Unpaid New Value Stays Unpaid Even When Later Paid Post Petition–11th Cir
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July 18, 2022, US Eleventh Circuit Court of Appeals – The Eleventh Circuit Court of Appeals reversed the Bankruptcy Court’s order which had denied Auriga Polymers Inc. (“Defendant”) motion to offset its preference liability against the new value Auriga provided to Beaulieu Group, LLC (“Debtor”) under section 547(c)(4) of the Bankruptcy Code. The District Court stayed the appeal made to it and allowed for a direct appeal to the Court of Appeals on finding that the case involves novel questions of law.
The Eleventh Circuit identified the principal issue: whether post-petition transfers made under a 11 U.S.C. § 503(b)(9) request would reduce the creditor’s new value defense under § 547(c)(4).
The Bankruptcy Code empowers a trustee to clawback preferential transfers under 11 U.S.C. § 547(b). But the creditor who gives new value to the debtor after receiving a preference may use that new value to offset its preference liability under § 547(c)(4). This “new value” defense, however, is itself offset to the extent that the debtor later makes an “otherwise unavoidable transfer” to the creditor on account of the value received under § 547(c)(4)(b). However, the Eleventh Circuit held that, for purposes of § 547(c)(4)(b), “otherwise unavoidable transfers” made after the debtor has filed for bankruptcy would not affect a creditor’s new value defense.
Debtor Beaulieu and its affiliates each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on July 16, 2017. PMCM 2, LLC (the “Trustee”), was appointed the liquidating trustee for the Beaulieu Liquidating Trust.
During the ninety days before the petition date (i.e., the preference period), Beaulieu transferred to Auriga more than $2.2 million. The Trustee in its complaint sought to clawback this transferred amount as alleged preferential transfers. During these ninety days, Auriga delivered to Beaulieu over $3.523 million worth of goods. Beaulieu and Auriga agreed that Auriga provided more than sufficient new value after the preferential transfers to offset its preferential liability. At least $694,502 worth of these goods were delivered by Auriga within twenty days prior to the petition date. Defendant Auriga claimed the amount of $694,502 as administrative expense under § 503(b)(9). A part of Auriga’s § 503(b)(9) claim amount overlapped with the amount of its new value defense to the extent of $421,119 (the “disputed amount”). The Trustee disputed Auriga’s use of $421,119 as new value as well as a part of administrative expenses made within twenty days before the petition date. However, the Trustee had meanwhile set aside reserves sufficient to pay the full amount of Auriga’s § 503(b)(9) request.
The Bankruptcy Court had to decide the applicability of new value defense to the disputed amount of $421,119. The Court found that the Debtor made an “otherwise unavoidable transfer” on account of that new value when it reserved post-petition the funds to pay Defendant Auriga’s § 503(b)(9) claims in full amount ($694,502). The Bankruptcy Court concluded that the disputed amount fell under an exception to the new value defense under § 547(c)(4)(b) and is therefore avoidable.
The Eleventh Circuit Court of Appeals reversed this order holding that the post-petition payments do not affect a creditor’s new value defense. The Court of Appeals agreed with the Bankruptcy Court’s view that the reserved funds would amount to a transfer but held that such “transfers” made post-petition would not reduce Auriga’s new value defense.
While interpreting the statutory language of § 547(c)(4), the Court of Appeals ruled that the word “transfer” should be presumed to bear the same meaning throughout § 547(c)(4). The Court held that the “otherwise unavoidable transfer” paid by the Debtor to the creditor must be a transfer made on or within ninety days before the date of the filing of the petition in order to enable the transfer to offset the creditor’s new value. The Court found that the title (“Preferences”) of § 547 suggested that it concerns transactions occurring during the preference period, which is by definition pre-petition. The Court observed that post-petition transactions and the avoidance of post-petition transfers are separately dealt within 11 U.S.C. § 549 of the Code. The Court also reasoned that post-petition payments must not affect the preferential analysis since the statute does not allow post-petition extensions of new value to become part of a creditor’s new value defense.
The Court dismissed the Trustee’s fears that allowing Auriga’s new value defense simultaneously with its § 503(b)(9) claim would amount to “double payment”. The Court of Appeals clarified that asserting a new value defense did not result in any actual payment to the creditor; it would merely prevent disgorgement of monies previously paid and that § 503(b)(9) claim only sought payment for unpaid invoices.
Auriga Polymers Inc. v. PMCM2, LLC, 2022 U.S. App. LEXIS 19761