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Note: All American Semiconductor, Inc. (Debtor) filed for bankruptcy under 11 U.S.C. Chapter 11 (Reorganization) on 25 April 2007. AASI Creditor Liquidating Trust (Trust) assumed the right to pursue Debtor's avoidance actions for improper preference by order of the bankruptcy court. During the 90 day preference period prior to Debtor filing for bankruptcy, Debtor paid USD 4,933,139 to Samsung Semiconductor, Inc. (Creditor), and Creditor extended USD 3,988,050 in new value to Debtor. Also during the preference period, Creditor drew down on a USD 1,000,000 LC from Debtor's secured lender, Harris Bank, N.A. (Issuer). Debtor had procured this LC for the benefit of Creditor, and after the drawing, Issuer applied USD 1,000,000 from Debtor's bank account to pay for the obligation.

Trust commenced this action to avoid preferential and fraudulent transfers received by Creditor. Creditor then moved for summary judgment on the ground that it was entitled to credit for the new value it extended to Debtor during the preference period. Debtor made a cross-motion for summary judgment, asserting that once Creditor drew on the LC, the new value was no longer unpaid and the amount of new value available as a defense should be correspondingly reduced. The U.S. Bankruptcy Court for the Southern District of Florida, Cristol, J., denied Creditor's motion for summary judgment and granted Debtor's motion for summary judgment in part.

The bankruptcy court followed Charisma Investment Co., N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th Cir. 1988), a decision followed by the majority of Circuit Courts of Appeals. That case set forth the requirements for a 11 U.S.C. §547(c)(4) new value defense as "(1) that the creditor must have extended new value after receiving the challenged payments, (2) that the new value must have been unsecured, and (3) that the new value must remain unpaid."

The bankruptcy court found that the new value temporarily transferred to Debtor was "eviscerated dollar for dollar by [Creditor]'s draw-down of Debtor's $1 million letter of credit and [Issuer]'s ensuing setoff against Debtor's bank account." The bankruptcy court ruled that payments made under a LC are to be treated as if they were made by the debtor itself because it is the impact on the debtor's estate, not the source of the payment, which controls whether a new value defense is available.

[JEB/ael]

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