*1 above, discussed the reasons Finally, for he should contention Gill’s
Defendant he because pay anything be ordered any not establish nothing does
received court’s the district of discretion
abuse sup- no evidence has offered Gill
part. did, his assertion, if he and even this
port over facto control and de
knowledge (as primary parties
conduct sup- agreements) the retainer
signatory to judg- decision and the district court’s
ports Gill, like Defendant any event.
ment a ba- to establish Murkey, fails
Defendant any court on reversing the district
sis for appeal. raised his grounds
AFFIRMED. FURNISHINGS, HOME SMITH’S
INC., Debtor. Trustee, Batlan, B.
Michael
Plaintiff-Appellant,
v. Finance
TransAmerica Commercial
Corporation, Defendant-
Appellee. 99-35946.
No. Appeals, Court
United States Circuit.
Ninth 15, 2000 Nov.
Argued and Submitted 13, 2001 Sept.
Filed *2 AND PROCEDURAL
FACTUAL
BACKGROUND Furnishings, Inc. Home Smith’s (“Smith’s”), furniture, electronic sold *3 in Ore- appliances and at 19 stores goods, and Idaho. TCFC was gon, Washington, for almost primary of lenders one Smith’s pur- financed Smith’s TCFC decade. Stutman, Shaffer, Treister & K. John (the “prime merchandise chase of some California, the Glatt, P.C., Angeles, Los consisting mainly of electronic inventory”), plaintiff-appellant. loans were appliances. and TCFC’s goods floating lien on by first-priority Lauren E. and Palmquist L. Jennifer inventory and the from prime proceeds the Barer, Port- & Winters, Garvey, Schubert Thus, inventory served as prime it.1 the land, defendant-appellee. the Oregon, for to collateral for TCFC’s Smith’s. loans ex- agreements, the loan TCFC Under ap- by granting tended credit to Smith’s After to various manufacturers. proval manufacturers receiving approval, the When merchandise to Smith’s. shipped HALL, TCFC, financed product HOLCOMB sold a Before: CYNTHIA Smith’s GRABER, RYMER, Judges. price of paid and Circuit TCFC wholesale
product. HALL, Circuit CYNTHIA HOLCOMB re- segregate its sales did not Smith’s Judge: Instead, all its deposited Smith’s ceipts. ac- commingled into bank proceeds sales Batían Michael Plaintiff-appellant First In- day. end of at the each counts (“trustee”) court’s district appeals the (“the Bank”), re- Smith’s terstate Bank affirming decision judgment financier, swept the volving-line-of-credit an action filed bankruptcy court. Batían with the accounts daily, leaving accounts by chapter recover made to day, The next of overnight balances zero. Transamerica defendant-appellee to debtor if funds to Smith’s Bank advanced new Corporation Finance Commercial available. Smith’s collateral sufficient was (“TCFC”). found bankruptcy court and credi- expenses paid operating then not avoidable were tors, including TCFC.2 547(b). We U.S.C. transfers substan- Smith’s During and the bankruptcy court with the suffered agree March 1995 Consequently, in tial losses. not satis- that the trustee did district court credit from line of reduced Smith’s that TCFC re- TCFC showing fy his burden the next million. Over million $20 virtue of greater $25 amount ceived months, line Smith’s in a few reduced have received than it would more, million twice $13 credit down liquidation. chapter hypothetical allegedly procedures, these 2. Because of on Smith's also held a blanket lien 1. TCFC will describe assets; payments, we prime preferential which junior that lien was other below, pro- directly from the were not made secured credi- other collateral liens Smith's of TCFC’s collateral. ceeds of the sales tors. During period, the same TCFC tablish an affirmative defense under 11 August. 547(c)(5). paydowns of required substantial Smith’s debt; of its avail- paid Smith’s TCFC most 10, 1998, September On payments, able cash a series of 36 total- ruled, in a letter opinion, million, May ing more than between $12 trustee had failed to meet his burden of 22,1995. 24,1995, August showing were preferential transfers. The court rea- August TCFC declared a On that, soned because the value of the collat- default, final accelerated the entire debt ($10,823,010.58) eral on the date Smith’s, sought due from a receiver exceeded amount of TCFC’s claim on time, company. for the For the first ($10,728,809.96), date *4 sought also to to require TCFC Smith’s $94,200.62. was oversecured As a re- segregate proceeds from collateral. its sult, that, the court concluded because voluntarily bankruptcy Smith’s initiated creditor, floating-lien TCFC was a proceedings chapter under 11 Bank- required trustee was to that TCFC (the 22, ruptcy August “peti- Code on 1995 was undersecured at during some time date”). date, tion As of that Smith’s owed preference period in order to avoid the $10,728,809.96 pos- to TCFC. TCFC took transfers. The court also ruled that it, session of its liquidated collateral and TCFC’s collateral should be valued at liq- $10,823,010.58. receiving ($10,823,010.58) uidation value liq- and that uidation costs should be deducted from the 11, 1995, On October the case was con- liquidation computing value in the value of verted to a 7 chapter liquidation and Bat- collateral, but the trustee had appointed ían was as trustee. The trustee present failed to credible evidence of $12,842,438.96 discovered the in payments liquidation TCFC’s costs. Because the that Smith’s had made during to TCFC bankruptcy court concluded that the trust- (the days the 90 before the date ee proved had'not that the transfers were “preference period”). Believing that preferential, the court did not address preferential, were he asked ’ TCFC’s affirmative defense under money TCFC to return the to the bank- 547(c)(5). refused, ruptcy estate. When TCFC The trustee filed a motion for reconsid adversary trustee initiated this proceeding, eration. In response, bankruptcy seeking to avoid the as preferen- opinion amended its typo correct transfers, 547(b), tial 11 under U.S.C. graphical errors, computational and but money recover the for the benefit of otherwise judgment. confirmed its The Smith’s, other creditors of under 11 U.S.C. timely trustee appeal filed an to the dis 550(a). court, trict raising the same issues that it parties stipulated The appeal. raises In published this opinion, met the preferen- first four elements of a tlan v. Transamerica Commercial Ba 547(b)(1)- tial transfer under 11 U.S.C. (D.Or. Finance Corp., 237 B.R. 776 (4). Additionally, agreed TCFC not to 1999), the district court affirmed the bank pursue affirmative defenses 11 ruptcy court’s decision “in all respects.” 547(c)(l)-(2). parties pro- timely appeal This followed. ceeded trial to determine whether the STANDARDS OF REVIEW
payments met the fifth element of the statute, preferential transfer 11 U.S.C. We review de novo the district 547(b)(5), and whether TCFC could es- appeal court’s decision on from a bank-
963 “ have if the transfer had been is, would independent ‘[w]e That court. ruptcy a hypothetical made and there had been decision court’s ly review as of the chapter liquidation 7 to the district deference give do not ” If the trustee shows TCFC Preblich v. date. determinations.’ court’s Cir.1999) (9th by virtue of the greater amount received Battley, 181 F.3d (In re Weis then the are avoid payments, v. Peters Robertson (quoting Cir.1993)). (9th In re man), preferential We as transfers. See F.3d able findings Inc., court’s F.2d Shurtleff, Lewis W. review (9th Cir.1985). and its conclusions The trustee contends fact for clear error 1) review the Finally, we law de novo. Id. that he satisfied his burden because: rulings for evidentiary bankruptcy court’s amount payments plus Vending Ardmor of discretion. See post-petition abuse received from the sale (In Kim), v. Kim Co. than the amount greater of its collateral is Cir.1997). post-petition from the sale of the received 2) alone; and standing
collateral
allegedly
DISCUSSION
not traced the source of the
has
collat
preferential payments to sales
Amount” Test
I. “Greater
*5
with both of the trust
disagree
eral. We
interpret
requires us to
This case
arguments.
ee’s
Code, 11
Bankruptcy
two sections of
547(b)(5)
11
547(g).
satisfy
§§
U.S.C.
does not
A. The add-back method
547(b)
any
“avoid
a trustee to
permits
pay-
trustee’s burden when
the debtor
an interest of
by
transfer of
collateral secured
ments comefrom
are met.
when certain conditions
property”
floating
a
lien
that the transfer
the conditions is
One of
satisfy
to
his burden
The trustee tried
than
creditor to receive more
enable the
amount of
adding
under
if:
creditor would receive
such
amount TCFC
payments
the 36
to the
(A)
chapter
were a case under
the case
post-petition
as a result of the
received
title;
7 of this
The trust
remaining
its
collateral.
sale of
(B)
made;
had not been
the transfer
this amount to
obvi
compared
ee then
post-petition
ously smaller amount of
(C)
payment of
creditor received
such
concluded that TCFC
by itself and
sale
by the
provided
to the extent
such debt
greater
a
amount be
have received
must
this title.
provisions of
payments.
Some
cause
547(b)(5).
“add-back”
have used the same
and the
courts
11 U.S.C.
the trustee to deter
employed by
method
36
dispute whether the
trustee
peti
of a creditor on
en- mine the status
period
during
preference
made
Al-Ben, Inc., 156
In re
TCFC,
tion date. See
pay-
a
of the 36
as
result
abled
(Bankr.N.D.Ala.1991)
(adding
B.R.
75
ments,
if the pay-
receive more than
un
amount of
to the
alleged preferences
made and TCFC had
ments had not been
to find the
petition
at the
date
paid
balance
only pursuant
received
status); In re Estate
secured
547(g) creditor’s
liquidation.
Section
Chapter 7
Inc.,
1018
Mortgage,
153 B.R.
Ascot
on the trustee
the burden of
places
547(b).
(Bankr.N.D.Ga.1993) (adding pre-petition
all of the conditions of
to show
would have been
received to what
Thus,
cred-
amounts
must show that the
the trustee
liquidation).
a chapter
it
than
received
greater
amount
itor received
agree
bankruptcy-
floating
against
constantly
with the
lien
a lien
We
is
however,
court,
court and the district
and changing mass of collateral for a loan value
conclude that
“add-back” calculation
that
change
will
as
are received
satisfy the trustee’s burden in
does hot
and further advances are made.
See
Pre-petition
this case.
transfers to a cred
Norton Bankr.L. & Prac.2d
57.23. The
fully
on the
itor that is
secured
applying
cases the trustee cites
the “add-
preferential
not
because
generally
date are
floating
back” method do not deal with
per
entitled to 100
the secured creditor is
It
liens.
is not correct to assume that the
cent of
claims.
In re LCO Enter
See
payments gave
TCFC more than
Cir.1993).
prises,
F.3d
would have received if the payments had
This is
a hard and fast rule. As the
not
Instead,
not been made.
under a floating
noted,
in this case
pay
lien arrangement,
those
are
ments
of a
change
the status
liquidate part
used to
of the debtor’s debt.
partially
fully
from
unsecured to
secured Then,
floating
new credit under the
lien is
petition may
preferential.
at the time of
be
extended and is secured
new collateral.
Bank,
See Porter v. Yukon Nat’l
enough
It is not
for the trustee to show
(10th Cir.1989).
Moreover,
payments plus
the 36
the amount
may
transfer
be avoided when the creditor
upon
received
dissolution exceeded the
at
payment,
is
the time of
but
amount of TCFC’s secured claim as of the
is undersecured on the
date. See petition date. Since collateral and indebt
Inc.,
Sufolla,
re Estate
F.3d
changed throughout
preference
edness
(9th Cir.1993).
985-86
The trustee failed
period,
these values do
however,
show,
was un
TCFC received more
pay
virtue of the
any
prefer
dersecured at
during
time
ments than it would have received without
*6
Instead,
period.
ence
the evidence sub
547(b)(5),
them. Under
the trustee
date,
mitted showed that
of the
as
must show that the amount of indebted
by
the value of the collateral held
Smith’s
floating
ness under the
greater
lien was
exceeded its indebtedness to TCFC.3 If
than the amount
point
of collateral at some
undercollateralized,
TCFC was never
then
during
90-day
period. See In re
TCFC could not have received more
Co.,
Bicycle
Schwinn
200 B.R.
992-93
virtue of the 36
than it would
(Bankr.N.D.Ill.1996) (“At
point
no
in time
have
in hypothetical liquidation
received
did the collateral value fall below the out
without
payments.
debt,
standing
and therefore TIFCO was
It
is important
to understand that
not preferenced
having
in
pay
received
TCFC did not loan one fixed amount to the
debt.”).
ments on its secured
debtor;
instead,
held a “floating
lien.” A
floating
financing
lien is a
trustee contends that the
device
existence
floating
where the creditor
an
in
of the
lien
claims
interest
means that the burden
547(c)(5).
property acquired
original
after the
exten-
is shifted to TCFC under
547(c)(5)
sion of the loan and extends its security
provides
Section
an affirmative
interest
to cover further advances. The
defense for creditors when the trustee has
($10,828,-
below,
3. See Batlan at
liquidation. holding to the court’s Id. at 555. Essential A reject argument.4 the trustee’s
We
that the creditor held a
recognition
was its
burden
lien does not shift the
floating
identity
of indi-
floating lien: “While
avoidability to the creditor. The
showing
changed because
vidual items of collateral
satisfy
his burden
trustee still has
acquisitions of new
subsequent
of sales and
547(b)(5).
has ad-
The Tenth Circuit
collateral,
nature of
credi-
[the
the overall
needs to be
of what
question
dressed
security interest
remained
tor’s]
a transfer
by a trustee
avoid
shown
Id. at 556.
same.”
subject to
inventory
financed
the sale
have evaluat
It is true that other courts
Castletons, 990
In re
floating
lien. See
by proceeding direct
floating lien cases
ed
Cir.1993).
Castletons,
F.2d 551
547(c)(5)
defense
to the
affirmative
ly
floating
lien on the
the creditor held
requirements
without a discussion
receivable,
inventory, accounts
debtor’s
Indus.,
547(b)(5).
Wesley
In re
See
sought to avoid
proceeds.
The trustee
(11th Cir.1994);
In re
F.3d
to the
by the debtor
payments given
Bros., Inc.,
1529, 1530-31
Lackow
preference period.
during
*7
Cir.1985).
cases,
(11th
the
But
those
affirmed the district
The Tenth Circuit
or the
stipulated
had
parties
failed to
holding that the trustee
court’s
un-
was
had
that the creditor
found
received more from
that the creditor
show
date.
In
of the
it would dersecured as
challenged payments than
the
259,
1983)
Vance,
(9th Cir.
721 F.2d
reject the dissent’s contention that
4. We also
("There
legislative
in the
his-
exception,
is no indication
"contemporaneous exchange”
the
547(c)(1)
547(c)(1),
tory
Congress intended section
that
places
the burden on the creditor
covering variety
general exception
of
through-
be a
showing
fully
to
it was
of
that
transactions.”).
547(c)(1)
to set
While we do not need
preference period. Section
the
out
547(c)(1)
the
precise
on the use of
avoid-
limits
designed
prevent
to
trustees from
was
case,
purposes
we do
in this
clearly
to
defense for our
ing payments that were
intended
transaction,
does not absolve the
that the defense
of an ante-
hold
support a new
instead
547(b)(5).
debt,
his burden under
though
trustee of
even
the actual
cedent
Cf.
America, 836
re Bullion Reserve North
In
until after the transaction.
was not recorded
of
Cir.1988)
1214, 1217,
(9lh
(apply-
F.2d
example
parties
when
intended
classic
is
The
sale,
exchange exception
ing
contemporaneous
the
party accepted a check in-
cash
one
cash,
concluding
trustee had
only
the
after
party
recorded
of
stead
547(b)(5)).
satisfied
days
the sale. See In re
several
after
check
words,
Thus,
overnight.
burden had with
balances
zero
other
need
already
satisfied so did not
to
been
challenged payments were not made di-
The trustee
this case
be discussed.
rectly
proceeds
from the
of the sales of
that TCFC was underse-
never showed
hand,
TCFC’s collateral. On the other
peri
any point during
90-day
cured at
indicating
there is no evidence
that Smith’s
and the
court determined
od
enough
did not sell off
of TCFC’s collateral
fully
was
secured as of the
to account for all of
challenged pay-
satisfy
date. The trustee did not
ments.
Duncan,
F.
his burden. See Richard
Pref
authority
requiring
There is some
Lien,
Transfers,
Floating
erential
establish that funds in a
517(c)(5)
com-
Bankruptcy
Re
Section
of
mingled account are
to the pro-
Act
36 Ark. L.Rev.
traceable
form
of
(1987) (“[I]t
necessary
is not
to reach the
ceeds of its collateral. See Stoumbos v.
547(c)(5)
of
question
application
(9th Cir.1993)
of
section
Kilimnik,
988 F.2d
until after the trustee has met his burden
(“This court has held that
the creditor
proving
necessary
of
all of the
elements of bears
of establishing
the burden
that a
547(b).”);
preference
section
proceeds
account
deposit
contains
of collat-
Israel,
James
& Daniel
J. White
Prefer
interest.”);
eral covered
a security
In
Conundrums,
(1993)
ence
98 Com. L.J.
Products,
re Gibson
(“It
remember, however,
important
is
Cir.1976) (“We think that
place
it is fair to
547(c)(5). applies only
to a creditor
identify
burden on the creditor to
his
ninety days
who is undersecured
before
defeat,
own proceeds and thus to
in whole
bankruptcy.
The creditor who is
se
in part,
or
prefer-
trustee’s claim of
547(b).
cured cannot be attacked under
ence.”). But Stoumbos and
Prod-
Gibson
deficiency
There is no initial
and later
persuasive
ucts are not
they
because
dealt
transactions cannot improve the creditor’s
with the intersection
Bankruptcy
position.”).
9-306(4)
Code and section
of the UCC.
provision
UCC
at issue in those cases
B. The
tracing
burden
used
funds
allows a creditor to claim all funds in a
preferential payments
make the
is
deposit account where the
pro-
funds are
on the trustee
ceeds from collateral
covered
the credi-
The trustee contends that its use of
Stoumbos,
security
tor’s
interest. See
the “add-back” method is correct because
situation,
F.2d at 957. In this
there is a
has not
shown
the source of
presumption against
the creditor and in
the allegedly preferential payments was
favor
trustee.
Id. at 957-58. This
Castletons,
sales of
TCFC’s collateral.
547(b)
opposite
is the
of a
analysis
it was undisputed
preference
that all of the
where the burden
is on the trustee
period payments came from sales of assets
*8
and the presumption is in favor of the
subject to the
floating
creditor’s
lien. See
Lease-A-Fleet,
Inc.,
creditor.
In
See
re
Castletons,
In re
As evidence
a
from which
reasoned estimate could be
testimony
presented deposition
trustee
Batlan,
made.”
cause it was probative of the actual CONCLUSION liquidation costs of incurred TCFC. affirm bankrupt- We the decision of the additionally presented The trustee cy court in all respects. testimony from TCFC’s senior counsel incur liquidation TCFC did some GRABER, Judge, concurring Circuit costs, portfolio and from a manager part and dissenting part: employed TCFC had people to over I concur in Part II liquidation. majority’s see the but opinion respectfully did not err when it dissent from Part concluded that view, my evidence I. In was not sufficient to liqui (g) dation costs. though Even the evidence trustee need not prove, part demonstrates that some as prima costs were in facie case curred, that is not establishing sufficient to establish an preference, avoidable the amount of those costs. creditor was not at the time
969 517(b)(5), purposes 1. For TCFC allegedly preferential payment, the of of the the value of the collateral on fully when was not secured. claim date exceeds the creditor’s petition Although recognized we have the date. on “[p]re-petition payments fully ato secured facie case that a prima To establish generally creditor ‘will not be considered preferential, was the payment to creditor preferential because the creditor would not payment that the en- trustee must show receive more than in a chapter liqui- 7 to receive more than it abled the creditor ” dation,’ Holding Committee Creditors of proceeding in a 7 had chapter
would have (In Unsecured Claims v. Koch Co. re Oil 11 payment the not been made. (9th Co.), Powerine Oil 972 547(b)(5) (g); & see also 3 Norton Cir.1995) 5 (quoting Bankruptcy Collier on (West 57:9, Bankr.L. & Prac.2d at 57-39 ¶ (Lawrence 547.08, ed., King at 547-47 P. 1997) (“[A] analysis required. is two-part ed.1995)), previous 15th our cases have First, must what the credi- one determine defined what it takes to make a creditor if the transfer remains valid. tor receives “fully meaning secured” within the of Second, what the one must determine 547(b)(5). The mere fact that the value in a liqui- creditor would have received of a creditor’s collateral exceeds the bank- dation case had not been if transfer indebtedness in a rupt’s “snapshot” on appropriate The date for this anal- made. petition date does not establish that a ysis petition filing.” is the date of the fully creditor is secured for purposes omitted)). added; (emphasis footnote 547(b)(5) analysis. See Comm. Official prefer- “Whether a creditor has received a v. Am. Unsecured Creditors Sterilizer determined, by ence is to be not what the (In Comptronix Corp.), re 239 B.R. have if the debtor’s situation would been (Bankr.M.D.Tenn.1999) (holding 362-63 liquidated assets had been and distributed that a creditor cannot defeat a claim of among alleged his creditors at the time the preference merely by showing that made, preferential payment was but date). fully debt is secured on the actual effect of the as determined Instead, § requires the court to Clay when results.” Palmer Brown, 227, 229, determine what status of creditor’s Prods. Co. v. 297 U.S. (1936); challenged claims would have been had the also S.Ct. 80 L.Ed. see (In Enters.), Alvarado v. Walsh re not been made. See Wickham LCO Cir.1993). (In Property F.3d Am. Bank Leas v. United Inc.), B.R. ing Mgmt., & majority court and the (Bankr.E.D.Tenn.1985) (“[T]he only rele First, ways. in two holding err vant what secured status of question is purposes TCFC was pay [had the claim would have been 547(b)(5) analysis, they disregard date of'the ments not been on the made] statutory directive to determine what the would determine petition since alone status of TCFC’s claims have been would ’ [the creditor] the distribution to which challenged payments had the not been chapter in a would have been entitled Second, by holding made. that the trustee Only then can the court liquidation.”). required to was was whether, extent, analyze and to what on the date of each chal- undersecured to receive payments caused lenged payment, they effectively shift to hypothetical more than it would have proof placed trustee a burden of liquidation. Bankruptcy chapter Code. *11 (1) 547(b)(5) collateral was summarize, § di here because: TCFC’s 11 U.S.C. To allegedly preferential not the source of the analyzing preference a court that is rects payments, so the return of the quantities: two compare claim to received, estate would not increase the value actually the creditor amount that securing indebted- the creditor would of the collateral Smith’s and the amount (2) TCFC; already received chapter 7 ness to hypothetical in a have received (3) collateral; full of its each allegedly preferential value had the liquidation an payment v. Fron allowed TCFC to receive made. Elliott transfers not been (In Shurtleff, in of the value of its collat- amount excess Props. re Lewis W. tier (4) (9th Cir.1985). eral; claim was unsecured to Inc.), TCFC’s value the extent that it exceeded the challenged payments To the extent (5) collateral; with more than it other creditors the creditor to receive permit on liquidation, unsecured claims received no hypothetical would have in the claims.4 can avoid them. U.S.C. those the trustee 547(b). excep contains no The statute Actually Received b. What TCFC creditor.1 “floating-lien” tion for a chal analyzing the amount that a Analysis Aggregated
a.
lenged transfer enabled the creditor to
receive,
charged
directs
the “creditor must be
Although the text of
Code
challenged pay- with the value of what was transferred
the court to examine each
any
would
individually,2
simplicity,
plus
I will
additional amount
he
ment
Chapter
be entitled to receive from a
analyze
aggregate
them in the
because
approach
liquidation.” Shurtleff, 778 F.2d at
result is the same under either
(emphasis
original).
challenged
is the same
The
on these facts.3
result
something
pay
tate has sufficient
1. Henderson v. National Bank
Commerce
assets
(In
Al-Ben, Inc.),
(Bankr.
(ii) The Value Collateral of in a c. TCFC’s Entitlement Although assessing the relevant date for 7 Hypothetical Chapter a securing the value of the collateral credi- Liquidation date, petition tor’s debt is the see Palmer Prods., 450; above, Clay at 56 S.Ct. U.S. explained As Enters., 547(b)(5) 942, § 547(b)(5) 12 F.3d at LCO analyze instructs us to how adjustment an requires amount in a much would have received TCFC allegedly preferen- when the source of the liquidation pe- conducted on the chapter payments party’s tial was the secured col- date, challenged payments had the tition lateral. See v. Scurlock Permian pay- made. The return of the not been Krafsur (In Corp. Refinery), re El Paso 171 F.3d potentially the estate alters two ments to (5th Cir.1999) (“[T]he (1) 254-55 the amount of the creditor’s quantities: not be deemed to have a will received petition on the against claim estate (2) of the greater percentage pay- as result collateral secur- date and the amount of if is ment the source of the claim on the ing the creditor’s collateral.”); own v. Zions ultimately creditor’s Sloan quantities Those two de- date. (In Castletons, Inc.), First Nat’l Bank re a creditor is termine the extent to which (10th Cir.1993) (con- 547(b)(5). 554-55 purposes of cluding that a secured creditor was not (i) Against challenged pay- the Estate all the preferred TCFC’s Claim when subject to the ments were from assets case, not been In this had the interest). security creditor’s The reason made, have owed Smith’s would TCFC that, adjustment for the is when source (its $10,728,809.96 peti actual claim on the creditor’s own col- of the is the (the date) $12,842,438.96 amount plus tion lateral, then, not been had the paid preference- of antecedent debt made, remained in the assets would have transfers), total of period or part securing as of the collateral estate Thus, $23,571,248.92. hypotheti TCFC’s extent, To that the creditor’s debt. estate, analysis in an against cal claim securing the collateral the credi- value of 547(b)(5), $23,571,248.92. See is El Paso greater. tor’s debt would be See (In v. Nat’l Bank Commerce Henderson of (“A at creditor who Refinery, 171 F.3d (Bankr. Inc.), Al-Ben, 156 B.R. collateral receives merely recovers its own N.D.Ala.1991) that the (holding creditor’s than it would have no more as result purposes “for claim on the date anyway had the funds been re- received 547(b)(5) analysis” unpaid was “the debtor, subject to the credi- tained filing as of the balance of the store loans interest.”). security tor’s date, alleged plus the total amount of the also, case, presented the trustee evi- payments”); e.g., see this preferential (In challenged payments re Paris dence that 31 of the Gray Corp. v. A.I. Credit (Bankr. commingled funds were B.R. 3-4 were from Corp.), Indus. D.Me.1991) of TCFC’s collat- proceeds not traceable to (computing the amount from were eral. The other purposes claim for creditor’s money to Smith’s and challenged who owed by adding the amount of the debtors direction, majori- and the 2. The court who, pay- sent the at Smith’s require Smith’s to ty improperly behalf of Smith’s. Ac- ments prove the absence TCFC’s payments not been cordingly, had the affirma- tive unen- made, funds would have been all the defense. pay available to unsecured held,
cumbered and ma- and the jority claims.5 that the trustee did not meet agrees, establishing his his burden of challenged payments were Because the the trustee’s prima facie case because collateral, to TCFC’s traceable was proof does not establish *13 a facie case that prima established trustee at the time the payments undersecured preferences were avoidable 13142.) (Majority op. at were made. (1) the value of the that: collat- by proving majority improperly re- holding, so $10,823,010.58,its worth as of the eral was the absence of quires the trustee to (2) claim, date; and the creditor’s as part the creditor’s affirmative defense $23,571,248.92. above, was as calculated prima facie case. his 506(a), § a creditor’s 11 U.S.C. Under fully A to a creditor payment secured is claim claim “is a secured to the extent of payment because the does preferential not in the value of such creditor’s interest deplete estate. 3 Nor- ... property such estate’s interest .in § Bankr.L & Prae.2d 57:9. “For ex- ton claim to the extent that is an unsecured fully a creditor ample, payment to creditor’s interest ... is the value of such does not diminish the value of the estate amount of such allowed less than the since, from the while cash is removed es- held a secured claim for claim.” TCFC tate, in party’s the secured lien is reduced $10,823,010.58,the extent of the value of 57:9, § equal amount.” Id. at 57-42. collateral, and an unsecured claim for Thus, why a the reason creditor who is the remainder. Because the unsecured challenged secured at the time of a creditors of Smith’s received no payment “preferred” cannot be considered in proceeding, on their claims this TCFC by pre-petition payment a is the credi- tor, paid would have been in full on its secured general, contemporaneously in returns Thus, in in the an only. hypothetical chap- equal claim a value the estate form of the lien. reduction of liquidation, ter 7 TCFC would have recov- $10,823,010.58. only Clearly, ered as illus- 547(c)(1), Under U.S.C. a trustee trated in the charts in the Appendix, payment cannot a to a if the avoid creditor payments enabled TCFC to receive more: payment creditor establishes that the “was $23,665,449.54. The trustee is entitled by intended the debtor and the creditor ($12,842,438.96) a recover the excess as ... contemporaneous exchange to be a for preference under 11 unless given new to the debtor” and was “in value substantially proves contemporaneous its affirmative defense. fact ex- (In appeal, dispute Supply 5. On TCFC does not the trust- see also Wholesale Co. v. Itule Ariz. Ariz.), ee’s characterization of the source of the chal- re Gibson Prods. 543 F.2d Moreover, circuit, (9th Cir.1976) lenged (stating general payments. in this rule that a bankruptcy proceeding, security proceeds in a a secured credi- creditor’s interest in in establishing commingled pref "presumptively tor bears the burden of account is that funds trustee, commingled except are as to to the in account traceable to the erential” extent proceeds by proceeds). can of its collateral and thus covered the creditor trace its See, security e.g., attempt v. does not to trace the interest. Stoumbos Kilimnik, (9th Cir.1993); proceeds 988 F.2d of its collateral. (al 547(b). change.” 547(g) types See also U.S.C. of liens. See 11 U.S.C. locating Although may the burden of to the credi it unwieldy be for a creditor tor). that, recognized We have the release to prove for each made on a security lien, of a interest to the extent of a debt secured a floating it contem- payment is one form of “new value” that a poraneously credit, extended new released may give exchange interest, for the a security or gave otherwise new payment. value, debtor’s a debt- “[P]ayments is what the statute requires. exchange for a secured My or creditor’s conclusion is buttressed the fact security that, release of its falls within interest Congress when has determined that 547(c)(1).” exception section unique character of floating lien de- (In O’Rourke v. Seaboard Sur. Co. re E.R. special mands in bankruptcy, treatment Inc.), Fegert, 887 F.2d provided Cir. has expressly for differential 1989); Sulmeyer 547(c)(5) see also v. Pac. Suzuki treatment. See U.S.C. (pro- (In Chevrolet, Inc.), re Grand viding floating inventory liens on (9th Cir.1994) that, (holding pur cannot prefer- receivables be avoided as 547(c)(1), poses of a creditor confers new except ences to the they permit extent that *14 on the by releasing value debtor’s estate improve a creditor to position during interests). Thus, security preference U.S.C. the period). 547(c)(1) a permits creditor to defend Neither changed by is this result the against preferential a trustee’s claim of decision, reason, creditor’s for whatever
payment by establishing contempo that it forego reliance on defense under 11 raneously security released a valid interest 547(c)(1), or any perceived in property the debtor’s to the extent of an unfairness in the Strategic outcome. preferential allegedly payment. equitable considerations cannot rewrite the
By requiring the trustee to show that Bankruptcy Code. the creditor secured on the was sum, In places because the statute the payment, bankruptcy date of each the on creditor gave burden to show that it majority effectively court and the require exchange new value in re- prove the trustee to the absence of the ceived, court and the ma- defense, i.e., creditor’s affirmative that the jority in concluding err the trustee contemporaneously did not ex had failed to meet his burden of change newrvalue with the debtor. This is 547(b)(5). under U.S.C. contrary to the statute. Subsections 547(c)(1) 547(g) plainly require majority statutory 3. The reverses the show, creditor to in order to defeat the by encouraging incentives a “race of preference, trustee’s claim of ” diligence. creditor contemporaneously released a val interest, or security gave id otherwise new that, majority The in a floating- holds value, to the extent of the that it case, lien the trustee must show that the received. specific creditor was undersecured at some in changed by during preference period, This result is not the fact time addi- security at to using statutory interest issue is a tion add-back meth- floating lien. The text of the In I have ex- previous statute does od. sections plained support not differentiate between made that there is no textual in nor for by floating proposition, debts secured liens and the statute for this differently. treating floating made on debts secured other lien $10,000 collateral is by the value of Creditor 2’s adopted the rule Additionally, $10,001. is remaining and the debt the articulated one of majority undermines operation “The underlying 547: policies the creditors are hypothetical, this ‘the section to deter preference [is] of the situated, majority’s meth- similarly but the to dismem diligence’ of creditors race 1 more analysis give od of would Creditor furthers debtor before ber the what the trustee must protection and alter preference section— goal of the the second proof. his burden of Fol- show sustain H.R.Rep. equality majority, of distribution.” lowing logic that of Creditor preference 177-178 will be found to have received Cong., 95th 1st Sess. No. 547(c) unless it can raise one of (1977), News Cong. & Admin. U.S.Code hand, defenses. On the other Creditor (as quoted Schwinn pp. virtue of the fact that it received a $2 Ins. Fin. v. Transamerica Plan Comm. assets, can greater transfer of the debtor’s (In Co.), Bicycle Corp. Schwinn attack preference withstand a because the (Bankr.N.D.Ill.1996)). B.R. that, point trustee must establish at some majority encourages by the rule stated date, value of the before the engage precisely creditors to collateral was less than the amount of type diligence.” of “race of Creditors provides debt. This differential treatment facing bankrupt fear that a is who debtor an incentive for the creditors to race to cy enough will want to extract hopes in the “dismember” debtor that, on the from the debtor to make sure making it harder for the trustee to date, remaining of their the value ' preference. the amount of indebted collateral exceeds *15 I advantage approach ness. propose is that it treats Creditor similarly- example Consider this of two identically requires Creditor Suppose that Debtor situated creditors: trustee to the same information with $30,001 1 during transfers to Creditor respect both. That approach identical (not preference period 547(b), from the Creditor with the text of is consistent collateral), payment provide l’s of a debt se- which does not a textual basis for distinguishing between the two creditors. by floating cured lien. As of the date, $9,999 Debtor owes to Creditor conclusion, agree I that we must af- $10,000 of collateral. lien rulings firm the court’s with contrast, that, By suppose during the same respect liquidation costs. On the other $29,999 period, transfers Debtor Credi- hand, I would hold (likewise, tor not from 2’s col- Creditor erroneously applied 11 U.S.C. lateral) and, of a debt secured from accordingly, dissent date, floating majority’s contrary lien. On decision.
APPENDIX THAT TCFC HAS OF TOTAL AMOUNT RECEIVED BECAUSE PAYMENTS
Ninth Circuit. PAINE, Plaintiff-Appellee,
Shannon Argued and Submitted Jan. v. LOMPOC, Defendant, Sept. Filed CITY OF Ast, individually Daniel P. and as a
peace officer; Timothy Tietjen, in E.
dividually peace officer, and as a De
fendants-Appellants.
No. 99-56347. Appeals,
United States Court of