In a decision that may encourage continued sales from suppliers to distressed entities, the Eleventh Circuit in Auriga Polymers Inc. v. PMCM2, LLC1 joined the Third Circuit,2 the only other circuit to directly address the issue, in concluding that post-petition payments for the value of goods received by a debtor within 20 days before the petition date, authorized by 11 U.S.C. section 503(b)(9), do not reduce a creditor's "subsequent new value" preference defense.

I. Preferences in a Nutshell

We have previously written about Siegel v. Fitzgerald, No. 21-441, the Supreme Court case considering the question of whether the 2018 difference in fees between Bankruptcy Administrator judicial districts and U.S. Trustee judicial districts was consistent with the Constitution’s uniformity requirement for bankruptcy laws.

A discharge in bankruptcy usually discharges a debtor from the debtor’s liabilities. Section 523 of the Bankruptcy Code, however, sets forth certain exceptions to this policy, including for “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud. . . .” 11 U.S.C. § 523(a)(2)(A).

Article I, Section 8 of the United States Constitution gives Congress the power to “establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.” While Congress has general authority to establish a bankruptcy system, bankruptcy laws must be “uniform.” But not every aspect of the bankruptcy system is the same across every judicial district.

In an underreported amendment to the Bankruptcy Code, the Small Business Reorganization Act amended §547(b) of the Code to add an explicit requirement for the bankruptcy trustee or debtor in possession to conduct “reasonable due diligence” before filing a preference action. The apparent goal of this amendment to the Bankruptcy Code is to reduce the number of frivolous preference lawsuits pursued by trustees.

On August 16, 2021, the US Court of Appeals for the Fifth Circuit held that an individual guarantor remained liable for more than $58 million in commercial debt, despite the individual’s claims that the lenders induced him to provide the guaranty under duress. See Lockwood International, Inc. v. Wells Fargo, NA, et al., Case No. 20-40324 (5th Cir. Aug. 16, 2021).

The Bankruptcy Code grants the power to avoid certain transactions to a bankruptcy trustee or debtor-in-possession. See, e.g., 11 U.S.C. §§ 544, 547–48. Is there a general requirement that these avoidance powers only be used when doing so would benefit creditors? In a recent decision, the United States Bankruptcy Court for the District of New Mexico addressed this question, concluding, in the face of a split of authority, that there was such a requirement.

A creditor in bankruptcy must normally file a proof of claim by a certain specified time, known as the bar date, or have its claim be barred.

In March, we reported on a brief filed by the Solicitor General recommending denial of a petition for certiorari filed by Tribune creditors seeking Supreme Court review of the Second Circuit ruling dismissing their state-law fraudulent transfer claims.

A discharge of debt in bankruptcy “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor. . . .” 11 U.S.C. § 524(a)(2). Certain debts, however, including debts “for violation of . . . any of the State securities laws,” are not subject to discharge. See 11 U.S.C. § 523(a)(19). A discharge injunction does not bar the collection of such debts.