The Bankruptcy Code is generally a debtor-friendly scheme that negatively impacts the rights of creditors. Given that fact, creditors are inclined to avoid troubled business if possible. The Code, however, provides a handful of incentives for creditors to continue doing business with a distressed company, even as it slides into bankruptcy. Among these incentives are the priority claim treatment provided for so-called “20-day claims,” covering goods delivered within 20 days of the filing and the “new value” preference defense shielding potential preferences when the creditor thereafter extends new credit to the debtor.
At times, these two protections may result in a “double-dipping” effect. One such instance arises when a creditor asserts an administrative expense claim for the value of goods provided to the debtor in the 20 days prior to bankruptcy under section 503(b)(9) and also attempts to use the value of those same goods as a “new value” defense to a preference action under section 547(c)(4). In Seigel v. Sony Electronics, Inc. (In re Circuit City Stores, Inc.), 2014 Bankr. LEXIS 4021 (Bankr. E.D. Va. Sept. 8, 2014), Judge Huennekens addressed this “double-dipping” effect and ruled that a creditor could not use the delivery of the same goods both to recover a section 503(b)(9) claim and to assert a new value defense under section 547(c)(4).
Prior to filing for bankruptcy and subsequently liquidating, Circuit City was a national retailer of consumer electronics with over 36,000 employees and more than 700 stores nationwide. Sony Electronics and Circuit City had a longstanding relationship governed by a Dealer Agreement under which Sony provided goods to Circuit City. The Circuit City liquidating trustee commenced an adversary proceeding against Sony asserting, among other things, a claim for recovery of an alleged $8 million preferential transfer. As part of its summary judgment briefing, Sony asked the court to rule as a matter of law that it was entitled to assert a claim for goods delivered to Circuit City in the 20 days prior to bankruptcy both for recovery under section 503(b)(9) and as new value under section 547(c)(4).
The court denied Sony’s request. Judge Huennekens had previously ruled on this issue in another Circuit City case, albeit under different circumstances, holding that the recipient of a section 503(b)(9) payment is not entitled to utilize the value of those same goods as the basis for a new value defense under § 547(c)(4). Circuit City Stores, Inc. v. Mitsubishi Digital Elecs. Am., Inc. (In re Circuit City Stores, Inc.), 2010 Bankr. LEXIS 4398 (Bankr. E.D. Va. Nov. 30, 2010). Notwithstanding Judge Huennekens prior ruling, Sony asked the court to reconsider this issue in light of the Third Circuit’s opinion in Friedman’s Liquidating Trust v. Roth Staffing Cos. (In re Friedman’s Inc.), 738 F.3d. 547 (3d Cir. 2013), wherein the Third Circuit held that post-petition transfers made pursuant to a pre-petition wage order did not affect the calculation of that creditor’s new value defense under section 547(c)(4)(B). Judge Huennekens rejected Sony’s argument on the basis that Friedman’s dealt with post-petition transfers and the 503(b)(9) transfers are prepetition. Instead, the court considered the plain language of section 547(c)(4)(B) and held (again) that nothing therein permits the assertion of a section 503(b)(9) claim as a new value preference defense. The court also found that Sony’s legal analysis was flawed because it would result in a double recovery for Sony and therefore the inequitable treatment of creditors.
Often, a creditor will file its section 503(b)(9) administrative expense claim early in the case and then years later it will face a debtor’s preference demand. Because there are deadlines for asserting section 503(b)(9) claims and because the creditor is likely to recover the full value of those goods delivered, it is always prudent to file a section 503(b)(9) claim regardless of its impact on a potential future new value defense. However, when later calculating preference exposure, a creditor should consider carefully whether a court will permit such “double-dipping” in light of the reasoning evidenced in Circuit City opinion—it may not.