BANKRUPTCY CORNER
Preferences and New Value Defense Paid as an Administrative Expense Claim
JASON S . RIGOLI
The Eleventh Circuit has weighed in on an issue of first impression in this circuit and held that a creditor / preference defendant ’ s “ new value defense ” is not reduced by the post-petition payment on the new value . See Auriga Polymers Inc . v . PMCM2 , LLC , 40 F . 4th 1273 , 2022 U . S . App . LEXIS 19761 , 2022 WL 2800195 ( 11th Cir . 2022 ).
Preferences
Preferences are one way in which federal bankruptcy laws seek to equalize positions of similarly situated creditors giving trustees the power to set aside transfers of debtor ’ s property made within 90-days prior to the bankruptcy filing , or in the case of insiders within 1-year of the bankruptcy filing and redistribute the funds “ equally ” amongst the similarly situated creditors . See 11 U . S . C . § 547 .
Section 547 ( b ), states in pertinent part :
[ Generally ,] the trustee may . . . avoid any transfer of an interest of the debtor in property [] to or for the benefit of a creditor ; [] for or on account of an antecedent debt . . . made while the debtor was insolvent ; [] made [] on or within 90 days before the date of the filing of the petition ; . . . and that enables such creditor to receive more than such creditor would receive [ in a Chapter 7 liquidation ].
2022 U . S . App . LEXIS 19761 at * 5 ( quoting 11 U . S . C . § 547 ( b )).
Section 547 ( c ) provides nine defenses to the § 547 ( b ) avoiding power . Pertinent to this case , § 547 ( c )( 4 ) states :
The trustee may not avoid under this section a transfer . . . 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 [ that was both :] ( 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 .
Auriga , at * 6 ( quoting 11 U . S . C . § 547 ( c ) ( 4 )). “ This defense protects a creditor who provided new value after receiving a preference payment . There are three elements to this defense : ( 1 ) the creditor must have given new value ; ( 2 ) the new value was not secured by an otherwise unavoidable security interest ; and ( 3 ) the debtor did not make an otherwise unavoidable transfer to or for the benefit of the creditor on account of the new value .”
Auriga at * 14-15 ( citation omitted ).
“ New Value Defense ”
New value is defined as “ money or money ’ s worth in goods , services , or new credit , or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law , including proceeds of such property , but does not include an obligation substituted for an existing obligation [.]” 11 U . S . C . § 547 ( a )( 2 ).
The Eleventh Circuit has previously held that “ new value ” need not remain unpaid to provide a defense to a preference claim , so long as that payment would also be subject to being avoided . See In re BFW
Liquidation , 899 F . 3d 1178 , 1189 ( 11th Cir . 2018 ).
In Auriga , some of the new value provided by the creditor was in the form of good shipped to the debtor within 20-days of the petition date . The delivery of these goods within 20-days of the petition date triggers a right to a priority payment status as an administrative expense claim under 11 U . S . C . § 503 ( b )( 9 ). The debtor filed a chapter 11 and confirmed a plan , creating a liquidating trust . Auriga filed two claims , one for a general unsecured claim and a request for a priority administrative expense claim under § 503 ( b )( 9 ). When the liquidating trustee , under the confirmed plan , sued Auriga on a preference claim , Auriga asserted a new value defense in the same amount as its 503 ( b )( 9 ) claim .
Payment on the 503 ( b )( 9 ) claim would be an unavoidable transfer . The Eleventh Circuit
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was therefore faced with a temporal question on whether the “ unavoidable transfer ” § 547 ( c )( 4 )( B ) was limited to prepetition transfers .
Conclusion
Applying cannons of statutory construction , including that the use of the word “ transfer ” throughout the statute refers transfers occurring “ prepetition ,” Auriga , at * 22-28 , the Eleventh Circuit held that the post-petition transfer made under § 503 ( b )( 9 ) does not offset the creditor ’ s prepetition “ new value defense .” Auriga , at * 30 .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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