## Facts

- Circuit City Stores, Inc. filed for Chapter 11 relief on November 10, 2008.
- Mitsubishi Digital Electronics America, Inc. supplied goods to Circuit City under prepetition trade arrangements.
- During the 90-day preference period, Circuit City made prepetition payments to Mitsubishi that Circuit City later alleged were avoidable preferential transfers under 11 U.S.C. § 547(b).
- Mitsubishi asserted an administrative expense claim under 11 U.S.C. § 503(b)(9) (nearly $5 million) for goods received by Circuit City within 20 days before the petition date.
- Circuit City alleged Mitsubishi had received avoidable preferences and sought to preserve estate rights while the preference action proceeded.
- The parties obtained approval to establish a segregated reserve sufficient to pay Mitsubishi’s § 503(b)(9) claim in full pending resolution of the preference dispute.
- In the preference litigation, Mitsubishi asserted the subsequent new value defense under 11 U.S.C. § 547(c)(4), relying on the same deliveries of goods that supported its § 503(b)(9) administrative claim.
- Circuit City argued Mitsubishi could not both obtain (or be assured of) § 503(b)(9) payment for the 20-day goods and also treat those goods as “unpaid” new value to reduce preference exposure.

## Issues

1. Whether goods delivered within 20 days prepetition that support a § 503(b)(9) administrative expense claim may also constitute “subsequent new value” under § 547(c)(4) to reduce preference liability.
2. Whether payment (or effective assurance of payment) on a § 503(b)(9) claim makes the same goods “paid,” defeating the “unpaid new value” requirement embedded in § 547(c)(4).
3. Whether a court-approved reserve earmarked to satisfy a § 503(b)(9) claim should be treated as the functional equivalent of payment for purposes of the § 547(c)(4) analysis.

## Decision

- The court ruled that a creditor may not use the same goods both to obtain § 503(b)(9) administrative expense treatment and to support a § 547(c)(4) subsequent new value defense in the same case.
- The court concluded that, to the extent the estate pays (or will pay via an established reserve) the creditor’s § 503(b)(9) claim for the goods, those goods do not qualify as “unpaid” new value for § 547(c)(4).
- The court resolved the discrete statutory-overlap question in Circuit City’s favor; the remaining preference issues continued subject to this limitation on the new value defense.

## Legal Principles

- The § 547(c)(4) subsequent new value defense is unavailable to the extent the debtor made an “otherwise unavoidable transfer” on account of the asserted new value; courts commonly treat this as requiring that the new value remain unpaid.
- Section 503(b)(9) grants administrative expense priority for the value of goods received by the debtor within 20 days before the petition date when sold in the ordinary course.
- A creditor may not obtain a priority benefit under § 503(b)(9) and also reduce preference liability under § 547(c)(4) based on the same goods when the goods are (or will be) compensated by the estate.
- A segregated, fully funded reserve established to satisfy a § 503(b)(9) claim can be treated as the practical equivalent of payment for purposes of determining whether new value remains unpaid.

## Conclusion

The court held that a trade creditor cannot “double count” the same 20-day goods by receiving (or being assured of) payment through a § 503(b)(9) administrative expense claim while also using those goods as “unpaid” subsequent new value under § 547(c)(4) to reduce preference exposure.


Circuit City Stores, Inc. v. Mitsubishi Digit. Elecs. Am., Inc. (In re Circuit City Stores, Inc.), 2010 Bankr. LEXIS 4398 (Bankr. E.D. Va. Dec. 1, 2010)