In re Circuit City Stores, Inc., 2010 Bankr. LEXIS 4398 (Bankr. E.D. Va. Dec. 1, 2010)

In In re Circuit City Stores, Inc., the debtors, former operators of electronics stores, sought partial summary judgment on their objection to the Bankruptcy Code Section 503(b)(9) claims of defendant creditor, a supplier of electronic items.  The debtors argued that the creditor could not assert both an administrative priority claim under Section 503(b)(9) of the Bankruptcy Code and utilize the value of the same underlying goods to support a new value defense to a preference claim asserted by the debtors.

Bankruptcy Code 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.   

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

As in In re TI Acquisition, LLC, 429 B.R. 377 (Bankr. N.D. Ga. 2010) and In re Commissary Operations, Inc., 421 B.R. 873 (Bankr. M.D. Tenn. 2010) (which were discussed in prior issues of the Avoidance Action Report), In re Circuit City Stores, Inc. analyzes whether a creditor could use the “new value” defense in connection with goods that also provide the basis for a Section 503(b)(9) claim.

The In re Circuit City Stores, Inc. court followed the In re TI Acquisition, LLC line of reasoning and 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 asserted a Section 503(b)(9) claim in connection with the same goods.  The Court rejected In re Commissary Operations, Inc.’s holding that postpetition payments on Section 503(b)(9) claims could not be used to deplete prepetition new value assessments in connection with the assertion of the new value defense to a preference action. 

The Court held that a creditor may either (a) assert a claim under Section 503(b)(9) for the value of the goods received by the debtors within 20 days of the bankruptcy filing or (b) utilize the value of those goods to support a new value defense to a preference claim under Section 547(c)(4), but not both.  The Court reasoned that allowing a supplier of goods to use the delivery of the same goods as both a defense under Section 547(c)(4) and as the basis for a Section 503(b)(9) claim would essentially provide the supplier with double recovery, resulting in unequal treatment of creditors.

 Commentary

The holding in In re Circuit City Stores, Inc. provides yet another example of a bankruptcy court seeking to balance the dual goals of encouraging vendors to work with troubled companies and, at the same time, promoting equality among all creditors.  Given the varied approaches taken by the bankruptcy courts nationwide, there will likely be rulings by appellate courts on this issue in the near future.