The Eleventh Circuit has held that amounts paid post-petition for an administrative expense claim under Section 503(b)(9) of the Bankruptcy Code do not reduce the “new value” otherwise available to the creditor as a defense to a preference claim. Auriga Polymers Inc. v. PMCM2, LLC, 2022 U.S. App. LEXIS 19761 (11th Cir. July 18, 2022).
Carpet manufacturer Beaulieu Group, LLC filed for bankruptcy in 2017. The resulting liquidating trust brought a complaint against one of Beaulieu’s erstwhile suppliers, Auriga Polymers, seeking to avoid under Section § 547(b) of the Bankruptcy Code and recover from Auriga under § 550 of the Code more than $2 million Auriga paid to Beaulieu during the 90 days preceding the bankruptcy filing. Auriga asserted a new value defense under § 547(c)(4) based on its provision to Beaulieu of new value following the allegedly preferential transfers. That new value was also part of Auriga’s administrative expense claim under § 503(b)(9) of the Code, which authorizes a priority claim for the value of goods received by the debtor within 20 days before the petition date where the goods were sold to the debtor in the ordinary course of the debtor’s business. The question for the Court was whether value resulting in payment of the 503(b)(9) claim could also function as “new value” as a defense to the preference claim—or, as the Court put it, “whether post-petition transfers made under a 11 U.S.C. § 503(b)(9) request will reduce the creditor’s new value defense.”
The bankruptcy court answered that question in the affirmative, holding that the funds being held in escrow by the liquidating trust for payment of Auriga’s § 503(b)(9) claim were “otherwise unavoidable transfers” within the meaning of § 547(c)(4), which provides that a “new value” defense is available when “on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” As a result, the bankruptcy court said, the amount held for payment of the § 503(b)(9) claim had to be subtracted from the new value available as a preference defense. Auriga appealed to the district court, which stayed the case pursuant to 28 U.S.C. § 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 liquidating trustee’s argument that Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018), required a decision in his favor. The transfers at issue in BFW had been made pre-petition, the Court noted, and did not present the question whether a post-petition transfer, including one for payment of a § 503(b)(9) claim, could constitute an “otherwise unavoidable transfer” to be offset against new value used as a defense to a preference claim. The Court also rejected Auriga’s argument that there had been no “transfer” at all, holding that the liquidating trust’s placing the contested amount in escrow constituted a “transfer.”
Turning to the issue whether that transfer was an “otherwise unavoidable transfer” within the meaning of §547(c)(4), the Court noted that only one Court of Appeals—the Third—had directly weighed in on the question, holding in Friedman’s Liquidating Trust v. Roth Staffing Cos. (In re Friedman’s Inc.), 738 F.3d 547 (3d Cir. 2013), that only pre-petition “otherwise unavoidable transfers” can offset a creditor’s new value defense. The Eleventh Circuit reached the same conclusion. Acknowledging that the text of § 547(c)(4) includes no express temporal limit, the Court reasoned that the word “transfer” should be given the same meaning throughout the section, and that the only consistent meaning would require that the “transfer” be made 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 avoidance action in a voluntary bankruptcy case begins to run on the petition date, meaning that, if post-petition transfers could defeat a new value defense, “the calculation of preference liability could change depending on when the preference avoidance action was filed.” For all these reasons, the Court concluded, a post-petition transfer made on account of a § 503(b)(9) claim is not an “otherwise unavoidable transfer” within the meaning of §547(c)(4) and thus does not reduce a creditor’s new value defense.