Opinion ID: 1441354
Heading Depth: 2
Heading Rank: 1

Heading: Preferential Transfers

Text: As described in § 547(b)(5), for a transfer to be preferential, the creditor must receive more from the transfer than it would have received if the case had proceeded under Chapter 7, the transfer had not been made, and the creditor had received payment of its debt to the extent provided under the bankruptcy laws. This analysis requires the court to construct a hypothetical Chapter 7 liquidation and determine what the creditor would have received had the transfers not taken place. Cunningham v. T & R Demolition, Inc. (In re ML & Assocs., Inc.), 301 B.R. 195, 202 (Bankr.N.D.Tex.2003). If the creditor receives a greater percentage of its debt as a result of the prepetition transfer than it would have in a bankruptcy distribution, the transfer is preferential. See Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery, L.P.), 171 F.3d 249, 253-54 (5th Cir.1999). In constructing a hypothetical Chapter 7 case, we are to assume that all persons would act in a commercially reasonable and businesslike manner. In re ML & Assocs., 301 B.R. at 202. Further, the alleged preferential transfer must not diminish or deplete the debtor's estate. Lovett v. Homrich, Inc. (In re Philip Servs. Corp.), 359 B.R. 616, 630 (Bankr.S.D.Tex.2006); see also Cage v. Wyo-Ben, Inc. (In re Ramba, Inc.), 437 F.3d 457, 460 (5th Cir.2006) (Essentially, a voidable preference must have depleted the estate.). This is because the preferential transfer statute was designed, in part, to prevent a transfer to one creditor that would diminish the estate of the debtor that otherwise would be available for distribution to all. Triad Int'l Maint. Corp. v. S. Air Transp., Inc. (In re S. Air Transp., Inc.), 511 F.3d 526, 530 (6th Cir. 2007) (internal quotation marks omitted). Thus, as the Fourth Circuit stated, the relevant inquiry focuses not on whether a creditor may have recovered all of the monies owed by the debtor from any source whatsoever, but instead on whether the creditor would have recovered 100% of the debt from the debtor's estate. Smith v. Creative Fin. Mgmt., Inc. (In re Virginia-Carolina Fin. Corp.), 954 F.2d 193, 199 (4th Cir.1992). Here, Palmetco argues that Texas law concerning materialman's liens and construction trust funds would result in Palmetco recovering 100% of what it was owed without depleting NA Flash's estate. We turn first to construction trust funds, as that is the theory relied on by the district court.