Does a supplier have to choose between asserting a subsequent new value bankruptcy preference defense and making a Section 503(b)(9) administrative expense request? Judge Marian F. Harrison of the Bankruptcy Court for the Middle District of Tennessee held on January 7, 2010 that a supplier does not have to choose. In the memorandum decision In re Commissary Operations, Inc. — B.R. —-, 2010 WL 99036 (Bkrtcy.M.D.Tenn.), Judge Harrison ruled that deliveries entitled to Section 503(b)(9) claim status are not disqualified from constituting new value for purposes of the subsequent new value defense to a bankruptcy preference claim.
The Commissary Operations decision provides ground breaking precedent in the continuing challenge of bankruptcy courts to reconcile the post-petition administrative expense granted for goods received by a debtor in the 20 day pre-petition period with the ability of a debtor to recover avoidable payments made in the 90 days prior to bankruptcy. The decision also provides a clear statement of and support for the Congressional intent in enacting Section 503(b)(9), which will be helpful to 503(b)(9) claimants in fighting off punitive bankruptcy preference attacks by debtors.
The Plain Meaning of the Definition of New Value and the Elements of the Subsequent New Value Bankruptcy Preference Defense
Judge Harrison’s decision was based on the plain wording the Section 547(a)(2) definition of “new value”, the provisions of the subsequent new value defense in Section 547(c)(4) and the administrative expense provision in Section 503(b)(9). The Bankruptcy Court noted that neither the definition of “new value” in Section 547(a)(2), nor the elements of the subsequent new value defense in 547(c)(4)(A), excluded goods subject to an administrative expense request. The court noted that the only exclusion from the subsequent new value defense was “new value” secured by an otherwise unavoidable security interest. The Bankruptcy Court noted that an administrative expense was not a security interest.
Distinguishing Reclamation from Section 503(b)(9)
Judge Harrison carefully considered the decision in Phoenix Rest. Group, Inc. v. Proficient Food Co. (In re Phoenix Rest. Group, Inc.), 373 B.R. 541, 547 (M.D.Tenn.2007), where the District Court held that goods subject to a reclamation claim could not qualify as “new value”. In distinguishing Phoenix Rest Group, Judge Harrison noted the fundamental distinctions between reclamation claims and Section 503(b)(9) administrative expenses. Among those distinctions is a reclamation claim’s creation of a de facto lien on the goods provided. Judge Harrison observed that:
With reclamation claims, the debtor is obligated to segregate and return reclamation goods, depriving it of the ability to re-sell the goods at a profit or to incorporate the goods into a manufactured product for sale. Conversely, a debtor can freely use goods subject to a § 503(b)(9) claim, whether before or after the petition date. Thus, goods shipped to and received by a debtor in the 20 days prior to bankruptcy are exactly the same as “money or money’s worth as goods shipped free of the seller’s strings.” Id. at 548.
Protecting the Congressional Policy Behind Section 503(b)(9)
Additionally, and arguably of broader importance to suppliers, Judge Harrison stressed the Congressional policy behind Section 503(b)(9), writing that:
To force a creditor to choose between asserting a § 503(b)(9) claim and preserving its right to assert a subsequent new value defense that includes deliveries made to the debtor within the 20 days prior to the bankruptcy filing would work a disservice on Congress’ inherent policy goals when enacting 11 U.S.C. §§ 503(b)(9) and 547(c)(4). Requiring creditors to make such a choice would chill their willingness to do business with troubled entities. In addition, requiring creditors to make this choice in essence deprives sellers of goods of the benefits Congress conferred upon them when it enacted 11 U.S.C. § 503(b)(9).
It is important to note that the Bankruptcy Court in Commissary Operations was not addressing a situation where an allowed Section 503(b)(9) expense already had been paid at the time the subsequent new value defense was asserted. In fact, it is unlikely that a creditor would ever refuse actual payment of an administrative expense even if such payment meant the loss of one defense to a later bankruptcy preference claim.