On September 3, 2013, after 20 months of chapter 11 proceedings, Eastman-Kodak’s bankruptcy plan was approved. Despite emerging from chapter 11, however, the case is far from over. Now, the trustee is seeking to recover preferential transfers made by the debtor to creditors in the 90 days preceding its chapter 11 filing. Many vendors have likely received demand letters and more than 600 complaints have been filed by the trustee totaling more than $400 million.

Developing a Strong Preference Defense

There are a number of defenses available for creditors facing a preference demand and the most common are contemporaneous exchange, ordinary course of business and subsequent new value. Each is subject to its own set of statutory rules and case law. Creditors are not limited to one of these defenses, but instead may combine defenses (i.e. ordinary course of business and new value) in order to reduce their potential preference exposure.

Focusing in on 503(b)(9) Claims and Subsequent New Value

Can post-petition payment of pre-petition invoices reduce or nullify a creditor’s subsequent new value defense? Must new value remain unpaid, even after the petition date? Can a creditor use subsequent new value to offset its preferential exposure even if that new value was paid post-petition with a 503(b)(9) motion? With $65 million in 503(b)(9) claims paid in the Eastman-Kodak chapter 11, these are issues many of the preference defendants must consider.

For years, courts have been split regarding the paid vs. unpaid new value issue. The recent Third Circuit ruling in In re Friedman’s, however, provides new guidance. The vendor in Friedman’s, represented by Blakeley & Blakeley LLP, received allegedly preferential transfers from the debtor, provided subsequent new value (in an amount greater than the transfers), and then was paid for a portion of that new value post-petition, pursuant to a first-day wage motion. The debtor argued that Roth Staffing was not entitled to assert the portion of the new value for which it was already paid. The Third Circuit, however, determined that filing of the bankruptcy fixes the preference analysis. Thus, “where an ‘otherwise unavoidable transfer’ is made after the filing of a bankruptcy petition, it does not affect the new value defense.”

While Friedman’s involved a first-day wage motion, the Third Circuit Court of Appeals’ decision should apply with equal force to all vendors who receive post-petition payment of a pre-petition invoice, such as a 503(b)(9) payment. The decision is binding in the Third Circuit (which includes Delaware, New Jersey and Pennsylvania) and persuasive in all other circuit and district courts.