In a Case of First Impression, 11th Circuit Rules “New Value” Can Be...


In Auriga Polymers, Inc. v. PMCM2, LLC, as Liquidating Trustee, No. 20-14647, 2022 WL 2800195 (11th Cir. July 17, 2022) (click here for .pdf) the creditor, Auriga, received transfers of more than $2.2 million in the 90 days before the Debtor, Beaulieu Group, LLC, filed its Bankruptcy case on July 16, 2017.  During the 90 day preference period, Auriga had also delivered to the Debtor over $3.523 million of goods, with at least $694,502.00 of the goods delivered within 20 days of the Petition Date.

Auriga filed two claims in the case: 1) a general unsecured claim in the amount of $3.596 million, and 2) an administrative claim in the amount of $694,502.00 pursuant to §503(b)(9) of the Bankruptcy Code for the value of the goods delivered within 20 days of the Petition Date.  After confirmation of the Debtor’s Plan, which gave authority to the Liquidating Trust to pursue avoidance actions, the Liquidating Trustee filed a proceeding against Auriga to avoid and recover the $2.2 million Pre-Petition Transfers under §547(b), to reclassify any portion of Auriga’s § 503(b)(9) request that was included as part of its new value defense as a general unsecured claim, and to disallow any claims by Auriga until it disgorged any amounts successfully avoided by Trustee. Auriga counterclaimed seeking a declaratory judgment that (1) its use of the new value defense under § 547(c)(4) does not preclude it from using the same value to recover under § 503(b)(9), and (2) the Trustee cannot use 11 U.S.C. § 502(d) to disallow Auriga’s § 503(b)(9) request for administrative expense treatment.

Auriga and the Trustee subsequently stipulated that the payments made to Auriga in the preference period were avoidable preferences, and the new value defense protected all but $421,119.00 of the preferential transfers.  “That $421,119 in value conveyed by Auriga to Beaulieu was part of Auriga’s $694,502 § 503(b)(9) request; the parties dispute Auriga’s ability to also use that $421,119 value as part of its § 547(c)(4) new value defense. The parties agreed, however, that Auriga had an allowed § 503(b)(9) claim for $273,382 (the difference between the total request for $694,502 and the $421,119 disputed portion).”

On summary judgment, the Bankruptcy Court entered an Order that, inter alia, held that “funds held in reserve to pay § 503(b)(9) claims are ‘otherwise unavoidable’ transfers for purposes of a § 547(c)(4) defense and cannot be used to offset preference liability. Click here for .pdf; see also In re Beaulieu Grp., LLC (“Fabric Sources”), 616 B.R. 857 (Bankr. N.D. Ga. 2020) (wherein the Bankruptcy Court previously ruled on this issue). In other words, using the same “value” as both an administrative claim and a new value defense was, in essence, a double recovery for the creditor.

Auriga appealed to the District Court, which stayed the case for immediate direct appeal to the Eleventh Circuit.

The precise question warranting direct appeal is:

whether a Liquidation Trustee’s post-petition reservation of funds sufficient to pay a defendant’s administrative expense claim under § 503(b)(9) amounts to an “otherwise unavoidable transfer” within the meaning of § 547(c)(4) such that it precludes the use of such new value as part of the defendant’s affirmative defense of subsequent new value under § 547(c)(4) of the Bankruptcy Code.

The Court first noted that it had previously held that new value need not remain unpaid for a valid §547(c)(4) defense. In re BFW Liquidation, LLC, 899 F.3d 1178 (11th Cir. 2018).

On appeal, Auriga argues that there has been no “transfer” at all because the funds held in reserve have not been paid. Auriga further argues that, even if there were a “transfer,” the statute’s silence is not dispositive, and the text and context of § 547(c)(4) cannot support the bankruptcy court’s interpretation. As to Auriga’s contention that no transfer has occurred, we agree with the bankruptcy court that there has been a “transfer.” But, for these reasons, we agree with Auriga that such transfers made post-petition will not affect a creditor’s new value defense.

Next, the Court applied a rule of statutory construction that words bear the same meaning throughout a text –

The statute [§ 547(c)(4)] uses the word “transfer” three times. The first two uses must refer to transfers that qualify as preferences, as the only preferences that can be avoided “under this section,” §547, are “preferences,” which by definition are pre-petition transfers. See § 547(b) (“[M]ade … on or within 90 days before the date of the filing of the petition ….”). We should likewise read the third use of “transfer” to refer to preference transfers, which necessarily occur pre-petition.

Additional factors in support of the Court’s decision –

  • The statute’s title – “Preferences” – also suggests that it concerns pre-petition transactions during the preference period.
  • Most case law has concluded that new value provided post-petition does not increase the creditor’s new value defense, so it logically follows that post-petition payments to the creditor also do not affect the preference analysis.
  • The statute of limitations for preference actions begins to run on the petition date (See 11 U.S.C. §§ 301(b), 546(a)), so if §547(c)(4)(B) is read as allowing post-petition payments to defeat a new value defense, “the calculation of preference liability could change depending on when the preference avoidance action was filed.”
  • The fact that Congress imposed a temporal limit in §547(c)(5) does not indicate that it intended to omit such a limit in § 547(c)(4).
  • Bankruptcy policy does not support the Trustee’s position and there is no risk if a “double payment” (i.e, the administrative claim and new value defense). “To clarify, asserting a new value defense does not result in any payment to the creditor; it merely prevents disgorgement of monies previously paid… Congress chose to afford creditors who ship goods to a debtor within twenty days of a bankruptcy filing with statutory priority.

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or [email protected].  For more information, click here.