Opinion ID: 3173155
Heading Depth: 2
Heading Rank: 2

Heading: the el paso refinery analysis

Text: 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. 9 Case: 15-10274 Document: 00513359812 Page: 10 Date Filed: 01/28/2016 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 12El 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). 16See 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 . . . .”). 10 Case: 15-10274 Document: 00513359812 Page: 11 Date Filed: 01/28/2016 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. 11 Case: 15-10274 Document: 00513359812 Page: 12 Date Filed: 01/28/2016 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. 12 Case: 15-10274 Document: 00513359812 Page: 13 Date Filed: 01/28/2016 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. 13 Case: 15-10274 Document: 00513359812 Page: 14 Date Filed: 01/28/2016 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. 14 Case: 15-10274 Document: 00513359812 Page: 15 Date Filed: 01/28/2016 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.) 15 Case: 15-10274 Document: 00513359812 Page: 16 Date Filed: 01/28/2016 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. 34Ultimately, 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].” 16 Case: 15-10274 Document: 00513359812 Page: 17 Date Filed: 01/28/2016 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). 17 Case: 15-10274 Document: 00513359812 Page: 18 Date Filed: 01/28/2016 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. 18 Case: 15-10274 Document: 00513359812 Page: 19 Date Filed: 01/28/2016 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.” 19 Case: 15-10274 Document: 00513359812 Page: 20 Date Filed: 01/28/2016 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.