Circuit Ruling Expands Subsequent New-Value Preference Defense

A recent decision of the U.S. Court of Appeals for the Eleventh Circuit has potential far-reaching implications concerning the extent of the new-value defense to preference liability. Whether a creditor can include, as part of its new-value defense, invoices for goods sold on credit terms prior to a debtor’s bankruptcy filing that are subsequently paid by a debtor or trustee post-petition has divided courts across the country for more than a decade.

In Auriga Polymers Inc. v. PMCM2 LLC,1 the Eleventh Circuit held that a creditor can use the goods or services provided on credit terms pre-petition both as a part of its § 503(b)(9) priority claim paid post-petition and as part of its subsequent new-value defense to reduce its preference exposure. The court’s holding also has larger implications for preference defendants that receive any post- petition payment of their pre-petition claims from a debtor or trustee pursuant to a bankruptcy court order because the decision would also permit them to include such pre-petition claims as part of their new-value defense.