Circuit City and Commissary
As discussed in the previous article, in Circuit City, the U.S. Bankruptcy Court for the Eastern District of Virginia refused to allow a preference defendant to claim § 547(c)(4) subsequent new value for goods that were also the subject of a § 503(b)(9) Claims (20-day goods). In Commissary, the U.S. Bankruptcy Court for the Middle District of Tennessee seemingly did just the opposite.
The courts in both Commissary and Circuit City undertook extensive analyses of the interplay between § 503(b)(9) claims the § 547(c)(4) new value defense, and similarities and differences between the relatively newly available § 503(b)(9) claims and the similar but distinguishable reclamation rights available prior to the enactment of § 503(b)(9).
TI Acquisition
One other case mentioned but not discussed in the previous article, TI Acquisition, [1] also held that 20-day goods could not serve as New Value. Like Commissary and Circuit City, in TI Acquisition, the U.S. Bankruptcy Court for the Northern District of Georgia undertook an extensive comparison of reclamation claims, critical-vendor payments and 503(b)(9) claims in an effort to reconcile disparate treatment in the context of a new value defense.
Reconciling Circuit City, Commissary and TI Acquisition
While these decisions would appear to indicate a split between the courts that have looked at the issue, all three are reconcilable by looking at the debtor's administrative solvency of the debtor and the status of payment on the respective § 503(b)(9) Claims.
In Commissary, the Court noted that payment of § 503(b)(9) Claims “is dependent upon whether the claimant's § 503(b)(9) claim is approved by the Court and whether the debtor-in-possession has the ability to pay the § 503(b)(9) claim either before or after a plan is confirmed.” [2] The Court in Commissary stated that “The possibility that a § 503(b)(9) claimant might receive payment for the deliveries it made to a debtor within the 20 days prior to the petition date does not remove those deliveries from the definition of “new value” in 11 U.S.C. § 547(a)(2). [3]” The Commissary decision did not explicitly discuss the status of payment of administrative expenses or administrative solvency of the debtor; however from the context of the decision it appears the debtor’s ultimate administrative solvency was still in question at the time the preference action was litigated.
At the time the preference actions were litigated in Circuit City and TI Acquisition, the creditors were paid or assured of payment on their ultimately allowed § 503(b)(9) Claims. In Circuit City, the debtor established a fully funded reserve to pay the creditor’s 503(b)(9) claim. [4] Similarly, in TI Acquisition, § 503(b)(9) Claims at issue were “allowed and fully funded. [5]” The TI Acquisition decision noted the factual distinction with Commissary, observing that “[i]f the estate were administratively insolvent, there may be no basis to hold that the claim was paid and the decision of the Court might be different. [6]”
A careful read of these three cases, the only cases to date addressing the use of 20-day goods as new value, leads to the conclusion that the question of whether 20-day goods may serve as new value depends entirely upon whether payment on §503(b)(9) claims are a “sure thing” or dependent upon the debtor’s ultimate administrative solvency.
Unresolved Questions
Having reconciled these seemingly divergent opinions, the author posits the following hypothetical: [7] Suppose a creditor files a § 503(b)(9) claim for 20-day goods, which is allowed but unpaid. The debtor files a preference action at a time when its ultimate administrative solvency remains unsettled. Finally, assume that the 20-day goods, if allowed as New Value, would cover all allegedly preferential payments.
On these facts, the 20-day goods should be available as new value. The creditor shipped the goods, has not yet been paid for them and has no guaranty that it will ever receive full payment on its § 503(b)(9) administrative claim. In addition to being consistent with the three cases discussed in this article, this result is compelled by a strict reading of § 547(c)(4).
While the 20-day goods are available for New Value, what happens to the § 503(b)(9) claim after summary judgment in the preference action based on New Value alone? Logically under the Circuit City and TI Acquisition holdings, the creditor’s § 503(b)(9) should be reduced by the amount of New Value associated with 20-day goods used to offset allegedly preferential transfers.
Add an additional fact: What if the creditor also had a strong ordinary course of business defense? Under Circuit City and TI Acquisition, a creditor in this position, rather than being able to seek summary judgment at the outset, is arguably compelled to seek bifurcation of the preference action in order to first litigate the ordinary course of business defense. Once the creditor obtains a judicial determination on ordinary course, it can determine precisely how much, if any, of its 20-day goods new value is required to offset non-ordinary course payments. The creditor must do this in order to maximize its § 503(b)(9) administrative claim. What was previously a slam dunk summary judgment now requires intensive fact and potentially expert litigation.
Conclusion
Reconciling Circuit City, TI Acquisition, and Commissary initially clarifies the landscape with respect to the use of 20-day goods as new value. If the estate is conclusively administratively solvent, 20-day goods cannot be used as new value. If administrative solvency is speculative, 20-day goods can be used as new value. Unfortunately, resolving this issue unfortunately does not simplify the typical case. The chapter 11 bankruptcy case teetering on the edge of administrative solvency will continue to present a difficult question with respect to 20-day goods and new value. Interestingly, while the issue is, on its face, one of new value, the result appears to be an increase in ordinary course of business litigation. Stay tuned.
1. In re TI Acquisition, LLC, 429 B.R. 377 (Bankr. N.D. Ga. 2010).
2. Commissary at 878 (emphasis added).
3. Commissary at 878 (emphasis added).
4. The administrative claim was not paid at the time of the decision in the preference action, but only because the debtor had sought to temporarily disallow the 503(b)(9) claims pending resolution of the issue discussed in this article.
5. TI Acquisition at 385
6. TI Acquisition at 385
7. This is an actual fact pattern from a case which settled.