PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 13-1712
___________
IN RE: FRIEDMAN’S INC.,
Debtor
FRIEDMAN'S LIQUIDATING TRUST,
Appellant
v..
ROTH STAFFING COMPANIES LP
Appeal from the United States District Court
for the District of Delaware
(District Court No. 1-12-cv-00306)
District Judge: Honorable Richard G. Andrews
Argued October 17, 2013
Before: RENDELL, JORDAN and LIPEZ*, Circuit Judges
(Opinion Filed: December 24, 2013)
John D. Demmy, Esquire (Argued)
Maria Aprile Sawczuk, Esquire
1105 North Market Street
Suite 700
Wilmington, DE 19801
Nicholas F. Kajon, Esquire
Stevens & Lee, P.C.
485 Madison Avenue
20th Floor
New York, NY 10022
Counsel for Appellant
*Honorable Kermit V. Lipez, Senior United States
Circuit Judge for the Court of Appeals for the First Circuit,
sitting by designation.
Peter M. Sweeney, Esquire
2
Blakeley & Blakeley, LLP
1000 North West Street
Suite 1200
Wilmington, DE 19801
Johnny White, Esquire
Bradley D. Blakeley, Esquire (Argued)
Blakeley & Blakeley, LLP
2 Park Plaza
Suite 400
Irvine, CA 92614
Counsel for Appellee
OPINION
RENDELL, Circuit Judge:
This appeal presents an issue of first impression in our
Court: can a post-petition payment to a creditor pursuant to a
Wage Order entered at a debtor’s request reduce the creditor’s
new value defense—and thereby increase preference
liability—the same as it would if the payment had been made
pre-petition?
Under the Bankruptcy Code, the trustee may avoid
certain preferential transfers made by a debtor to a creditor in
3
the 90 days before its bankruptcy petition was filed. See 11
U.S.C. § 547(b) (2006). A creditor who gives the debtor new
value subsequent to a preference payment, however, may use
what is referred to as the “new value” defense to offset an
otherwise avoidable preference. See id. § 547(c)(4). The new
value defense is not applicable to the extent that, thereafter,
the debtor makes “an otherwise unavoidable transfer” to the
creditor on account of the value received. Id. § 547(c)(4)(b).
We hold that where “an otherwise unavoidable transfer” is
made after the filing of a bankruptcy petition, it does not
affect the new value defense. For this reason, we will affirm
the order of the District Court affirming the Bankruptcy
Court.
I. Background
The facts giving rise to this appeal are undisputed.
Friedman’s, Inc. (“the Debtor”) filed for bankruptcy under
Chapter 7 of the Bankruptcy Code on January 22, 2008, and
thereafter the case was converted to one under Chapter 11 of
the Bankruptcy Code. In the 90 days prior to filing for
bankruptcy (“the preference period”), the Debtor made
payments for personnel to Roth Staffing (“Appellee”) totaling
$81,997.57. After these preferential transfers, but before the
petition was filed, Roth Staffing 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 (collectively, “Employees”), pre-
petition wages, compensation, and related benefits. It stated
4
that as of the petition date, it had approximately 3,500
Employees and outstanding obligations to them in the amount
of approximately $4 million. The Debtor represented to the
Court, inter alia, that if its Employees were not compensated
at least in part for the services that had been provided, there
would likely be “an epidemic of Employee departures” and/or
a “deterioration in morale.” Mot. of Debtors and Debtors in
Possession for an Order Authorizing the Debtors To Pay
Prepetition Wages, Compensation, and Employee Benefits
Pursuant to Sections 105(a) and 363(b) of the Bankruptcy
Code ¶¶ 39-40, In re: Friedman’s Inc., No. 08-10161 (Bankr.
D. Del. Jan. 25, 2008). It argued that this would “substantially
and adversely impact [its] businesses and result in immediate
and irreparable harm to the creditors and estates.” Id. ¶ 40.
The Debtor asked the Court to invoke its power under
§ 105(a) of the Bankruptcy Code to enable the Trustee to
make the payments to Employees pursuant to § 363(b)(1).
Section 105(a) states, in relevant part: “The court may issue
any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title.” 11 U.S.C.
§ 105(a). Section 363(b)(1) provides that a “trustee, after
notice and a hearing, may use, sell or lease, other than in the
ordinary course of business, property of the estate.” Id. §
363(b)(1).
The Court granted the Debtor’s motion (“the Wage
Order”). Pursuant to the Wage Order, and after filing its
bankruptcy petition, the Debtor paid $72,412.71 to Roth
Staffing on account of pre-petition staffing services.
On March 5, 2009, Friedman’s Liquidating Trust
(“FLT” or “Appellant”), the successor in interest to the
5
Debtor, commenced this action in Bankruptcy Court, seeking
to avoid and recover transfers made to Roth Staffing as
preferences, pursuant to § 547(b) of the Bankruptcy Code.
This section states:
Except as provided in subsections (c) and (i) of
this section, the trustee may avoid any transfer
of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by
the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date
of the filing of the petition; or
(B) between ninety days and one year
before the date of the filing of the
petition, if such creditor at the time
of such transfer was an insider; and
(5) that enables such creditor to receive more than
such creditor would receive if—
(A) the case were a case under chapter 7
of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of
such debt to the extent provided by
the provisions of this title.
11 U.S.C. § 547(b).
6
In its answer to FLT’s complaint, Roth Staffing
asserted the affirmative defense of new value, pursuant to §
547(c)(4) of the Code, which reads:
The trustee may not avoid under this section a
transfer—
(4) to or for the benefit of a creditor, to the
extent that, after such transfer, such creditor
gave new value to or for the benefit of the
debtor—
(A) not secured by an otherwise
unavoidable security interest; and
(B) on account of which new value the
debtor did not make an otherwise
unavoidable transfer to or for the
benefit of such creditor. . .
Id. § 547(c)(4). Roth Staffing claimed that because it had
provided subsequent new value to the Debtor in an amount
($100,660.88) exceeding the preferential transfers made
($81,997.57), FLT could not avoid these transfers.
FLT responded by arguing that Roth Staffing’s new
value defense had to be reduced by the post-petition payment
of $72,412.71 that the Debtor had made pursuant to the Wage
Order. FLT argued that this “otherwise unavoidable transfer”
reduced Roth Staffing’s new value defense to $28,248.17, and
therefore entitled FLT to recover $53,749.40 ($81,997.57 -
$28,248.17) on its preference claim.
7
The Bankruptcy Court held that because FLT’s
payments made pursuant to the Wage Order occurred after the
bankruptcy petition was filed, these payments could not enter
into the preference calculation. Because the Bankruptcy Code
does not set forth a cutoff for when an “otherwise
unavoidable transfer” should be considered in computing
“new value,” the Court looked to caselaw. The Court
concluded that the cutoff should be the petition date, relying
on language from our opinion in In re New York City Shoes,
Inc., describing the three requirements for establishing a new
value defense as follows:
First, the creditor must have received a transfer
that is otherwise voidable as a preference under
§ 547(b). Second, after receiving the
preferential transfer, the preferred creditor must
advance “new value” to the debtor on an
unsecured basis. Third, the debtor must not
have fully compensated the creditor for the
“new value” as of the date that it filed its
bankruptcy petition.
880 F.2d 679, 680 (3d Cir. 1989) [hereinafter New York City
Shoes] (emphasis added). The Bankruptcy Court found our
opinion in New York City Shoes to be controlling, and,
therefore, held that since the otherwise unavoidable transfer
was made after the petition date, FLT was not entitled to
recover on its preference claim. The District Court affirmed
the Bankruptcy Court’s order denying summary judgment for
FLT, but stated that it found our language in New York City
Shoes regarding the bankruptcy petition date to be dicta.
Nevertheless, the District Court explained that it would
follow New York City Shoes because we described the new
8
value defense test outlined in that case as a holding in a
subsequent opinion, In re Winstar Communications, Inc., 554
F.3d 382, 402 (3d Cir. 2009) [hereinafter Winstar
Communications] (“This court has held that § 547(c)(4)
imposes three requirements . . . (3) ‘the debtor must not have
fully compensated the creditor for the ‘new value’ as of the
date that it filed its bankruptcy petition.’”) (emphasis added).
The Court reasoned that while the language from Winstar
Communications could also be construed to be dicta, it was
reluctant to find that what we said twice, and once referred to
as a “holding,” was dicta.
FLT now appeals the District Court’s decision. It
argues that the Bankruptcy Court (and by extension, the
District Court) erred in: (1) relying on dicta from New York
City Shoes rather than the “plain language” of § 547(c)(4) of
the Bankruptcy Code; (2) allowing Roth Staffing to “double
dip”—contrary to policies underlying bankruptcy law—by
asserting a new value defense even though it did not replenish
the Debtor’s estate; and (3) failing to follow our holding in In
re Kiwi International Air, Inc., 344 F.3d 311 (3d Cir. 2003)
[hereinafter Kiwi Air], which, it urges, requires us to account
for material events occurring after the commencement of a
bankruptcy case in performing the preference analysis.
II. Standard of Review
Our standard of review of a District Court’s review of
a Bankruptcy Court’s decision is plenary. Winstar Commc’ns,
554 F.3d at 389 n.3. We “exercise the same standard of
review as the District Court in reviewing the Bankruptcy
Court’s determinations.” Id. We review the Bankruptcy
Court’s “legal determinations de novo, its factual findings for
9
clear error, and its exercises of discretion for abuse thereof.”
In re Goody’s Family Clothing, Inc., 610 F.3d 812, 816 (3d
Cir. 2010).
III. Discussion
As a threshold matter, we must determine whether we
are bound by prior Third Circuit precedent on the question
presented here. If a determination by our Court is not
necessary to our ultimate holding, “it properly is classified as
dictum.” Calhoun v. Yamaha Motor Corp., U.S.A., 216 F.3d
338, 343 n.9 (3d Cir. 2000). It is well established that “we are
not bound by our Court’s prior dicta.” Galli v. New Jersey
Meadowlands Comm'n, 490 F.3d 265, 274 (3d Cir. 2007).
The District Court correctly noted that on both occasions
when we previously addressed this question, our statement of
the law may well have been dicta, and not a holding, because
neither New York City Shoes nor Winstar Communications
involved a post-petition payment on new value. Therefore
neither we, nor the Bankruptcy Court nor District Court,
would be bound by these opinions. We examine these
opinions more closely below.
A. New York City Shoes and Winstar Communications
In New York City Shoes, we were faced with the
question of “when a postdated check given by a debtor to a
creditor should be deemed transferred for purposes of section
547(c)(4).” 880 F.2d at 679. The answer to this question bore
on whether new value had been given before or after a
preferential transfer, and therefore whether the new value
defense was applicable. None of the relevant transactions or
dates in the case occurred post-petition. Therefore, when we
10
announced the test for a defense under § 547(c)(4), and
stated that the third requirement was that “the debtor must not
have fully compensated the creditor for the ‘new value’ as of
the date that it filed its bankruptcy petition,” id. at 680, the
extra-statutory language we included regarding the petition
date was not germane to our analysis. This language was
dicta, and consequently not binding upon future courts.
Nevertheless, in Winstar Communications, we referred
to the three-part test announced in New York City Shoes as a
holding. 554 F.3d at 402. Reference to the third requirement
was again, however, immaterial to our disposition of the case.
In Winstar Communications, the primary questions with
respect to the new value defense were whether new value had
been extended after the preferential transfer, and whether new
value had been extended on an unsecured basis. Id. We
quoted New York City Shoes for the principle that new value
must be extended after a preferential transfer on an unsecured
basis. See id. at 402. Because none of the relevant
transactions occurred post-petition, our statement regarding
the petition date was not pertinent to our analysis. The
statement was, again, dicta and we are not bound by it here.1
1
We are mindful that numerous courts have adopted
and followed this dicta as if it were a holding. See, e.g., In re
Braniff, Inc., 154 B.R. 773, 784 (Bankr. M.D. FL. 1993)
(referring to dicta from New York City Shoes as majority
rule); In re Energy Coop., Inc., 130 B.R. 781, 789 (N.D. Ill.
1991) (citing New York City Shoes in holding that post-
petition transactions between creditor and debtor do not limit
new value defense).
11
Having established that no prior opinion binds us on
the question presented, we turn to FLT’s other arguments.
FLT contends that we need look no further than the text of the
Bankruptcy Code in determining whether or not to consider
post-petition payments. We agree; however, in doing so, we
reach a different conclusion from the one Appellant urges
regarding the plain meaning of the statute.
B. The Plain Language of § 547(c)(4)(B)
When statutory “language is plain, the sole function of
the courts—at least where the disposition required by the text
is not absurd—is to enforce it according to its terms.”
Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.,
530 U.S. 1, 6 (2000); see also Parker v. NutriSystem, Inc.,
620 F.3d 274, 277 (3d Cir. 2010) (“Where the statutory
language is unambiguous, the court should not consider
statutory purpose or legislative history.”). Here, §
547(c)(4)(B) is silent as to when a payment must be made by
a debtor to defeat a creditor’s new value defense. Must it have
been made before the petition date? Do other provisions of
the Bankruptcy Code inform this issue? District and
bankruptcy courts are nearly equally divided on this issue.2
2
Some of these cases involved post-petition payments
made pursuant to a Critical Vendor Order. The Wage Order in
the instant case was filed pursuant to §§ 105(a) and 363(b) of
the Bankruptcy Code, provisions often invoked in Critical
Vendor Orders. Given the similarity of the Wage Order to a
Critical Vendor Order, the issue presented in these cases is
analogous.
12
Compare In re Phoenix Rest. Grp., Inc., 373 B.R. 541, 547
(M.D. Tenn. 2007) (holding that post-petition payments made
pursuant to Critical Vendor Order could not be used to offset
pre-petition new value); In re Schabel, 338 B.R. 376, 381
(Bankr. E.D. Wis. 2005) (holding that new value must remain
unpaid at time of filing of bankruptcy petition); In re
Thurman Constr., Inc., 189 B.R. 1004, 1014 (Bankr. M.D. Fl.
1995) (finding that new value must remain unpaid as of
petition date, rather than date court adjudicates preference
action); In re Braniff, Inc., 154 B.R. 773, 784-85 (Bankr.
M.D. Fl. 1993) (following “majority rule” articulated in New
York City Shoes that new value remain unpaid as of petition
date); and In re Energy Coop., Inc., 130 B.R. 781, 789 (N.D.
Ill. 1991) (citing New York City Shoes for principle that post-
bankruptcy payments by debtor do not limit new value
Also analogous are cases in which post-petition
payments were made pursuant to § 503(b)(9), which allows
for administrative expense priority for the value of goods
received by a debtor 20 days before filing for bankruptcy.
Courts are similarly divided on whether goods given priority
later pursuant to § 503(b)(9) can constitute new value.
Compare In re Commissary Operations, Inc., 421 B.R. 873,
878 (Bankr. M.D. Tenn. 2010) (holding that deliveries
entitled to a § 503(b)(9) claim are not disqualified from
constituting new value), with In re T.I. Acquisition, LLC, 429
B.R. 377 (Bankr. N.D. Ga. 2010) (holding that new value
defense does not apply where creditor has been paid for
goods pursuant to § 503(b)(9)), and In re Circuit City Stores,
Inc., No. 10-3068, 2010 WL 4956022 (Bankr. E.D. Va. Dec.
1, 2010) (applying analysis from T.I. Acquisition in
concluding that same materials cannot be the basis for both a
new value defense and § 503(b)(9) claim).
13
defense); with In re Furr’s Supermarkets, Inc., 485 B.R. 672,
733-34 (D.N.M. 2012) [hereinafter Furr’s Supermarkets]
(holding that cutting off preference calculation at petition date
“makes no economic sense”); In re Login Bros. Book Co.,
294 B.R. 297, 300 (N.D. Ill. 2003) [hereinafter Login Bros.]
(“[B]oth the plain language and policy behind the statute
indicate that the timing of a repayment of new value is
irrelevant.”); In re MMR Holding Corp., 203 B.R. 605, 609
(Bankr. M.D. La. 1996) (“An unavoidable post-petition
transfer on account of new value extended subsequent to a
preference should limit the use of § 547(c)(4) by the amount
of the unavoidable transfer, as without a reduction in the new
value offset, the transferee would be receiving double use of
the new value. . ..”); and In re D.J. Mgmt. Grp., 161 B.R. 5, 8
(Bankr. W.D.N.Y. 1993) (holding that post-petition payments
on new value must be considered under § 547(c)(4)).
The fact that courts are divided in their interpretations
of § 547(c)(4)(B) does not mean, however, that the provision
is necessarily ambiguous. See In re Price, 370 F.3d 362, 369
(3d Cir. 2004) (“[J]ust because a particular provision may be,
by itself, susceptible to differing constructions does not mean
that the provision is therefore ambiguous.”). A provision is
ambiguous, “when, despite a studied examination of the
statutory context, the natural reading of a provision remains
elusive.” Id. We have previously noted that “in interpreting
the Bankruptcy Code, the Supreme Court has been reluctant
to declare its provisions ambiguous, preferring instead to take
a broader, contextual view, and urging courts to ‘not be
guided by a single sentence or member of a sentence, but look
to the provisions of the whole law, and to its object and
policy.’” Id. at 369 (quoting Kelly v. Robinson, 479 U.S. 36,
43 (1986)). Context is therefore key in determining the
14
meaning of a particular provision and whether or not it is
ambiguous. See Official Comm. of Unsecured Creditors of
Cybergenics Corp., ex rel. Cybergenics Corp. v. Chinery, 330
F.3d 548, 559 (3d Cir. 2003) (en banc) (“As the Supreme
Court has often noted, ‘[s]tatutory construction [ ] is a holistic
endeavor,’ and this is especially true of the Bankruptcy
Code.”) (quoting United Sav. Ass’n of Tex. v. Timbers of
Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988)); see
also Alli v. Decker, 650 F.3d 1007, 1012 (3d Cir. 2011)
(holding that courts may look to statutory context in making
threshold ambiguity determination). If, after close
examination of the statutory context and underlying policy
goals, the plain meaning of a provision is still unclear, we
then turn to pre-Code practice and legislative history to find
meaning. See In re Price, 370 F.3d at 369. These tools of
construction, however, are tools of last resort. Id.
Appellant argues that the statute plainly indicates that
a debtor’s payment offsetting new value may occur at any
time, either pre- or post-petition, as long as it is a transfer
made after the new value is extended. Appellant bases this
interpretation on the Code’s silence, in that it lacks any
specific language containing a temporal limitation. Because
the drafters could have set forth a cutoff date, but did not,
Appellant urges there is no limit. This reading has some
appeal, but does not take into account the context in which
the provision is found. If we read the statute in this manner,
the time period involved would be totally open-ended such
that any payment, at any time, could defeat a new value
defense. Did Congress really intend there to be no limit to
when a payment defeating a new value defense could be
made in determining whether a preference has occurred? We
think not.
15
However, we rest this conclusion primarily on the
context and policy of the Code, rather than specific language,
as we discuss below. We, therefore, do not rely on two
arguments Appellee makes hinging on single words and
phrases in § 547(c)(4). For example, Appellee contends that
the word “transfer” as used in § 547(c)(4) refers back to §
547(b), which states that in order for a transfer to be
avoidable, it must have occurred within the 90 days preceding
the petition date.3 Appellee urges that the later use of
“transfer” must mean that the later word is also modified by
the 90-day phrase. While in two instances in § 547(c)(4)
“transfer” is clearly modified in a way referring back to the
90-day period, in the last instance, referring to the “otherwise
unavoidable transfer” issue here, it is not. The mere addition
of the word “unavoidable” does not give us any reason to
think that such a temporal limitation should apply. Thus, this
argument is without merit.
3
Section § 547(b)(4) provides :
[T]he trustee may avoid any transfer of an
interest of the debtor in property—
(4) made—
(A) on or within 90 days before
the date of the filing of the
petition; or
(B) between ninety days and one
year before the date of the
filing of the petition, if such
creditor at the time of such
transfer was an insider. . .
11 U.S.C. § 547(b)(4).
16
Appellee rests on similarly shaky ground where it
argues that the use of the word “debtor” rather than “estate”
or “debtor-in-possession” might indicate that the provision
only refers to pre-petition activity. Several other courts have
found this argument persuasive,4 but it does not withstand
scrutiny. Not only does the Bankruptcy Code fail to define a
“debtor” as a pre-petition, as opposed to post-petition, entity,
see 11 U.S.C. § 101(13), but also many other provisions in
the Code refer to “debtors” in the post-petition context. See,
e.g., id. § 329 (referring to attorneys representing “a debtor”
in a case under the title); and § 521 (describing a debtor’s
4
See, e.g., In re Phoenix Rest. Grp., Inc., 317 B.R. 491,
497 (Bankr. M.D. Tenn. 2004) (“Throughout § 547, “the
debtor” refers to the prepetition entity . . .. Had Congress
intended § 547(c)(4)(B) to account for payments made post
petition, the section would have included something like ‘an
otherwise unavoidable transfer of an interest of the estate in
property to or for the benefit of such creditor.’”); In re
Sharoff Food Serv., Inc., 179 B.R. 669, 678 (Bankr. D.Co.
1995) (citing In re Bellanca Aircraft Corp., 850 F.2d at 1284)
(stating that “the specific language ‘to or for the benefit of the
debtor’ [implies] that the subsequent advances of new value
are only those given prepetition, because any post-petition
advances are given to the debtor's estate, not the debtor”); In
re D.J. Mgmt. Grp., 161 B.R. 5, 6 (Bankr. W.D.N.Y. 1993)
(“The phrase ‘the debtor’ is systematically used throughout
the Bankruptcy Code to connote an entity different from ‘the
estate,’ ‘the Trustee,’ or ‘the debtor-in-possession.’ If
Congress had intended to recognize a ‘new value’ exception
for credit extended to the ‘estate’ or to the ‘trustee,’ it would
not have used the word ‘debtor.’”).
17
post-petition duties). We must conclude that Appellee’s
argument, therefore, is not persuasive on this issue.
Rather than focusing, as the parties do, on the presence
or absence of individual words and phrases within §
547(c)(4)(B), we take a broader approach to our analysis,
examining the provision in the context of the Bankruptcy
Code as a whole.
1. Statutory Context
We find numerous contextual indicators in the Code
that point to the petition date as a cutoff for analysis of the
new value defense. First, as a general matter, § 547 is titled
“Preferences,” and therefore suggests that it concerns
transactions occurring during the preference period, which is
by definition pre-petition (i.e., the 90 days before the filing of
the petition). 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.5
5
We also note that post-petition transactions and the
avoidance of post-petition transfers are separately dealt with
in § 549 of the Code. The post-petition transfer pursuant to
the Wage Order would appear to be unavoidable as analyzed
under § 549, as it was specifically authorized by court order.
See 11 U.S.C. § 549(a)(2)(B). How can we then say it has the
pernicious effect of creating, if you will, a pre-petition
preference? Would not this at least send mixed signals that
are ill-advised, if not illogical?
18
Second, Appellee urges that the fact that the preference
test known as the “hypothetical liquidation test” must be
performed as of the petition date points to that date as the
cutoff for determining new value. We agree. The hypothetical
liquidation test requires courts to compare the payment
received by a creditor during the preference period with what
the creditor would have received if the payment had not been
made and the debtor’s assets were liquidated and distributed
to creditors “to the extent provided by the provisions of [the]
title.” 11 U.S.C. § 547(b)(5). Courts have held that this test
should be performed as of the petition date even though the
statute does not specify the date to be used. See, e.g., In re
Union Meeting Partners, 163 B.R. 229, 237 (Bankr. E.D. Pa.
1994) (holding that hypothetical liquidation analysis must be
conducted as of date bankruptcy petition is filed); see also 5
Collier on Bankruptcy ¶ 547.03 (16th ed. 2013) (stating that §
547(b)(5) codifies holding from Palmer Clay Products Co. v.
Brown, 297 U.S. 227 (1936), in setting petition date as date to
be used in hypothetical liquidation analysis). Extending
preference analysis past the petition date would be
inconsistent with § 547(b)(5).
Third, the statute of limitations for filing a preference
avoidance action under § 547 in a voluntary case begins
6
to run on the petition date. This supports the notion that the
6
The statute of limitations reads:
(a) An action proceeding under section . . . 547 .
. . may not be commenced after the earlier of—
(1) the later of –
(A) 2 years after the entry of
the order for relief; or
19
cause of action accrues as of that date. See 11 U.S.C. § 546. If
Congress had intended to allow for post-petition transactions
to affect the impact on the estate, it is likely that it would
have crafted a different statute of limitations. The fact that the
statute of limitations for a preference avoidance action under
§ 547 generally begins on the petition date suggests that the
calculation of preference liability should remain constant
post-petition. If we read § 547(c)(4)(B) to allow post-petition
payments to defeat a new value defense, the calculation of
preference liability could change depending on when the
preference avoidance action was filed.
Fourth, Appellee argues that extending the preference
analysis past the petition date would be inconsistent with the
“improvement-in-position” test articulated in § 547(c)(5).
This provision provides a defense from preference liability
for a creditor with a floating lien on a debtor’s inventory and
receivables, so long as the creditor did not improve its
position during the preference period. Notably, the provision
(B) 1 year after the
appointment or election of
the first trustee . . . if such
appointment or such
election occurs before the
expiration of the period
specified in subparagraph
(A); or
(2) the time the case is closed or
dismissed.
11 U.S.C. § 546(a). In a voluntary case, the commencement
of the case constitutes an “order for relief.” Id. § 301(b).
20
includes the phrase “as of the date of the filing of the
petition.” Appellee avers that because Congress specifically
articulated an intention—in an analogous defense to
preference liability—to confine the analysis to pre-petition
activity, we should assume it had the same intention with
respect to the new value defense. The converse could be
argued, however; namely, that this omission from § 547(c)(4)
was intentional, since Congress knew how to set forth a
relevant time period when it thought it applied. Still, on
balance, we believe that the policy of improvement of
position prior to the petition date is central to the concept of
preference. We find this provision to bolster our reasoning
Lastly, if we allow post-petition payments to affect the
preference analysis, it would seem logical also to consider
post-petition extensions of new value to be available as a
defense. However, the vast majority of courts that have
considered this issue have concluded that new value advanced
after the petition date should not be considered in a creditor’s
new value defense. See In re Bellanca Aircraft Corp., 850
F.2d 1275, 1284-85 (8th Cir. 1988); In re Rocor Int’l, Inc.,
352 B.R. 319, 333 (Bankr. W.D. Okla. 2006); In re George
Transfer, Inc., 259 B.R. 89, 96 (Bankr. D. Md. 2001); In re
Sharoff Food Serv., Inc., 179 B.R. 669, 678 (Bankr. D. Co.
1995); In re D.J. Mgmt. Grp., 161 B.R. 5, 6 (Bankr.
W.D.N.Y. 1993); In re Jolly “N,” Inc., 122 B.R. 897, 909-10
(Bankr. D.N.J. 1991); In re Vunovich, 74 B.R. 629, 632 (D.
Kan. 1987); see also In re Kumar Bavishi & Assocs., 906
F.2d 942, 951 n.9 (3d Cir. 1990) (Cowen, J., dissenting)
(noting trend among courts to exclude post-petition advances
of new value from preference analysis); 4 Norton Bankruptcy
Law and Practice 3d § 66:36 (2013) (“[P]ostpetition
extensions of unsecured credit to the debtor are not
21
encompassed by § 547(c)(4) and may not be utilized to
protect prior preferential transfers.”). But see In re Keydata
Corp., 37 B.R. 324, 329 (Bankr. D. Mass. 1983) (approving
without discussion setoff of post-petition service against pre-
petition preferential transfers). Although § 547(c)(4) only
specifies that new value be given to a debtor subsequent to a
preference payment, courts have read the petition date into
the statute as a cutoff. At least one court has found that the
logic leading to the conclusion that post-petition new value
should not be considered in the preference analysis also
applies to the issue before us. See In re Murray, Inc., No. 04-
13611, 2007 WL 5595447, at *2 (Bankr. M.D. Tenn. June 6,
2007) (“[T]he Trustee would have the Court conclude that
post-petition payments remain in play while post-petition
advances of new value are excluded from the analysis under §
547(c)(4). Logically, and as a matter of statutory consistency,
the Trustee’s argument fails.”).
While, as we noted above, a number of courts have
come out the other way on the issue before us, none has made
a convincing contextual argument. See Furr’s Supermarkets,
485 B.R. at 730-34 (resting primarily on policy grounds, as
we discuss below); Login Bros., 294 B.R. at 300-301 (same);
In re MMR Holding Corp., 203 B.R. at 609 (stating that
“[a]voidable is avoidable,” and concluding that “[i]t simply
does not matter that the avoidable transfer subsequent to the
extension of new value is a pre- or post-petition avoidable
transfer”); In re D.J. Mgmt. Grp., 161 B.R. at 8 (rejecting
argument that just because recovery of post-petition transfer
is time-barred under § 549 means that it cannot be considered
in calculating amount of preference). Thus we believe that the
context of the Code supports the conclusion that post-petition
22
payments by a debtor do not affect a creditor’s new value
defense.
2. Policy
Appellant argues that the policies underlying the
preference provision and the new value defense should
compel us to conclude that post-petition payments defeat a
new value defense. For the reasons that follow, we disagree.
The Supreme Court has articulated two policies
underlying § 547:
First, by permitting the trustee to avoid pre-
bankruptcy transfers that occur within a short
period before bankruptcy, creditors are
discouraged from racing to the courthouse to
dismember the debtor during his slide into
bankruptcy. The protection thus afforded the
debtor often enables him to work his way out of
a difficult financial situation through
cooperation with all of his creditors. Second,
and more important, the preference provisions
facilitate the prime bankruptcy policy of
equality of distribution among creditors of the
debtor.
Union Bank v. Wolas, 502 U.S. 151, 161 (1991) (quoting
H.R. Rep. No. 95-595, at 177-78, U.S. Code Cong. & Admin.
News 1978, pp. 6137, 6138). The Court has also stated that it
is not our role to second guess how Congress has balanced
these sometimes competing policies in different provisions of
the Code. See id. at 162 (“Whether Congress has wisely
23
balanced the sometimes conflicting policies underlying § 547
is not a question that we are authorized to decide.”).
While the Supreme Court cites to Congressional
records to capture the essence of the provision, we find a
more complete quote from the Committee Report to be
helpful:
A preference is a transfer that enables a creditor
to receive payment of a greater percentage of
his claim against the debtor than he would have
received if the transfer had not been made and
he had participated in the distribution of the
assets of the bankrupt estate. The purpose of the
preference section is two-fold. First, by
permitting the trustee to avoid prebankruptcy
transfers that occur within a short period before
bankruptcy, creditors are discouraged from
racing to the courthouse to dismember the
debtor during his slide into bankruptcy. The
protection thus afforded the debtor often
enables him to work his way out of a difficult
financial situation through cooperation with all
of his creditors. Second, and more important,
the preference provisions facilitate the prime
bankruptcy policy of equality of distribution
among creditors of the debtor. Any creditor that
received a greater payment than others of his
class is required to disgorge so that all may
share equally. The operation of the preference
section to deter ‘the race of diligence’ of
creditors to dismember the debtor before
bankruptcy furthers the second goal of the
24
preference section-that of equality of
distribution.
H.R. Rep. No. 95-595, at 177-78, U.S. Code Cong. & Admin.
News 1978, pp. 6137, 6138. Notably, this explanation of the
purpose focuses on the pre-petition period: “to deter the ‘race
of diligence’ of creditors to dismember the debtor before
bankruptcy furthers the . . . goal of . . . equality of
distribution.” Id. We require those who received “a greater
payment than others of his class to disgorge so that all may
share equally.” Id. Thus, it makes sense that the equality
should be measured, and inequalities rectified, as of the
petition date.
The new value defense as part of the preference
analysis serves two underlying purposes. As we stated in New
York City Shoes, “First, the section is designed ‘to encourage
trade creditors to continue dealing with troubled businesses. .
.. Second, [it] is designed to ‘treat fairly a creditor who has
replenished the estate after having received a preference.’”
880 F.2d at 680-81 (emphasis omitted) (quoting In re Almarc
Mfg., 62 B.R. 684, 688 (Bankr. N.D. Ill. 1986)). Appellant
mischaracterizes the objective of § 547(c)(4) in stating that
“[t]he most relevant inquiry, and policy consideration . . . is
whether the alleged new value replenishes the estate.”
Appellant’s Br. at 15.7 As Appellee points out, Appellant
conflates the formula for calculating new value with the
7
Appellant relies heavily upon the Login Bros. case in
describing the policy behind the new value defense as one of
replenishment to the estate. 294 B.R. at 301. We are not
bound by the Login Bros. court’s opinion, and we choose not
to follow it for the reasons described.
25
objective of the new value defense, which is to “treat fairly a
creditor” who provides new value. New York City Shoes, 880
F.2d at 681.
Appellant urges that if post-petition payments by a
debtor are not considered in the Court’s analysis of a
creditor’s preference liability, the creditor will receive a
“windfall” and will be unjustly favored over other creditors.
See Appellant’s Br. at 15. Appellant argues that the debtor’s
estate is not replenished when the debtor makes a transfer to
the creditor after the petition date, and that the creditor
unfairly receives double payment, once post-petition, and
“once indirectly as an offset against its . . . preference liability
to the estate.” Id. at 16. Appellant cites a number of cases in
support of this proposition. See, e.g., In re T.I. Acquisition,
LLC, 429 B.R. at 385 (“Allowing BOTH new value credit and
payment of [a] § 503(b)(9) claim elevates the claim of that
creditor and results in double payment to that creditor.”);
Login Bros., 294 B.R. at 301 (“[T]he policy behind the new
value exception—that the estate be replenished by the new
value—would be defeated if a creditor were allowed to keep a
preferential payment of its debt on account of a new value
contribution to the estate and also receive repayment of that
contribution.”); In re MMR Holding Corp., 203 B.R. at 609
(stating that without considering post-petition transfers on
account of new value in calculating new value offset, “the
transferee would be receiving double use of the new value
(once as consideration for the unavoidable transfer which
effects a dollar-for-dollar reduction, and once as an offset to
the prior preference which would also reflect a dollar-for-
dollar reduction)”).
26
However, this “replenishment” argument misses the
mark. First, it is clear that even if a creditor is paid post-
petition for new value it provided pre-petition, the creditor
still replenished the debtor’s estate during the preference
period, and therefore aided the debtor in avoiding bankruptcy
to whatever extent possible. Cf. In re Commissary
Operations, Inc., 421 B.R. at 878 (“[T]he possibility that a
debtor may pay a creditor’s § 503(b)(9) claim post-petition
does not negate the value represented by the claim that the
creditor provided to the debtor. The deliveries benefit the
estate. . . regardless of whether the § 503(b)(9) claimants are
paid at a later date for those deliveries.”). Second, Appellant’s
reference to a creditor’s “double dipping” is misleading
because it implies that the creditor is receiving payment for
goods or services that were never provided, or that the
creditor is being paid twice. By examining Appellant’s
argument in the factual context of the instant case, it becomes
clear why the argument fails. Here, the creditor provided
services on credit during the preference period. After the
debtor’s bankruptcy petition was filed, the trustee paid the
creditor some of the money owed, pursuant to the Wage
Order. All of the money the creditor received was for goods
and services actually provided. The creditor, therefore, was
never unjustly enriched as Appellant seems to suggest.
Appellant also urges that cutting off preference
analysis at the petition date results in unequal treatment of
creditors. Indeed, a number of courts have followed this line
of reasoning in finding that post-petition events should enter
into preference liability calculations. See, e.g., In re T.I.
Acquisition, LLC, 429 B.R. at 385 (“The [] policy
consideration—equal treatment of creditors—weighs heavily
in favor of denying new value credit for allowed and paid §
27
503(b)(9) claims.”). One bankruptcy court in the District of
New Mexico, presented with the exact question before us,
came to this conclusion by applying different rules regarding
the treatment of post-petition payments to a hypothetical
preference recovery scenario and then adopting the rule that
resulted in the most equal treatment of creditors. Furr’s
Supermarkets, 485 B.R. at 730-31. In Furr’s Supermarkets,
the bankruptcy court decided that treating post-petition events
as relevant to § 574(c)(4) defenses would “result[] in
absolutely equal treatment of all unsecured claims” and
therefore was in accord with the policies underlying the Code.
The court reasoned that a creditor who is repaid post-petition
for new value should be treated identically to a creditor who
is repaid pre-petition.
If it is a rule in bankruptcy that all creditors must be
treated equally, surely the exceptions swallow the rule. It
could be said that some creditors are treated more equally
than others. There are special provisions for aircraft leases
and shopping center leases, and some claims are given
priority over others. The balancing of interests in, for
instance, wage orders, has been held to justify the type of
unequal treatment condemned in cases that would include the
post-petition payment in the preference analysis. See, e.g., In
re Primary Health Sys., Inc., 274 B.R. 709, 709 (Bankr. D.
Del. 2002) (holding payments pursuant to court order
allowing debtor to pay employee wages and benefits to be out
of reach of § 547). Inequality per se is not to be avoided;
indeed, reasoned and justified inequality sometimes prevails,
usually based on what is in the best interest of the estate.8 For
8
The Wage Order here specifically states that the relief
sought is in the best interest of the Debtors and their estate.
28
this reason, the courts positing that the interpretation that
“results in absolutely equal treatment of all unsecured claims”
is the “most reasonable interpretation of section 547(c)(4),”
Furr’s Supermarkets, 485 B.R. at 734, are misguided.
Moreover, we submit that the cases ruling that post-
petition payments should be counted so as to achieve
“replenishment” and “equality” have lost sight of the real
policy objectives as noted above. Nowhere is the goal or
rationale of “replenishment” set forth. Nor is “equality” as
such to be achieved. Rather, if a creditor has been preferred,
he must “disgorge so that all may share equally.” H.R. Rep.
No. 95-595 at 178. In other words, it is all about deterring
“the race of diligence,” and setting things straight, before
bankruptcy. As the Eighth Circuit Court of Appeals noted:
The general avoidance portion of the
Bankruptcy Code was intended to ‘facilitate the
prime bankruptcy policy of equality of
distribution among creditors of the debtor.’
Nevertheless, the subsequent advance rule,
section 547(c)(4), ‘was not enacted to ensure
equitable treatment of creditors, but rather is
intended to encourage creditors to deal with
troubled businesses.’
In re Bellanca Aircraft Corp., 850 F.2d at 1280 (citations
omitted).
In addition, we have held that the policy underlying §
547 is that of “equal distribution among similarly situated
creditors.” In re First Jersey Sec., Inc., 180 F.3d 504, 511 (3d
Cir. 1999) (emphasis added). As we noted above, the
29
Bankruptcy Code does not give equal treatment to the claims
of all creditors, but rather carves out special treatment for
creditors or claims of certain kinds. For example, § 503(b)(9)
claimants, ostensibly similar to general unsecured creditors,
are afforded priority status for administrative expenses.
“Critical vendors,” like Roth Staffing, can similarly be given
preferred treatment under § 105 and § 363. A critical vendor
who provided new value during the preference period need
not be treated the same as another creditor who provided new
value but is not considered by the debtor and the bankruptcy
court to be a critical vendor post-petition. They are not
similarly situated.
The scheme of the Bankruptcy Code contains
numerous post-petition mechanisms for ensuring that
similarly situated creditors are treated equally. For this
reason, preference analysis need not account for post-petition
activity. As the Bankruptcy Court stated, once a bankruptcy
petition is filed, “the supervision of the case by the court,
among other things, ensures that similar claims receive
similar treatment.” (App. 17) The bankruptcy court acts as a
referee, capable of considering and weighing competing
policy objectives in authorizing, for example, the Wage Order
in the instant case. A bankruptcy court in the Middle District
of Tennessee has noted:
Closing § 547(c)(4) analyses at the petition is
consistent with other Code remedies that only
apply post petition. . . . [C]onsiderations change
when the petition is filed and the debtor
becomes a bankruptcy estate under the
administration of the bankruptcy court and
30
subject to the scrutiny of creditors, committees,
the U.S. Trustee, etc.
In re Phoenix Rest. Grp., Inc., 317 B.R. 491, 497-98 (Bankr.
M.D. Tenn. 2004).9 Here, the Bankruptcy Court determined
that it would be “in the best interests of the Debtors and their
estates” to issue the Wage Order. Order Authorizing the
Debtors and Debtors in Possession To Pay Prepetition Wages,
Compensation and Employee Benefits Pursuant to Sections
105(a) and 363(b) of the Bankruptcy Code, In re: Friedman’s
9
In a related case in accord with the bankruptcy court’s
decision, the district court distinguished post-petition
payments made under a Critical Vendor Order from post-
petition payments on a reclamation claim. In re Phoenix Rest.
Grp., Inc., 373 B.R. 541, 547-48 (M.D. Tenn. 2007). The
court held that reclamation claims are unique because goods
shipped subject to reclamation “are not the same money or
money’s worth, as goods shipped free of the seller’s strings.”
Id. at 548 (internal quotation mark omitted). Essentially the
court found that goods subject to reclamation do not truly
enhance the debtor’s estate since a debtor’s conduct is limited
by the “seller’s strings.” The court therefore concluded that a
creditor could not assert a reclamation claim and a new value
defense for the same money.
Here, we need not resolve the question of whether
assertion of a reclamation claim should reduce a new value
defense, as we are only considering the effect of payments
made pursuant to a Wage Order (akin to a Critical Vendor
Order). We acknowledge, however, that reclamation claims
could be treated differently from other post-petition activities
under the rule we are establishing the purpose of the Order.
31
Inc., No. 08-10161 (Bankr. D. Del. Jan. 28, 2008). If we
allowed payments made pursuant to the Wage Order to
increase Roth Staffing’s preference liability, we would defeat.
In effect, we would be giving with one hand and taking away
with the other. The intended goal of the Order – to ensure
“continued service, satisfaction and loyalty of [the debtor’s]
numerous Employees” – would not be served if the Debtor
sought and obtained permission to pay wages to Appellee one
week but then sued Appellee for a preference the next. Mot.
of Debtors and Debtors in Possession for an Order
Authorizing the Debtors To Pay Prepetition Wages,
Compensation, and Employee Benefits Pursuant to Sections
105(a) and 363(b) of the Bankruptcy Code ¶ 43. We will not
undermine the Bankruptcy Court’s Order by including such
post-petition activity in the preference liability equation.
Instead, we will allow the Bankruptcy Code’s provisions
dealing with post-petition conduct to govern, as we believe
Congress intended.
C. Kiwi Air
As a final matter we address the applicability of Kiwi
Air, 344 F.3d 311 (3d Cir. 2003), to this situation. Appellant
argues that our opinion in that case requires us to take into
account all material post-petition events in determining
preference liability. Kiwi Air, however, only examines the
“unique set of rights” created by § 365 (a provision regarding
the assumption of contracts by a trustee) and § 1110 (a
provision on security agreements, leases, and conditional
sales of aircraft equipment and vessels), and addresses their
interaction with rights created under § 547. 344 F.3d at 317
(emphasis added). In Kiwi Air, we held that the post-petition
assumption of an executory contract under § 365 and a
32
stipulated order pursuant to § 1110, which both require a
trustee to cure certain defaults, preclude a trustee from
bringing a preference action to recover pre-petition payments
made pursuant to the contract. Id. at 314. We reasoned that,
insofar as § 365 and § 1110 entitle creditors to receive unpaid
pre-petition payments in connection with the assumption of
the contract and curing of defaults, allowing recovery of a
preference payment would thwart their effect. Id. at 321. In
particular, we emphasized that the debtor’s assumption of
contracts was “important because it enabled [the debtor] to
compel its creditors to continue performing under the
assumed agreements, for the purpose of receiving contract
benefits necessary to its operation.” Id. at 314. To the extent
that § 365 enables bankrupt companies to continue to operate,
it serves a similar purpose to § 363, one of the statutes upon
which the Bankruptcy Court relied in granting Appellant’s
Wage Order. If anything, Kiwi Air teaches that post-petition
events can cast the payment in a different light in order to
effectuate the purposes and provisions of the Code. Here, that
translates into a directive that we should not undermine the
purpose of the Wage Order. This is best accomplished by
precluding post-petition payments made pursuant to the Wage
Order from consideration in preference liability analysis.
Kiwi Air demonstrates that there are unique
circumstances in which other provisions of the Bankruptcy
Code dealing with post-petition transactions directly interact
with § 547 and thus can alter the otherwise straightforward
preference analysis. As with the entry of the Wage Order, the
assumption of a contract involves a “unique set of rights” that
warrants different preference treatment of creditors not
similarly situated. We, therefore, view the import of Kiwi Air
to be more helpful to Appellee than to Appellant.
33
IV. Conclusion
We hold that Appellant’s post-petition payment
pursuant to the Wage Order does not affect the calculation of
Appellee’s preference liability, pursuant to § 547.
Accordingly, we will affirm the District Court’s order.
34