January 2, 2014
A Victory for Preference Defendants: Third Circuit Affirms Friedman’s Holding and Holds Post-Petition Payments Do Not Affect the Calculation of a Creditor’s New Value Defense
By Evan T. Miller
On December 24, 2013, the United States Court of Appeals for the Third Circuit (the “Court”) issued an opinion in In re Friedman’s Inc., Case No. 13-1712, 2013 WL 6797958 (3d Cir. Dec. 24, 2013), affirming the District Court’s order which had affirmed the Bankruptcy Court’s holding that post-petition transfers to a creditor do not affect the calculation of that creditor’s new value defense under 11 U.S.C. § 547(c)(4). The opinion represents a clear refutation of the positions taken in the lower courts of several other jurisdictions which held that permitting a creditor to accept post-petition payments on pre-petition liabilities while simultaneously claiming the pre-petition liabilities as new value would constitute “double-dipping”.
The facts in Friedman’s are undisputed. Friedman’s, Inc. (the “Debtor”) filed for bankruptcy under Chapter 7 of the Bankruptcy Code on January 22, 2008 (the “Petition Date”), and thereafter the case was converted to one under Chapter 11 of the Bankruptcy Code. In the 90 days prior to the Petition Date, the Debtor made payments to Roth Staffing (“Appellee”) totaling $81,997.57 (the “Transfers”). After the Transfers, but before the petition was filed, Appellee provided services valued at $100,660.88 to the Debtor; the money owed for these services remained unpaid as of the date the bankruptcy petition was filed.
On January 25, 2008, the Debtor filed a motion in Bankruptcy Court seeking authority to pay its employees and independent contractors, prepetition wages, compensation, and related benefits. The Court granted the Debtor’s motion (the “Wage Order”). Pursuant to the Wage Order, the Debtor paid $72,412.71 to Appellee on account of pre-petition staffing services.
On March 5, 2009, Friedman’s Liquidating Trust (“Appellant”), the successor-in-interest to the Debtor, commenced this action in Bankruptcy Court, seeking to avoid and recover the Transfers as preferences, pursuant to § 547(b) of the Bankruptcy Code. In response, Appellee asserted the affirmative defense of new value under § 547(c)(4), claiming that the Transfers could not be avoided as preferences because it had provided subsequent new value to the Debtor in an amount ($100,660.88) exceeding the Transfers made ($81,997.57). Appellant responded by arguing that Appellee’s new value defense had to be reduced by the post-petition payment of $72,412.71 made pursuant to the Wage Order. Appellant argued that this “otherwise unavoidable transfer” reduced Appellee’s new value defense to $28,248.17, and entitled Appellant to recover $53,749.40 ($81,997.57 - $28,248.17) on its preference claim.
Bankruptcy Judge Sontchi granted Appelle summary judgment, holding that because the Debtor’s payments made pursuant to the Wage Order occurred after the Petition Date, these payments could not enter into the preference calculation. Judge Sontchi based this holding on his reading of In re New York City Shoes, Inc., 880 F.2d 679 (3d Cir. 1989) (“NYC Shoes”), specifically its language reading “the debtor must not have fully compensated the creditor for the “new value” as of the date that it filed its bankruptcy petition.” The Bankruptcy Court found NYC Shoes to be controlling, and, therefore, held that since the otherwise unavoidable transfer was made after the Petition Date, Appellant was not entitled to recover on its preference claim.
The District
On December 24, 2013, the United States Court of Appeals for the Third Circuit (the “Court”) issued an opinion in In re Friedman’s Inc., Case No. 13-1712, 2013 WL 6797958 (3d Cir. Dec. 24, 2013), affirming the District Court’s order which had affirmed the Bankruptcy Court’s holding that post-petition transfers to a creditor do not affect the calculation of that creditor’s new value defense under 11 U.S.C. § 547(c)(4). The opinion represents a clear refutation of the positions taken in the lower courts of several other jurisdictions which held that permitting a creditor to accept post-petition payments on pre-petition liabilities while simultaneously claiming the pre-petition liabilities as new value would constitute “double-dipping”.
The facts in Friedman’s are undisputed. Friedman’s, Inc. (the “Debtor”) filed for bankruptcy under Chapter 7 of the Bankruptcy Code on January 22, 2008 (the “Petition Date”), and thereafter the case was converted to one under Chapter 11 of the Bankruptcy Code. In the 90 days prior to the Petition Date, the Debtor made payments to Roth Staffing (“Appellee”) totaling $81,997.57 (the “Transfers”). After the Transfers, but before the petition was filed, Appellee provided services valued at $100,660.88 to the Debtor; the money owed for these services remained unpaid as of the date the bankruptcy petition was filed.
On January 25, 2008, the Debtor filed a motion in Bankruptcy Court seeking authority to pay its employees and independent contractors, prepetition wages, compensation, and related benefits. The Court granted the Debtor’s motion (the “Wage Order”). Pursuant to the Wage Order, the Debtor paid $72,412.71 to Appellee on account of pre-petition staffing services.
On March 5, 2009, Friedman’s Liquidating Trust (“Appellant”), the successor-in-interest to the Debtor, commenced this action in Bankruptcy Court, seeking to avoid and recover the Transfers as preferences, pursuant to § 547(b) of the Bankruptcy Code. In response, Appellee asserted the affirmative defense of new value under § 547(c)(4), claiming that the Transfers could not be avoided as preferences because it had provided subsequent new value to the Debtor in an amount ($100,660.88) exceeding the Transfers made ($81,997.57). Appellant responded by arguing that Appellee’s new value defense had to be reduced by the post-petition payment of $72,412.71 made pursuant to the Wage Order. Appellant argued that this “otherwise unavoidable transfer” reduced Appellee’s new value defense to $28,248.17, and entitled Appellant to recover $53,749.40 ($81,997.57 - $28,248.17) on its preference claim.
Bankruptcy Judge Sontchi granted Appelle summary judgment, holding that because the Debtor’s payments made pursuant to the Wage Order occurred after the Petition Date, these payments could not enter into the preference calculation. Judge Sontchi based this holding on his reading of In re New York City Shoes, Inc., 880 F.2d 679 (3d Cir. 1989) (“NYC Shoes”), specifically its language reading “the debtor must not have fully compensated the creditor for the “new value” as of the date that it filed its bankruptcy petition.” The Bankruptcy Court found NYC Shoes to be controlling, and, therefore, held that since the otherwise unavoidable transfer was made after the Petition Date, Appellant was not entitled to recover on its preference claim.
The District