___________ No. 95-3832

___________ Southern Technical College, * Inc., * * Appellant, * * Appeals from the United States v. * District Court for the * Eastern District of Arkansas. James W. Hood, * * Appellee. *

___________ No. 95-3833

___________ Southern Technical College, * Inc., * * Appellant, * * v. * * Graham Properties Partnership, * * Appellee. *

___________ Submitted: April 10, 1996 Filed: July 25, 1996

___________ Before BOWMAN, BEAM, and MURPHY, Circuit Judges.

___________ BOWMAN, Circuit Judge.

Sou thern Technical College (STC) filed a voluntary petition fo r bankruptcyreorganization on April 28, 1992. These appeals arise out of adversary proceedings conducted in the context of the Chapter 11 bankruptc y procee dings. STC leased nonresidential real property from both Graha m Properties Partnership and James W. Hood.

### The Honorable Mary Davies Scott, United States Bankruptc y 1 

### Judge for the Eastern District of Arkansas. The Honorable Stephen M. Reasoner, Chief Judge, United States 2 

### District Court for the Eastern District of Arkansas.
-2- STC did not make its February 1992 rent payments on these properties until March 1992. STC claims that it is entitled to recover the $16,900.67 late

rent paym ent to Graham and the $19,530 late-rent payment to Hood a s avoidable preferential transfers under 11 U.S.C. § 547(b) (1994). Th e Bankruptcy

Court disagreed, concluding that while the transfers from STC

1 to Graham and Hood were preferential transfers, STC could not recover them because they fell within the subsequent-advance- of-new-value exception, 11 U.S.C. § 547(c)(4). The District Court affirmed the grants of summar y 2 jud gment by the Bankruptcy Court, and STC timely appeals. We hav e jurisdiction over these appeals pursuant to 28 U .S.C. § 158(d) (1994), and we affirm the judgments of the District Court.

In Au gust 1987, STC began leasing property from Graham in Monroe , Louisiana. STC paid a security deposit of $11,8 46. After April 1989, the monthly lease payments were $16,900.67. STC consistently made its payment s during th e first week of each month until January 1992, when Graha m received the January 1992 check on January 17, 1992. The February check, whichis the subject of the litigation between STC and Graham, was dated Februar y28, 1992, and not received by Graham until March 2, 1992. ST C failed to pay any rent for March or April 1992.

In May 1987, STC began leasing property from Wally Caldwell i n Jacks on, Mississippi, for $19,530 per month. STC also paid a securit y deposi t of $19,530. Caldwell later assigned the lease to Hood. ST C typically made its mo nthly payments to Hood during the first week of each month. T he February 1992 check, which is the subject of the litigatio n between STC and Hood, was not received by

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Hood until March 2, 1992. STC failed to pay any rent for March or April 1992.

The Bankruptcy Court held that the two late-rent payments wer e preferential transfers within the meaning of § 5 47(b), and that conclusion is not challenged in these appeals. The Bankruptcy Court also held that STC received subsequent new value from Graham an d Hood in exchange for the late-rent payments, a nd thus STC could not recover those payments despite the fact that they were preferential transfers. STC now argues that the BankruptcyCourt and the District Court erred when they held that Graham and Hood provided STC with new value after Graham and Hood received th e preferential transfers.
In bankruptcy cases, this court sits as a second court of review and applies the same standards as the district court. United States v. Roso ( In re Roso ), 76 F.3d 179, 181 (8th Cir. 1996). "We review de novo th e granting of a summary judgment motion." Maitland v. University of Minn. , 43 F.3d 357, 360 (8th Cir. 1994). If the record shows that there is n o genuine issue of material fact and that the prevailing party is entitled to judgment as a matter of law, we will affirm the grant of summar y judgment. Id. ; see also Fed. R. Civ. P. 56(c).

STC a rgues that it received no new value within the meaning o f § 547(c)(4) after its late-rent payments. The Bankruptcy Court held that STC's continued use o f the properties during March and April, without the payment of rent, constituted subsequent new value. Sectio n 547, in pertinent part, provides as follows:
(c) The trustee may not avoid under this section a transfer --

. . . . (4) to or for the benefit of a creditor, to th e ext ent that, after such transfer, such credito r gave new value to or for the benefit of the debtor

--

### -4- (A) not secured by an otherwise unavoidable securi ty interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for th e benefit of such creditor . . . .

The statute defines new value as "money or money's worth in goods , services, or new credit . . . ." 11 U.S.C. § 547(a)(2). Section 547(c)(4 ) thus modifies the general rule that preferential transfers may be recovere d bycreating an exception for situations in which a creditor provides new value after the preferential transfer is made bu t before the filing of the debtor's bankruptcy petition. The giving of new value alone is no t sufficient for this exception to apply. The deb tor must not have paid for the new value by making "an otherwise unavoidable transfer to or for the benefit of the creditor." Id. § 547(c)(4)(B). Additionally, the new valu e
can not be secured by "an otherwise unavoidable security interest." Id

. § 547(c)(4)(A). In t his case, it is undisputed that STC has not paid for any new value that Gr aham and Hood have extended, but STC argues that its securi tydeposits constitute an unavoidable security interest. Such a n int erest could make § 547(c)(4) inapplicable to all or part of th e preferential transfer s at issue. The first step in our inquiry, however, is to determine whether the rent-free use of the Graham and Hood propertie s constitutes new value.

The pur pose of § 547(c)(4) is "to encourage creditors to deal wit h troubled businesses in the hope of rehabilitation." Kroh Bros. Dev. Co. v. Continental Constr . Eng'rs, Inc. ( In re Kroh Bros. Dev. Co. ), 930 F.2d 648, 651 (8th Cir. 1991). As the Eleventh Circuit has noted, "[a ] subsequent advance [of new value] is excepted be cause . . . a creditor who contributes new value in return for payments from the incipient bankrupt . . . should not later be deemed to have deplete d the bankruptcy estate to the disadvantage of o ther creditors." Charisma Inv. Co. v. Airport Sys., Inc. , ( In re Jet Fla. Sys., Inc. ), 841 F.2d 1082, 1083 (11th

### -5-

Cir. 1988) (per curiam). "Thus, the relevant inquiry under sectio n 547(c)(4) is whether the new value replenishes the estate." Kroh Bros. , 930 F.2d at 652.
STC argues that § 547(c)(4) does not apply to the late-rent payments because under the terms of STC's leases with Graham and Hood it had th e right to occupy the properties in March and April even though it had not paid rent. Graham and Hood, in response, contend that STC's argumen t misses the point. Ac cording to Graham and Hood, STC's right to remain in possession of the pro perty is irrelevant. Instead, they argue that STC's actual use of the property for almost two months without paying any rent should be the focus of the § 547(c)(4) inquiry. They contend that by usin g the leased properties during March and April, STC received new value for which it did not pay.

We are persuaded by the arguments advanced by Graham and Hood. Each month, a lessee receives new value from its lessor when it continues to us e and occ upy the rented property. STC does not and could not dispute th e fact t hat the continued use of the two leased premises enabled it t o continue operations in Monroe, Louisiana, and Ja ckson, Mississippi, during March and April 1992. Graham and Hood did not p rovide STC with money, but they certainly provided STC with "money's worth." This new value, tw o
re nt-free months, facilitated STC's continued operation. The incom e ge nerated thereby replenished the estate, increased STC's chances o f survi val, and benefitted all of STC's creditors. As the two rent-fre e months have not been paid for by STC, we conclud e that Graham and Hood fit within the subsequent-advance exception of § 547(c)(4) and therefore STC cannot avoid the preferential transfers it made to them.

Our decis ion is supported by the Eleventh Circuit's decision in the somewhat factually similar case of In re Jet Florida System, Inc. , 841 F.2 d 1082 (11th Cir. 1988). In that case the court of

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appeals held that the lessee-debtor had not received new value, but only because the bankruptcy court found that the less ee-debtor "had made no use of the rental property throughout the preference period." Id. at 1084

. The court's reasoning, however, leads to the inescapable conclusion that continued use of leased property can constitute new value. The subsequent

advance exception pro motes the preference policies of the Bankruptcy Code "be cause its utility is limited to the extent to which the estate wa s
en hanced by the creditor's subsequent advances during the preferenc e period." Id. at 1083-84 (quoting 4 Collier on Bankruptcy, ¶ 547.12, a t 547-49 n.5 (15th ed. 1987)). The court explained that
courts have generally required a transfer which fit s within the subsequ ent advance exception to provide the debtor with a material benefit. This focus upon whether a material benefit has been conferred has b een explained in terms of insulating a prefer ential transfer to a particular creditor to the exten t that that creditor there after replenishes the estate. In such a situation, the creditor pool would not be harmed to th e extent of the offset and the fundamental goal of equality o f distribution would be preserved.

Id. at 1084 (citation s omitted). We think the present case presents just such a situation. Graham and Hood provided STC with the leased properties aft er the preferential transfer and before the filing of the bankruptc y petition. STC did not pay for the use of the properties. The rent-free use of the properties conferred a material benef it on STC: the ability to contin ue operations on and generate income from the leased propertie s between t he date of the preferential transfer and the filing of th e bankru ptcypetition. Thus Graham and Hood replenished the bankruptc y estate by giving STC rent-free use of the leasedproperties. Accordingly,
we hold that STC may not avoid the preferential transfer to the extent tha t the new value--nearly two rent-free months--remains unpaid for an d unsecured. See 11 U.S.C. § 547(c)(4). STC clearly

### It is undisputed that the security deposits paid by ST C 3 

### constitute unavoidable security interests under § 547(c)(4)(A).
-7- derived a material benefit from the new value advanced by Graham and Hood.
Even though we have concluded that Graham and Hood provided new value to STC, our inquiry is not at an end. In order to fit within the exceptio n carved out by § 547(c)(4), a preferential transf er must be both unpaid for and unsecured. In this part of the opinion, we address the Graham and Hoo d properties separately . In each case, if the new value conferred upon STC by the lessor, consisting of close to two months of free rent, exceeded th e amount of the February-rent payment plus the security deposit, then th e 3 amount of the February-rent payment is not recoverable as a preference.
With respect to the property leased from Graham, STC argues that the
new value provided by Graham does not exceed the amount of the securit y deposit held by Graham plus the amount of the pr eferential transfer. When STC enter ed into the lease agreement with Graham, STC paid Graham a security deposit of $11,846. In March and April 1992, the monthly ren t payment was $16,900.6 7, and the Bankruptcy Court did not clearly err when it used this figure as the basis for its calcula tion of new value. Graham received the preferential payment at issue on Ma rch 2, 1992, and STC filed its bankr uptcy petition on April 28, 1992. Only new value that wa s extended between these two dates may be considered for purposes o f § 547(c)(4). Thus the new value provided is equal to 29/31 of the rent du e for March plus 28/30 of the rent due for April, which in turn equal s $31,584.86. This amount exceeds the amount of the preferential transfer plus the security deposit, $28,745.67 ($16,900.6 7 plus $11,846). Thus the Bankruptcy Court corr ectly concluded that STC could not avoid any part of the preferential transfer to Graham.

### In the litigation with Graham in the Bankruptcy Court, ST C 4 

### raised the argument that the new value did not exceed the sum o f the late rent and the security deposit during the proceedings o n Graham's motion to amend or alter the judgment. Throughout those proceedings, a summary judgment motion was pending in th e liti gation with Hood. The Bankruptcy Court granted summar y judgm ent in favor of Hood only after it had already decided th e issue of whether the new value given by Graham exceeded the amount of the security deposit plus the amount of the preferentia l tran sfer, and STC had not raised the issue in its briefs i n opposition to Hood's motion for summary judgment. The procedural dif ferences between these two cases account for STC's failure t o raise the issue in one case but not the other.
-8- STC makes the same argument with res pect to the property leased from Hood. ST C argues that it may recover a portion of the preferentia l transfer to Hood because the new value provided does not exceed the amount of the preferential payment plus the security deposit. STC, however , faile d to make this argument to the Bankruptcy Court. Rather, STC mad e 4 the all-or-nothing argument that the new value w as secured by the security dep osits and that the statute did not differentiate between secured an d undersecured new value; thus, according to STC, the entire amount of any new value received was secured and the preferent ial transfers did not fall within the subsequent-advance exception. Memorandum Brief in Support of Response to Defendant's Motion for Summary Judgment at 9-10, STC v. Hood ( In re STC ), No. 94-4063 (Bankr. E.D. Ark. March 8, 1995) (brief filed). The argument advanced by STC in this Court was raised for the first time
on appeal to the District Court and is not properly before us. W e therefore decline to consider it. See Abbott Bank-Thedford v. Hanna ( In re Hanna ), 912 F.2d 945, 948 (8th Cir. 1990).

In sum, we hold that the Bankruptcy Court properly concluded as a matter of law that STC could not avoid the preferential transfers to Graham and Hood because the undisputed material facts established that the ST C
rec eived unsecured new value for which it had not paid. We therefor e affirm the judgments of the District Court affirming the judgments of the Bankruptcy Court.

### -9- A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.