‘Admin’ Claims for 20-Day Shipments Don’t Offset the New Value Defense, Circuit Says

The Eleventh Circuit joined the Third Circuit in holding that the amount of a new value defense to a preference is not reduced if the debtor pays for some of the new value after filing. In other words, the new value defense is set in stone on filing, without regard to whether the debtor pays some of the new value invoices after filing.

At filing, the creditor was facing a large preference claim. Before filing, the creditor had given new value after receipt of the preferences that would have the effect of reducing the preference claim.

Some of the new value was in the form of shipments received by the debtor within 20 days of filing. The creditor had a valid administrative claim for the shipments within 20 days of filing. The 20-day shipments were a fraction of the new value given within the preference period.

The debtor confirmed a chapter 11 plan providing for payment in full of the creditor’s 20-day shipments. However, the liquidating trustee under the plan sued the creditor for preferences. The trustee conceded that the creditor was entitled to the new value defense for shipments within the 90-day period, but not for the shipments that would be paid via the 20-day administrative claim.

The creditor argued that the shipments within 20 days should not be excluded from the new value defense, although the 20-day shipments would be paid in full under the plan. The bankruptcy court agreed with the liquidating trustee and excluded the 20-day shipments from the new value defense.

The Eleventh Circuit accepted a direct appeal and reversed in an opinion on July 18 by Circuit Judge Barbara Lagoa.

The outcome turned on the interplay between Section 547(c)(4), the new value defense, and Section 503(b)(9), giving administrative status for claims resulting from shipments received within 20 days of filing.

Creating the new value defense, Section 547(c)(4), precludes recovery of an otherwise preferential transfer made

to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —

(A) not secured by an otherwise unavoidable security interest; and

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.

Section 503(b)(9) gives administrative status to a claim for

the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.

For Judge Lagoa, the principal question was: Would the eventual payment of the 20-day administrative claim be “an otherwise unavoidable transfer” under Section 547(c)(4)(B) and thereby reduce the new value defense?

Judge Lagoa said the question was “unsettled” in the Eleventh Circuit. Among the courts of appeals, only the Third Circuit had issued an opinion. See In re Friedman’s Inc., 738 F.3d 547 (3d Cir. 2013). The Philadelphia-based appeals court held that only prepetition transfers can offset the new value defense.

Contrary to the Third Circuit’s holding, the liquidating trustee saw nothing in the language of the statute limiting the new value offset to transfers made before filing.

To answer the question, Judge Lagoa looked to the “broader, contextual view.” She admitted, though, that the section has “no temporal limit on when a ‘transfer’ occurs.” However, she noted that Section 547(c) uses the word “transfer” three times.

The first two uses refer to transfers that must have occurred before filing. The third use of “transfer” in subsection (c)(4)(B) is pivotal. It defines the types of transfers that will bar an offset.

“We should likewise read the third use of ‘transfer’ to refer to preference transfers, which necessarily occur pre-petition,” Judge Lagoa said.

“Notwithstanding the lack of an explicit pre-petition limit,” Judge Lagoa said that “most courts” and the Norton treatise “have concluded that new value advanced after the petition date does not increase a creditor’s new value defense.”

Drawing an analogy, Judge Lagoa said,

If the statute does not allow post-petition extensions of new value to become part of a creditor’s new value defense, then logically it does not allow post-petition payments to affect the preference analysis.

“Reading the plain text in context,” Judge Lagoa reversed the bankruptcy court and held that “only pre-petition transfers will affect a creditor’s subsequent new value defense.

Observations

The Third and Eleventh Circuit opinions mean that shipments of goods within 20 days of filing serve double duty for a creditor: (1) The creditor has an administrative claim; and (2) the administrative claim will not offset the new value defense.

There is unlikely to be a unified theory behind both Sections 547(c)(4)(B) and 503(b)(9). They were adopted by Congress decades apart to address different policy considerations. On the other hand, both sections have the effect of encouraging suppliers to continue dealing with companies in financial distress.

Allowing a double dip certainly encourages continued trading with troubled companies. Indeed, Judge Lagoa had a point when she said that the first two uses of “transfer” in Section 547(c)(4)(B) must refer to prepetition transfers. Logically, the third use of “transfer” should have the same implied meaning.

When the Bankruptcy Code overall aims to achieve equality of distribution, why would the statute allow a creditor to realize value twice from the same transfer?