Opinion ID: 474027
Heading Depth: 1
Heading Rank: 4

Heading: Were There Any Preferential Payments Under 11 U.S.C.

Text: 51 Sec. 547? 52 The Trustee's second main argument is that, even if the Bank took a valid security interest in the accounts receivable, the Debtor's loan repayments during the ninety days preceding bankruptcy amount to voidable preferences under 11 U.S.C. Sec. 547(b). The Bank defends under 11 U.S.C. Sec. 547(c)(5), which invokes what is known as the improvement in position exception. The Bank argues that it was fully secured at all times, Appellee's Brief at 17, and therefore the payment to it under its lines of credit could not have resulted in an improvement of its position, id. at 25 (emphasis added). It is a commonplace that preference law exempts fully secured creditors from its grasp. 9 11 U.S.C. Sec. 547(c)(5) provides: 53 (c) The trustee may not avoid under this section a transfer-- 54 .... 55 (5) of a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interest for such debt on the later of-- 56 (A) (i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or 57 (ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; and 58 (B) the date on which new value was first given under the security agreement creating such security interest.... 59 Pub.L. 95-598, 92 Stat. 2597 (1978). 10 The two-point net improvement test of Section 547(c)(5) requires, in the present case, a computation of (1) the loan balance outstanding ninety days prior to bankruptcy; (2) the value of the accounts receivable on that day; (3) the loan balance outstanding on the day the bankruptcy petition was filed; and (4) the value of the accounts receivable on that day. 11 According to the Trustee's calculations, the Bank was undersecured by $160,883.58 ninety days prior to bankruptcy, and oversecured by $162,617.37 on the day of bankruptcy. See Appellant's Brief at 11-12, 15-15A; Plaintiff's Exhibit 142; Testimony of Robert Cash, III Statement of Facts 449-52. Thus, according to the Trustee's computations, the Bank improved its position by $323,500.89 during the preference period. 12 As the Bank sees it, however, One must look at the entire loan transaction as a 'pot' of accounts receivable, which was the basis of the Bank's advances and loans under its revolving line of credit. To attempt to break this transaction into a daily basis, simply because the bankruptcy was filed in the middle of the month, is to distort the entire transaction. Appellee's Brief at 16-17. The Bank thus maintains that All evidence shows at all times material to this litigation, that the total monthly accounts receivable of the Debtor and its affiliated group never was lower than the amount of the revolving line of credit, which was $500,000.00. Id. at 15-16 (emphasis added) (citing testimony); see also Defendant's Exhibit 201. 60 The bankruptcy court made no specific findings of fact on this issue. Instead, the court simply stated that the evidence does not support the trustee's position that the bank improved its position within 90 days of bankruptcy. Memorandum and Order at 20; see also id. at 19 (the bank was fully secured against accounts receivable for all of the line of credit financing); id. at 26 (same). The district court's review of this issue was equally conclusory and unilluminating: 61 The trustee's other principal attack on the Bankruptcy Court's judgment concerns the court's conclusion that FNB did not improve its position within 90 days of the filing of the bankruptcy petition. Although the trustee's witness Mr. Robert Cash testified that FNB did improve its position during the 90 days preceding bankruptcy, cross-examination cast considerable doubt on his conclusions. The court agrees with the Bankruptcy Court that the credible evidence does not reveal any improvement in position that would allow the trustee to recover any amount under Bankr.Code Sec. 547(c)(5). 62 Order at 3. This court is thus left with no basis for deciding whether the bankruptcy court's findings on this issue were clearly erroneous or not; indeed, we have no basis for meaningful review at all. See Bankr.Proc.Rule 7052 (incorporating Fed.R.Civ.P. 52 by reference); Golf City, Inc. v. Wilson Sporting Goods Co., Inc., 555 F.2d 426, 432 (5th Cir.1977) (requiring a clear understanding of the ground or basis of the decision of the trial court); Theriault v. Silber, 547 F.2d 1279, 1280-81 (5th Cir.) (findings inadequate in absence of any indications of how, why, or on what basis they were reached), cert. denied, 434 U.S. 871, 98 S.Ct. 216, 54 L.Ed.2d 150 (1977); Sellers v. Wollman, 510 F.2d 119 (5th Cir.1975). 63 The proper solution is to remand the case for a factual determination as to whether the Bank improved its position during the ninety-day preference period. See 13 Collier on Bankruptcy p 752.02 (14th ed. 1985); Pullman-Standard v. Swint, 456 U.S. 273, 290-93, 102 S.Ct. 1781, 1791-93, 72 L.Ed.2d 66 (1982); Hydrospace-Challenger, Inc. v. Tracor/Mas, Inc., 520 F.2d 1030 (5th Cir.1975) (remanded where findings were couched in conclusory terms); United States v. Northside Realty Associates, Inc., 474 F.2d 1164 (5th Cir.1973) (remanded where court of appeals was unable to determine precise legal rationale of trial court's decision), cert. denied, 424 U.S. 977, 96 S.Ct. 1483, 47 L.Ed.2d 747 (1976); Ionmar Compania Naviera, S.A. v. Olin Corp., 666 F.2d 897 (5th Cir.1982); Fortner v. Balkcom, 380 F.2d 816 (5th Cir.1967). Such a determination should yield at least four numbers: (1) the loan balance outstanding ninety days prior to bankruptcy; (2) the value of the accounts receivable on that day; (3) the loan balance outstanding on the day the bankruptcy petition was filed; and (4) the value of the accounts receivable on that day. 13 64 The above instructions on remand do not end our inquiry, however, because Congress did not define the term value for purposes of Section 547, 14 and several different alternatives suggest themselves. 15 In particular, simply taking the value of accounts receivable as their face value might place an undue burden on the Bank if, as appears to be the case, the accounts receivable outstanding on the day of bankruptcy were not or could not in fact be collected in full. Thus, a more particularized, individualized assessment may be in order: 65 An individualized approach need be neither difficult to apply nor arbitrary. In each bankruptcy proceeding, the creditor or the trustee at some point liquidates the accounts receivable constituting collateral. This can be done either by collecting the accounts or by selling them. To determine whether the creditor is in a better position than it would have been had bankruptcy been declared ninety days earlier, the appropriate comparison would seem to be between the proceeds of the receivables actually liquidated after bankruptcy and the amount which would have been obtained if the receivables serving as collateral ninety days earlier had been liquidated in the same manner. In other words, if the receivables at bankruptcy were liquidated by collection, the comparison should be with the amounts actually collected from receivables serving as collateral ninety days before bankruptcy. If the receivables were liquidated by sale, the comparison should be with the amount which would have been received had the receivables serving as collateral ninety days before bankruptcy been sold. Thus, the first example adopts a collection value approach, while the second uses a market value approach. Because this individualized approach defines value in accordance with the method actually chosen to transform the accounts receivable to cash, it more accurately measures how much a particular creditor actually improved its eventual position during the ninety days before bankruptcy. 66 Cohen, supra, 66 Minn.L.Rev. at 664 (footnotes omitted). See also 11 U.S.C. Sec. 506(a) (value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest); H.R.Rep. No. 595, 95th Cong., 1st Sess. 356 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6312 (Courts will have to determine value on a case-by-case basis, taking into account the facts of each case and the competing interests in the case.). 67