Post-Petition Payment of Section 503(b)(9) Claims Does Not Reduce a Creditor’s New Value Preference Defense

The Eleventh Circuit held that amounts paid after the petition for an administrative expense claim under Bankruptcy Code Section 503(b)(9) do not reduce the “new value” otherwise available to the creditor as defense to a preferential claim. Auriga Polymers Inc. v. PMCM2, LLC, 2022 US app. LEXIS 19761 (11th Cir. July 18, 2022).

Carpet manufacturer Beaulieu Group, LLC filed for bankruptcy in 2017. The resulting liquidation trust sued one of Beaulieu’s former suppliers, Auriga Polymers, seeking avoidance under § 547 (b) of the Bankruptcy Code and to recover from Auriga pursuant to Section 550. of the Code more than $2 million that Auriga paid to Beaulieu in the 90 days prior to filing for bankruptcy. Auriga asserted a new value defense under section 547(c)(4) based on its provision to Beaulieu of new value as a result of the allegedly preferential transfers. This new value was also part of Auriga’s claim for administrative costs under Section 503(b)(9) of the Code, which allows a priority claim for the value of goods received by the debtor within 20 days prior to the date of the request on which the goods were sold. to the debtor in the normal course of its business. The question for the Court was whether the value resulting from the payment of the 503(b)(9) claim could also function as “new value” as a defense to the claim of preference – or, as put the Court, “if after the request? transfers made pursuant to a 11 USC § 503(b)(9) claim will reduce the creditor’s new value defense.

The bankruptcy court answered this question in the affirmative, finding that the funds held in escrow by the winding-up trust for payment of Auriga’s 503(b)(9) claim were “otherwise unavoidable transfers” within the meaning of Section 547(c). (4), which provides that a “new value” defense is available where “by reason of what new value the debtor has not made an otherwise unavoidable transfer to or for the benefit of that creditor”. As a result, the bankruptcy court declared that the amount withheld for payment of the § 503(b)(9) claim should be subtracted from the new value available as a defense of preference. Auriga appealed to the district court, which stayed the case pursuant to 28 USC § 158(d)(2)(A) for an immediate appeal to the Eleventh Circuit.

The Eleventh Circuit, in an opinion written by Judge Lagoa and joined by Judge Wilson and Judge Jose Martinez visiting from the Southern District of Florida, reversed. The court began by rejecting the liquidator’s argument that Kaye vs. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018), required a ruling in its favour. The transfers in question in BFW had been made prior to the petition, the Court noted, and did not address whether a post-petition transfer, including one for payment of a 503(b) claim (9), could constitute an “otherwise unavoidable transfer” to be offset by the new value used as a defense against a claim of preference. The Court also rejected Auriga’s argument that there had been no “transfer”, finding that the deposit of the disputed amount by the liquidation trust constituted a “transfer”.

Turning to the question of whether this transfer was an “otherwise unavoidable transfer” within the meaning of section 547(c)(4), the Court noted that only one Court of Appeal – the Third – had directly weighed on the question, judging by Friedman’s Liquidating Trust v. Roth Staffing Cos. (In re Friedman’s Inc.), 738 F.3d 547 (3d Cir. 2013), that only “otherwise unavoidable transfers” before the petition can offset a creditor’s new value defense. The Eleventh Circuit came to the same conclusion. Recognizing that the text of section 547(c)(4) does not include any express time limit, the Court held that the word “transfer” should have the same meaning throughout the section, and that the only consistent meaning would require that the “transfer” be made in pre-petition. The title of Section 547 – “Preferences” – also suggested that the “transfers” described in the section were pre-petition transfers. And the statute of limitations for filing an annulment action in a voluntary bankruptcy case begins to run from the date of the petition, which means that, if post-petition transfers could defeat a valuable new defense, “the calculation of preferential liability could change depending on when the preferential annulment action was filed.For all of these reasons, the Court held that a post-petition transfer made due to a claim under § 503 (b)(9) is not an “otherwise unavoidable transfer” within the meaning of §547(c)(4) and therefore does not reduce a creditor’s new defense value.

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