In a positive decision for trade vendors and non-debtor suppliers, the Eleventh Circuit, in Auriga Polymers Inc. v. PMCM2, LLC, held that a Section 503(b)(9) post-petition priority payment received by a creditor for goods received during the 20 day period before the petition date did not diminish its subsequent new value preference defense. 40 F.4th 1273 (11th Cir. 2022).
Under Section 547(c)(4) of the Bankruptcy Code, preferential exposure can be reduced by the amount of "new value" provided by the defendant to the debtor subsequent to receipt of the alleged preferential transfer.
In this case, carpet manufacturer Beaulieu Group, LLC ("Beaulieu") entered chapter 11 bankruptcy. One creditor, Auriga Polymers Inc. ("Auriga"), sold the debtor textiles. It made a Section 503(b)(9)request for goods delivered within 20 days of the petition date, which provides for administrative expense priority. Priority claims are often paid in full, whereas unsecured creditors often receive pennies on the dollar.
Section 547(b) of the Bankruptcy Code authorizes the trustee to clawback (avoid) certain payments made to a creditor within 90 days preceding the petition date. However, under Section 547(c)(4), the trustee cannot clawback an otherwise preferential payment if the creditor supplied "new value" to the debtor after receiving such payment, which is (A) not secured by an otherwise unavoidable security interest, and (B) on account of which the debtor did not make an "otherwise unavoidable transfer" to the benefit of the creditor.
During the preference period, Beaulieu paid Auriga $2.2 million, after which time Auriga delivered additional goods. The trustee agreed that the Section 547(c)(4) new value defense served as a defense to all of the transfers except $421,119, the amount of Auriga's Section 503(b)(9) claim. The trustee argued that such payment, even though received post-petition, constituted an "otherwise avoidable transfer" that would negate Auriga's 547(c)(4) defense as to that amount.
The Eleventh Circuit disagreed. It examined Section 547 in context and concluded:
- "Transfers," as defined in the statute, must be made pre-petition;
- "Preferences" refers to pre-petition payments; and
- If "new value" must be delivered pre-petition, so must "otherwise unavoidable transfers".
Therefore, because the Section 503(b)(9) claim was paid post-petition, it did not constitute an "otherwise unavoidable transfer". Auriga's new value defense was upheld.
For a discussion of various defenses that can be raised in response to Section 547 avoidance actions, the following article is a helpful read: A Primer on Defenses to Bankruptcy Preference Claims.
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