Opinion ID: 18275
Heading Depth: 2
Heading Rank: 2

Heading: Otherwise Unavoidable Security Interest

Text: 15 Section 547(c)(4) does not allow all extensions of new value to be offset against prior preferences. Only new value that is not secured by an otherwise unavoidable security interest may be used. Section 547(c)(4)(A). Here, Agama retained a security interest in the new value goods at the time of shipment. However, it is undisputed that Agama never took any action to perfect its security interests. These unperfected security interests could not be, and were not, enforced by Agama. Moreover, subsequent payment by MIC would also bar enforcement of the security interests under Texas law. See, e.g., Barr v. White Oak State Bank, 677 S.W.2d 707, 710 (Tex.App.--Tyler 1984, writ ref'd). The trustee nevertheless argues, and the courts below agreed, that Agama may not invoke section 547(c)(4) because at one time it reserved a security interest. It concedes that this security interest is not enforceable, but reads the statute to require that for an extension of new value to be available for set off,any security interest attached to it must be subject to the trustee's avoidance power. The argument is that since the security interests here were in fact extinguished by payment (the payment asserted as a preference), not by the actual operation of the avoidance powers, the security interests were unavoidable and the shipments which were subject thereto can not constitute new value applicable against prior preferences. 16 The trustee's argument necessarily assumes that Congress was concerned with the mere existence, at any time, of securityinterests, rather than their enforcement and subsequent diminishing of the estate. However, the text of the statute indicates clearly that this is not the case. The statute concerns itself not with all security interests, but only with otherwise unavoidable security interests. This indicates that the proper temporal focus is not on the historical existence of security interests, but rather the existence of such interests at the time of bankruptcy. If security interests exist at that time and the new value rule is invoked, the court should not allow the thus secured new value to be set off against past preferences if the security interests are otherwise unavoidable. However, if at the time of bankruptcy no such interest exists, the once secured new value may be applied against such preferences. Since no security interest existed at the relevant time, section 547(c)(4)(A) is facially inapplicable. 17 This interpretation of the statute is the only sensible, real world result. A key justification for the new value exception is that while the payment of preferences to the creditor diminished the estate, other creditors are not really worse off since the subsequent advance of new value replenishes the estate. See In re Toyota, 14 F.3d at 1091. This logic is obviously undercut if the creditor retains a valid, enforceable security interest in the new value. If section 547(c)(4)(A) did not exist, such a creditor could not only shield a past preference, but also enforce the security interest and recover the new value. The net effect on the estate would no longer be neutral, and the other creditors would have cause for complaint. But if the security interest originally attached to the new value is unenforceable-either because it has been extinguished or is avoidable-the mere fact it once existed cannot disadvantage the other creditors. The new value remains firmly fixed in the estate and availableto all the creditors. There thus is really no reason to prevent the set-off of this new value against prior preferences. See Kroh Brothers, 930 F.2d at 654 (stating that the availability of section 547(c)(4) depends on the ultimate effect on the estate and thus if a party could assert a secured claim against the estate the defense could not be invoked). Neither the trustee nor the courts below cite any case in which the prior existence of a security interest that was not capable of being asserted against the estate was relied on to defeat invocation of section 547(c)(4)'s protection. We therefore hold that section 547(c)(4)(A) prevents the application of new value against prior preferences only if that new value is subject to a security interest that is valid and enforceable at the time of the bankruptcy.