WE WON WE MADE A NEW LAW.
In the Chapter 11 case of Beaulieu Group, LLC (carpet industry in Dalton, Georgia) in the US Bankruptcy Court for the Northern District of Georgia, we defended Auriga Polymers Inc. (a subsidiary of Indorama Ventures) in a preference claim filed by the Beaulieu Liquidating Trustee.
We successfully asserted Auriga’s “new subsequent value” defense, that after receiving preference payments, Auriga shipped more merchandise. A substantial portion of the merchandise was shipped within 20 days prior to the Chapter 11 filing, which provided Auriga with a Bankruptcy Code section 503(b)(9) administrative priority claim for the value of the merchandise sent The central issue in this case, as in virtually all preference cases, was whether Auriga could be paid on its section 503(b)(9) administrative expense priority claim (for goods shipped within 20 days prior to the Chapter 11 filing) and also reduce your priority liability based on the value of the shipments that included that claim.
In the vast majority of Chapter 11 cases, after the “main event” (a Section 363 sale of all assets or a reorganization), the “residual” assets are transferred to a “creditor” trust to realize these assets. Ironically, “residual” assets are mostly preferences and other avoidance claims against creditors. In filing claims against creditors, liquidating trustees throughout the US have consistently asserted, and several bankruptcy courts have found, that a creditor may not receive payment on its Section 503(b)(9) claim and also reduce your preference. liability for 20-day shipments that were paid after request, as impermissible “double dipping.”
Rejecting this “double dipping” theory, the United States Court of Appeals for the 11th Circuit, in a well-reasoned opinion, held that a priority creditor/defendant is entitled to both payment of his claim of Section 503(b)(9) as a reduction. of its preferential liability for the value of this claim.
Conclusion: Auriga has no priority liability and is entitled to receive 100% of its Section 503(b)(9) claim.
With this decision, the 11th Circuit became the first United States Circuit Court to address whether post-petition payments on account of Section 503(b)(9) claims reduce the subsequent defense of the new value, and joins the 3rd Circuit Court of Appeals in ruling in favor. for creditors that the subsequent defense of the new value is fixed on the date of the request. There are no other decisions of the US Circuit Court of Appeals on this issue.
This is one of the most significant rulings in a preference case. Although not controlling precedent in other circuits, the 11th Circuit’s ruling will likely materially improve the position of preference creditors/defendants in defending preference cases. To quote a Kansas City colleague, “This case will definitely have implications beyond the confines of the 11th Circuit.”
