Post-Petition Payment for Pre-Petition Delivery of Goods under Section 503(b)(9) Does Not Reduce Creditor’s Subsequent New Value Defense to Preference Lawsuit

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

An Eleventh Circuit Court of Appeals’ decision permits a creditor both to be paid in full under Bankruptcy Code section 503(b)(9) for goods delivered within 20 days before commencement of a bankruptcy case, and to use the delivery of those goods on credit as “subsequent new value” in defense to a trustee’s preference lawsuit.


  • A creditor who receives payment from a debtor in the 90-day period before bankruptcy can be subject to a preference lawsuit to recover the payment.
  • The “subsequent new value” defense allows a creditor to reduce preference liability when the creditor provided new value (e.g., additional goods or services) to the debtor on credit after receiving a preference payment.
  • Post-petition payments to a creditor under Bankruptcy Code section 503(b)(9), which provides payment in full for goods delivered within 20 days before commencement of bankruptcy, did not reduce creditor’s “subsequent new value” defense.

On direct appeal from the bankruptcy court, the U.S. Court of Appeals for the Eleventh Circuit held in Auriga Polymers Inc. v. PMCM2, LLC, 40 F. 4th 1273 (11th Cir. 2022), that post-petition payment to a creditor for goods delivered within 20 days of a debtor’s bankruptcy case under a creditor-friendly provision of the U.S. Bankruptcy Code (11 U.S.C. § 503(b)(9)) does not reduce the creditor’s “subsequent new value” defense to a lawsuit for recovery of preference payments. The decision provides a potential avenue for creditors who provide goods and services to distressed counterparties during the 20-day period prior to the bankruptcy filing to (1) retain payments previously received during the 90-day preference period (for non-insiders) and (2) receive payment in full for those goods and services as an administrative expense in the bankruptcy case.


In 2017, Beaulieu Group LLC, a carpet manufacturer, filed for chapter 11. Beaulieu purchased polyester and other materials for its products from Auriga Polymers Inc. In the 90 days before Beaulieu filed for bankruptcy, Auriga delivered approximately $3.523 million in materials to Beaulieu and received more than $2.2 million in payments for its materials. (See Auriga, 40 F.4th at 1279.)

Payments or other transfers made by a debtor on account of debts owed to non-insiders within 90 days of a bankruptcy filing (or to insiders within a year prior to the bankruptcy filing) can be avoided (i.e., recovered) under the Bankruptcy Code if the debtor was insolvent at the time and the payments allowed the creditor to receive more than it would in a chapter 7 liquidation. (See 11 U.S.C. § 547(b).) These payments are known as “preference payments.” The power to avoid preference payments is intended to ensure equality of distribution by recovering payments that would provide creditors with superior treatment to other similarly situated creditors who were not paid during the preference look back period.

Certain defenses to actions for recovery of preference payments are available under the Bankruptcy Code, including the “subsequent new value” defense, which is intended to encourage creditors to continue extending credit to distressed counterparties. (See 11 U.S.C. § 547(c)(4).) The new value defense provides that a payment or other transfer from the debtor may not be avoided if the creditor provided new value (e.g., additional goods or services) after receiving such payment or transfer as long as the new value provided is unpaid (or paid but not on account of “an otherwise unavoidable transfer” to such creditor). (See 11 U.S.C. § 547(c)(4).) In other words, if the new value is unpaid (or paid by payments that are not also subject to avoidance through a preference action or otherwise), then the new value advanced by the creditor can be used to reduce its preference liability.

Of the $3.5 million in materials provided by Auriga during the preference period, approximately $694,502 were delivered within 20 days of the bankruptcy filing. (See id. at 1279.) A creditor is entitled to an administrative expense claim (i.e., payment in full) for the value of goods sold to a debtor within 20 days before commencement of a bankruptcy case under Bankruptcy Code section 503(b)(9). (See 11 U.S.C. § 503(b)(9) (allowing administrative expense priority for the “value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”)) Therefore, under this provision, Auriga sought payment in the bankruptcy case for the goods as an administrative expense.

The bankruptcy court approved Beaulieu’s chapter 11 plan. The plan provided for the transfer of assets (including certain litigation claims) to a trust administered by a trustee. The trustee sued Auriga to recover the $2.2 million in payments it received during the 90-day preference look back period.

In response to the lawsuit, Auriga asserted the “subsequent new value” defense based on the delivery of goods on credit to Beaulieu pre-petition after the alleged preference payments. The trustee asserted that the amount paid (or to be paid) on Auriga’s section 503(b)(9) claim could not both support a payment to Auriga under section 503(b)(9) and reduce its preference liability under the “subsequent new value” defense because it would amount to Auriga receiving “double-payment.” (See id. at 1288.)

At the trial court level, the bankruptcy court ruled in favor of the trustee by finding that Auriga could not use the same value both to support a payment under section 503(b)(9) and reduce its preference liability under the “subsequent new value” defense. (See id. at 1280-81.) The bankruptcy court’s decision was appealed directly to the U.S. Court of Appeals for the Eleventh Circuit.

The Decision

Auriga’s ability to reduce its preference liability using the subsequent new value defense turned on whether payment during the case under section 503(b)(9) amounted to an “otherwise unavoidable transfer” within the meaning of the preference provisions of the Bankruptcy Code. Stating that it was relying on the statute’s plain language, among other bases, the Circuit Court found that for an “otherwise unavoidable transfer” to occur (i.e., a payment that would eliminate the new value it satisfied), the payment had to be made by the debtor before the bankruptcy case. Thus, a payment made by the debtor pursuant to section 503(b)(9) after the bankruptcy case was not an “otherwise unavoidable transfer” (and did not eliminate its use as a defense, even though it satisfied the new value).

The Circuit Court also found that the word “transfer” in the term “otherwise unavoidable transfer” must refer to pre-bankruptcy transfers because the preference provisions of the Bankruptcy Code only relate to pre-petition transfers (payments) made within the applicable look back period.1 Even the title of the statutory provision (“Preferences”) suggested to the Circuit Court that it concerned only transactions during the preference period, which, by definition, occurs pre-bankruptcy. (See id. at 1286.)

Further, a creditor’s extension of new value during a debtor’s bankruptcy case does not form a basis for asserting a defense to a preference claim. Therefore, the Circuit Court reasoned that the statute does not allow post-petition payments received under section 503(b)(9) to affect the preference analysis. (See id.)

Lastly, the Circuit Court rejected the trustee’s argument that assertion of the new value defense to reduce preference liability and payment for an administrative expense claim under section 503(b)(9) would result in “double payment.” The Circuit Court reasoned that honoring the defense will only prevent return of payments already made on account of completely different goods than those delivered during the 20 days before debtor’s bankruptcy and paid for as section 502(b)(9) claims, and as a matter of fact does not result in any double payment to Auriga. (See id. at 1288.)

The Takeaway

Trade creditors should remain vigilant in identifying potential signs of a counterparty’s distress and may even ask whether (and when) the counterparty intends to file for bankruptcy. For those creditors who can discuss the timing of an impending bankruptcy with its counterparty, this decision provides a potential avenue to (1) retain payments received from such counterparties (who eventually file for bankruptcy) based on new value thereafter extended by the creditors during the 20 days before the bankruptcy and (2) still receive payment in full for those goods delivered as an administrative expense under section 503(b)(9). Moreover, all creditors who deliver goods and services during the 20 days before bankruptcy should vigilantly assert the new value defense for such deliveries, even if they are paid for during the bankruptcy case.

1 But see 11 U.S.C. § 101(54) (providing for the definition of “transfer” in the Bankruptcy Code, which does not, on its face, limit itself to pre-bankruptcy transactions); § 549 (providing for avoidance of post-bankruptcy transfers).

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Pillsbury Winthrop Shaw Pittman LLP

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