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Update On Preference and Fraudulent Transfer Litigation
The appellate courts have been busy explaining or clarifying preference and fraudulent transfer law. Although novices may think the Bankruptcy Code (Code) is clear on its face, imaginative counsel have found gaps in the statute and generated rafts of litigation since the Code's enactment in 1979. Recent appellate decisions, summarized below, show that courts are still making new law or refining prior case law.
Preferences
New Value Defense Not Reduced by Debtor's Post-Petition Payment of Twenty-Day Goods Administrative Claim (§503(b)(9))
The Eleventh Circuit held that, "for purposes of [Code] (§547(c)(4)(B), 'otherwise unavoidable transfers' made after … bankruptcy [i.e., (§503(b)(9) post-petition administrative priority payments] do not affect a [preference defendant] creditor's new value defense." Auriga Polymers Inc. v. PMCM2, LLC (In re Beaulieu Group, LLC), 2022 WL 2800195, *1 (11th Cir. July 17, 2022) (emphasis added). Reversing the bankruptcy court, the court explained that "only pre-petition transfers will affect a creditor's subsequent new value defense." Id. at *11 (emphasis added). According to the court, the new value defense in Code §547(c)(4)(B) "protects a creditor who provided new value to [the debtor] after receiving a preference payment." Id. at *5. But "(1) the creditor must have given new value; (2) the new value [must be unsecured], not secured by an … unavoidable security interest; and (3) the debtor did not make an otherwise unavoidable transfer to … the creditor on account of the new value." Id. "[O]nly the Third Circuit has directly [held] that only pre-petition 'otherwise unavoidable transfers' can offset a creditor's … new value defense." Id. at *6, [emphasis added] citing In re Freedman's Inc., 738 F.3d 547, 549 (3d Cir. 2013) (post-petition payments per wage order did not impair new value defense). Here, the creditor admittedly gave $421,119 of new value to the debtor on an unsecured basis "after the final preferential transfer" and had an administrative expense priority claim of $694,502 for goods delivered within twenty days of bankruptcy. Id. at *3. In sum, the court held that the creditor could be paid on its administrative expense priority claim and also reduce its preference liability based on subsequent new value. The creditor was not being paid twice, but only once. The issue here was the amount of the creditor's disgorgement.
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