On July 25, 2016, Judge Kevin Carey of the Delaware Bankruptcy Court issued a thorough decision pursuant to a motion for judgment on the pleadings analyzing the intersection of a preference defendant’s post-petition administrative claim and their preference exposure. A copy of the Opinion is available here.
In the Opinion, Judge Carey cites the Third Circuit’s Friedman’s decision extensively: Friedman’s Liquidating Tr. v. Roth Staffing Co., LP (In re Friedman’s, Inc.), 738 F.3d 547 (3d Cir. 2013). According to the Friedman’s court, “As articulated by the Third Circuit in Friedman’s, the preference analysis cannot be affected by post-petition activity.” Further, “The judicial consensus is that setoff is only available in bankruptcy when the opposing obligations arise on the same side of the . . . bankruptcy petition date.” Opinion at *7.
Judge Carey provides a thorough explanation of the various theories by which preference defendants may attempt to reduce their preference liability through post-petition transfers. He holds that a post-petition transfer cannot act as new value to reduce a preference payment, but is not prohibited from offsetting a preference payment as both arise post-petition. Opinion at *7-8. He then turns to the plaintiff’s argument in its motion for judgment on the pleadings that pursuant to Section 502, the defendant is not entitled to any payment, including administrative payments, until the preference payment is satisfied. In the Opinion, Judge Carey holds to the contrary, concluding his Opinion with the following quote from the Friedman’s decision:
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., 275 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. For 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),”. . . are misguided.
Opinion at *10.
Defenses to a Preference Action
The Bankruptcy Code provides creditors with many defenses to preference actions. While the efficacy of the preference defendants’ attempt to reduce exposure in this case is still in question, it does not look like it will be an easy decision for the court or a briefly litigated issue. Other defenses are more common, and more easily gauged. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”