Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca5-15-10274/USCOURTS-ca5-15-10274-0/pdf.json

Parties Involved:
Marilyn D. Garner
Appellant
Knoll, Incorporated
Appellee

Document Text:

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 15-10274

In Re: TUSA-EXPO HOLDINGS, INCORPORATED, 

 Debtor

MARILYN D. GARNER, 

 Appellant

v.

KNOLL, INCORPORATED, 

 Appellee

Appeal from the United States District Court

for the Northern District of Texas

Before SMITH, WIENER, and GRAVES, Circuit Judges.

WIENER, Circuit Judge:

This adversary action was brought by Appellant Marilyn D. Garner (the 

“Trustee”) against Appellee Knoll, Incorporated (“Knoll”). Specifically, the 

Trustee seeks to avoid transfers from Tusa Office Solutions, Incorporated

(“Tusa Office”), the debtor, to Knoll, its creditor, as preferences under § 547 of 

the Bankruptcy Code. 

United States Court of Appeals

Fifth Circuit

FILED

January 28, 2016

Lyle W. Cayce

Clerk

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FACTS & PROCEEDINGS

I. FACTS1

For many years, Tusa Office was the largest retail dealer in new

furniture manufactured by Knoll. Tusa Office and Knoll’s relationship was 

embodied in several contractual arrangements, only one of which is relevant

here. Under it, (1) a customer would order furniture from Tusa Office, (2) Tusa 

Office would then order that furniture from Knoll, (3) Knoll would deliver the 

furniture to Tusa Office, (4) Tusa Office would deliver the furniture to the 

customer and install it, (5) Tusa Office would invoice the customer, (6) the 

customer would pay Tusa Office, and (7) Tusa Office would pay Knoll. This 

arrangement was initially governed by an April 30, 2002, Payment Agreement 

between Tusa Office and Knoll. Under that agreement, Tusa Office granted 

Knoll a first-priority security interest in, among other things, all of its present 

and after-acquired assets, including its accounts receivable. 

In 2005, Tusa Office acquired Office Expo, Incorporated (“Office Expo”),

a dealer in used furniture. After a reorganization, Tusa Office and Office Expo 

became wholly-owned subsidiaries of Tusa-Expo Holdings, Incorporated. 

Although Tusa Office continued to operate profitably, Office Expo did not. To 

bolster Office Expo’s flagging performance, Tusa Office began to transfer funds 

to Office Expo regularly, which caused Tusa Office problems of its own. 

 

1 We rely on the findings of fact in the bankruptcy court’s opinion. Thibodeaux v. 

Olivier (In re Olivier), 819 F.2d 550, 552 (5th Cir. 1987) (“In bankruptcy proceedings, [this 

court] review[s] findings of fact—including those based on credibility determinations, on 

physical and documentary evidence, and on inferences from other facts—under the clearly 

erroneous standard.”); see FED. R. BANKR. P. 7052. (“[Federal Rule of Civil Procedure 52] 

applies in adversary proceedings . . . .”); FED. R. CIV. P. 52(a)(1) (“In an action tried on the 

facts without a jury . . . , the court must find the facts specially and state its conclusions of 

law separately. The findings and conclusions may be stated on the record after the close of 

the evidence or may appear in an opinion or a memorandum of decision filed by the court.”). 

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Tusa Office and Knoll eventually entered into an Amended Payment 

Agreement (the “APA”) in June 2008, which restructured Tusa Office’s debt to 

Knoll. Under the APA, Tusa Office’s current indebtedness to Knoll (that is, the 

part of its debt that was more than 90 days old) could not exceed $3.1 million 

until its past-due indebtedness (that is, the part of its debt that was more than 

90 days old) was less than $1.9 million. The APA again granted Knoll a firstpriority security interest in substantially all of Tusa Office’s present and afteracquired assets, including its accounts receivable. When Tusa Office and Knoll 

entered into the APA, Tusa Office’s current indebtedness to Knoll was 

$2,863,898.60 and its past-due indebtedness was $2,703,955.29.23. 

In addition to restructuring its debt to Knoll, Tusa Office obtained 

financing from Textron Financial, Incorporated (“Textron”). Specifically, Tusa 

Office and Textron entered into an agreement (the “Loan Agreement”) in July 

2009, under which Textron provided Tusa Office with a $6.5 million revolving 

loan in exchange for a first-priority security interest in all of Tusa Office’s 

current and after-acquired assets, including Knoll’s collateral. The Loan

Agreement also required Tusa Office to have its customers make payments 

directly to a bank deposit account (the “lockbox”) that was controlled by 

Textron. 

As a condition precedent to the Loan Agreement, Textron and Knoll 

entered a separate Subordination Agreement, under which Knoll retained a 

first-priority security interest in specified accounts receivable of Tusa Office 

and a second-priority security interest in all other current and after-acquired 

assets of Tusa Office. With the exception of those specified accounts receivable, 

Textron received a first-priority security interest in all remaining current and 

after-acquired assets of Tusa Office. Textron and Knoll subsequently entered 

an Amended Subordination Agreement. 

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Under these several agreements, Tusa Office’s accounts receivable were 

paid directly into the lockbox by its customers. Having control of the lockbox, 

Textron withdrew the deposited funds daily and applied them to increase the 

available credit to Tusa Office on its revolving loan. On request, Textron would 

advance new revolving loan funds to Tusa Office’s operating account. Tusa 

Office used those funds to, among other things, pay Knoll. By paying Knoll, 

Tusa Office reduced its indebtedness under the APA, allowing it to fill new 

orders from its customers.

II. PROCEEDINGS

A. BANKRUPTCY COURT

In November 2008, Tusa Office filed a voluntary petition for relief under 

Chapter 11 of the Bankruptcy Code. Shortly thereafter, Knoll filed its proof of 

claim in the amount of $6,929,783.87. In July 2009, the bankruptcy court 

granted Tusa Office’s motion to convert its Chapter 11 petition for 

reorganization to a Chapter 7 petition for liquidation. 

In November 2010, the Trustee filed a complaint, initiating this 

adversary action. She sought to avoid as preferences $4,592,483.90.55 in 

transfers made by Tusa Office to Knoll during the 90-day preference period,

pursuant to 11 U.S.C. § 547(b). The bankruptcy court bifurcated the first and 

second counts of the adversary action in April 2012, then tried those counts 

over nine nonconsecutive days between August 2012 and January 2013. The 

next month, Knoll filed a motion for leave to amend its answer to assert an

exception under § 547(c) as a new affirmative defense to the first count. The 

Trustee filed a response. Following a hearing, the court issued an order 

granting Knoll’s motion, and the amended answer was entered into the record.

The bankruptcy court issued its findings of fact and conclusions of law in

August 2013. It entered its final judgment on the first count a year later. The 

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Trustee then filed a timely notice of appeal in the bankruptcy court and, in the 

following days, filed an amended notice of appeal, but only sought review of the 

judgment on the first count. 

B. DISTRICT COURT

In March 2015, the district court issued its order and judgment, 

affirming the bankruptcy court. Although the parties had raised other issues, 

the district court stated that “nothing would be gained by a discussion of any 

of the issues the parties say are presented by this appeal other than the

§ 547(c)(5) issues.” Specifically, it concluded that the bankruptcy court had not 

abused its discretion in granting Knoll’s motion to amend its answer and that 

it had not erred in concluding alternatively that, even if the transfers were 

preferences, Knoll had established that the exception to avoidance under 

§ 547(c)(5) applied. Later that month, the Trustee timely filed notice of appeal

to this court.

ANALYSIS

I. STANDARD OF REVIEW

We review the bankruptcy court’s findings of fact and conclusions of law 

“under the same standards employed by the district court hearing the appeal 

from bankruptcy court; conclusions of law are reviewed de novo, findings of fact 

are reviewed for clear error, and mixed questions of fact and law are reviewed 

de novo.”2 “Under a clear error standard, this court will reverse only if, on the 

entire evidence, we are left with the definite and firm conviction that a mistake 

 

2 Century Indem. Co. v. NGC Settlement Trust (In re Nat’l Gypsum Co.), 208 F.3d 498, 

504 (5th Cir. 2000); see Templeton v. O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 152 

(5th Cir. 2015) ("This court reviews the bankruptcy court's findings of fact for clear error and 

its conclusions of law de novo."). The bankruptcy court’s order granting Knoll leave to amend, 

which we do not review, is subject to a different standard of review. See Deere & Co. v. 

Johnson, 271 F.3d 613, 621 (5th Cir. 2001).

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has been made.”3 “Strict application of the clearly erroneous rule is particularly 

important where, as here, the district court has affirmed the bankruptcy 

judge’s findings.”4

II. THE REQUIREMENTS OF § 547(B)

A. THE VARIOUS ANALYSES

The Trustee complains that the bankruptcy court erred in holding that 

the transfers from Tusa Office to Knoll were not preferences under § 547(b) of 

the Bankruptcy Code. Section 547(b) specifies, in the conjunctive:

[T]he trustee may avoid any transfer of an interest of 

the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by 

the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made . . . on or within 90 days before the date of 

the filing of the petition [viz., the preference 

period] . . . ; and

(5) that enables such creditor to receive more than 

such creditor would receive if—

(A) the case were a case under chapter 7 of 

this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such 

debt to the extent provided by the

[Bankruptcy Code].5

 

3 Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 480 (5th 

Cir.2009) (internal quotation marks omitted).

4 Wilson v. Huffman (In re Missionary Baptist Found. of Am., Inc.), 712 F.2d 206, 209 

(5th Cir. 1983).

5 11 U.S.C. § 547(b).

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If a trustee establishes each of the requirements of § 547(b), the transfer is a 

preference, which must be returned to the bankruptcy estate unless the 

creditor establishes an exception to avoidance under § 547(c).6

The instant dispute concerns the last of the § 547(b) requirements,

namely, subsection (b)(5). “This is the requirement that before a trustee in 

bankruptcy can [sic] avoid a preferential [transfer], the trustee must establish

that the [transfer] enabled the creditor to receive more than the creditor would 

have received upon liquidation under Chapter 7 of the [B]ankruptcy [C]ode.”7

To determine whether a trustee has established this requirement, a 

court typically uses the so-called “hypothetical Chapter 7 liquidation analysis”

inherent in § 547(b)(5) itself. To do so, the court (1) constructs a hypothetical 

Chapter 7 liquidation in which the creditor retains the disputed transfers, viz., 

the transfers-retained hypothetical, and (2) constructs another in which the 

creditor returns those transfers, viz., the transfers-returned hypothetical. To

establish the requirement of § 547(b)(5) under this analysis, the sum of (1) the 

disputed transfers and (2) the creditor’s distribution in the transfers-retained

hypothetical must be “more” than the creditor’s distribution in the transfersreturned hypothetical. 

 

6 Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery), 171 F.3d 249, 253 (5th 

Cir. 1999); see 11 U.S.C. § 547(g) (“For the purposes of [§ 547], the trustee has the burden of 

proving the avoidability of a transfer under [§ 547(b)], and the creditor or party in interest 

against whom recovery or avoidance is sought has the burden of proving the nonavoidability 

of a transfer under [§ 547(c)].”). In addition to the requirements enumerated in § 547(b)(1) 

through § 547(b)(5), there is an unenumerated requirement in § 547(b) itself that such a 

transfer must have been made from “an interest of the debtor in property.” That is, to be 

avoidable, the transfer must have diminished the debtor’s estate. Because we hold that the 

trustee has not established another of the requirements of § 547(b), we do not consider the 

unenumerated requirment. 

7 Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1034 (5th Cir. 1987); see 

11 U.S.C. § 547(b)(5).

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But a court may occasionally circumvent the often arduous hypothetical 

Chapter 7 liquidation analysis by employing the abbreviated El Paso Refinery

analysis.8 This analysis considers only the disputed transfer itself. It is 

premised on the truism that, if a creditor receives a transfer which, by its very 

nature, would not have been available to any of the other secured or unsecured 

creditors, it could never receive “more” under the hypothetical Chapter 7 

liquidation analysis.9 Specifically, the El Paso Refinery analysis states:

To determine whether an undersecured creditor 

received a greater percentage recovery [read: “more”] 

on its debt than it would have under [C]hapter 7 the 

following two issues must first be resolved: (1) to what 

claim the [transfer] is applied and (2) from what source 

the [transfer] comes. Both aspects must be examined 

before the issue of greater percentage recovery can be 

decided.10

These are referred to as the application aspect and the source aspect, 

respectively. 

If the disputed transfer (1) reduced the creditor’s collateral under the 

application aspect of the El Paso Refinery analysis or (2) was made from the 

debtor’s collateral under the source aspect of that analysis, the trustee could

never establish that the creditor received “more” under the hypothetical 

Chapter 7 liquidation analysis. But only in such an instance is the El Paso 

Refinery analysis dispositive. If, conversely, the disputed transfer (1) did not

reduce the creditor’s collateral under the application aspect and (2) was not

made from the debtor’s collateral under the source aspect, the trustee might

 

8 El Paso Refinery, 171 F.3d at 253.

9 See, e.g., Missionary Baptist, 796 F.2d at 759 (“It is a commonplace that preference 

law exempts fully secured creditors from its grasp.”).

10 El Paso Refinery, 171 F.3d at 254 (citation omitted).

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still be able to establish that the creditor received “more” under the 

hypothetical Chapter 7 liquidation analysis. Simply put, the El Paso Refinery

analysis provides a threshold. It is intended to aid the hypothetical Chapter 7 

liquidation analysis under § 547(b)(5), not to replace it. Nor could it. As the 

hypothetical Chapter 7 liquidation analysis is embodied in § 547(b)(5), it must 

control.

Here, in a belt-and-suspenders approach, the bankruptcy court 

undertook both the El Paso Refinery analysis and the hypothetical Chapter 7 

liquidation analysis. It began by determining that the Trustee had failed to 

establish the requirement of § 547(b)(5) under the El Paso Refinery analysis 

because she had not satisfied the source aspect.11 Although it did not need to 

have done so, the bankruptcy court went on to determine that the Trustee had 

also failed to establish the requirement of § 547(b)(5) under the hypothetical

Chapter 7 liquidation analysis: Even if the transfers had not been made from 

Knoll’s collateral, Knoll still did not receive “more.” 

The district court did not use either analysis, however. Instead it

determined that, even if the Trustee had established all of the requirements of

§ 547(b), Knoll itself had established an exception to avoidance under 

§ 547(c)(5). 

B. THE EL PASO REFINERY ANALYSIS

We begin, as did the bankruptcy court, with the El Paso Refinery

analysis. The Trustee contends that the bankruptcy court erred in deciding 

that the Trustee did not satisfy the source aspect of the El Paso Refinery

analysis. This analysis specifies that “[e]ven if the [transfer] in question was 

 

11 The parties do not appear to dispute that the trustee established the application 

aspect of the analysis because the transfers from Tusa Office to Knoll did not reduce Knoll’s 

collateral.

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applied to the unsecured portion of an undersecured creditor’s claim, the 

creditor will not be deemed to have received a greater percentage [read: “more”]

as a result of the [transfer] if the source of the [transfer] is the creditor’s own 

collateral.”12 Accordingly, “[a] creditor who merely recovers its own collateral 

receives no more as a result than it would have received anyway had the

[transfer] been retained by the debtor, subject to the creditor’s security 

interest.”13

The Trustee asserts that the transfers from Tusa Office to Knoll were 

not made from the proceeds of Knoll’s collateral. Knoll disputes this. We note

that “[p]roperty interests are created and defined by state law” and that, 

“[u]nless some federal interest requires a different result, there is no reason 

why such interests should be analyzed differently simply because an interested 

party is involved in a bankruptcy proceeding.”14 “It is [therefore] common in 

the bankruptcy context to look to state law to define security interests created 

under state law.”15 The parties do not contest the applicability of state law, 

here that of Texas.

Texas has adopted the Uniform Commercial Code (“UCC”), which 

governs this dispute.16 The term “proceeds” is defined under § 9.102 of the UCC

as including “whatever is acquired upon the sale, lease, license, exchange, or 

 

12 El Paso Refinery, 171 F.3d at 254–55; see 5 COLLIER ON BANKRUPTCY ¶ 547.09 (16th 

ed. 2009).

13 El Paso Refinery, 171 F.3d at 254–55; see 5 COLLIER ON BANKRUPTCY ¶ 547.09.

14 Butner v. United States, 440 U.S. 48, 55 (1979).

15 Ford Motor Credit Co., LLC v. Dale (In re Dale), 582 F.3d 568, 573 (5th Cir. 2009).

16 See TEX. BUS. & COM. CODE ANN. § 1.101 (“This title [the Texas Business and 

Commercial Code] may be cited as the Uniform Commercial Code.”); Coburn Supply Co. v. 

Kohler Co., 342 F.3d 372, 376 (5th Cir. 2003) (“Texas has adopted the UCC . . . .”). 

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other disposition of collateral.”17 Under § 9.315, “a security interest attaches to 

any identifiable proceeds of collateral.”18 Further, “[a] security interest in 

[those] proceeds is a perfected security interest if the interest in the original 

collateral was perfected.”19 Knoll had a first-priority security interest in Tusa 

Office’s accounts receivable, so they were Knoll’s first-priority collateral. By 

extension, Knoll’s first-priority collateral included both the accounts receivable 

and any proceeds of those accounts receivable.20 To determine whether the 

Trustee satisfied El Paso Refinery’s source aspect, we must consider whether

those accounts receivable and proceeds remained Knoll’s collateral after being 

transferred (1) first into the lockbox by Tusa Office’s customers, then (2) out of 

the lockbox by Textron, and finally (3) by Textron to Tusa Office’s operating 

account. 

1. TRANSFERS FROM TUSA OFFICE’S CUSTOMERS INTO THE 

LOCKBOX

The Trustee does not dispute that the payments Tusa Office’s customers 

deposited into the lockbox were proceeds of Tusa Office’s accounts receivable.

She argues instead that, because this constituted a transfer of money, Knoll’s 

first-priority security interest in the payments was “stripped” by operation of

§ 9.332(a): “A transferee of money takes the money free of a security 

 

17 TEX. BUS. & COMM. CODE ANN. §§ 9.102(65), 9.102(65)(a).

18 Id. § 9.315(a)(2).

19 Id. § 9.315(c).

20 Knoll also had a second-priority security interest, after Textron’s first-priority 

security interest, in Tusa Office’s “now existing and hereafter acquired or arising 

Accounts, . . . Receivables, General Intangibles, Payment Intangibles, Deposit 

Accounts, . . . Letters of Credit, Letter-of-Credit Rights, advices of credit, money, . . . together 

with all products of and Accessions to any of the forgoing, and all Proceeds of any of the 

forgoing . . . .” These things constituted Knoll’s second-priority collateral. This secondpriority collateral is not relevant to the El Paso Refinery analysis. 

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interest . . . .”21 The comments explain that “the debtor itself is not a 

transferee,”22 meaning that § 9.332(a) does not apply if such a transfer of 

money was made to the debtor. The Trustee therefore insists that Textron, not 

Tusa Office, was the transferee. In so doing, the Trustee contends that the 

lockbox was “owned and controlled by Textron.”

Knoll disputes this contention. Specifically, Knoll explains that (1) the 

deposit by Tusa Office’s customers into the lockbox corresponded with 

reductions in Tusa Office’s accounts receivable and (2) the transfers out of the 

lockbox to Textron corresponded with reductions in Tusa Office’s debt to 

Textron under the revolving loan. Knoll also observes that the bankruptcy

court never expressly found that Textron owned the lockbox. The Trustee

counters that Tusa Office’s former controller testified that the lockbox 

“belonged to Textron” and that there is no reference to the lockbox in Tusa 

Office’s bankruptcy schedules.

Regardless of the Trustee’s and Knoll’s competing assertions, the Loan 

Agreement is clear. It specifies that “[Tusa Office] shall utilize a lockbox 

arrangement for collection of Accounts at a bank designated by [Textron] . . . .”

and, as a condition precedent to the Loan Agreement, “[Tusa Office] shall have 

established a blocked account or lockbox . . . for its collections and the transfer 

thereof to [Textron] . . . .” The Loan Agreement also states that “[Tusa Office] 

shall have possession of [Textron’s] Collateral” and “will cooperate with and 

assist [Textron] in obtaining control . . . with respect to [c]ollateral consisting 

of . . . Deposit Accounts . . . .”

 

21 TEX. BUS. & COMM. CODE ANN. § 9.332(a).

22 Id. § 9.332, cmt. 2. 

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Because Tusa Office, not Textron, owned the lockbox, § 9.332(a) does not 

apply. Therefore, Knoll’s first-priority security interest in the proceeds of Tusa 

Office’s accounts receivable survived the deposit into the lockbox. 

2. TRANSFERS FROM THE LOCKBOX TO TEXTRON

The Trustee next contends that Knoll’s first-priority security interest in 

the proceeds of Tusa Office’s accounts receivable, initially paid into the lockbox, 

did not then transfer from the lockbox to Textron. She states specifically that 

§ 9.332(b) of the UCC stripped Knoll’s first-priority security interest when they 

were transferred from the lockbox to Textron.

Knoll responds that § 9.332(b) only concerns a security interest in the

deposit account itself, not a security interest in the funds contained in it.

Accordingly, Knoll insists that, even though § 9.332(b) would have prevented 

a security interest in the lockbox itself from transferring, it did not prevent the

transfer of Knoll’s first-priority security interest in the proceeds of its 

collateral. 

The plain language of § 9.332(b) states that a “transferee of funds from 

a deposit account takes the funds free of a security interest in the deposit 

account.”23 Although § 9.332(a)—which applies to transfers of “money”—and 

§ 9.332(b)—which applies to transfers of “funds”—are similar, they are not 

identical.24 Specifically, § 9.332(a) provides that “[a] transferee of money takes 

 

23 Id. § 9.332(b) (emphasis added).

24 As used in the UCC, “money” and “funds” are not synonymous. The UCC defines 

“money” as “a medium of exchange currently authorized or adopted by a domestic or foreign 

government.” Id. § 1.201(24). As the comments to § 9.201 explain: “‘[M]oney’ is limited 

essentially to currency . . . . ‘[F]unds’ is a broader concept (although the term is not defined

[by the UCC]).” Id. § 9.201, cmt. 5. The comments to § 9.332 explain that “[a] transfer of 

funds . . . , to which [§ 9.332(b)] applies, normally will be made by check, by funds transfer, 

or by debiting the debtor’s deposit account and crediting another depositor’s account.” Id. 

§ 9.332, cmt. 2. 

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the money free of a [read: any] security interest.”25 By contrast, § 9.332(b) 

provides that “[a] transferee of funds from a deposit account takes the funds 

free of a security interest in the deposit account . . . .”26 This difference must 

have been intentional. The drafters could have specified, but did not, that “a 

transferee of funds from a deposit account takes the funds free of a [read: any] 

security interest” as they did in § 9.332(a). Or they could have specified that “a 

transferee of funds from a deposit account takes the funds free of a security 

interest in the funds themselves.” The comments to § 9.332 bolster this 

distinction between a deposit account itself and the funds contained in it. In 

particular, the comments explain that § 9.332(b) “applies to transfers of funds 

from [a] deposit account” but “does not apply to transfers of the deposit account

itself or of [a security] interest therein.”27 (Of course, the question whether 

§ 9.332(b) applies is distinct from the subsequent question whether § 9.332(b) 

then strips a particular security interest.) 

The comments to § 9.332 further explain that “[b]road protection for 

transferees helps to ensure that security interests in deposit accounts do not 

impair the free flow of funds.”28 It is clear to us that § 9.332(b) ensures that the

funds in a deposit account remain unencumbered by a security interest in the 

deposit account itself. Section 9.332(b) does not even address, must less strip, 

a security interest that encumbers the funds contained in the deposit account. 

Stated simply, § 9.332(b) protects Knoll from Textron’s first-priority security 

interest in the deposit account; it does not, however, protect Textron from 

Knoll’s first-priority security interest in the funds contained in that account. 

 

25 Id. § 9.332(a) (emphasis added).

26 Id. § 9.332(b) (emphasis added).

27 Id. § 9.332, cmt. 2 (emphasis in original). 

28 Id. § 9.332, cmt. 3. 

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Because § 9.332 is a recent addition to the UCC, the jurisprudence 

interpreting it is scarce. Nevertheless, the Trustee and Knoll each proffer cases 

to support their respective positions.29 Knoll relies on Madisonville State Bank 

v. Canterbury, in which a state appeals court held that § 9.332 strips the 

security interests in the deposit account itself but not the security interest in 

the funds in it.30 By contrast, the Trustee notes that this holding was 

disregarded as “unsound” by a federal district court in City Bank v. Compass 

Bank, which determined that § 9.332 strips the security interest from both the 

deposit account and the funds in it.31 But, in doing so, that court disregarded 

the plain language of § 9.332 in favor of the comments. It reasoned that the 

comments to § 9.332 “specifically define[ ] encumbered accounts as being not 

only those subject to a direct security interest [in] the account itself, but also 

‘deposit accounts containing collections from accounts receivable.’”32

 

29 Knoll also relies on a district court’s decision in Western National Bank v. United 

States, which held that funds deposited by a debtor’s customers into a lockbox remained 

subject to a security interest. W. Nat’l Bank, Odessa v. United States, 812 F. Supp. 703, 706 

(W.D. Tex. 1993) (“[T]he corresponding receivable was immediately impressed with the

[federal] tax lien. Therefore, the lien followed the payments into the lockbox and could not be 

severed. . . . Although [the debtor] could no longer physically obtain the funds once they 

passed into the lock box, it still had an interest in the funds. The funds were payments from 

[the debtor’s] customers. Such funds were credited to [the debtor’s] account with [its creditor]. 

If a customer failed to pay, [the debtor] had a legal remedy to ensure payment. Moreover, if 

[the creditor] removed the funds and did not apply the proceeds to [the debtor’s] account, [the 

debtor] would have a cause of action against [the creditor] for misappropriation of funds. 

Thus, . . . [the debtor] had a sufficient interest in the funds deposited in the lock box for the 

[federal tax] lien to attach.”). But this holding was premised on federal law: “under the 

Treasury Regulations, property subject to a federal tax lien which has been sold or otherwise 

transferred by the taxpayer may be seized while in the hands of the transferee or any 

subsequent transferee.” Id. It is therefore inapposite.

30 209 S.W.3d 254, 258 (Tex. Ct. App. 2006).

31 717 F. Supp. 2d 599, 616 (W.D. Tex. 2010).

32 City Bank, 717 F. Supp. 2d at 616-17 (quoting TEX. BUS. & COMM. CODE ANN.

§ 9.332, cmt. 3.)

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But this so-called “explicit statement of legislative intent” is nothing of 

the sort. In context, the comments merely explain that § 9.332 is justified 

because “payments of funds from encumbered deposit accounts (e.g., deposit 

accounts containing collections from accounts receivable) occur with great 

regularity.”33 This simply suggests that transfers of funds from deposit 

accounts, “including deposit accounts containing collections from accounts 

receivable,” are taken “free of a security interest in the deposit account.” City 

Bank’s assertion, which may very well be dicta, 34 is incorrect. In any event, it 

does not bind us. 

The plain language of § 9.332(b) is unambiguous. Knoll’s first-priority 

security interest in the proceeds of Tusa Office’s accounts receivable survived 

the transfer from the lockbox to Textron. Not only is this consistent with 

§ 9.332(b), but it is also consistent with the Subordination Agreement between 

Knoll and Textron.35

 

33 TEX. BUS. & COMM. CODE ANN. § 9.332, cmt. 3.

34 Ultimately, the district court “decline[d] to decide this uncertain point of state law” 

after remarking that “there [we]re adequate alternative grounds to decide the overall issue 

of conversion . . . .” City Bank, 717 F. Supp. 2d at 616-17.

35 Neither party addresses the applicability of § 9.339, which provides that § 9.332 

“does not preclude subordination by agreement by a person entitled to priority.” TEX. BUS. &

COMM. CODE ANN. § 9.339. As the comments to § 9.339 explain: “The preceding sections

[including § 9.332] deal elaborately with questions of priority. This section [§ 9.339] makes it 

entirely clear that a person entitled to priority may effectively agree to subordinate its claim. 

Only the person entitled to priority may make such an agreement: a person’s rights cannot 

be adversely affected by an agreement to which the person is not a party.” Notably, the 

comments to § 9.332 further provide that “[§ 9.332] sets forth the circumstances under which 

certain transferees of money or funds take free of security interests. It does not determine 

the rights of a transferee who does not take free of a security interest.” It is clear to us, as it 

was to the bankruptcy court, that Textron and Knoll did not intend for Knoll’s first-priority 

security interest to be preserved only to be destroyed by § 9.332(a) or § 9.332(b).The Loan 

Agreement between Textron and Tusa Office provides that “[Tusa] has a perfected first 

priority security interest in the Collateral and the Collateral is free of any lien, encumbrance 

or adverse interest of any kind whatsoever, with the exception of . . . liens permitted under 

the terms of [the Subordination Agreement with Knoll].” 

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3. TRANSFERS FROM TEXTRON TO TUSA OFFICE

The Trustee also urges that, even if Knoll’s first-priority security interest 

in the proceeds of Tusa Office’s accounts receivable did survive the transfer 

into and out of the lockbox, it did not survive the transfer from Textron to Tusa 

Office’s operating account. Specifically, the Trustee insists that the proceeds 

were commingled. Knoll responds that, unless the Trustee establishes that the 

proceeds were commingled, they are presumed to be identifiable. Knoll

suggests that the Trustee never established, and the bankruptcy court never 

found, that the funds transferred by Textron into Tusa Office’s operating 

account were commingled. 

As a preliminary matter, § 9.315(b)(2) of the UCC specifies that 

“[p]roceeds that are commingled with other property are identifiable 

proceeds . . . to the extent that the secured party identifies the proceeds by a 

method of tracing, including application of equitable principles, that is 

permitted under law . . . .”36 Knoll argues that § 9.315(b)(2)’s requirement that 

“the secured party identif[y] the proceeds by a method of tracing”37 is 

inconsistent with the § 547(g)’s instruction that “the trustee has the burden of 

proving the avoidability of a transfer under [§ 547(b)].”38 Knoll relies on Batlan 

v. TransAmerica Commercial Finance Corp. (In re Smith’s Home Furnishings, 

Inc.),39 in which the Ninth Circuit explained that “it is part of the trustee’s § 

547(b)(5) burden to trace the funds used to make the payments to [funds] not 

 

36 TEX. BUS. & COMM. CODE ANN. § 9.315(b)(2).

37 Id. § 9.315(b)(2) (emphasis added).

38 11 U.S.C. § 547(g) (emphasis added).

39 265 F.3d 959, 967 (9th Cir. 2001).

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subject to [the creditor’s] liens.”40 In so doing, that court observed that “in 

bankruptcy, it is the trustee who accedes to the debtor’s books and records and 

has easier access and a better ability to divine the financial activities of the 

debtor in its last months of operation.” The Smith’s court also clarified that,

“[r]egardless of [whether the creditor or trustee] is better equipped to decipher 

the debtor’s final financial actions, we hold that the language of [§ 547(g)]

places the burden of demonstrating the source of such preferential payments 

squarely on the trustee.”41

The Trustee responds that this was merely dicta because the Ninth 

Circuit had already held that the debt owed to the creditor was completely 

secured, so the transfer could not be a preference. This, however, ignores the 

Ninth Circuit’s clear signal to the contrary, viz., “we hold.” It also ignores the 

fact that the Ninth Circuit relied on the same reasoning for its holdings that 

(1) the creditor was completely secured and (2) the trustee had the burden of 

tracing. In deciding that the debt owed to the creditor was completely secured,

the Ninth Circuit explained: “Under § 547(b)(5), the trustee must show that 

the amount of indebtedness under the floating lien was greater than the 

amount of collateral . . . . A floating lien does not shift the burden of showing 

avoidability to the creditor. The trustee still has to satisfy his burden under 

§ 547(b)(5).”42 Thus, the Ninth Circuit’s decision in Smith’s stands for the 

proposition that a trustee has the burden of showing that the source of any 

transfers from a debtor to a creditor was not the proceeds of the creditor’s 

 

40 Id. at 966.

41 Id. at 967.

42 Smith’s, 265 F.3d at 965.

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collateral. That court’s reasoning in this respect is strongly persuasive. The 

UCC applies “[u]nless some federal interest requires a different result.”43

The Trustee also suggests that the lockbox arrangement between the 

lender and debtor in Smith’s was different from the one between Textron and 

Tusa Office. She argues expressly that, in Smith’s, the lender swept the lockbox 

daily and advanced funds the next day, but that here Textron swept the funds 

daily, but only advanced funds at Tusa Office’s request.

The Ninth Circuit’s description of the arrangement in Smith’s is broad 

enough to encompass the instant arrangement. There, the court explained that

“[the lender] . . . swept the [lockbox] accounts daily, leaving the accounts with 

overnight balances of zero,” that “[t]he next day, the [lender] advanced new 

funds to [the debtor] if sufficient collateral was available,” and that “[the 

debtor] then paid its operating expenses and creditors . . . .” 44 It observed that,

“[b]ecause of these procedures, the allegedly preferential payments . . . were 

not made directly from the proceeds of the sales of [the creditor’s] collateral.”45

The Trustee seems to suggest that, because Tusa Office did not request such 

transfers each day, and because Textron did not make such transfers each day, 

the arrangement in Smith’s is distinguishable. But this is not entirely relevant, 

especially because the contractual arrangement between Tusa Office and 

Textron expressly permitted Tusa Office to request funds more frequently than 

once a day.46

 

43 Butner, 440 U.S. at 55.

44 Smith’s, 265 F.3d at 961. 

45 Id. at 961 n.2. 

46 Specifically, it provides that “[Tusa Office] shall make no more than three (3) 

requests for Revolving Loans per business day.”

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Because § 547(g) is clear and Smith’s is persuasive, we hold that it was 

the Trustee’s burden to establish that the funds in the operating account were 

not the proceeds of Tusa Office’s accounts receivable and that she failed to do 

so.47 The definition of “proceeds” in the UCC is broad. It includes “whatever is 

acquired upon the sale, lease, license, exchange, or other disposition of 

collateral,” “whatever is collected on, or distributed on account of, collateral,” 

and “rights arising out of collateral.”48 Absent any reasonable indication to the 

contrary, it follows that, but for the transfers from the lockbox to Textron, no

transfers from Textron to Tusa Office would have been possible. The 

bankruptcy court did not err in determining that “Tusa Office acquired funds 

from Textron upon the disposition of Knoll's Collateral.” 

Because the Trustee did not satisfy the source aspect of the El Paso 

Refinery analysis, testing under the hypothetical Chapter 7 liquidation 

analysis is unnecessary. The Trustee did not establish the requirement of 

§ 547(b)(5), so we hold that the transfers from Tusa Office to Knoll were not 

preferences.

III. THE EXCEPTION UNDER 547(C)(5)

We would normally stop here without addressing the exception to 

avoidance under § 547(c)(5). However, the district court went on to consider 

that exception and to hold that Knoll had established it. As we shall explain, 

we disagree. 

In pertinent part, § 547(c)(5) states that “[t]he trustee may not avoid 

under [§ 547] a transfer . . . that creates a perfected security interest in 

 

47 The trustee herself states that “tracing is not possible under these circumstances,” 

which seems to be an acknowledgment that, if that burden is hers, she cannot meet it.

48 TEX. BUS. & COMM. CODE. ANN. § 9.102(65).

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inventory or a receivable or the proceeds of either . . . .”49 As she did in the 

bankruptcy court and in the district court, the Trustee again argues that the 

exception under § 547(c)(5) does not apply to the disputed transfers from Tusa 

Office to Knoll because those transfers did not create any security interest. She 

also notes that neither the bankruptcy court nor the district court considered 

whether the transfers created such a security interest.

The Trustee properly distinguishes the Eleventh Circuit’s decisions on 

which the district court relied. In Galloway v. First Alabama Bank (In re 

Wesley Industries Inc.), the Eleventh Circuit applied § 547(c)(5) to determine

that a debtor’s transfer of a perfected security interest in its accounts 

receivable under a ‘floating lien’ was not avoidable because the creditor’s 

position had not improved as a result.50 This allowed that court to use 

§ 547(b)(5) to conclude that a debtor’s transfer of the proceeds of the accounts

receivable themselves was not a preference because the creditor merely 

received its own collateral.51 Although the decision is admittedly vague in its 

analysis, it did not hold that § 547(c)(5) applies to transfers of accounts

receivable themselves. Instead, it expressly states that § 547(c)(5) “protects the 

transfer of a security interest in after-acquired property . . . .”52

In Roemelmeyer v. Walter E. Heller & Co., Southeast, Inc. (In re Lackow 

Brothers, Inc.), the Eleventh Circuit determined the appropriate method of 

valuation of under § 547, but it did not consider whether § 547(c)(5) applies to 

transfers of accounts receivable.53 Further, § 547(c)(5) could not have applied 

 

49 11 U.S.C. § 547(c).

50 30 F.3d 1438, 14-38-42 (11th Cir. 1994).

51 Id.

52 Id. at 1442 (emphasis added).

53 752 F.2d 1529 (11th Cir. 1985).

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to the transfers there because the creditor was fully secured. As this court has 

held, “[i]t is . . . commonplace that preference law exempts fully secured 

creditors from its grasp.”54 We agree with the Trustee that, even if these 

opinions were binding on us, they are nonetheless inapplicable here. 

In response, Knoll relies primarily on this court’s decision in Wilson v. 

Huffman (In re Missionary Baptist Foundation of America, Inc.) for the 

proposition that the exception to § 547(c)(5) applies here.55 In that decision, we

discussed the exception under § 547(c)(5) at some length, but remanded 

without deciding whether it applied to transfers of funds because the district 

court’s analysis was so “conclusory and unilluminating” that we had “no basis 

for meaningful review at all.”56 Despite this, Knoll advances that Missionary 

Baptist nonetheless held that if, on remand, the district court were to conclude

that the creditor had not improved its position, then the transfers would be 

unavoidable pursuant to the exception under § 547(c)(5).

Regardless, this court’s 1986 decision in Missionary Baptist and the 

Eleventh Circuit’s 1985 decision in Lackow are inapplicable for another, more 

significant reason. In reciting § 547(c)(5), both courts stated that it applies to 

a transfer “of a perfected security interest in inventory or a receivable or the 

proceeds of either.”57 Yet, as explained above, § 547(c)(5), as it now exists,

applies only to a transfer “that creates a perfected security interest in inventory 

or a receivable or the proceeds of either.”58 The amendment that replaced “of”

 

54 796 F.2d at 759.

55 796 F.2d at 760-61.

56 Id.

57 Id. at 759 (emphasis added) (quoting 11 U.S.C. § 547(c)(5)); Lackow, 752 F.2d at

1530 n.2 (emphasis added) (quoting 11 U.S.C. § 547(c)(5)).

58 11 U.S.C. § 547(c)(5) (emphasis added).

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with “that creates” was enacted in 1984 and codified in 1985.59 Missionary 

Baptist and Lackow might very well have interpreted the exception under 

§ 547(c)(5) as it then existed to apply to a transfer of accounts receivable 

themselves and any proceeds thereof. But, as it now exists, the exception under 

§ 547(c)(5) only applies to a transfer that creates a perfected security interest 

in such things. As we recently held, “the Bankruptcy Code must be read 

literally . . . .”60 Read literally—as it must be—the exception under § 547(c)(5) 

does not apply to the transfers at issue here. This does not, however, affect our 

outcome, which is grounded in the requirement of § 547(b)(5) and the

attendant El Paso Refinery analysis. 

CONCLUSION

For the forgoing reasons, we hold that the Trustee failed to establish the

requirement of § 547(b)(5) because the source aspect of the El Paso Refinery

analysis demonstrates that the transfer from Tusa Office to Knoll was made 

from the proceeds of Knoll’s own collateral.61 The judgment of the district court, 

affirming the bankruptcy court, is AFFIRMED. 

 

59 98 Stat. 355, 377 (July 10, 1985) (current version at 11 U.S.C. § 547). 

60 In re Vill. at Camp Bowie I, L.P., 710 F.3d 239, 246 (5th Cir. 2013) (emphasis in 

original).

61 To the extent we address the exception under § 547(c)(5), we do so in dicta. The 

trustee’s failure to establish the requirement of § 547(b)(5) alone is dispositive. 

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