Contemporaneous Exchange for New Value Defense (Bankruptcy) Law and Legal Definition
Contemporaneous exchange for new value is a statutory defense available to a creditor facing a preference action filed by a trustee of a bankruptcy estate (or a debtor in possession) to recover payments made by the debtor to a creditor prior to the filing of the bankruptcy petition. Pursuant to 11 USCS § 547, there can be no recovery where the transfer was:
- Intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor.
- In fact a substantially contemporaneous exchange. [11 USCS § 547 (c)(1).]
Underlying this defense is the understanding that where a creditor provides new value in exchange for a preferential transfer, the estate has not been diminished. However this defense only protects preference transfers to the extent that the creditor can prove that the value given to the creditor equals the value the debtor received. Absence of requisite intent on behalf of the parties will preclude the viability of this defense. Courts have held that transactions that appear on their face to be a contemporaneous exchange for new value will not be considered as such if there is evidence that the parties did not intend the exchange to be contemporaneous. The purpose behind this defense is to encourage creditors to continue to conduct business with a financially distressed entity in the hope that a bankruptcy filing can be avoided.