The Bankruptcy Court for the District of Delaware recently faced a question of first impression: whether an allowed postpetition administrative expense claim can be used to set off preference liability. In concluding that it can, the court took a closer look at the nature of a preference claim.

Facts and Arguments

Two months after Quantum Foods, LLC (“Quantum”) filed its chapter 11 petition, Tyson Fresh Meats, Inc. and Tyson Foods, Inc. (collectively, “Tyson”) supplied meat products to Quantum. Tyson filed an administrative claim seeking payment for the postpetition deliveries, which the Bankruptcy Court allowed in an amount of approximately $2.6 million.

Thereafter, Quantum’s creditors’ committee commenced an adversary proceeding against Tyson seeking to avoid preferential and fraudulent transfers totaling almost $14 million. Tyson answered the committee’s complaint, denying that the transfers constituted avoidable preferences. Tyson also contended that the committee’s claims to recover avoidable preferences were postpetition causes of action that Tyson was entitled to set off by the amount of its administrative expense claim. The committee countered that Tyson’s administrative expense claim was really a “disguised” new value defense because it had the effect of reducing the amount of preferential transfer returned to the estate. Therefore, argued the committee, because the Third Circuit has held that goods or services provided to the debtor postpetition cannot be used as subsequent new value, the defense was unavailable.

Analysis

The court rejected the committee’s argument that Tyson’s claim was a disguised new value defense, holding that Tyson’s setoff claim did not affect the bottom line of the preference calculation, instead, it merely changed the amount paid to the estate. In the court’s words, the administrative claim “affect[ed] the preference claim externally, not internally.” Therefore, the court held that Tyson’s claim was an independent, pre-existing and wholly unrelated postpetition administrative expense claim.

Having held that Tyson’s claim was an administrative claim and not a disguised new value defense, the court was left with the question of first impression of whether an allowed postpetition administrative expense claim can be used to set off preference liability. The court readily concluded that such a setoff was available. The court’s analysis began with the principle that setoff is only available where the opposing obligations arise on the same side of the petition date. Tyson’s administrative claim clearly arose postpetition. The critical issue was whether the committee’s preference claim, that necessarily concerned only the prepetition preference period and prepetition facts, arose postpetition as well.

The court concluded that it did. The court reasoned that a preference claim can only be asserted after the filing of a bankruptcy petition. Pointing to the Bankruptcy Code’s definition of “claim” as a “right to payment,” the court reasoned that absent a chapter 11 filing no preference actions can be brought. The fact that a debtor’s ability to recover a transfer depends on prepetition actions is irrelevant. Because a preference action can only be initiated in the context of a bankruptcy case after the filing of a petition, it is a claim that arises postpetition.

Conclusion

The court’s decision highlights the dual nature of a preference claim. While the underlying transfer arises out of prepetition activity in the prepetition preference period, the claim arises postpetition. As demonstrated by the Quantum Foods case, this distinction may be particularly beneficial to prepetition vendors who continue to supply goods and services postpetition, as they may be able to offset preference liability with administrative claims.