In Re Ti Acquisition LLC

• Decision Date: 28 April 2010
• Docket Number: Bankruptcy No. 08-42370-MGD.,Adversary No. 09-04009-MGD.
• Citation: 429 B.R. 377
• Parties: In re TI ACQUISITION, LLC, Debtor.TI Acquisition, LLC, Plaintiff,v.Southern Polymer, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

429 B.R. 377

In re TI ACQUISITION, LLC, Debtor.

TI Acquisition, LLC, Plaintiff,

v.Southern Polymer, Inc., Defendant.

Bankruptcy No. 08-42370-MGD.

Adversary No. 09-04009-MGD.

United States Bankruptcy Court,

N.D. Georgia,

Rome Division.

April 28, 2010.

Richard C. Kennedy, Richard T. Klinger, Kennedy, Koontz & Farinash, Chattanooga, TN, for Plaintiff.

J. Hayden Kepner, Jr., J. Robert Williamson, Scroggins & Williamson, Atlanta, GA, for Defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

MARY GRACE DIEHL, Bankruptcy Judge.

This adversary proceeding is before the Court on Plaintiff's Motion for Partial Summary Judgment and Defendant's Cross Motion for Partial Summary Judgment. (Docket Nos. 22, 25). These motions raise a question of first impression in this Circuit with respect to the interplay between a preference action defendant's “new value” defense under 11 U.S.C. § 547(c)(4) and the defendant's allowed and fully funded claim pursuant to 11 U.S.C. § 503(b)(9). For the reasons set out below, the new value defense is not available to Defendant Southern Polymer, Inc. (“SPI”). Plaintiff TI Acquisition, LLC's (“Debtor”) Motion for Partial Summary Judgment is GRANTED and Defendant's Cross Motion is DENIED.

I. FACTS

The facts relevant to the Motions for Partial Summary Judgment are undisputed. Debtor and several of its affiliates filed their Chapter 11 cases in this Court on July 27, 2008. (Bankr.Case No. 08-42370-MGD) ¹. Debtor was a manufacturer of carpeting and textiles. SPI supplied materials that Debtor used in its manufacturing process. Prior to the filing of the Chapter 11 case, and within the twenty-day period preceding the Petition Date, Debtor received two shipments from SPI for which SPI was not paid pre-petition: a July 11, 2008, shipment in the amount of $154,840.00 and a July 22, 2008, shipment in the amount of $147,672.00. (Docket No. 23, ¶¶ 1-3; Docket No. 27, ¶¶ 1-3). On May 6, 2009, the Court entered an Order allowing SPI's § 503(b)(9) claim in the amount of $302,512.06. In re TI Acquisition, LLC, 410 B.R. 742, 751 (Bankr.N.D.Ga.2009). That Order further provided that the payment of the claim was deferred pending the outcome of this adversary proceeding. Id. Bank of America (“BOA”), as a creditor whose claim was secured by all of Debtor's assets, has reserved funds from the proceeds of the sale or liquidation of Debtor's assets to cover SPI's allowed § 503(b)(9) administrative claim.

On January 30, 2009, Debtor filed the present adversary complaint against SPI to avoid alleged preferential transfers pursuant to 11 U.S.C. § 547(b) in the net amount of $193,152.75 reflecting a “new value” credit to SPI for the shipments that were the subject of SPI's pending § 503(b)(9) claim. Since the Court had not ruled yet on the allowance of SPI's administrative claim, Debtor noted in its Complaint that the allowance of the § 503(b)(9) claim would alter the monetary demand. (Complaint at ¶ 13). Debtor's Complaint stated that, if SPI's § 503(b)(9) claim was allowed, that Debtor would not grant SPI new value credit and that the amount of preference sought would be $495,664.75. Id.

On January 15, 2010, Debtor filed the present Motion for Partial Summary Judgment seeking a determination that SPI is not entitled both to receive payment on its allowed § 503(b)(9) claim and to use the value of the same pre-petition shipments as a defense pursuant to § 547(c)(4). (Docket No. 22). On February 4, 2010, SPI filed its Response in Opposition to Debtor's Motion and Cross Motion for Partial Summary Judgment. (Docket No. 25). The parties each submitted briefs in support of their motions. (Docket Nos. 24, 26).

II. SUMMARY JUDGMENT STANDARD

Rule 56(c) of the Federal Rules of Civil Procedure, applicable herein by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that summary judgment shall be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” See also, Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Maniccia v. Brown, 171 F.3d 1364, 1367 (11th Cir.1999). Each party has moved for partial summary judgment based upon the same undisputed facts and neither party asserts that any material fact is in dispute. Thus, both parties have met the burden of showing that there are no disputed facts and that disposition of the case is warranted without trial. The sole question for the Court is the application of the law to those undisputed facts.

III. DISCUSSION

Avoidance actions pursuant to 11 U.S.C. § 547 and administrative expense claims pursuant to 11 U.S.C. § 503(b)(9) both deal with pre-petition transfers between a debtor and a creditor. Section 547 provides for the recovery of transfers made by a debtor to a creditor by permitting a debtor-in-possession, exercising the powers of a trustee, to avoid certain transfers made prior to the bankruptcy filing if the elements of Bankruptcy Code § 547(b) are met. 11 U.S.C. § 547. Certain transfers are not avoidable if a defendant can avail itself of one of the defenses set out in § 547(c). Here, SPI seeks to assert the “new value” defense of § 547(c)(4), which provides as follows:

(c) 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.

11 U.S.C. § 547(c)(4). The term “new value” as used in this section is defined in § 547(a)(2) as meaning

money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.

11 U.S.C. § 547(a)(2).

Section 547 focuses on recovering pre-petition transfers made by the debtor to a creditor. Section 547(c)(4) offers protection for pre-petition payments a creditor receives when the creditor then delivers goods to the debtor. Section 503(b)(9) provides creditors with a similar protection. Specifically, § 503(b)(9) allows for post-petition payment to a creditor for the pre-petition transfer of goods from the creditor to the debtor. Section 503(b)(9) encompasses “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 business.” 11 U.S.C. § 503(b)(9). While most of the other paragraphs in § 503(b) are expenses incurred by the debtor post-petition, § 503(b)(9) joins §§ 503(b)(3)(A), 503(b)(3)(E) and 503(b)(4) in describing pre-petition expenses that are to be accorded administrative expense priority.

There is only one published decision on the precise legal issue raised in this case. In Commissary Operations, the Bankruptcy Court for the Middle District of Tennessee held that claims entitled to § 503(b)(9) status may constitute new value for purposes of 11 U.S.C. § 547(c)(4). In re Commissary Operations, 421 B.R. 873, 879 (Bankr.M.D.Tenn.2010). While that court contemplated whether payment of a § 503(b)(9) claim would affect the availability of a § 547(c)(4) new value defense, it does not appear from the reported decision that any payment, or reservation for payment, had been made on any § 503(b)(9) claims at the time the court issued its decision. The Commissary Operations decision, therefore, is informative but is not based on the precise facts before this Court.

This Court will evaluate the interplay between § 547(c)(4) and § 503(b)(9) in two ways. First, the Court will considered similarities between § 503(b)(9) claims and other types of claims, then address whether the treatment provided to those claims is appropriate for § 503(b)(9) claims. Second, the Court will consider the policies behind § 547(c)(4) and how best to achieve those policies when dealing with § 503(b)(9) claims.

A. Comparing Claims

Section 503(b)(9) claims can be compared easily to two other types of claims: reclamation claims and critical vendor claims. For each type of claim, the Court will consider the relationship between those claims and § 503(b)(9) claims, the treatment of those claims in § 547 actions, then evaluate whether that treatment is appropriate for § 503(b)(9) claims. Much of the Commissary Operations decision seeks to distinguish a creditor's rights pursuant to § 503(b)(9) from the rights of reclamation pursuant to § 546(c), and this Court shall begin there. Id. at 877-878.

1. Section 503(b)(9) Claims and Reclamation Claims

This Court has previously addressed this history of § 503(b)(9) and its relationship to reclamation rights. In re TI Acquisition, LLC, 410 B.R. 742, 745-746 (Bankr.N.D.Ga.2009). In light of that relationship, it is unsurprising that courts should look to the treatment of reclamation claims in § 547 actions when considering the treatment of § 503(b)(9) claims. A decision of the District Court for the Middle District of Tennessee had previously held that a creditor could not use the new value defense when the new value supplied to the debtor was goods that were subject to a reclamation claim. In re Phoenix Rest. Group, Inc., 373 B.R. 541, 547-548 (M.D.Tenn.2007). That court stated as follows:

The Bankruptcy Court further held, however, that the amount of Proficient's reclamation claim could be used to deplete Proficient's pre-petition “new value” because Proficient essentially kept strings on those goods and thus, the goods

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