In this precedential decision by the United States Court of Appeals for the Third Circuit, the Court in Friedman’s Liquidating Trust v. Roth Staffing Companies LP (Case No. 13-1712) held that “where ‘an otherwise unavoidable transfer’ is made after the filing of a bankruptcy petition, it does not affect the new value defense.”
The opinion, filed December 24, 2013, examined closely two prior decisions of the Circuit: In re New York City Shoes, 880 F.2d 679 (3d Cir. 1989) and In re Winstar Communications, Inc., 554 F.3d 382 (3d Cir. 2009). The recent opinion found that the language of the new value test in New York City Shoes was mere dicta. The Court also recognized that in the Winstar case, the Court had called the New York City Shoes dicta a “holding.” However, the Court noted that articulation of the new value three-part test in New York City Shoes was wholly unnecessary to the decision either in that case or in Winstar. Accordingly, the Friedman’s Court found that it was not bound by either decision.
In its analysis, the Court focused on the “contextual indicators” in the Code that point to the petition date as being the operative cutoff date for the new value defense. First, the Court noted that Section 547 is captioned “Preferences” and concerns transfers made during that time period. “It would make sense that the calculation of the amount of the preference, and application of any new value reduced by subsequent transfers, would relate to that time period.”
The Court also agreed that the “hypothetical liquidation test” was to be performed as of the petition date. That too, points to the cutoff period being the petition date for purposes of calculating new value.
Likewise, the Court found persuasive the fact that the statute of limitations for preference actions begins to run as of the petition date. This “suggests that the calculation of preference liability should remain constant post-petition.” To hold otherwise means that the “calculation of preference liability could change depending on when the preference avoidance action was filed.”
The Court also examined the policies behind Section 547 of the Code, including the policy of encouraging trade creditors to continue deadline with troubled debtors, and to treat fairly those creditors who have replenished the estate after receiving transfers. Notably, the Court rejected the Liquidating Trust’s “double dipping” argument, i.e. the argument that the creditor, post-petition, receives payment and yet, at the same time gets to use the invoices (which were unpaid on the petition date) as new value. The Court noted that such an argument was misleading, as it implied that the creditor, when paid post-petition, was paid for goods or services never delivered or received.
This is a decision well worth a full read. Accordingly, we have attached a copy here. Happy Holidays.
Friedman's Liquidating Trust v. Roth Staffing Companies LP (In re Friedman's Inc.), Case No. 13-1712 (3d Cir.)