compose a piece on the use of the doctrine of necessity to make post-petition payments to pre-petition "critical vendors."
Draft a short publication on hot tips to help avoid preference liability (this may be in the preference manual).
Write a short piece on consignments under the new Article 9.
Examine tax issues (suggested by Larry Ahern (Gullett, Sanford, Robinson & Martin PLLC; Nashville, Tenn.)).
There is apparently a case involving Northeast Airlines that could be worth an article for trade creditors.
Bob Keach (Bernstein, Shur, Sawyer & Nelson; Portland, Maine)Êand William Wolfson (Parker & Wolfson LLC; Flemington, N.J.) raised the issue of supply agreements.

The next UTC Committee meeting will be held Saturday morning, Dec. 1, at this year's Winter Leadership Conference in Carlsbad, Calif. Hope to see everyone there.

—Judy Thompson (Former UTCC Co-chair)
Poyner & Spruill LLP; Charlotte, N.C.

UTC Committee Meeting Calendar

The UTC Committee will meet at the upcoming conferences:

Saturday, Dec. 1, 2001: ABI Winter Leadership Conference; LaCosta Resort & Spa, Carlsbad, Calif.
April 18-21, 2002: ABI Annual Spring Meeting; J.W. Marriott, Washington, D.C.

The next issue of News & Views will be published early next year. Call Lynnette Warman at (214) 855-4792 or e-mail lwarman@jenkens.com for more information.

The "Nuts & Bolts Creditors' Forum" is a feature that contains questions relating to credit issues and their suggested solutions. Questions or comments to be included in future newsletters are welcome.
Question:
Is there a new value preference defense with post-petition sales?
Answer:
A sophisticated credit professional that receives a preference demand always looks for defenses to defeat the preference demand. If the vendor sold the debtor post-bankruptcy, can the vendor use this post-petition value, whether or not the vendor provided goods or services, as a defense to the preference action? A recent bankruptcy court decision¹ considers how far a vendor may use the subsequent new value defense.
The Bankruptcy Preference Law

The Bankruptcy Code vests the trustee with far-reaching powers to avoid transfers and transactions prior to a bankruptcy filing. The power to avoid preferential transfers is one of the trustee's most potent weapons. The Bankruptcy Code defines a preferential transfer expansively to include nearly every transfer by an insolvent debtor during the preference period. Vendors are discouraged from racing to the courthouse to dismember a debtor, thereby hastening its slide into bankruptcy. A debtor is deterred from preferring a vendor by the requirement that any vendor that receives a greater payment than similarly situated vendors disgorge the preference so that like vendors receive an equal distribution of the debtor's assets.
Not all transfers made within the preference period may be recaptured. One of the most effective and common preference defenses used by a vendor is the subsequent new value or subsequent advance rule, which excludes from recapture payments to a vendor that subsequently extended goods or services (or credit for those goods or services) to the debtor.
Beating the Preference Lawsuit: The Subsequent New Value Defense

The subsequent new value operates as follows. Say on Jan. 1, the debtor gives an unsecured vendor a check for $10,000 for goods supplied. On Jan. 5, the vendor provides the debtor an additional $10,000 in goods on open account (no purchase money security interest is taken in the goods). On Feb. 1, the debtor files for bankruptcy. The Jan. 1 payment, made within 90 days before the bankruptcy filing, may be recaptured as a preference assuming that the criteria for the preference law were met. However, because the subsequent advance of goods by the vendor replenished the bankruptcy estate, the subsequent new value rule permits the vendor to reduce its Jan. 5 advance against the preference, and does not have to disgorge the payment.
The subsequent advance rule has its most frequent application where a vendor provides goods or services on open account and the debtor pays the vendor at various points during the preference period. Congress intended to protect the open account vendor with the subsequent new value rule. Under this analysis, a single transfer during the preference period is not analyzed in isolation from the overall course of business between the vendor and debtor, as the basis for maintaining the open account is considered the debtor's entire financial picture and not the debtor's most recent payment.
The objectives of the subsequent new value rule are (1) to encourage a vendor to continue to extend credit to the financially troubled debtor, possibly helping the debtor avoid bankruptcy, (2) to promote equality among vendors, and (3) to reward vendors that actually enhance the estate during the preference period. Without the exception, a vendor that continues to extend credit to the debtor would merely be increasing its bankruptcy loss and in effect be punished for continuing to work with the debtor.
Considering the sequence of the trade relationship between the debtor and the vendor, may a vendor that provides goods or services post-bankruptcy use such transfers as defense to preference payments (payments received within 90 days of the bankruptcy filing) under the subsequent new value rule?
Post-petition Advances Are Not Subsequent New Value

In TennOhio Transp. Co., the vendor leased tractor-trailers to the debtor, which the debtor paid up through its chapter 11 filing. The debtor used the trailers post-petition and paid the vendor. The debtor purchased the trailers from the vendor, with the bankruptcy court approving the sale. The sale agreement did not exclude the debtor pursuing preference claims against the vendor. After the sale was approved, the debtor sued the vendor for preferences. The vendor claimed that it had an absolute defense to the preference action based on the debtor's use of the trailers post-petition qualified for the subsequent new value defense. The court disagreed, saying:
Post-petition advances of new value may not be applied to offset preferential transfers. Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir. 1988). First, §547(c)(4) specifically requires that the advances be made "to or for the benefit of the debtor," and any post-petition transfers would not be for the debtor, but for the bankruptcy estate. Id. Second, the purpose of the subsequent new value exceptionÜto encourage creditors to deal with troubled businessesÜis better served by other Bankruptcy Code provisions, such as §§364 or 503(b)(1), once a petition has been filed. Id.²
The court ruled that the vendor did not have a subsequent new value defense as to the debtor's post-petition use of the trailers.
The Limits of a Subsequent New Value Defense

The TennOhio Transp. Co. case may clarify the limits of the subsequent new value defense. The court's decision may guide the credit professional in developing a preference defense and in determining whether selling to the debtor post-petition in part to reduce preference exposure may or may not succeed. The court's decision is also a reminder that a vendor entering into an agreement with a debtor post-petition, when the vendor has preference exposure, should insist on a preference waiver as part of the agreement so that the debtor may not later sue for a preference.
—Scott Blakeley³
Blakeley & Blakeley LLP; Irvine, Calif.
Footnotes

¹ In re TennOhio Transp. Co., 255 B.R. 307 (Bankr. S.D. Ohio 2000). Return to article
² In re TennOhio Transp. Co., 255 B.R. 310. Return to article
³ Scott Blakeley is a principal of Blakeley & Blakeley LLP, where he practices vendors' rights and bankruptcy law. His e-mail address is sblakeley@bandblaw.com. Return to article

2001 Winter Leadership Conference UTCC Agenda

The UTCC will meet at the 2001 ABI Winter Leadership Conference in Carlsbad, Calif., on Saturday, Dec. 1, 2001, from 8:00-9:15 a.m.

I. Recognition of Judy Thompson and Sandra Schirmang, Immediate Past Co-chairs
II. Introduction of New Co-chairs
III. Discussion and Assignment of New Projects
IV. Reports of Pending Projects and Activities
     A. Ad Hoc Task Force on Trade Creditor Involvement (Tom Grace, Locke Liddell & Sapp LLP; Houston)
     B. Reclamation Project (Bruce Nathan, Davidoff & Mailito L.L.P.; New York)
     C. Report on Publications (Lynnette Warman, Jenkens & Gilchrist PC; Dallas)
     D. Preference Project Update (David Wheeler, Moore & Van Allen; Charleston, S.C.)
V. Educational Program (Jay Indyke, Kronish, Lieb, Wiener and Hellman; New York).