Creditors Beware - Post-Petition Standby Letter of Credit Payments May Reduce New Value Defense

Sep 16, 2026

Explains how the subsequent new value defense in preference litigation can be affected when a creditor receives payment after a customer’s bankruptcy filing via a standby letter of credit. Reviews the requirement that the asserted new value not be paid for by an otherwise unavoidable transfer that is subject to another preference defense. Describes standby letters of credit as independent documentary undertakings and analyzes how draws can change the timing and treatment of invoices and related payments.

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Creditors Beware: Post-Petition Standby Letter of Credit Payments

Selected Topic

May Reduce New Value Defense

How Standby Letters of Credit Work

The Facts of the NewPage Case

Creditors Beware: Post-Petition Standby Letter of Credit Payments S e l e c t e d t o p i c BruCe NatHaN , eSq. aND eriC CHafetz, eSq. May Reduce New Value Defense naT io na l assoc iaT io n o F c r e d iT Ma nag e M e nT The PublicaTion For crediT & Finance ProFessionals $7.00 February 2015 on a dollar-for-dollar basis, to the extent the creditor had provided new goods and/or services on credit terms to the debtor subsequent to the receipt of a preference. The subsequent new value defense protects a creditor from preference liability because the new goods and/or services the creditor had provided to the debtor after the payment replenished the debtor’s assets that were otherwise diminished by the alleged preference. The new value defense is also supposed to encourage creditors to continue extending credit to financially troubled companies and promote equality of treatment among creditors. One of the requirements of the subsequent new value defense, contained in §547(c)(4)(B), is that a creditor’s new value was not paid for by an otherwise unavoidable transfer by the debtor to or for the creditor’s benefit. New value is paid by an otherwise unavoidable transfer where payment of the new value is subject to another preference defense, such as the ordinary course of business defense. So what is the impact of a creditor’s receipt of payment of its asserted new value invoices by drawing on a standby letter of credit after its customer’s bankruptcy filing? How Standby Letters of Credit Work Standby letters of credit are a tool that trade creditors frequently rely upon to protect themselves from the risk of nonpayment of their invoices by a financially troubled customer. A letter of credit transaction involves three parties and three independent contracts. The first contract oftentimes involves a sale of goods or provision of services between a seller and a buyer. In 1 B us i n ess C r e d it f e B r ua ry 2 0 1 5 order to obtain additional credit protection, however, the seller may require that a buyer cause a bank to issue a letter of credit in the seller’s favor as a condition to the seller extending credit or otherwise doing business with a buyer. The second discrete contract is between the buyer, as the letter of credit applicant, and the bank issuing the letter of credit. The buyer agrees to repay the bank for the bank’s payments made to the beneficiary upon the presentation of conforming documents, and the buyer’s reimbursement and other obligations to the bank are frequently secured by the buyer granting a security interest in all of the buyer’s assets in favor of the bank. The final contract is the standby letter of credit that the bank issues in favor of the seller as beneficiary. When the beneficiary submits conforming documents to the issuing bank, the bank’s only duty is to examine the documents and determine whether they are consistent with the documentary requirements set forth in the letter of credit. After the bank determines that the beneficiary has presented all of the required documents, the bank must pay the amount requested by theseller as beneficiary. The bank’s obligation to honor a conforming draw on a letter of credit is independent of the beneficiary’s/seller’s performance of the underlying contract for which the letter of credit was issued and the bank’s ability to recover its reimbursement claim against the letter of credit applicant/buyer. The bank is required to pay the beneficiary upon the presentation of all of the documents required by a letter of credit, regardless of any contractual dispute between the seller and buyer and/or the bank’s inability to obtain payment of its reimbursement claim from the buyer. the bank’s obligation to honor a conforming draw on a letter of credit is independent of the beneficiary’s/seller’s performance of the underlying contract. the facts of the NewPage Case Styron LLC (“Styron”)started doing business with NewPage Corporation an

FAQs

What is the subsequent new value defense and why does it matter for creditors?

The subsequent new value defense protects a creditor from preference liability when post-payment goods or services replenish the debtor’s assets diminished by an alleged preference. It is intended to encourage continued credit and promote equality among creditors.

What key requirement must be met for new value under 28 U.S.C. §547(c)(4)(B)?

The new value must not be paid for by an otherwise unavoidable transfer. If the new value is paid through a transfer that is itself protected by another preference defense, the requirement is not satisfied.

How do standby letters of credit affect payment timing after a bankruptcy filing?

Standby letters of credit are structured so the bank must honor conforming draws based on document consistency, largely independent of disputes in the underlying contract. The document discusses whether drawing on a standby letter of credit after bankruptcy can reduce or complicate the new value defense.

Sep 16, 2026

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