Bankruptcy proceedings often involve preferences, a complex issue that can be mitigated or eliminated through several affirmative defenses provided by the Bankruptcy Code. This article focuses on one such defense: the contemporaneous exchange defense, codified in 11 U.S.C. § 547(c)(1). This defense encourages creditors to continue business with companies potentially facing bankruptcy and protects transfers intended as a contemporaneous exchange for new value given to the debtor.

To successfully assert this defense, a creditor must demonstrate mutual intent for the transfer to be contemporaneous and that the transfer was, in fact, a substantially contemporaneous exchange of new value. This process is fact-intensive and may require evidence such as written communications or historical dealings between the parties. The timing of the payment and exchange is crucial, and interpretations of “contemporaneous” vary across jurisdictions.

The defense also requires that new value be provided to the debtor, which can include goods, services, or a release of an interest or lien. However, forbearance does not constitute new value. The contemporaneous exchange defense, alongside the new value and ordinary course of business defenses, offers a way to circumvent or eliminate preference exposure.

Given the complexities and jurisdictional variations of this defense, creditors are advised to retain competent counsel to assist with its application. It’s essential to carefully review the applicability of the contemporaneous exchange defense to determine whether a creditor may assert it. Read full article here.