The Eleventh Circuit sided with the Third Circuit in finding that a creditor’s administrative claim under 11 U.S.C. § 503(b)(9) does not offset its new value defense pursuant to 11 U.S.C. § 547(c)(4).  Auriga Polymers Inc. v. PMCM2, LLC as Trustee for Beaulieu Liquidating Trust, 40 F. 4th 1273 (11th Cir. 2022)

The Debtor, Beaulieu, was a large carpet manufacturer and distributor that entered Chapter 11 in July 2017.  Ultimately, the Court approved a chapter 11 plan which provided for the creation of a liquidating trust and the appointment of a liquidating trustee empowered with the authority, among other things, to pursue preference claims against the Debtor’s creditors.  The subject creditor, Auriga, had been a supplier of polyester resins to the Debtor and had shipped over $3.5 million in goods to the Debtor in the ninety days prior to the petition date, while receiving $2.2 million in payments during this same ninety-day period.

In defending the trustee’s action to recover allegedly preferential transfers, Auriga relied heavily on the new value defense under Section 547(c)(4) of the Bankruptcy Code, which allows a creditor to offset any transfers received in the amount of new value provided after receipt of the transfers (i.e. in this case, materials Auriga shipped after it received payments from the Debtor).  The trustee contended that Auriga’s new value defense must be reduced by the amount of Auriga’s claim under Section 503(b)(9), which allows a creditor an administrative priority claim for the value of goods received by the Debtor within twenty (20) days prior to the petition date.  The parties essentially stipulated to the facts and presented the legal issue to the bankruptcy court for resolution.  As the math worked out, the trustee would either prevail in the amount of $421,119 or receive nothing.

The bankruptcy court agreed with the trustee, and more specifically with its own prior opinion regarding another preference action in the same bankruptcy case.  The Eleventh Circuit granted an immediate appeal and reversed the bankruptcy court.

The Eleventh Circuit seemingly extended its determination beyond the facts, reasoning that no post-petition transfer (not just a 503(b)(9) claim) could be used to reduce a creditor’s new value defense.  The court distinguished its prior opinion in In re BFW Liquidation, LLC, 899 F.3d 1178 (11th Cir. 2018), and joined the Third Circuit in In re Friedman’s, Inc., 738 F.3d 547 (3d Cir. 2013).  Although the court agreed with the trustee that the statute was silent on whether transfers reducing new value had to be made pre-petition or post-petition, it essentially held that the word “transfer” should have the same meaning throughout the statute (i.e. since a preferential transfer must, by definition, be pre-petition, so must a transfer reducing the new value defense).  It also held that the 503(b)(9) claim constituted a transfer, even though the trustee had not paid it, because the trustee was holding the funds in reserve.  In addition, the court concluded that its reading supported the bankruptcy policy of discouraging creditors “racing to the courthouse to dismantle a financially distressed debtor,” and noted that “equity of distribution does not mean equal distribution.”

Although other lower bankruptcy courts have held to the contrary, creditors facing preference actions should take to heart that two circuit courts have now held that creditors can have a priority 503(b)(9) claim and use the same invoices to support a new value defense.

M. Kevin McCarrell is a partner, based in the firm’s Greenville, SC office.  Stephanie Slater is an associate, based in the firm’s Wilmington, DE office.