Magazine article Business Credit

Do Fully Funded Section 503(b)(9) Priority Claims Count as Additional New Value to Reduce Preference Liability? A Contrary View!

Magazine article Business Credit

Do Fully Funded Section 503(b)(9) Priority Claims Count as Additional New Value to Reduce Preference Liability? A Contrary View!

Article excerpt

The dramatic increase in bankruptcy filings in 2008 and 2009, and the continued, although slower, increase in filings in 2010, has led to an onslaught of preference actions against trade creditors that should continue over the next couple of years. Thank goodness creditors are armed with the new value defense to preference exposure for extensions of credit subsequent to the alleged preference payments.

Well, what happens when a creditor also has an allowed Section 503(b)(9) administrative priority claim, that was fully funded post-petition, for goods the debtor had received within 20 days of its bankruptcy filing? Can the creditor assert its fully paid Section 503(b)(9) priority claim as additional new value to reduce its preference liability?

The United States Bankruptcy Court for the Northern District of Georgia, in the TI Acquisition, LLC case, recently ruled that a creditor cannot include its Section 503(b)(9) priority claim, that was fully funded post-petition, as part of its new value defense. Lucky for trade creditors, the United States Bankruptcy Court for the

Middle District of Tennessee, in the Commissary Operations case, had previously ruled that a trade creditor could assert its Section 503(b)(9) priority claim, that was fully paid post-petition, as additional new value to reduce preference liability.

The Elements of a Preference Claim

A trustee can recover a preference by satisfying all of the following requirements laid out by Bankruptcy Code Section 547(b):

1. The debtor transferred its property, such as by tendering a payment, to or for the benefit of a creditor (Section 547(b)(1));

2. The transfer was made on account of antecedent or existing indebtedness that the debtor owed the creditor (Section 547(b)(2));

3. The transfer was made when the debtor was insolvent (Section 547(b)(3)) based on a balance sheet definition of liabilities exceeding assets, which is presumed during the 90-day preference period;

4. The transfer was made within 90 days of the debtor's bankruptcy filing, in the case of transfers to non-insider creditors, and within one year of bankruptcy for transfers to insiders, such as the debtor's officers, directors, controlling shareholders and affiliates (Section 547(b)(4)); and

5. The creditor received more than it would have recovered in a Chapter 7 liquidation of the debtor, which is easy to satisfy, unless the creditor was fully secured by the debtor's assets, received payment from the proceeds of the creditor's collateral, or would have recovered 100% of its claim in the debtor's Chapter 7 case (Section 547(b)(5)).

The New Value Defense to Preference Claims

When a debtor or trustee satisfies all of Section 547's preference requirements, the burden shifts to the preference defendant to prove one or more of the preference defenses contained in Section 547(c) of the Bankruptcy Code. The Section 547(c)(4) new value defense is one such defense to reduce or eliminate preference exposure. The new value defense reduces a creditor's preference liability to the extent the creditor had replenished the debtor and its bankruptcy estate by providing new goods and/or services on credit terms subsequent to the preference. The defense is designed to encourage creditors to continue to do business with, and extend trade credit to, their financially distressed customers.

Section S03 (b)(9) "20 Day Goods" Priority Claims

Section 503(b)(9) grants goods sellers an administrative priority claim for:

"... the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business."

Debtors and trade creditors have been frequently litigating Section 503(b)(9)'s seemingly simple straightforward requirements. The TI Acquisition and the Commissary Operations rulings dealt with a trade creditor's ability to use its fully funded Section 503(b)(9) priority claim as part of its new value defense to reduce its preference liability. …

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