ORDER
Barbara Ellis-Monro, U.S. Bankruptcy Court Judge.
On June 25, 2019, Plaintiff filed a Complaint (I) Objecting to Claims and (II) Seeking to Avoid and Recover Transfers. [Doc. 1]. The Complaint consisted of eight counts, as follows: (I) Objection to Reclamation Demand; (II) Objection to Proof of Claim No. 1062; (III) Objection to Proof of Claim No. 1413; (IV) Objection to § 503(b)(9) Claim
I. Summary Judgment Standard
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Fed. R. Civ. P. 56(a); Fed. R. Bankr. P. 7056. The Court will only grant summary judgment when the evidence, viewed in the light most favorable to the nonmoving party shows no genuine dispute of material fact. Tippens v. Celotex Corp., 805 F.2d 949, 953 (11th Cir. 1986). A fact is material if it "might affect the outcome of the suit under the governing law...." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). A dispute of material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
The moving party has the burden of establishing its entitlement to summary judgment. Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991). The moving party must identify the pleadings, discovery materials, or affidavits that show the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S. Ct. at 2553. Once this burden is met, the non-moving party cannot merely rely on allegations or denials in its own pleadings. Hairston v. Gainesville Sun Publ'g. Co., 9 F.3d 913, 918 (11th Cir. 1993). Rather, the non-moving party must present specific facts supported by evidence that demonstrate there is a genuine material dispute. Id. When the material facts are not in dispute, the role of the Court is to determine whether the law supports a judgment in favor of the moving party. Anderson, 477 U.S. at 250-51, 106 S. Ct. at 2511.
When the moving party has the burden of proof at trial, that party must affirmatively show the absence of a genuine issue of material fact: it must support its motion "with credible evidence ... that would entitle it to a directed verdict if not controverted at trial." Celotex, 477 U.S. at 331, 106 S. Ct. at 2557 (Brennan, J., dissenting). Upon making this showing, the burden shifts to the nonmoving party, who must produce "significant probative evidence demonstrating the existence of a triable issue of fact" to avoid summary judgment. American Viking Contractors, Inc. v. Scribner Equip. Co., Inc., 745 F.2d 1365, 1369 (11th Cir. 1984). When considering summary judgment, the Court "`must not resolve factual disputes by weighing conflicting evidence[.]'" Tippens, 805 F.2d at 953 (quoting Lane v. Celotex Corp., 782 F.2d 1526, 1528 (11th Cir. 1986)).
II. Undisputed Material Facts
On March 12, 2020, the parties filed a Joint Stipulation of Facts (the "Stipulation"
Defendant is a Georgia limited liability company with its principal place of business in Dalton, Georgia. [Stip. ¶ 1]. It is a full-service provider of nonwoven, composite, specialty, and woven products. [Id. ¶ 6]. Plaintiff is the Liquidating Trustee for the Beaulieu Liquidating Trust (the "Trust"). [Id. ¶ 2]. The Trust is the transferee of certain assets and claims formerly held by the debtor, Beaulieu Group, LLC (the "Debtor"). [Id.].
Debtor and its affiliated entities filed voluntary Chapter 11 petitions on July 16, 2017. [Id.]. For quite some time before Debtor's bankruptcy filing, Defendant sold primary and secondary backing to Debtor. [Id. ¶ 7]. A true and accurate Payment History between Defendant and Debtor covering the period from May 2014 to the petition date is attached to the Stipulation as Exhibit A (the "Payment History") and is incorporated herein. [Id. ¶ 8]. The Payment History provides the number for each invoice, the date of each invoice, the amount of each invoice, the date on which each invoice was paid, and the number or days between the invoice date and the date the invoice was paid. [Id. ¶ 9] The Payment History identifies those invoices that were not paid and identifies the value of goods that were sold by Defendant to Debtor. [Id.]. All of the goods were sold on open credit terms in the normal course of business between the parties. [Id. ¶ 10]. Debtor purchased the goods for use in its normal business operations. [Id.].
The 90th day before Debtor's bankruptcy filing was April 17, 2017. [Id. ¶ 11]. April 17, 2017 through July 15, 2017 is defined as the "Preference Period." [Id.]. The period of time from May 2014 (the beginning of Payment History) to April 17, 2017 is defined as the "Pre-preference Period." [Id.].
Debtor's payments for the goods during both the Pre-preference Period and the Preference Period were for debts that Debtor incurred with Defendant in the ordinary course of business or financial affairs of the parties. [Id. ¶ 12]. Plaintiff has not asserted, and agrees not to assert, that Defendant made any undue or unusual demands during either the Pre-preference Period or the Preference Period to obtain payment from Debtor for any out-standing monies owed for the goods it had delivered to Debtor. [Id. ¶ 13]. Similarly, Plaintiff has not asserted, and agrees not to assert, that Debtor made any payments to Defendant during either the Pre-preference Period or the Preference Period with the intention of deliberately preferring Defendant over other creditors of Debtor. [Id. ¶ 14].
During both the Pre-preference and Preference periods, there were goods sold by Defendant to Debtor for which Defendant has never received payment. [Id. ¶ 15]. More specifically, beginning on March 21, 2017 and continuing through July 14, 2017, Defendant sold and delivered to Debtor $1,333,253.07 of goods for which Defendant never received payment (the "Goods"). [Id.] The Goods are set forth on the Payment History. [Id.]
During the Preference Period Defendant sold and delivered to Debtor $1,088,942.67 worth of Goods. [Id. ¶ 16]. Of that amount, $160,088.92 of those Goods were delivered within 20 days of Debtor's bankruptcy petition date. [Id.]. All the Goods that were sold by Defendant to Debtor were goods
Following its bankruptcy filing, Debtor operated for a period of time as a debtor-in-possession. [Id. ¶ 20]. While operating as a debtor-in-possession, Debtor did not make any distributions to Defendant on account of the Goods that Defendant had delivered to Debtor prior to Debtor's bankruptcy petition. [Id. ¶ 21]. Debtor remains an entity in legal compliance with its filing obligations with the Georgia Secretary of State's Office. [Id. ¶ 22].
To date, the Trust has not made any distributions on either Defendant's timely filed proof of claim in the amount of $1,173,152.49 or Defendant's timely filed § 503(b)(9) administrative claim in the amount of $160,088.92. [Id. ¶ 23].
Following the Petition Date, Debtor made various pre-payments in the amount of $25,463.51 (the "Pre-Payments") to Defendant for goods that were never delivered to Debtor. [Id. ¶ 24]. The Pre-Payments were not applied to any invoices. [Id.]. Defendant continues to hold the Pre-Payments. [Id.].
On November 1, 2017, the Court entered its Order (A) Approving Asset Purchase Agreement And Authorizing the Sale of Assets of the Debtors Outside the Ordinary Course of Business, (B) Authorizing the Sale of Assets Free And Clear of All Liens, Claims, Encumbrances And Interests, (C) Authorizing the Assumption And Sale And Assignment Of Certain Executory Contracts And Unexpired Leases And Establishing Cure Costs In Connection Therewith, And (D) Granting Related Relief granting the Sale Motion authorizing the Debtors to sell substantially all their personal property assets to Engineered Floors, LLC and certain real property to Pentz Street Holdings, LLC (the "Buyers"). [Id. ¶ 25]. The sale of substantially all Debtors' assets to the Buyers closed on November 6, 2017. [Id. ¶ 26].
On March 14, 2018, Debtor, other debtors, and the Official Committee of Unsecured Creditors filed a First Amended Joint Plan of Liquidation (the "Plan") in the Bankruptcy Case. [Id. ¶ 27]. The Plan created the Trust, into which all the assets of Debtor and its affiliated debtors were transferred on the Plan's effective date. [Id. ¶ 28]. On May 2, 2018, this Court entered its Order Confirming First Amended Joint Plan of Liquidation Proposed by Debtors and Official Committee of Unsecured Creditors (the "Confirmation Order"). [Id. ¶ 29]. The Plan became effective on June 4, 2018. [Id. ¶ 30]. Pursuant to the terms of the Plan, on the effective date, all the assets of Debtor, including all causes of action belonging to Debtor, were transferred to the Trust. [Id. ¶ 31].
III. Analysis
A. Count III: Objection to Proof of Claim No. 1413
Count III of the Complaint objects to Claim No. 1413 as duplicative of proof of Claim No. 1062 and alleges that Claim No. 1413 does not adequately establish which entity is the actual creditor on the claim. Claim No. 1062 was filed by Coface North America Insurance Company ("Coface") in the amount of $1,333,253.07 and identified the creditor as Fabric Sources, Inc. [Complaint,
Defendant seeks summary judgment on Count III on the grounds that the Complaint fails to state a colorable challenge to Claim No. 1413. Defendant acknowledges that Fabric Sources, Inc. is a former d/b/a of Defendant. However, Defendant attached supporting documents to Claim No. 1413 consisting of transaction detail invoice reports with the invoice number, date, out-standing balance, and days outstanding. The reports made no reference to Fabric Sources, Inc. In addition, Debtor scheduled Defendant as a creditor, not Fabric Sources, Inc. Furthermore, Defendant did not file Claim No. 1062 and did not authorize Coface to file Claim No. 1062. Coface withdrew Claim No. 1062 on August 6, 2018 and has not filed any other claim.
A proof of claim executed and filed in accordance with the Bankruptcy Rules is prima facie valid. Fed. R. Bankr. P. 3001(f). The burden is on the objecting party to overcome the prima facie validity of the claim. If the objecting party succeeds, the burden of proof shifts to the claimant to prove its claim by a preponderance of the evidence. In re International BioChemical Inds., Inc., 521 B.R. 395, 398 (Bankr. N.D. Ga. 2014) (Ellis-Monro, J.) (citing 4 Collier on Bankruptcy ¶ 502.02[3][f] (16th ed.)).
Plaintiff does not dispute Defendant's assertions as to POC No. 1413 but argues that summary judgment for Defendant is premature. Plaintiff agrees POC No. 1413 appears to be a valid unsecured claim. However, in the Complaint, Plaintiff expressly reserved the right to object further to the claim on any additional factual or legal grounds. Discovery has not closed in this proceeding. Plaintiff contends that although the claim appears to be properly calculated, it is possible discovery might reveal a further basis to object to the amount of the claim.
Defendant argues that Plaintiff's response is unacceptable pursuant to BLR N.D. Ga. 7056-1(a)(2), which provides: "The response [to the moving party's statement of material facts] that a party has insufficient knowledge to admit or deny is not an acceptable response unless the party has complied with the provisions of Rule 56(d) of the Federal Rules of Civil Procedure." Rule 56(d) provides: "If a non-movant shows by affidavit or declaration that, for specified reasons, it cannot present facts essential to justify its opposition, the court may: (1) defer considering the motion or deny it; (2) allow time to obtain affidavits or declarations or to take discovery; or (3) issue any other appropriate order." Rule 56(b) states that "a party may file a motion for summary judgment at any time until 30 days after the close of all discovery" unless a local rule or court order provides otherwise. Fed. R. Civ. P. 56(b) (emphasis added). BLR 7056-1(b) provides that "Motions for summary judgment must be filed as soon as possible, but, unless the Bankruptcy Court orders otherwise, not later than twenty-eight days after the close of discovery." In this proceeding, the Court entered an order giving the parties 60 days after the close of discovery to file dispositive motions. [Docs. 14, 19]. Regardless of the deadline, the parties are entitled to "adequate time for discovery...." prior to entry of summary
Smedley v. Deutsche Bank Trust Co. Am., 676 F. App'x 860, 861-62 (11th Cir. 2017) (emphasis added) (quoting Florida Power & Light, 893 F.2d at 1316).
With respect to the adequacy of discovery time, Defendant filed Claim No. 1413 with supporting documentation on November 8, 2017. Plaintiff filed its Complaint on June 25, 2019, and Defendant filed its answer and counterclaims on July 26, 2019. The parties filed a report of Rule 26(f) conference on September 24, 2019, in which Defendant stated they could not agree to a discovery plan. [Doc. 14 ¶ 2]. After a status conference, on October 23, 2019, the Court entered a scheduling order that approved 180 days for discovery. [Doc. 19 and Doc. 14 Ex. A]. The Motion for Summary Judgment was filed on November 20, 2019. On January 8, 2020, the Court entered a consent order, extending the time for discovery through May 1, 2020. [Doc. 30]. While Defendant has requested discovery from Plaintiff [Doc. 27], nothing on the docket shows that Plaintiff has requested any discovery from Defendant. Given that Claim No. 1413 was filed on November 8, 2017 with supporting documentation, and Plaintiff is in control of the Debtors' books and records, the Court concludes Plaintiff has had adequate time for discovery or to present "specified reasons it cannot present facts essential to justify its opposition" to the Motion.
Regarding the applicability of Rule 56(d), Plaintiff did not file a motion under that Rule, but Plaintiff attached the Jacoby Declaration to its response to Defendant's statement of material facts. [Doc. 31 Ex. 1, hereinafter "Jacoby Declaration"]. With respect to Claim No. 1413, the Declaration states:
[Jacoby Declaration ¶ 5]. As stated by the Eleventh Circuit, these sort of vague assertions of the need for additional discovery do not support the protection of Rule 56(d). Plaintiff does not dispute the validity or accuracy of any of the documentation
Based on the foregoing, the Court concludes that summary judgment on Count III of the Complaint is not premature. The Court further finds that Plaintiff has conceded the validity of Claim No. 1413 and has failed to produce any evidence contesting the amount of Claim No. 1413 or otherwise creating a question of fact about the claim. Therefore, Defendant is entitled to summary judgment on Count III, and Claim No. 1413 will be allowed in full as a general unsecured claim.
B. Count IV: Objection to § 503(b)(9) Request
In the Complaint, Plaintiff objects to Defendant's § 503(b)(9) Claim as duplicative of Claim No. 1062. Claim No. 1062 had been the subject of objection in Count II of the Complaint. However, Claim No. 1062 was withdrawn, and Plaintiff dismissed Count II as a result. [Doc. 21]. To the extent Count IV can be construed as objecting to § 503(b)(9) as duplicative of the Claim No. 1413, Plaintiff argues summary judgment is premature for the same reasons it gave for Count III. The Court disagrees with Plaintiff for the same reasons stated above. Plaintiff has acknowledged the apparent validity of the claim [Jacoby Declaration ¶ 6], Plaintiff controls the Debtors' books and records but has not pointed to any documentation challenging the amount of the claim, and Plaintiff has had an opportunity to propound discovery but has not done so. Accordingly, Defendant is entitled to summary judgment on Count IV of the Complaint, and its § 503(b)(9) Claim will be allowed in full.
C. Count VIII and Counterclaim II: Disallowance of § 503(b)(9) Claim Under § 502(d)
In its Response, Plaintiff states that it "withdraws Count VIII as a basis for objecting to the 503(b)(9) Claim." [Doc. 31 at 22]. But it continues to assert Count VIII as to Claim No. 1413. As Defendant only sought summary judgment as to the § 503(b)(9) Claim, and Plaintiff has conceded the issue, Defendant is entitled to summary judgment on Count VIII of the Complaint with respect to its § 503(b)(9) Claim and on Counterclaim II.
D. Counterclaim I: Declaratory Judgment That the Same New Value May Be Used as a Defense to a Preference and as a Basis for a § 503(b)(9) Claim
Debtor made payments to Defendant during the 90-day prepetition period that the Court will assume for purposes of this analysis constitute preferences.
11 U.S.C. § 547(c)(4). Under this section, known as the subsequent new value defense, if the debtor makes a preferential payment to the creditor and the creditor thereafter provides the debtor with new value, that new value is a defense to a preference claim so long as the debtor does not make an "otherwise unavoidable transfer" on account of that new value. Defendant argues that payment on a § 503(b)(9) claim is not an "otherwise unavoidable transfer" and therefore the payment does not reduce its new value defense. Plaintiff argues that payment on a § 503(b)(9) claim is an "otherwise unavoidable transfer" such that the subsequent new value defense does not apply to any new value covered by the claim. Both parties rely on the plain language of the statute and bankruptcy policy in support of their positions.
A bankruptcy judge in this district has previously held that "[a] creditor that delivered goods to the debtor pre-petition is not entitled to the new value defense under § 547(c)(4) when that creditor has been paid in full by a § 503(b)(9) claim." TI Acquisition, LLC v. Southern Polymer, Inc. (In re TI Acquisition, LLC), 429 B.R. 377, 385 (Bankr. N.D. Ga. 2010) (Diehl, J.). The court compared § 503(b)(9) claims to rights of reclamation under § 546(c) and to critical vendor claims, finding reclamation claims to be more similar. Id. at 380. When an administrative expense claim has been or will be paid in full, it is like a reclamation claim because "the estate was not enhanced by the `new value.'" Id. at 381. By contrast critical vendor claims are subject to negotiation with the debtor, including "how to deal with the potential preference liability of a critical vendor creditor, which can ensure than the value received by the debtor-in-possession is sufficient to justify the favored treatment." Id. at 382. Furthermore, a critical vendor payment is subject to the stringent Kmart test and is subject to the approval of the court; neither of which is true for a § 509(b)(3) claim. Id. (citing In re Kmart Corp., 359 F.3d 866, 871-74 (7th Cir. 2004)). After also considering policy implications, the court concluded that "it would be inequitable and contrary to the statute to allow the new value defense to be used when the creditor has been paid in full, out of the debtor's estate, for the new value shipments." Id. at 385.
As pointed out by Defendant, the Eleventh Circuit Court of Appeals recently interpreted § 547(c)(4) to determine whether the new value given by the creditor must remain unpaid and to determine the meaning of the term "otherwise unavoidable." BFW Liquidation, 899 F.3d 1178. BFW Liquidation involved a series of transactions that took place during the 90-day pre-petition preference period, including 13 payments by the debtor. After each payment, the creditor, Blue Bell, delivered products (i.e., new value) to the debtor. Id. at 1183-84. Unlike this proceeding, no post-petition payments by the debtor on account of the new value were at issue in BFW Liquidation. However, it offers a useful framework for analysis.
In Charisma Investment Company, N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th Cir. 1988), the court stated that the subsequent new value defense generally requires: "(1) that the creditor must have extended the new value after receiving the challenged payments, (2) that the new value must have been unsecured, and (3) that the new value must remain unpaid." Id. at 1083 (emphasis added). As a result, the bankruptcy court in BFW Liquidation held that the subsequent new value defense is only available to the extent the new value remains unpaid.
Having determined that the "remains unpaid" language was dictum, the Eleventh Circuit went on to hold that § 547(c)(4) does not require new value to remain unpaid. 899 F.3d at 1189.
Id. In so concluding, the court noted that both the Seventh and Third Circuits require new value to remain unpaid, but that in Friedman's, the Third Circuit said an earlier decision "was not a holding with respect to whether post-petition payments could affect a creditor's subsequent-new-value defense." Id. at 1189 n.9.
The court then considered the meaning of the term "otherwise unavoidable" in § 547(c)(4)(B). Id. at 1196. The debtor had made payments to Blue Bell after receiving new value and those payments were themselves avoidable as preferences. Id. at 1198. The trustee argued that the payments must be avoidable under a provision other than § 547, such as the fraudulent transfer provisions of § 548. Id. The court disagreed, stating that "the Trustee's argument largely renders § 547(c)(4) an empty set" because although the payment on account of new value could not be clawed back under § 547, it would be avoided under § 548. Id. Defendant argues that in so stating, the court limited the meaning of "otherwise unavoidable" to preferential transfers that are unavoidable based on a defense in § 547(c) other than the subsequent new value defense. To the contrary, the court found that "otherwise unavoidable" does not exclude the other defenses in § 547(c), but neither does it exclude any other defense to avoidance. Id. The court interpreted "otherwise unavoidable" to mean "a transfer that is unavoidable for reasons other than § 547(c)(4)'s subsequent-new-value defense." Id.
In BFW Liquidation, the Eleventh Circuit made very clear that new value does
1. Plain Language
When the language of a statute has "a plain and unambiguous meaning with regard to the particular dispute in the case and the statutory scheme is coherent and consistent, the inquiry is over." BFW Liquidation, 899 F.3d at 1188 (internal quotation marks and citations omitted). To determine whether the language is plain and unambiguous, the court considers "the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Id. (internal quotation marks and citations omitted).
The Eleventh Circuit described the general structure and the language of § 547 as follows: Section 547(b) allows the trustee to avoid certain transfers made by the debtor on account of an antecedent debt if the transfer was made during the 90-day period before the petition date. Id. The burden of proof for establishing that a transfer is avoidable is on the trustee. Id. (citing 11 U.S.C. § 547(g)). If the trustee avoids the transfer, any claim the creditor has against the estate is disallowed until the creditor pays the trustee, after which the creditor will have an unsecured claim for the amount recovered by the trustee. Id. and n.8. (citing 11 U.S.C. §§ 502(d), (h)). Section 547(c) sets forth various defenses the creditor may raise to avoidance, including the subsequent new value defense in subsection (c)(4). Id. at 1188-89.
a. Transfer by the Debtor
The Court will begin with Defendant's argument that its administrative expense claim does not offset its subsequent new value defense because there has been no payment by Debtor. Section 547(c)(4) requires that "the debtor did not make an otherwise unavoidable transfer" on account of new value. Defendant argues that payment of a § 503(b)(9) claim does not result in a transfer from the debtor but rather is a distribution from the estate. Therefore, it cannot limit Defendant's new value defense. Defendant contends its interpretation is supported by other sections of the Bankruptcy Code, including: (a) § 1129(a)(9)(A), which provides that holders of § 503(b)(9) claims "will receive on account of such claim cash equal to the allowed amount of such claim" on the effective date of the Chapter 11 plan and does not refer to the payment as a transfer; (b) § 726(a), which recognizes that payments from the estate are distributions; (c) § 1143, which recognizes that payments under a confirmed plan are distributions; (d) § 1222(b)(8), which refers to "distribution" of property of the estate; (e) § 1225(b)(1)(C), which refers to distributions under the plan; and (f) § 1329(a)(3), which deals with plan modifications that alter the amount of distributions to creditors. Defendant argues that Congress did not use the term "transfer" when talking about payments under a plan because transfers and distributions are distinct concepts. Distributions are limited to situations where estate property is distributed to creditors under a confirmed plan or pursuant to § 726.
The Court disagrees with Defendant. The Bankruptcy Code defines a transfer as "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with— (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D). Nothing in the definition of "transfer" excludes distributions. While not all transfers are distributions, all distributions —or at least those at issue in this proceeding—are transfers.
It is true that Plaintiff, as liquidating trustee, has not actually paid Defendant's § 503(b)(9) claim, but it does maintain sufficient reserves to pay all such claims in full. [Case No. 17-41677, Doc. 631 (the Plan) ¶ 2.02 & Art. VIII; Sched. 6.02 (the Liquidating Trust Agreement) ¶ 5.4, providing for payment of administrative expense claims in full and establishing reserves for disputed claims]. The subsequent new value defense requires an unavoidable "transfer," not an unavoidable "payment." The reserve fund satisfies this definition. See Circuit City I, 2010 WL 4956022, at *6.
To the extent Defendant argues that because Debtor transferred all its assets to the Trust, Debtor cannot make an otherwise unavoidable transfer, the Court is equally unpersuaded. The fact that Debtor has transferred all its assets to a Trust does not mean Debtor is incapable of paying the § 503(b)(9) Claim. Any such payment would ultimately come from Debtor; the Trust is a pass-through vessel through which Debtor's assets flow pursuant to the Plan and Confirmation Order. The Plan provides that for tax purposes the transfer of Debtor's assets into the Trust is deemed a transfer to holders of allowed claims followed by a deemed transfer from the Trust beneficiaries to the Trust. [Doc. 631 ¶ 6.03]. And the Trust beneficiaries are deemed the owners of the Trust assets. [Id. ¶ 6.04]. Thus, a payment on a § 503(b)(9) claim is either a transfer from Debtor to the Trust for the benefit of
b. Temporal Limitations on the Payment of New Value
In BFW Liquidation, the court found nothing in the language of the statute that requires new value to remain unpaid for purposes of the subsequent new value defense.
899 F.3d at 1189.
Plaintiff argues that in stating that these are the only two requirements, the Eleventh Circuit implicitly recognized there is no temporal limitation on the debtor's transfer on account of new value. Defendant argues that § 547, as a whole, is a backward-looking statute, and therefore the "transfer" referenced in § 547(c)(4) is limited to prepetition transfers.
Defendant argues the "transfer" in § 547(b) must occur during the prepetition preference period to be avoidable. In addition, the introductory language in § 547(c) provides that the trustee may not avoid "under this section a transfer" that meets one of the defenses. The "transfer" is referring to one that meets the requirements of a preference, including having been made during the prepetition preference period. Because these two parts of § 547 refer to prepetition transfers, then the phrase "otherwise unavoidable transfer" is also clearly referring to a prepetition transfer. The Third Circuit in Friedman's rejected a similar argument as "without merit" stating that "[w]hile in two instances in § 547(c)(4) `transfer' is clearly modified in a way referring back to the 90-day period, in the last instance, referring to the `otherwise unavoidable transfer' issue here, it is not." 738 F.3d at 555.
On this point, the Court agrees with Friedman's. As set forth above, the word "transfer" is broadly defined to include all modes of disposition of property. 11 U.S.C. § 101(54)(D). Congress has defined a preference as a transfer by the debtor made during the 90 days prior to the bankruptcy filing. Id. § 547(b)(4)(A). Congress did not similarly limit subsequent transfers by the debtor on account of new value—which is different and distinct from the preferential transfer; although it may also independently qualify as a preference, the statute does not require it to be a preference.
Defendant further contends its position is supported by the language "on account of which new value the debtor did not make an otherwise unavoidable transfer." Id. § 547(c)(4). Because the provision uses the past tense, it is looking backward in time to what the debtor did as opposed to looking forward in time, according to Defendant. However, nothing in the statute designates the petition date as the cut-off point for the lookback period as opposed to the date at which preference liability is determined or some other date.
While the Eleventh Circuit found the plain language of § 547 to be determinative in BFW Liquidation, the Third Circuit in Friedman's relied "on the context and policy of the Code, rather than specific language" to determine that payments on account of new value must be made pre-petition in order to offset the creditor's preference liability. 738 F.3d at 554. At issue in Friedman's was a wage order issued by the bankruptcy court that authorized the debtor to make post-petition
The Eleventh Circuit reached a different conclusion about congressional silence in the same provision. In deciding that new value need not remain unpaid, the court stated that "[b]y its plain terms ... the statute only excludes `paid' new value that is paid for with `an otherwise unavoidable transfer.'" 899 F.3d at 1189. The court found the statutory history supported its reading of that plain language. Id. at 1190. Section 60(c) of the Bankruptcy Act of 1898 (the "Bankruptcy Act"), codified at 11 U.S.C. § 96(c), was the predecessor to § 547(c)(4). It provided as follows:
11 U.S.C. § 96(c) (1976) (emphasis added). The Eleventh Circuit stated that "in the absence of any evidence to the contrary, one can plausibly infer that, by replacing § 60(c)'s `remaining unpaid' language with new language that omits any such requirement, Congress intended to eliminate § 60(c)'s requirement that new value remain unpaid, and to replace that requirement with something substantively different." Id. at 1191.
The same can be said of the "time of the adjudication" language in the predecessor statute. Section 60(c) included a temporal limitation on payments made on account of new value, and any such limitation was excluded from § 547(c)(4). The Court can reasonably infer that the change was intentional. Further indication that the omission was intentional is found in § 547(c)(5), which is limited to transfers made "as of the date of the filing of the petition," as it shows Congress knew how to impose such a limitation when it intended to do so. 11 U.S.C. § 547(c)(5).
The Court recognizes that the legislative history of § 547(c)(4) does not support this view. The legislative history states: "The fourth exception codifies the net result rule in section 60c of current law. If the creditor and the debtor have more than one exchange during the 90-day period, the exchanges are netted out according to the formula in paragraph (4)." S. Rep. 95-989 (1978), 1978 U.S.C.C.A.N. 5787, 5874. However, the best evidence of Congress' intent is the language of the statute, which does not include any requirement that the otherwise unavoidable transfers take place pre-petition. And, when the language of the statute is plan and unambiguous, it cannot be overcome by the legislative history. See American Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203, 1207 (11th Cir. 2002).
2. The Third Circuit's Opinion in Friedman's
BFW Liquidation does not address the effect of post-petition payments on the
Addressing each of the Third Circuit's arguments in turn: First, the title of § 547 is "Preferences." The Court may consider the title of a statute to resolve an ambiguity in the text of a statute, but the title of a statute "cannot trump the plain meaning of its text." United Mine Works of Am. Combined Benefit Fund v. Toffel (In re Walter Energy, Inc.), 911 F.3d 1121, 1154 n.38 (11th Cir. 2018) (citing Brotherhood of R.R. Trainmen v. Baltimore & O.R. Co., 331 U.S. 519, 528-29, 67 S.Ct. 1387, 1392, 91 S.Ct. 1646 (1947)). Here, the text is plain and unambiguous. It does not include any requirements regarding the timing of a debtor's payment of new value for defensive purposes. Nor does this Court find the title persuasive in construing defenses to preferences and whether a temporal limit should be implied when none is express, especially when considering the differences between § 547(b) and § 547(c). See, e.g., Barnhill v. Johnson, 503 U.S. 393, 402, 112 S.Ct. 1386, 1391, 118 L.Ed.2d 39 (1992) (noting that subsection (c) provides exceptions to subsection (b), that the two subsections have different policy considerations, and that given these distinctions, a legislative statement about subsection (c) should not be used to interpret subsection (b)).
In Barnhill, the Court concluded that for purposes of the prima facie preference case, a transfer made by check occurs on the date the check is honored by the bank, rather than the day the check is received by the creditor. Id. at 394-95, 112 S. Ct. at 1388. Nevertheless, the Court recognized—without taking a position on— circuit court authority that the date of delivery of a check applies to the preference defenses under § 547(c). Id. at 402 n.9, 112 S. Ct at 1391 n.9 (collecting cases). The date of delivery rule remains good law
Second, the fact that the hypothetical liquidation test in § 547(b)(5) is performed as of the petition date is not inconsistent with allowing post-petition payments by the debtor to offset the new value defense. As cited by the Third Circuit and explained in Collier on Bankruptcy,
5 Collier on Bankruptcy ¶ 547.03[7] (16th ed.) (quoting Palmer Clay Prod. Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 451, 80 S.Ct. 655 (1936)); Friedman's, 738 F.3d at 556. Thus, under the prima facie case for a preference, different time periods apply to different elements to carry out the purpose of the preference statute. The Court in Palmer Clay was interpreting sections 60(a) and 60(b) of the Bankruptcy Act, which did not expressly include a hypothetical liquidation test. Under § 547, different time periods continue to apply to different parts of the statute, as Judge Diehl pointed out in TI Acquisition.
429 B.R. at 385.
Third, with regard to the statute of limitations, there is some logic to the argument that the cause of action must accrue on the date the statute of limitations begins
Fourth, in rejecting the argument that inclusion of the petition date limitation in § 547(c)(5) and exclusion of the same language from § 547(c)(4) indicates congressional intent not to impose a temporal limit on new value, the Third Circuit concluded that the policy of improvement of position prior to the petition date was central to the concept of preference and thus was not swayed. 738 F.3d at 556. This Court disagrees. Requiring both payment of the § 503(b)(9) claim and offset of preference liability improves the creditor's position relative to all other creditors that continued to do business with the debtor and received preferential payments by giving the § 503(b)(9) claimant payment for the new value plus reducing what it must repay, which in turn reduces the amount available to pay all general unsecured creditors. This "payment plus" treatment, while not double-dipping in the sense that Defendant is not being paid twice for the same invoice, undercuts equality of treatment while failing to materially advance the policy of encouraging creditors to continue to do business on credit with the debtor.
The preference section was enacted to prevent creditors from racing to the courthouse to dismantle a financially distressed debtor, which in turn promotes equality of distribution among similarly situated creditors. BFW Liquidation, 899 F.3d at 1193. The preference defenses were enacted to encourage creditors to continue doing business with such debtors under usual practices. See id. The subsequent new value defense reflects the understanding that when a debtor makes a preferential payment to the creditor— thereby depleting the pool of funds available to other creditors—that pool is replenished when the creditor subsequently provides new value to the debtor. If the debtor makes a further payment on account of the new value that is itself avoidable, then status quo is maintained. But if the debtor makes a further payment on account of the new value that cannot be clawed back, the estate is once again depleted, and the new value cannot be used to offset preference liability. The clear language of the statute implements this leveling of the playing field and equality of distribution by carving out only payments made with otherwise unavoidable transfers.
Defendant contends its position does not run afoul of the policy of equality of distribution because only similarly situated creditors must be treated equally. By giving Defendant an administrative expense claim for goods delivered to the Debtors in
Id. at 385.
Finally, the Third Circuit reasoned that if post-petition payments by the debtor are allowed in the calculation of preference liability, then post-petition extensions of new value must also be allowed, contrary to the conclusion of the majority of courts. Defendant extends this argument by contending that distributions on a creditor's general unsecured claim would also have to be included in the calculation of preference liability as there is no means to avoid them under the Code. As a result, the calculations would be a moving target and would require inconsistent interpretations of the meaning of "otherwise unavoidable transfer."
When courts have barred post-petition new value from offsetting preference liability, "[o]ne reason given is that `the specific language "to or for the benefit of the debtor" [implies] that the subsequent advances of new value are only those given pre-petition, because any post-petition advances are given to the debtor's estate, not the debtor.'" Wiscovitch-Rentas v. PDCM Assoc., S.E. (In re PMC Marketing Corp.), 518 B.R. 150, 157 (1st Cir. BAP 2014) (quoting Clark v. Frank B. Hall & Co. of Colo. (In re Sharoff Food Serv., Inc.), 179 B.R. 669, 678 (Bankr. D. Colo. 1995); Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir. 1988)); see also Rocin Liquidation Estate v. Alta AH & L (In re Rocor Int'l, Inc.), 352 B.R. 319, 333 (Bankr. W.D. Okla. 2006) (stating without analysis that "post-petition advances of new value may not be included in the subsequent new value analysis"); Miller v. A & M Oil Co., Inc. (In re Smith Min. & Material, LLC), 405 B.R. 589, 594 (Bankr. W.D. Ky. 2009) (same). As such, post-petition advances of new value to the debtor can be distinguished from post-petition payments to the creditor on account of new value. In addition, post-petition new value does not advance the policy of encouraging creditors to continue doing business with financially distressed debtors. Sharoff Food Serv., 179 B.R. at 678; see also Kellman v. P.S.E. & G (In re Jolly N, Inc.), 122 B.R. 897, 909-10 (Bankr. D.N.J. 1991) ("To allow a creditor to offset post-petition advances against preferential transfers would be contrary to other provisions of the Code dealing with post-petition advances, would possibly prejudice the interests of other creditors, and would ignore the orderly mechanisms established by Congress to protect all interested parties
The orderly mechanisms of the Code provide for administrative expenses claims for creditors who advance new value post-petition. 11 U.S.C. § 503(b)(1)(A). If creditors who have advanced new value in goods or services post-petition were also permitted to use this new value to reduce preference liability under § 547(c)(4) they would be receiving payment plus reducing the amount of preference liability owed to the estate. This "payment plus" directly undercuts the policy of equality of distribution that is the most important policy underpinning § 547 of the Code and an animating policy for the entire Code.
Similarly, with respect to Defendant's argument regarding post-petition payments on the general unsecured claims of preference creditors who have provided new value,
3. Defendant Cannot Use Its New Value Twice
In light of the foregoing discussion, the Court concludes that there is no temporal requirement in § 547(c)(4) for the debtor's transfer on account of new value. Accordingly, when a creditor has a claim under § 503(b)(9) and a defense under § 547(c)(4) and when the debtor has established reserves to pay administrative claims in full, then that reserve constitutes an "otherwise unavoidable transfer" by the debtor, and the new value represented by the § 503(b)(9) claim cannot be used to offset the creditor's preference liability. Therefore, Defendant is not entitled to summary judgment on Counterclaim I with respect to its § 503(b)(9) Claim.
IV: Conclusion
Based on the foregoing, it is ORDERED that:
Defendant's Motion is GRANTED with respect to Count III of the Complaint;
Defendant's Motion is GRANTED with respect to Count IV of the Complaint;
Count VIII of the Complaint is deemed withdrawn solely as to Defendant's § 503(b)(9) Claim and Defendant's Motion is GRANTED with respect to Counterclaim II; and
Defendant's Motion is DENIED as to Counterclaim I with respect to its § 503(b)(9) Claim and GRANTED as to Counterclaim I with respect to its general unsecured claim.
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