New York City Shoes, Inc., In re

• Decision Date: 12 July 1989
• Docket Number: No. 89-1051,89-1051
• Citation: 880 F.2d 679
• Parties: , 19 Bankr.Ct.Dec. 1118, Bankr. L. Rep. P 73,030 In re NEW YORK CITY SHOES, INC., Debtor. NEW YORK CITY SHOES, INC., Appellant, v. BENTLEY INTERNATIONAL, INC., Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 679

880 F.2d 679

58 USLW 2145, 19 Bankr.Ct.Dec. 1118,

Bankr. L. Rep. P 73,030

In re NEW YORK CITY SHOES, INC., Debtor NEW YORK CITY SHOES, INC., Appellant, v. BENTLEY INTERNATIONAL, INC., Appellee.

No. 89-1051.

United States Court of Appeals Third Circuit.

Argued May 23, 1989.

Decided July 12, 1989.

Pauline K. Morgan (argued), Douglas J. Smillie, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for appellant.

Joseph I. Mezrahi (argued), New York City, for appellee.

Before BECKER, STAPLETON and ROSENN, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

The bankruptcy code allows the debtor's trustee to avoid certain preferential transfers made by the debtor to a creditor within the 90-day period before the debtor filed its petition in bankruptcy. See 11 U.S.C. Sec. 547(b) (1982 & Supp. V 1987). However, 11 U.S.C. Sec. 547(c)(4) (1982) allows a creditor to retain an otherwise voidable preference if the creditor gave the debtor new value after the preferential transfer. This appeal presents the question of when a postdated check given by a debtor to a creditor should be deemed transferred for purposes of section 547(c)(4). We hold that there is a presumption that postdated checks are transferred for section 547(c)(4) purposes either on the date on the face of the check or on the date that the check clears the bank, ¹ as opposed to the date on which the check was delivered. We further hold that this presumption can be rebutted if the creditor can demonstrate that the parties treated the transaction as though it were a cash transaction and that if the creditor rebuts the presumption, the date of transfer should be considered to be the date that the debtor delivered the check to the creditor.

The appeal also requires us to decide whether, on the facts of this case, the bankruptcy court erred in finding that the creditor has established that it treated the transaction as a cash transfer on the day it received the post-dated check. We believe that finding to be clearly erroneous, and thus, because we find that the new value in this case was given before the preferential transfer, we hold that the exception provided by section 547(c)(4) does not apply.

I

The facts are straightforward. In November 1986 the debtor, New York City Shoes ("NYC"), received a shipment of shoes worth $15,960 from its creditor, Bentley International, Inc. ("Bentley"). In February 1987, NYC ordered more shoes, but Bentley refused to ship because NYC had not yet paid the November bill. At the beginning of March, NYC sent two checks to Bentley to cover the amount due from the November shipment. One of the checks, worth $7,960, was postdated April 1, 1987.

On March 3 and March 10, 1987, Bentley shipped additional shoes, worth $40,000, to NYC. Bentley attempted to deposit the postdated check on April 1, but at first the bank refused to cash it because there were insufficient funds in NYC's account. The check finally cleared the bank on April 13, 1987. On July 7, 1987, NYC filed a petition in bankruptcy.

II

For clarity's sake we will first discuss the relevant provisions of the bankruptcy code and then turn to the procedural history of the instant case. The bankruptcy code provides that a trustee in bankruptcy:

may avoid any transfer of an interest of the debtor in property--

(1) to or for the benefit of the creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on or within 90 days before the date of the filing of the petition....

11 U.S.C. Sec. 547(b). However, even if a creditor has received a preference that is voidable pursuant to section 547(b), the creditor may nonetheless keep the preferential transfer, if the transfer meets the criteria enunciated in any of the subsections of section 547(c). The only subsection relevant to the instant case is section 547(c)(4), which provides that:

The trustee may not avoid under this section a transfer ...

(4) 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.

The three requirements of section 547(c)(4) are well established. First, the creditor must have received a transfer that is otherwise voidable as a preference under Sec. 547(b). Second, after receiving the preferential transfer, the preferred creditor must advance "new value" to the debtor on an unsecured basis. Third, the debtor must not have fully compensated the creditor for the "new value" as of the date that it filed its bankruptcy petition. See In re Almarc Manufacturing, Inc., 62 B.R. 684, 686 (Bankr.N.D.Ill.1986). If a creditor satisfies these elements, it is entitled to set off the amount of the "new value" which remains unpaid on the date of the petition against the amount which the creditor is required to return to the trustee on account of the preferential transfer it received. Id.

Section 547(c)(4) has two interrelated purposes. First, the section is designed "to encourage trade creditors to continue dealing with troubled businesses." In re Gold Coast Seed Co., 30 B.R. 551, 553 (Bankr. 9th Cir.1983). In the ordinary course of business, suppliers provide goods to businesses on credit. The financial pressure that would result if creditors were to force an ailing company to pay for supplies up- front could turn many a troubled company into a bankrupt one. By allowing creditors to rely on payments of back debt in shipping new goods, section 547(c)(4) serves the purpose of avoiding unnecessary bankruptcies.

Second, section 547(c)(4) is designed to "treat fairly a creditor who has replenished the estate after having received a preference." Almarc, 62 B.R. at 688. See also In re American International Airways, Inc., 68 B.R. 326, 337 (Bankr.E.D.Pa.1986) (Section 547(c)(4) "protects creditors who deal with financially unstable businesses and reasonably rely on their payments as a consideration for providing these future services."). This point is illustrated by the following hypothetical discussed by Judge Ginsberg in Almarc.

Creditor C sells on credit $1000 worth of goods to Debtor D. D subsequently asks C for an additional $1000 worth of goods. C refuses unless D pays for the initial shipment. D does so, and C ships the $1000 worth of new merchandise. If D files for bankruptcy less than 90 days after he paid C for the initial shipment, assuming that the other criteria of section 547(b) were met and that section 547(c)(4) were not applied, the trustee would be able to recoup the $1000 that D paid to C for the first shipment. In that case, D's estate would be $2000 richer at C's expense; it would have received $2000 of goods while paying C nothing. However, if the payment and the second shipment had not occurred, the estate would be enriched only by $1000 (the value of the first shipment). For no justifiable reason, D ends up in a better position as a result of the payment and the new shipment, whereas C ends up worse off. Furthermore, even though C never agreed to risk more than $1000 on D, C ends up losing $2000. See Almarc, 62 B.R. at 688. The enactment of section 547(c)(4) obviates this problem. Section 547(c)(4), therefore, is intended to prevent needless bankruptcies and to treat fairly creditors who deal with troubled companies.

III

The trustee for NYC brought suit in bankruptcy court, pursuant to section 547(b), to avoid the transfer of the $7,960. Bentley contended from the outset that the preference was not voidable because it fell within the exception provided by section 547(c)(4). As discussed above, there are three elements involved in Sec. 547(c)(4) analysis. The parties have stipulated to the first element--that the transfer was otherwise a voidable preference within the meaning of Sec. 547(b). ² And they agree that the third element has been met: NYC never paid Bentley for the shoes shipped in March. With respect to the second element, they agree that the shipment of shoes in March constituted the provision of new value. They disagree solely on the question whether the transfer of money from NYC to Bentley occurred before or after the March transfer of shoes from Bentley to NYC. Bentley contends that the transfer should be deemed to have occurred in early March, the date that it received the check, which is before it shipped the shoes. ³ NYC contends that a postdated check should be deemed transferred on the date that the check clears the bank and thus that the transfer occurred on April 13, after the March shoe shipment.

The bankruptcy court held that a post-dated check is deemed transferred for purposes of section 547(c)(4) at the time of receipt. It thus agreed with Bentley that the transfer occurred in early March, before Bentley shipped the shoes. It concluded that after the $7,960 was transferred, Bentley gave new value to NYC, and, consequently, that the transfer was not voidable. Alternatively, the bankruptcy court found as a matter of fact that "[t]he Defendant's Controller credibly testified that the new value was given solely because of receipt of the post-dated check, and that the transaction was treated as a cash transaction by the parties." Bankr.Ct.Op. at 4. It found this to be an alternative basis for holding that the transfer occurred in early March, and thus that the new value exception applied. NYC appealed to the district court.

The district court rejected the standard formulated by the bankruptcy court. It held that a postdated check is only deemed transferred at the time of receipt if the parties reasonably treated the transaction as a cash transaction. As the district court explained

[t]he new value exception rests on the assumption that the creditor is reasonably...