Allowed, Unpaid Administrative Expense Claims to Set Off Preference Liability

With the U.S. Court of Appeals for the Third Circuit’s holding in Friedman’s Liquidating Trust v. Roth Staffing (In re Friedman’s), 738 F.3d 547 (3d. Cir. 2013), it became settled law in the Third Circuit that post-petition activities cannot be used to affect the calculation of preference liability or of “new value” defenses against such liability. The court’s rationale in Friedman’s was based largely on the concept that “new value” is something that can be provided strictly during the preference period (for noninsiders of the debtor, the “preference period” is the 90-day period immediately preceding the debtor’s bankruptcy filing). However, the question not answered by Friedman’s was whether, if allowed as an administrative expense claim, the value of post-petition goods and services could be set off against preference liability. In Official Committee of Unsecured Creditors of Quantum Foods v. Tyson Foods (In re Quantum Foods), No. 15-50254, 2016 (Bankr. D. Del. July 25), the Delaware Bankruptcy Court addressed whether a meat supplier could use its allowed post-petition administrative expense claim to set off its preference liability, or whether such an attempt would be akin to a subsequent new value defense in disguise (and therefore prohibited by the holding in Friedman’s). In holding that setoff is permissible in this context, the Quantum Foods court confirmed that a supplier that continues to do business with a debtor after bankruptcy will likely either be paid for its post-petition sales to the debtor, or may otherwise avail itself of the opportunity to reduce any preference liability it might face.

The Facts

Tyson Foods Inc. and Tyson Fresh Meats Inc. (Tyson) supplied meat products to Quantum Foods, both before and after Quantum Foods filed a Chapter 11 bankruptcy petition. The U.S. trustee in the bankruptcy case appointed an official Committee of Unsecured Creditors, which was empowered by the bankruptcy court to investigate potential preference claims that Quantum Foods might have against creditors. During the preference period, Tyson received approximately $13.6 million for goods delivered to the debtor. Tyson also provided meat products to the debtor after Quantum Foods’ petition was filed. Tyson sought allowance of an administrative expense claim for its post-petition sales to Quantum Foods in the amount of about $2.6 million. The bankruptcy court allowed Tyson’s claim in July 2014.