by August Meny*

In Chap­ters 7, 13, and some Chap­ter 11 bank­rupt­cies, an admin­is­tra­tive pay­ment under § 503(b)(9) made by a trustee would not con­sti­tute an “oth­er­wise unavoid­able trans­fer” under § 547(c)(4)(B), mean­ing that cred­i­tors can use both § 503(b)(9) and a § 547(c)(4) defense to pro­tect their trans­fers. How­ev­er, the unique role of debtors-in-pos­ses­sion in some Chap­ter 11 bank­rupt­cies has led some courts to inter­pret § 503(b)(9) as fore­clos­ing the § 547(c)(4) defense under (c)(4)(B) when a debtor-in-pos­ses­sion makes the trans­fer. This Con­tri­bu­tion argues that this dif­fer­en­tial treat­ment of § 547(c)(4)(B) in Chap­ter 11 bank­rupt­cies involv­ing debtors-in-pos­ses­sion erro­neous­ly strays from the prin­ci­ple that debtors-in-pos­ses­sion should be treat­ed the same as trustees, and that § 547(c)(4)(B) should be read to apply only to pre-peti­tion trans­fers across all major forms of bankruptcy.

Under § 547(b)(4)(A) of the Bank­rupt­cy Code, trustees may avoid pref­er­en­tial trans­fers which are made “on or with­in 90 days before the date of the fil­ing of the peti­tion.”1 That is, a trustee has the pow­er to claw back pay­ments made by the debtor to cred­i­tors with­in that pre-peti­tion peri­od. How­ev­er, the Bank­rupt­cy Code pro­vides sev­er­al restric­tions on that avoid­ance pow­er of trustees through § 547(c), among them § 547(c)(4), which pro­tects trans­fers to cred­i­tors who have pro­vid­ed “new val­ue” to the debtor’s ben­e­fit.2 § 547(c)(4)(B) restricts the use of this defense when the debtor made “an oth­er­wise unavoid­able trans­fer to or for the ben­e­fit of such cred­i­tor” on account of the new val­ue pro­vid­ed.3

By way of exam­ple, con­sid­er the fol­low­ing sce­nario. A trustee wants to avoid a trans­fer to a cred­i­tor of $100 made in two install­ments by the debtor before the bank­rupt­cy was declared so that all the cred­i­tors can be paid their fair share. The two $50 install­ments were made 89 days and 19 days before the bank­rupt­cy was filed respec­tive­ly. Six­ty days in, the cred­i­tor pro­vid­ed $50 worth of wood on account of the first pay­ment. The cred­i­tor might be able to pre­vent the trustee from claw­ing back the first $50 using § 547(c)(4) because they pro­vid­ed $50 worth of new val­ue in wood after the first pay­ment. How­ev­er, since the debtor paid anoth­er $50, if the cred­i­tor seeks to pro­tect that sec­ond trans­fer and the pro­tec­tion is deemed an “unavoid­able trans­fer,” § 547(c)(4)(B) could make it impos­si­ble for the debtor to use § 547(c)(4) to pro­tect the first pay­ment. That way, instead of the cred­i­tor being able to pro­tect $50 under § 547(c)(4) and $50 under anoth­er claim (in this hypo­thet­i­cal, as seen infra § 503(b)(9)) for a total defense of $100, § 547(c)(4)(B) can­cels the § 547(c)(4) defense, so the cred­i­tor can only pro­tect $50 of the $100 under the § 503(b)(9) defense. Alter­na­tive­ly, the cred­i­tor could also pro­tect $50 under the § 547(c)(4) defense if they for­go the § 503(b)(9) defense. How­ev­er, the result is the same either way: they must choose between one of the two defens­es. The trustee can then claw back the remain­ing $50 for the bank­rupt­cy estate.

Sec­tion 547(c)(4) func­tions pri­mar­i­ly to incen­tivize oth­er­wise ner­vous cred­i­tors to con­tin­ue to do busi­ness with soon-to-be debtors who are fight­ing against bank­rupt­cy.4 It would seem to fol­low, then, that the pro­vi­sion and its restric­tions would be read to ben­e­fit the cred­i­tor. But a prob­lem­at­ic inter­pre­ta­tion of § 547(c)(4)(B) has emerged that could instead take rights away from the cred­i­tor. Some courts, when faced with a defense under § 547(c)(4) and an admin­is­tra­tive pay­ment under § 503(b)(9), are find­ing that the pro­vi­sion of the lat­ter can­cels out the for­mer because of the § 547(c)(4)(B) restric­tion dis­cussed above.5

Sec­tion 503(b)(9) allows for cred­i­tors to be paid an admin­is­tra­tive expense for “the val­ue of any goods received by the debtor with­in 20 days before” the com­mence­ment of the bank­rupt­cy pro­ceed­ing, so long as those sales hap­pen in the ordi­nary course of busi­ness.6 The out­stand­ing ques­tion for § 547(c)(4) is whether the trans­fer under § 503(b)(9) is “oth­er­wise unavoid­able.”7 Because admin­is­tra­tive expens­es under § 503(b)(9) are often found to be unavoid­able in cas­es involv­ing § 547(c)(4),8 some courts have read the text to sug­gest that § 503(b)(9) ren­ders the § 547(c)(4) defense invalid by appli­ca­tion of § 547(c)(4)(B).9 Yet there is sig­nif­i­cant evi­dence that  sug­gests read­ing § 547(c)(4)(B) to exclude a § 503(b)(9) admin­is­tra­tive expense would twist the bank­rupt­cy sys­tem in unin­tend­ed ways by mak­ing § 547(c)(4)(B) apply to trans­fers made after the peti­tion date when it was designed pri­mar­i­ly for pre-peti­tion trans­fers.10

Although there are many rea­sons to sug­gest that § 547(c)(4)(B) should be read to only restrict the § 547(c)(4) defense to a pre-peti­tion unavoid­able trans­fer, this Con­tri­bu­tion tar­gets a jus­ti­fi­ca­tion large­ly under­de­vel­oped in the fed­er­al courts.11 Chap­ter 5 of the Bank­rupt­cy Code gov­erns the rela­tion­ship between “cred­i­tors, the debtors, and the estate” for all types of bank­rupt­cy pro­ceed­ings.12 Yet this con­flict between a § 503(b)(9) claim and § 547(c)(4) defense only emerges in a spe­cif­ic sub­set of bankruptcies—the major­i­ty of Chap­ter 11 bank­rupt­cies. Post-peti­tion pay­ments in all oth­er com­mon bank­rupt­cy pro­ceed­ings, under Chap­ters 7 and 13, are made by the trustee, the enti­ty to which the debtor would relin­quish the estate post-peti­tion.13 Even some Chap­ter 11 bank­rupt­cies do not involve a debtor post-peti­tion, and although these con­sti­tute a rare sub­set of Chap­ter 11 pro­ceed­ings, they still help inform how Chap­ter 11 over­all should func­tion.14 Thus, post-peti­tion pay­ments that would not block the § 547(c)(4) defense in Chap­ter 7, 13, and some Chap­ter 11 bank­rupt­cies would block it in oth­er Chap­ter 11 bank­rupt­cies. Only some Chap­ter 11 bank­rupt­cies involve this per­plex­ing sit­u­a­tion, sug­gest­ing that it was not con­sid­ered in the design of the bank­rupt­cy code. Giv­en that the Bank­rupt­cy Code imbues trustees and debtors-in-pos­ses­sion with sim­i­lar and over­lap­ping pow­ers, § 503(b)(9) should not be read with § 547(c)(4)(B) to deprive a Chap­ter 11 debtor-in-pos­ses­sion of pow­ers exer­cised with­out such a lim­i­ta­tion by Chap­ter 7, 13, and 11 trustees in iden­ti­cal circumstances.

It is impor­tant to under­stand why Chap­ter 11 bank­rupt­cies involve the debtor post-peti­tion in the first place to under­stand how much of an out­lier the sit­u­a­tion involv­ing § 547(c)(4)(B) and § 503(b)(9) real­ly is. There are three main types of bank­rupt­cies in the Unit­ed States: Chap­ters 7, 11, and 13.15 Chap­ter 7, a “liq­ui­da­tion” bank­rupt­cy, sim­ply involves the sale of all a debtor’s assets to pay off as much of their debts as pos­si­ble in an equi­table fash­ion.16 In Chap­ter 7 bank­rupt­cies, a trustee, appoint­ed on the peti­tion date, con­trols that dis­tri­b­u­tion.17 A Chap­ter 13, or “wage earn­ers,” bank­rupt­cy allows the debtor to keep cer­tain forms of prop­er­ty (most impor­tant­ly, their homes) while cre­at­ing a repay­ment plan for their debts and liq­ui­dat­ing oth­er assets.18 And, sim­i­lar to Chap­ter 7, a trustee is appoint­ed to con­trol dis­tri­b­u­tion after the peti­tion date.19 Thus, any trans­fers that trig­ger § 547(c)(4)(B) will have been made pre-peti­tion in Chap­ter 7 and 13 bank­rupt­cies, since the trustee, and not the debtor, is mak­ing such trans­fers post-petition.

Chap­ter 11, how­ev­er, is called a “reor­ga­ni­za­tion” bank­rupt­cy, and gen­er­al­ly func­tions in a way that facil­i­tates the con­tin­ued oper­a­tion of a busi­ness, although indi­vid­u­als can also file for Chap­ter 11 bank­rupt­cies.20 Unlike Chap­ters 7 and 13, trustees do not con­trol the dis­burse­ment of assets, although they will have sig­nif­i­cant over­sight over a business’s con­tin­ued oper­a­tion.21 The fidu­cia­ry role is instead filled by the debtor, who takes on the moniker of the “debtor-in-pos­ses­sion.”22 Under 11 U.S.C. § 1107(a), the debtor-in-pos­ses­sion is imbued with “all the rights … and pow­ers, and shall per­form all the func­tions and duties … of a trustee serv­ing in a case under this chap­ter [11.,” with cer­tain excep­tions men­tioned in the statute.23 But the duties and pow­ers of a trustee under Chap­ter 11 sig­nif­i­cant­ly over­lap with those of Chap­ter 7, as many of them are deriv­a­tive of that chap­ter.24 This sim­i­lar­i­ty evinces an inten­tion­al over­lap between the duties of the debtor-in-pos­ses­sion in Chap­ter 11 and the duties of trustees in Chap­ter 7, which also can occur with trustees in Chap­ter 13 bank­rupt­cies.25 To with­draw a pow­er that any oth­er trustee could rea­son­ably exer­cise, includ­ing the pow­er to make a § 503(b)(9) trans­fer with­out risk­ing the can­cel­la­tion of a § 547(c)(4) defense, would there­fore go against the scheme envi­sioned for Chap­ter 11 as a whole.

Crit­ics may argue that Chap­ter 11 is its own beast and that the norms of Chap­ters 7 and 13 should not be imposed on it. Yet even with­in Chap­ter 11 of the Code, par­al­lel prob­lems could arise when a trustee replaces the debtor-in-pos­ses­sion. Sec­tion 1104 allows for the appoint­ment of a trustee “for cause” or “if such appoint­ment is in the inter­ests of cred­i­tors, any equi­ty secu­ri­ty hold­ers, and oth­er inter­ests of the estate.…”26 In effect, this replaces the debtor-in-pos­ses­sion with a trustee if the debtor-in-pos­ses­sion can­not be trust­ed to act as a prop­er fidu­cia­ry.27 Any trustee appoint­ed under this pro­vi­sion would be able to both pay out an admin­is­tra­tive expense under § 503(b)(9) and avoid a trans­fer under § 547(c)(4); the (c)(4)(B) excep­tion would not apply because it only applies to trans­fers made by debtors. Thus, even in Chap­ter 11 bank­rupt­cies, there are cer­tain ways of exe­cut­ing these post-peti­tion trans­fers that clear­ly do not vio­late § 547(c)(4)(B). If a trustee can make the same pay­ment under Chap­ter 11 with­out trig­ger­ing § 547(c)(4)(B), and the debtor-in-pos­ses­sion is sup­posed to exer­cise the same pow­ers as a trustee in that Chap­ter, con­sis­ten­cy with the statu­to­ry scheme would per­mit the debtor-in-pos­ses­sion to make that pay­ment with­out trig­ger­ing § 547(c)(4)(B) restric­tions as well. Fur­ther­more, § 1104 acts as a fail-safe to pre­vent any abu­sive dou­bling up of § 503(b)(9) and § 547(c)(4)—if such actions are not in the inter­est of the cred­i­tors, § 1104 allows them to request the removal of the debtor-in-pos­ses­sion.28

Only the Third Cir­cuit in Friedman’s Liq­ui­dat­ing Trust has come close to grap­pling with this line of rea­son­ing. In doing so, the court makes only a cur­so­ry analy­sis that the exis­tence of the term “debtor-in-pos­ses­sion” in the bank­rupt­cy code does not imply that debtors are sole­ly pre-peti­tion enti­ties.29 The court’s analy­sis does not grap­ple at all with the con­tentions made here­in that § 547(c)(4)(B) would nev­er apply to the same sit­u­a­tion in Chap­ters 7 and 13 bank­rupt­cies, as well as Chap­ter 11 bank­rupt­cies with a trustee. Friedman’s points to post-peti­tion duties for debtors in § 329 and § 521, and assumes that the mere exis­tence of such a duty, although min­i­mal and large­ly admin­is­tra­tive in nature, dis­proves the con­tention that § 547(c)(4)(B) was not designed with post-peti­tion trans­fers in mind.30 But the duties list­ed in § 329 and § 521 pro­vide no real insight on the con­text in which § 547(c)(4)(B) is sup­posed to apply—they mere­ly say that a debtor could be ref­er­enced in a pre-peti­tion con­text in the bank­rupt­cy code.31

Because of Friedman’s, it may seem to the bank­rupt­cy advo­cate that any argu­ment based on the debtor/debtor-in-pos­ses­sion dis­tinc­tion for deter­min­ing the tem­po­ral­i­ty of the § 547(c)(4)(B) restric­tion on oth­er­wise unavoid­able trans­fers would be frowned upon in appel­late courts. But my hope is that by demon­strat­ing how § 547(c)(4)(B) is usu­al­ly inop­er­a­tive post-peti­tion because of the involve­ment of trustees, and how Chap­ter 11 bank­rupt­cies with debtors-in-pos­ses­sion dis­rupt this norm, advo­cates will be able to make a stronger case that pay­ments under § 503(b)(9) should not trig­ger § 547(c)(4)(B) in this sub­set of cas­es. The fidu­cia­ry rela­tion­ship shared by trustees and debtors-in-pos­ses­sion and linked explic­it­ly in the pro­vi­sions of the bank­rupt­cy code sug­gests that the courts should embrace har­mo­ny in the treat­ment of sit­u­a­tions involv­ing § 547(c)(4)(B) and § 503(b)(9). By empha­siz­ing how dras­ti­cal­ly dif­fer­ent the treat­ment of debtors-in-pos­ses­sion is from oth­er trustees, advo­cates can show how strange it would be to block § 503(b)(9) pay­ments with § 547(c)(4)(B) in this one aber­rant instance.

* August Meny is a J.D. Can­di­date (2023) at New York Uni­ver­si­ty School of Law. This Con­tri­bu­tion arose from the prob­lem at the 2022 Duber­stein Bank­rupt­cy Com­pe­ti­tion host­ed by St. John’s Law School. The ques­tion pre­sent­ed was “whether a sell­er of goods may reduce its pref­er­ence expo­sure accord­ing to 11 U.S.C. § 547(c)(4) by the new val­ue con­veyed to the debtor, after the debtor paid for the goods in full as an admin­is­tra­tive expense under 11 U.S.C. § 503(b)(9).” This Con­tri­bu­tion con­sid­ers a por­tion of the argu­ment assigned to the author in the com­pe­ti­tion and the views expressed here­in do not nec­es­sar­i­ly reflect the views of the author.

1. 11 U.S.C. § 547(b)(4)(A).

2. Id. § 547(c).

3. Id. § 547(c)(4)(B).

4. See Phoenix Rest. Grp. v. Ajilon Pro. Staffing LLC, 317 B.R. 491, 497 (Bankr. M.D. Tenn. 2004) (“At its heart, the pref­er­ence pow­er in § 547 lev­els the play­ing field for cred­i­tors that do busi­ness with a debtor dur­ing the slide into bankruptcy.”).

5. See Beaulieu Liq­ui­dat­ing Tr. v. Fab­ric Sources, Inc. (In re Beaulieu Grp., LLC), 616 B.R. 857, 878 (Bankr. N.D. Ga.  2020) (con­clud­ing that when a “debtor has estab­lished reserves to pay [the § 503(b)(9)] admin­is­tra­tive claims in full,” the reserves con­sti­tute an “oth­er­wise unavoid­able trans­fer” by the debtor, and “the new val­ue rep­re­sent­ed by the § 503(b)(9) claim can­not be used to off­set the creditor’s pref­er­ence lia­bil­i­ty” with a § 547(c)(4) defense).

6. 11 U.S.C. § 503(b)(9).

7. 11 U.S.C. § 547(c)(4)(B).

8. See, e.g., Cir­cuit City Stores, Inc. v. Mit­subishi Dig. Elecs. Am., Inc. (In re Cir­cuit City Stores, Inc.), 2010 Bankr. LEXIS 4398 at *26 (Bankr. E.D. Va. 2010) (“Thus, under the hold­ing of JKJ, the Trans­fer for the Ben­e­fit of Mit­subishi on account of its 503(b)(9) Claim . . . is an oth­er­wise unavoid­able transfer.”).

9. See In re Beaulieu Grp., LLC, 616 B.R. at 878.

10. For a selec­tion of argu­ments devel­oped in favor of § 547(c)(4)(B) apply­ing only to post-peti­tion trans­fers, see Friedman’s Liq­ui­dat­ing Trust v. Roth Staffing Cos. LP (In re Friedman’s Inc.), 738 F.3d 547, 555 (3d. Cir. 2013). Iron­i­cal­ly, Friedman’s rejects an argu­ment derived from the debtor/debtor-in-pos­ses­sion dis­tinc­tion, dis­cussed infra in notes 29–31 and accom­pa­ny­ing text.

11. See In re Beaulieu Grp., LLC, 616 B.R. at 878.

12. 11 U.S.C. Chap­ter 5 (quot­ing title of the chapter).

13. Chap­ter 7 – Bank­rupt­cy Basics, Unit­ed States Courts (Dec. 17, 2022),

14. See 11 U.S.C. § 1104 (dis­cussing the pro­ce­dures for appoint­ing a trustee in a Chap­ter 11 bankruptcy).

15. See supra note 13. Oth­er forms of bank­rupt­cy exist, but they tend to be high­ly spe­cial­ized. See, e.g., Chap­ter 12 – Bank­rupt­cy Basics, Unit­ed States Courts (Dec. 17, 2022), (a form of bank­rupt­cy for farm­ers and fishermen.).

16. See supra note 13.

17. Id.

18. Chap­ter 13 – Bank­rupt­cy Basics, Unit­ed States Courts (Dec. 17, 2022),

19. Id.

20. Chap­ter 11 – Bank­rupt­cy Basics, Unit­ed States Courts (Dec. 17, 2022),

21. Id.

22. Id.

23. 11 U.S.C. § 1107(a).

24. Id. § 1106(a)(1) (“A trustee shall per­form the duties of the trustee, as spec­i­fied in [cer­tain] para­graphs … of sec­tion 704(a).”).

25. Id. § 1302(b) (“The trustee shall per­form the duties spec­i­fied in [cer­tain sec­tions of 704(a)].”).

26. Id. §§ 1104(a)(1)–(2).

27. White, Clif­ford J. III & Theus, Wal­ter W. Jr., Tak­ing the Mys­tery Out of the Chap­ter 11 Trustee Appoint­ment Process, Exec­u­tive Office for U.S. Trustees at 1 (2014),

28. Id. at 4.

29. Friedman’s Liq­ui­dat­ing Trust, 738 F.3d at 555. As dis­cussed supra note 9, Friedman’s ulti­mate­ly sup­ports the propo­si­tion that § 547(c)(4)(B) is not trig­gered by § 503(b)(9) but does so on oth­er grounds.

30. Id. at 555; see, e.g., 11 U.S.C. § 521 (“a state­ment dis­clos­ing any rea­son­ably antic­i­pat­ed increase in income or expen­di­tures over the 12-month peri­od fol­low­ing the date of the fil­ing of the peti­tion.”). The quot­ed sec­tion is one of the rel­e­vant post-peti­tion duties of a debtor includ­ed there­in, but it is emblem­at­ic of the more dis­clo­sure-ori­ent­ed duties that § 521 entails.

31. See Friedman’s Liq­ui­dat­ing Trust, 738 F.3d at 555. As stat­ed in Friedman’s, § 329 only ref­er­ences a con­text in which the debtor is men­tioned post-peti­tion. Sec­tion 529 does describe cer­tain post-peti­tion duties, but as described supra note 30, those duties are more ori­ent­ed towards dis­clo­sure, and they have lit­tle rela­tion to deter­min­ing the avoid­abil­i­ty of a transfer.