New Value For Which Creditor Received A § 503 (b)(9) Can Offset Preference Liability in the Eleventh Circuit
Auriga Polymers Inc. v. PMCM2, LLC as Tr. for Beaulieu Liquidating Tr., 40 F.4th 1273 (11th Cir. 2022)
Beaulieu Group, LLC (“Beaulieu”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code. PMCM 2, LLC was appointed as the liquidating trustee. The liquidating trustee sued Auriga Polymers Inc. (“Auriga”), a provider of polyester resins and specialty polymers, to avoid approximately $2.2 million paid to Auriga within 90 days prior to the bankruptcy filing. Auriga moved for summary judgment arguing that goods it provided to Beaulieu within twenty days prior to the bankruptcy filing reduced its expo- sure pursuant to the “subsequent new value” defense under § 547(c)(4) of the Bankruptcy Code. The bankruptcy court agreed with the trustee and held that Auriga could not use the same value to seek payment under § 503(b)(9) of the Bankruptcy Code and to offset its preference liability under § 547(c)(4) of the Bankruptcy Code. Auriga filed a notice of appeal to the district court which stayed the case pursuant to 28 U.S.C. § 158(d) (2)(A) for a direct appeal to the Eleventh Circuit since the case involved a novel question of law.
Bankruptcy code § 547(c)(4) states that providing subsequent new value to a debtor is an affirmative defense to a preference, so long as on account of such new value, “the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” Auriga argued that there had been no “transfer” on account of such new value because the trustee was holding the funds to pay Auriga’s § 503(b)(9) claim in reserve and no payment had actually occurred yet. Auriga further argued that even if there was a “transfer” by virtue of the funds being held in reserve to pay the § 503(b) (9) claim, only prepetition transfers on account of the new value could be used to negate the new value defense under § 547(c)(4). The trustee argued that even though the debtor did not actually pay the § 503(b)(9) claim, it had the funds to do so held in reserve, and, therefore, it was as good as paid by an “otherwise unavoidable transfer.” The trustee further argued that when Congress intended to impose a temporal limitation in other statutes, Congress did so by explicitly pinpointing to a specific timeframe like in § 547(c)(5) of the Bankruptcy Code which provides a defense from preference liability for a creditor with a floating lien. Thus, since Congress intentionally omitted a temporal limitation from § 547(c)(4) of the Bankruptcy Code, such as a requirement that the otherwise unavoidable transfer be made prepetition, no such limitation existed.
The court agreed with Auriga. While the court emphasized that funds held in re- serve should be considered “transfers” within the meaning of § 547(c)(4)(B) because the Bankruptcy Code defines “transfer” broadly as including “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with – (i) property; (ii) or an interest in property” under 11 U.S.C. § 101(54)(D), it held that the statute’s silence on the timing of the “otherwise unavoidable transfer” is not dispositive. The court noted that the word “transfer” in an “otherwise unavoidable transfer” should bear the same meaning as in the first two uses of this word in § 547(c)(4) of the Bankruptcy Code which refer to prepetition transfers. And since the otherwise unavoidable transfer had not occurred prepetition, the Eleventh Circuit reversed the bankruptcy court’s order denying summary judgment to Auriga.
COMMENTARY
In re Auriga underscores that creditors who ship goods to a bankrupt company within 20 days of the petition date could “double dip” by getting paid on their administrative claim and using the same administrative claim to reduce preference exposure through a subsequent new value defense. However, both plaintitts and defendants should be mindful of the law in their particular jurisdiction on this issue, as it is unsettled and may vary from place to place.