Velde v. Kirsch, 543 F.3d 469 (8th Cir. 2008)

In Velde, Daniel Miller, the debtor and owner of a soybean storage facility, provided David Kirsch, a seller of soybeans, with a personal check for goods received. The check bounced, and Miller replaced the dishonored check with a bank check made jointly payable to Kirsch and Kirsch’s bank. Miller filed for bankruptcy within 90 days of issuing the replacement check, and the trustee, David Velde, sought to avoid the payment to Kirsch under Bankruptcy Code section 547. Kirsch’s bank had a valid lien on all Kirsch’s beans and precluded Miller from reselling the soybeans until the lien was removed, which occurred when the replacement check cleared.

Kirsch argued that the release of the bank’s lien upon the payment of the “preferential” transfer constitutes “new value” received by the debtor, and pursuant to Bankruptcy Code section 547(c)(1), the transfer could not be avoided. Bankruptcy Code section 547(c)(1) states, in pertinent part, “The trustee may not avoid under this section a transfer … whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor.” The bankruptcy court held that a payment to cure a dishonored check is not subject to the “contemporaneous exchange for value” defense. In support of this conclusion, the court cited other cases that state “the definition [of new value] expressly excludes ‘an obligation substituted for an existing obligation’.” Kirsch appealed, arguing that the bankruptcy court misunderstood the cases it relied upon. Kirsch argued that while an obligation substituting an existing obligation cannot be considered “new value” when given by the defendant, the debtor’s replacement of a bad check does not fall within this preclusion of the new value defense. The District Court for the District of Minnesota reversed, and appeal was taken.

The Court of Appeals for the Eighth Circuit sided with the District Court. The Court stated that the fact that the alleged preferential transfer was a replacement check is irrelevant. The key question is whether the debtor received value when the alleged preferential transfer was made. In this instance, the Court concluded that the release of Kirsch’s bank’s lien on the soybeans, which enabled Miller to sell the soybeans, was indeed contemporaneous new value received by the

debtor.

Under Velde, sellers of goods may be able to assert the contemporaneous new value defense under section 547(c)(1) if they retain a lien on the goods sold and such lien is released upon the alleged preferential payment. Notwithstanding this, it is unclear whether the holding in Velde, where Miller was precluded from re-selling the soybeans until the lien was removed, would apply if the debtor/purchaser of the goods had a right to resell the goods notwithstanding the lien.