Post-Petition Payment For 20-Day Goods Does Not Reduce New Value Defense

By Michael Enright

Vendors are sometimes pleasantly surprised to learn that their claims for goods they delivered on credit to a debtor within the twenty days just prior to the bankruptcy filing are entitled to first priority as administrative claims. They can then be unpleasantly surprised when the debtor or a trustee seeks to use the post-petition payment of that claim against them when they become a preference defendant for amounts they were paid during the ninety-day preference period. The theory is that these twenty-day goods cannot be counted as “new value” delivered after the preferential payments were received, because they were themselves paid for during the bankruptcy case. Recently, in Auriga Polymers Inc. v. PMCM2, LLC, No. 20-14647 (11th Cir. July 18, 2022), the Court of Appeals for the 11th Circuit held that notwithstanding the post-petition payment status of the twenty-day goods claim, the value of those deliveries were available as new value for purposes of defending against the preference claim. The court’s rationale was similar to that of the 3d Circuit in In re Friedman’s Inc., 783 F.3d 547 (3d Cir. 2013), though slightly different, and the facts are somewhat different (Friedman’s dealt with post-petition payments pursuant to a wage order, rather than Section 503(b)(9)). Although the bankruptcy court in Auriga Polymers relied on the absence of any text in the preference statute addressing the differentiation of pre- and post-petition transfers as the basis for its ruling that the value of the twenty-day goods could not be used as a new value defense, in reversing on direct appeal, the 11th Circuit looked to the overall context of the statute to evaluate the meaning of the text present in the statute. Notably, the word “transfer” was used three times. The first two times, the context necessitates the conclusion that the transfer in question occurred pre-petition. Because statutory construction promotes consistency of the meaning of words used in the statute, this led the court to conclude that the third use of the word must be intended to carry the same temporal meaning, thus referring only to transfers made pre-petition (therefore excluding the payment made post-petition as a transfer for this purpose). The title of the statute (“Preferences”) referred by definition to pre-petition payments. The statute of limitations for bringing preference claims starts to run on the petition date, so requiring consideration of post-petition payments in adjudicating defenses necessarily would make the outcome dependent on the timing of initiation of the suit. All of this context led the court to conclude that the post-petition payment of the twenty-day goods claim should not be deemed a transfer of a nature that would reduce the new value defense. Finally, the court noted that this was not a “double payment” in violation of bankruptcy policy. The vendor was only paid once. The only issue was the amount of the disgorgement it might be forced to make. The decision is a favorable one for preference defendants who chose to keep dealing with the debtor right up to the petition date, and the issue bears watching as other courts of appeal are called upon to weigh in on the issue.



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