In the wake of its recent precedential decision In re Friedman’s, some commentators have questioned the Third Circuit Court of Appeals’ treatment of post-petition events as they relate to the preference analysis, arguing that the Friedman’s decision contradicts the earlier Third Circuit Kiwi Air decision. After comparing the Court of Appeals’ respective analyses, it is clear that these decisions do not contradict but rather compliment each other.

In re Kiwi Air

Kiwi International Air Lines, Inc. made allegedly preferential payments to the Port Authority of New York and New Jersey, the Sabre Group and the CIT Group, pursuant to existing contracts it had with each. Shortly thereafter, the Court of Appeals approved a sale of Kiwi’s assets to Kiwi International Holdings, Inc. Pursuant to §§ 365 and 1110 of the Bankruptcy Code, Kiwi assumed these three agreements. The case’s chapter 7 trustee filed adversary proceedings against Port Authority, Sabre and CIT.

The trustee argued that, as of the petition date, the creditors had not decided whether or not to assume their existing agreements with the debtor. And, because the hypothetical liquidation analysis of § 547(b)(5) must be conducted as of the petition date, the trustee argued that the defendants should be in no better position than general unsecured creditors. The Court of Appeals rejected the argument, holding that policy underlying § 547(b) is not total equality of creditors, but rather equality amongst similarly situated creditors. Each of the creditors was entitled to unique rights in accordance with §§ 365 and 1110.  Therefore, the defendants are subject to a different standard than those creditors without the same statutory protections. The Court of Appeals reasoned that allowing the trustee to avoid pre-petition payments in this setting, would undermine the statutory protections afforded to creditors under §365 and §1110.

In re Friedman’s

Friedman’s, Inc. made preferential payments to Roth Staffing Companies L.P. After receiving the transfers, but prior to the petition date, Roth provided Friedman’s with additional services in an amount greater than the transfers.  Post-petition, Roth received a partial payment for the services through Friedman’s first-day wage motion. Friedman’s then brought a preference action against Roth. When Roth asserted that its subsequent new value eliminated any preference exposure, FLT countered that the post-petition payment reduced the available amount of Roth’s subsequent new value and left Roth with significant exposure.

The Court of Appeals in Friedman’s rejected the notion that § 547 requires equal treatment for all vendors. Instead, the Court of Appeals held that “the 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.” After being identified as a critical vendor by the debtor’s first-day wage motion, Roth was entitled to a unique set of rights. To reduce Roth’s subsequent new value defense would serve only to undermine the purpose of the wage order and ignore Roth’s rights afforded by that order.

Some commentators support the Friedman’s liquidating trust position that Kiwi Air stands for the proposition that all material post-petition events must be considered to determine preference liability.  While on the surface the Court of Appeals decision Friedman’s to exclude post-petition payments from the preference analysis seems to contradict its decision in Kiwi, closer examination shows that both decisions operate under the same principle.  That is, where post-petition events bring § 547 into contact with provisions of the bankruptcy code governing a debtor’s reorganization (i.e. §§ 363, 365, 1110, etc.), § 547 should not operate in a manner that abrogates the effects of these other Bankruptcy Code provisions.

It is also important to note that Kiwi involved solely one of the elements the party pursuing the preferences must establish, section 547(b).  The new value defense at issue in Friedman’s is under an entirely different subsection – §547(c) – the defenses afforded to creditors.