In re TI Acquisition, LLC, 429 B.R. 377 (Bankr. N.D. Ga. 2010)

In re Commissary Operations, Inc., 421 B.R. 873 (Bankr. M.D. Tenn. 2010)

In re TI Acquisition, LLC and In re Commissary Operations, Inc. (which was discussed in the last issue of the Avoidance Action Report) analyze whether a creditor could use the “new value” defense in connection with goods for which it received a Section 503(b)(9) claim.

In In re TI Acquisition, LLC, the Court held that a creditor cannot use the shipment of goods received by a debtor within 20 days prior to filing for bankruptcy as the basis for a new value defense under Section 547(c)(4) if the creditor received a Section 503(b)(9) claim for the goods and will be paid in full on such claim.  In In re Commissary Operations, Inc., however, the Court held that Bankruptcy Code Sections 503(b)(9) and 547 are not mutually exclusive and a creditor can assert the new value defense in connection with the provision of goods for which it received a 503(b)(9) claim.

In re TI Acquisition, LLC, 429 B.R. 377 (Bankr. N.D. Ga. 2010)

In In re TI Acquisition, LLC, the Debtor, a manufacturer of carpeting and textiles, brought an adversary proceeding to avoid alleged preferential transfers pursuant to Section 547(b) for amounts it paid the Defendant within 90 days prior to filing for bankruptcy.  The Debtor received the goods in question within 20 days prior to the petition date, for which the Defendant received an administrative claim under Section 503(b)(9).

Section 503(b)(9) provides that a creditor may receive an administrative expense priority claim in connection with goods received by the debtor within 20 days prior to the commencement of a bankruptcy case.   

Section 547(c)(4) provides a defense to the avoidance of a preferential transfer to the extent the creditor provided new value to or for the benefit of the debtor after such transfer.

The Debtor filed a motion for partial summary judgment under Federal Rule of Bankruptcy Procedure 56 and Federal Rule of Civil Procedure 56(c) seeking a determination that the Defendant should not receive payment on its Section 503(b)(9) claim and reduce its preference exposure to the extent it will receive such payment, as it would allow the Defendant to receive duplicate value for the goods it shipped. 

The Court held that a creditor that delivers goods to a debtor pre-petition is not entitled to the new value defense under Section 547(c)(4) of the Bankruptcy Code when (1) such creditor receives a Section 503(b)(9) claim for such goods, and (2) it is certain that the creditor will be paid in full on such claim.  The Court reasoned that while a creditor’s knowledge of the availability of the new value defense under Section 547(c)(4) encourages continued commerce with a prepetition debtor, there is no difference from the creditor’s pre-petition perspective in incentive to ship goods if it instead receives value in the form of payment on a 503(b)(9) claim.  The Court specifically noted that in this case, Section 503(b)(9) claims were guaranteed to be paid in full, and that it may have arrived at a different conclusion if the Debtor’s estate was administratively insolvent.

In re Commissary Operations, Inc., 421 B.R. 873 (Bankr. M.D. Tenn. 2010)

As set forth more fully in the last issue of the Avoidance Action Report, in In re Commissary Operations, Inc., the Debtor brought avoidance actions against creditors that also held Section 503(b)(9) claims.  The Debtor moved for declaratory judgment that such shipments could not be used for a new value defense, because it would permit the Defendants to “double dip” by receiving payment on the administrative expense claim and reduce liability in a preference action.

The Bankruptcy Court ruled in favor of the creditors, reasoning that there is nothing in the plain language of Section 503(b)(9) or Section 547(c)(4) to indicate that the two sections are mutually exclusive.  The Court stated that the “preference window” closed on the date the Debtor filed its bankruptcy petition and “postpetition payments [on Section 503(b)(9) claims] could not be used to deplete prepetition ‘new value.’”  It also reasoned that requiring suppliers to choose between an administrative expense claim and the new value defense would negate the benefits that Congress intended to confer upon businesses that ship goods to troubled companies when it enacted the new value defense in the Bankruptcy Code.

 Commentary

The Courts’ holdings in In re TI Acquisition, LLC and In re Commissary Operations, Inc. are examples of how bankruptcy courts’ efforts to implement Congressional policies designed to incentivize entities to deal with troubled companies, while also promoting equal treatment of creditors, can lead to different results.  In determining whether a defendant who received a Section 503(b)(9) claim can also use the goods for which it received such claim as
“new value” to reduce preference exposure, practitioners should ascertain how courts in their district and circuit have ruled on this issue.