Charlene Hicks, Senior Attorney, National Legal Research Group
Bankruptcy preference litigation involves situations in which the plaintiff (normally the trustee) tries to claw back substantial monetary payments debtors make to creditors within 90 days of filing for bankruptcy. Preference cases are deceptively simple in form. However, complications often arise, particularly in cases involving creditors that regularly do business with the debtor. Such creditors may invoke diverse sections of the Bankruptcy Code in an attempt to negate the trustee’s reimbursement claim against them.
In Auriga Polymers Inc. v. PMCM2, LLC, 40 F.4th 1273, 1277 (11th Cir. 2022), the Eleventh Circuit Court of Appeals recently analyzed the interplay between two such sections of the Bankruptcy Code. One of the eight preference defenses a creditor may raise is known as the subsequent new value defense and is set forth in 11 U.S.C. § 547(c)(4). Section 503(b)(9), in turn, contains an administrator expense claim that a creditor may obtain for payment in full for the value of goods sold to the debtor in the ordinary course of business within 20 days before the debtor files for bankruptcy. 11 U.S.C. § 503(b)(9). In an issue of first impression in the Eleventh Circuit and one which is unsettled in other circuits, the Auriga Polymers court addressed “whether post-petition transfers made under a 11 U.S.C. § 503(b)(9) request will reduce the creditor’s new value defense” under 11 U.S.C. § 547(c)(4). The trustee claimed that Auriga would effectively receive a “double payment” if it were allowed to obtain payment for its administrator expense claim and also to avoid repayment to the trustee under the preference defense of subsequent new value. Auriga Polymers, 40 F.4th at 1288.
The bankruptcy court ruled inthe trustee’s favor, and Auriga appealed directly to the Eleventh Circuit Court of Appeals. Id. at 1280-81. The Eleventh Circuit court first determined that the case turned on whether the funds the trustee had in reserve to pay Auriga’s § 503(b)(9) administrator expense claim represented an “‘otherwise unavoidable transfer’ that would offset Auriga’s preference defense to the extent of that amount.” Id. at 1282. The court concluded that “for purposes of § 547(c)(4)(B), ‘otherwise unavoidable transfers’ made after the debtor has filed for bankruptcy do not affect a creditor’s new value defense.” Id. at 1277. In effect, for an “otherwise unavoidable transfer” to occur, the debtor had to make the payment before filing for bankruptcy. Thus, “only pre-petition transfers will affect a creditor’s subsequent new value defense.” Id. at 1288. A § 503(b)(9) payment is issued to the creditor after the bankruptcy case is filed. Hence, it is not an “otherwise unavoidable transfer” that serves to reduce a creditor’s subsequent new value defense. Id.
The circuit court also rejected the trustee’s assertion that Auriga would receive a “double payment” if the subsequent new value defense were applied to reduce its preference liability and it was also permitted to receive payment for a § 503(b)(9) administrative expense claim. Id. The subsequent new value defense would prevent the return of payments already made on account of completely different goods than those delivered during the 20-day period immediately prior to the debtor’s filing of bankruptcy. As a factual matter, this would not result in a double payment to Auriga. Id.
Under Auriga Polymers, any business creditor that delivers goods to a debtor more than 20 days before the debtor files for bankruptcy should assert the subsequent new value preference defense set forth in 11 U.S.C. § 547(c)(4). Even if the creditor receives payment for administrative expenses under § 503(b)(9), it may still reduce its preference liability to the trustee under § 547(c)(4) for the value of deliveries made within the preference period.