Circuit Court Strengthens ‘New Value’ Defense Against Avoidable Preference Lawsuits

The U.S. Court of Appeals for the Eleventh Circuit "held that, for purposes of Section 547(c)(4)(B), 'otherwise unavoidable transfers' made after the debtor has filed for bankruptcy do not affect a creditor's new value defense," according to the Justia website.

Background from Court Documents

Beaulieu Group, LLC ("Beaulieu"), was one of the largest carpet manufacturers in North America and "engaged in the distribution of carpet and hard surface flooring products in both residential and commercial markets in the United States and many foreign countries."

Beaulieu had eight manufacturing facilities in Georgia and one in Alabama, and had three distribution facilities in Georgia, California and Illinois. Over the course of 10 years, Beaulieu's annual revenue declined from $1 billion in 2007 to less than $600 million in 2016, while its market share fell from 7.7% to 4.4%.

In 2016, Beaulieu added new members to its board of directors and brought in new senior management to develop a business turnaround and transformation plan. But Beaulieu had insufficient borrowing power and liquidity to complete its turnaround efforts. On July 16, 2017, Beaulieu and its affiliates each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.

The bankruptcy court subsequently approved a plan of liquidation that involved transferring all of Beaulieu's assets to a liquidating trust. PMCM 2, LLC (Trustee), is the liquidating trustee for the Beaulieu Liquidating Trust. The creditor here is Auriga Polymers Inc. (Auriga), which sold Beaulieu polyester resins and specialty polymers used in a range of products, including textiles, before the bankruptcy.

In total, Auriga delivered to Beaulieu over $4.2 million in goods before Beaulieu filed for bankruptcy, for which Auriga had not been paid. Beaulieu filed for bankruptcy on July 16, 2017 (Petition Date). During the 90 days before the Petition Date (i.e., the preference period), Beaulieu transferred to Auriga more than $2.2 million (Pre-Petition Transfers). During that same period, Auriga delivered to Beaulieu over $3.523 million of goods (Goods). At least $694,502 of those Goods were delivered within 20 days of the Petition Date. The Goods were sold on credit and were not secured by an otherwise unavoidable security interest. After Beaulieu filed for bankruptcy, Auriga filed two claims against the estate.

The bankruptcy court approved a plan of liquidation that transferred Beaulieu's assets, including "claw back" claims for avoidable preferential payments, to a liquidating trust. The trustee of the trust then filed a lawsuit against Auriga, seeking to recover $2.2 million in payments made to Auriga during the 90 days before the bankruptcy filing.

Findings of the Appeals Court

• The Eleventh Circuit held that a creditor may file a post-petition claim for the unpaid value of goods delivered to the debtor immediately before bankruptcy without impairing the creditor's defense against disgorgement of pre-petition payments.
• Specifically, the court determined that a creditor's "new value" defense (a creditor receiving a preferential payment from a debtor gave "new value" in the form of goods or services to the debtor after receiving the payment) against avoidance of pre-petition transfers under 11 U.S.C. § 547(c)(4) is not offset by the debtor's post-petition transfer made in response to the same creditor's claim under 11 U.S.C. § 503(b)(9).
• The court concluded that the context of § 547(c)(4) provides that the statute's reference to "otherwise unavoidable transfers" is limited to pre-petition transfers (Auriga Polymers Inc. v. PMCM2, LLC).

For an in-depth look at the case, watch for Lowenstein Sandler's analysis in the September/October issue of Business Credit magazine. 

-Diana Mota, editor in chief