Opinion ID: 479412
Heading Depth: 1
Heading Rank: 2

Heading: Valuation of Marine's Security

Text: 20 Before the bankruptcy court, the trustee alleged that Marine had received an avoidable preference under 11 U.S.C. Sec. 547(b). That section provides: 21 (b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property-- 22 (1) to or for the benefit of a creditor; 23 (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; 24 (3) made while the debtor was insolvent; 25 (4) made-- 26 (A) on or within 90 days before the date of the filing of the petition; or 27 (B) between ninety days and one year before the date of the filing of the petition if such creditor at the time of such transfer was an insider; 28 (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; 29 (B) the transfer had not been made; and 30 (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 31 The trustee has the burden of proving the first, second, fourth and fifth elements of a preference by a preponderance of the evidence. See In re the Music House, Inc., 11 B.R. 139 (Bankr.D.Vt.1980); In re Hogg, 35 B.R. 292 (Bankr.S.D.1983). No one disputes that the first four elements have been proven. The parties do disagree on whether the trustee has established the fifth element--that the transfers enabled Marine to receive more than it would have had they not been made. 32 In order to meet this burden, the trustee generally must establish that the preferred party's claim is not fully secured. The payment of a secured claim ordinarily does not allow a creditor to receive more than it would receive in a Chapter 7 distribution. See In re Santoro Excavating, Inc., 32 B.R. 947 (Bankr. S.D.N.Y.1983); In re Hale, 15 B.R. 565, 567 (Bankr.S.D.Ohio 1981). By contrast, an unsecured claim is by definition one held by a party in the class of general creditors; it is subject to rules of priority and entitled to distribution only pro rata with other general claims. A payment to a creditor with an unsecured claim, therefore, may well favor that party over other general claimholders. 33 In the instant case, to meet his burden, the trustee must establish that the value of Marine's collateral on March 16, 1983--the date before the first alleged preferential transfer took place--was less than the amount owed by Prescott to Marine on that date. Marine contends that the trustee did not meet this burden before the bankruptcy court. It states that no evidence was presented to establish the value of inventory at the East Washington store on March 16: John Prescott was asked at trial to estimate the value of the store's inventory on that date, but he never answered the question. Therefore, Marine contends, the bankruptcy court's finding is clearly erroneous. The court's assessment of the value of the collateral is additionally in error, Marine argues, because it never took into account the value on that date of other elements of the collateral, such as accounts receivable or proceeds from inventory. 34 The bankruptcy court's findings on this matter are subject to the clearly erroneous standard. See Ginsu Products, Inc. v. Dart Industries, Inc., 786 F.2d 260 (7th Cir.1986). A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)). Here, the bankruptcy court found that on March 16, 1983, Prescott was indebted to Marine in the following amounts: 35 note $121,920.49 overdrafts $ 50,546,84 ----------- Total $172,467.33 The court found that indebtedness secured by: deposit accounts $ 1,734.00 inventory and accounts receivable $130,000.00 ----------- Total $131,734.00 36 We agree with the district court that the support for the $130,000 figure is slender but that this is of necessity so. Prescott did not take inventory on March 16. When a debtor maintains control of certain collateral during part of the preference period, it is to be expected that precise figures for the exact date relevant to a court's valuation may be lacking. That is why no fixed formula exists for valuing collateral, and courts, in considering the facts, circumstances and competing interests of each case, have substantial leeway in arriving at a figure. Cf. Barash v. Public Finance Corp., 658 F.2d 504, 512 (7th Cir.1981); 3 Collier on Bankruptcy, p 506.04 at 506-24 ([V]irtually no attempt is made [in the Bankruptcy Statute] to set forth the manner in, or basis ... upon which such valuation is to be conducted. These are left to judicial development.). If the value of a creditor's collateral had to be established with complete certainty before an avoidable preference could be found, section 547 would be of little effect, and its goal of securing equality of distribution among creditors, see In re J.E. Jennings, Inc., 46 B.R. 167 (Bankr.E.D.Pa.1985), would be unreachable. 37 Here, the bankruptcy court based its findings on several factors. Uncontroverted evidence at trial showed that the value, on March 31, 1983, of the East Washington store inventory was $130,000 at retail and $105,000 at wholesale. The joint application for relief from stay, filed by Marine and Gateway, and admitted into evidence at trial, alleged a wholesale value of $105,000 at the East Washington store as of June 14, 1983. Because the value of the inventory appears static for this period, it is not unreasonable to assume that it remained static for the two-week period in March. Prescott also testified at trial that the inventory of the other two stores remained static during this period. While these stores were in different communities and may have had a different pattern of inventory turnover, their static nature, in conjunction with the available evidence regarding the East Washington store, buttresses the trustee's position. 38 This evidence was sufficient to establish a prima facie case for the trustee. See In re Crump, 42 B.R. 636, 638 (Bankr.E.D.Mo.1984). At that point, the burden shifted to Marine to demonstrate that the trustee's figures were wrong. Apparently no rebuttal evidence was presented on inventory values or accounts receivable as of March 16. While Marine contends the court ignored evidence of more than $10,000 in proceeds from inventory in computing its valuation, the trustee argued that the evidence did not establish that these proceeds came from inventory available at the East Washington store on March 16. In any event, to the extent the bankruptcy court may have overlooked evidence of proceeds, this oversight tends to be mitigated by the fact that the court assessed the inventory at its retail value, rather than at the wholesale value which many bankruptcy courts have relied on in assessing creditors' interests in property. See In re Paige, 13 B.R. 713, 714 (S.D.Ohio 1981): Matter of Van Nort, 9 B.R. 218, 221 (Bankr.E.D.Mich.1981). Under these circumstances, we cannot say the bankruptcy court's findings were clearly erroneous.