In Re Smith's Home Funishings v. Transamerica Commercial Fin. Corp., PLAINTIFF-APPELLANT

Citation265 F.3d 959
Decision Date13 September 2001
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

K. John Shaffer, Stutman, Treister & Glatt, P.C., Los Angeles, California, for the plaintiff-appellant.

Jennifer L. Palmquist and Lauren E. Winters, Garvey, Schubert & Barer, Portland, Oregon, for the defendant-appellee.

Appeal from the United States District Court for the District of Oregon Robert E. Jones, District Judge, Presiding D.C. No. CV-99-400-JO

Before: Cynthia Holcomb Hall, Pamela Ann Rymer, and Susan P. Graber, Circuit Judges.

Hall, Circuit Judge

Opinion by Judge Hall; Partial Concurrence and Partial Dissent by Judge Graber

Plaintiff-appellant Michael Batlan ("trustee") appeals the district court's judgment affirming the decision of the bankruptcy court. Batlan filed an action to recover payments made by a chapter 11 debtor to defendant-appellee Transamerica Commercial Finance Corporation ("TCFC"). The bankruptcy court found that the payments were not avoidable transfers under 11 U.S.C. §§ 547(b). We agree with the bankruptcy court and the district court that the trustee did not satisfy his burden of showing that TCFC received a greater amount by virtue of the payments than it would have received in a hypothetical chapter 7 liquidation.


Smith's Home Furnishings, Inc. ("Smith's"), sold furniture, electronic goods, and appliances at 19 stores in Oregon, Washington, and Idaho. TCFC was one of Smith's primary lenders for almost a decade. TCFC financed Smith's purchase of some merchandise (the "prime inventory"), consisting mainly of electronic goods and appliances. TCFC's loans were secured by a first-priority floating lien on the prime inventory and the proceeds from it.1 Thus, the prime inventory served as collateral for TCFC's loans to Smith's.

Under the loan agreements, TCFC extended credit to Smith's by granting approval to various manufacturers. After receiving approval, the manufacturers shipped merchandise to Smith's. When Smith's sold a product financed by TCFC, it paid TCFC the wholesale price of that product.

Smith's did not segregate its sales receipts. Instead, Smith's deposited all its sales proceeds into commingled bank accounts at the end of each day. First Interstate Bank ("the Bank"), Smith's revolving-line-of-credit financier, swept the accounts daily, leaving the accounts with overnight balances of zero. The next day, the Bank advanced new funds to Smith's if sufficient collateral was available. Smith's then paid its operating expenses and creditors, including TCFC.2

During 1994, Smith's suffered substantial losses. Consequently, in March 1995 TCFC reduced Smith's line of credit from $25 million to $20 million. Over the next few months, TCFC reduced Smith's line of credit twice more, down to $13 million by August. During the same period, TCFC required substantial paydowns of Smith's debt; Smith's paid TCFC most of its available cash in a series of 36 payments, totaling more than $12 million, between May 24, 1995, and August 22, 1995.

On August 18, 1995, TCFC declared a final default, accelerated the entire debt due from Smith's, and sought a receiver for the company. For the first time, TCFC also sought to require Smith's to segregate the proceeds from its collateral.

Smith's voluntarily initiated bankruptcy proceedings under chapter 11 of the Bankruptcy Code on August 22, 1995 (the "petition date"). As of that date, Smith's owed $10,728,809.96 to TCFC. TCFC took possession of its collateral and liquidated it, receiving $10,823,010.58.

On October 11, 1995, the case was converted to a chapter 7 liquidation and Batlan was appointed as trustee. The trustee discovered the $12,842,438.96 in payments that Smith's had made to TCFC during the 90 days before the petition date (the "preference period"). Believing that the payments were preferential, he asked TCFC to return the money to the bankruptcy estate. When TCFC refused, the trustee initiated this adversary proceeding, seeking to avoid the payments as preferential transfers, under 11 U.S.C. §§ 547(b), and to recover the money for the benefit of other creditors of Smith's, under 11 U.S.C. §§ 550(a).

The parties stipulated that the payments met the first four elements of a preferential transfer under 11 U.S.C. §§ 547(b)(1)-(4). Additionally, TCFC agreed not to pursue affirmative defenses under 11 U.S.C. §§ 547(c)(1)-(2). The parties proceeded to trial to determine whether the payments met the fifth element of the preferential transfer statute, 11 U.S.C. §§ 547(b)(5), and whether TCFC could establish an affirmative defense under 11 U.S.C. §§ 547(c)(5).

On September 10, 1998, the bankruptcy court ruled, in a letter opinion, that the trustee had failed to meet his burden of proof in showing that the payments were preferential transfers. The court reasoned that, because the value of the collateral on the petition date ($10,823,010.58) exceeded the amount of TCFC's claim on the petition date ($10,728,809.96), TCFC was oversecured by $94,200.62. As a result, the court concluded that, because TCFC was a floating-lien creditor, the trustee was required to prove that TCFC was undersecured at some time during the preference period in order to avoid the transfers. The court also ruled that TCFC's collateral should be valued at liquidation value ($10,823,010.58) and that liquidation costs should be deducted from the liquidation value in computing the value of the collateral, but that the trustee had failed to present credible evidence of TCFC's liquidation costs. Because the bankruptcy court concluded that the trustee had not proved that the transfers were preferential, the court did not address TCFC's affirmative defense under §§ 547(c)(5).

The trustee filed a motion for reconsideration. In response, the bankruptcy court amended its opinion to correct typographical and computational errors, but otherwise confirmed its judgment. The trustee timely filed an appeal to the district court, raising the same issues that it raises in this appeal. In a published opinion, Batlan v. Transamerica Commercial Finance Corp., 237 B.R. 765, 776 (D. Or. 1999), the district court affirmed the bankruptcy court's decision "in all respects." This timely appeal followed.


We review de novo the district court's decision on appeal from a bankruptcy court. That is, " `[w]e independently review the bankruptcy court's decision and do not give deference to the district court's determinations.' " Preblich v. Battley, 181 F.3d 1048, 1051 (9th Cir. 1999) (quoting Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir. 1993)). We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Id. Finally, we review the bankruptcy court's evidentiary rulings for abuse of discretion. See Armor Vending Co. v. Kim (In re Kim), 130 F.3d 863, 865 (9th Cir. 1997).

I. "Greater Amount" Test

This case requires us to interpret two sections of the Bankruptcy Code, 11 U.S.C. §§§§ 547(b)(5) and 547(g). 11 U.S.C. §§ 547(b) permits a trustee to "avoid any transfer of an interest of the debtor in property" when certain conditions are met. One of the conditions is that the transfer enable the creditor to receive more than such creditor would receive if:

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b)(5). TCFC and the trustee dispute whether the 36 payments made during the preference period enabled TCFC, as a result of the 36 payments, to receive more than if the payments had not been made and TCFC had received payments only pursuant to a Chapter 7 liquidation. Section 547(g) places the burden of proof on the trustee to show all of the conditions of §§ 547(b). Thus, the trustee must show that the creditor received a greater amount than it would have if the transfer had not been made and there had been a hypothetical chapter 7 liquidation as of the petition date. If the trustee shows that TCFC received a greater amount by virtue of the 36 payments, then the payments are avoidable as preferential transfers. See In re Lewis W. Shurtleff, Inc. , 778 F.2d 1416, 1421 (9th Cir. 1985). The trustee contends that he satisfied his burden because: 1) the 36 payments plus the amount that TCFC received from the post-petition sale of its collateral is greater than the amount received from the post-petition sale of the collateral standing alone; and 2) TCFC has not traced the source of the allegedly preferential payments to sales of its collateral. We disagree with both of the trustee's arguments.

A. The add-back method does not satisfy the trustee's burden when the payments come from collateral secured by a floating lien

The trustee tried to satisfy his burden under §§ 547(b)(5) by adding the amount of the 36 payments to the amount TCFC received as a result of the post-petition sale of its remaining collateral. The trustee then compared this amount to the obviously smaller amount of the post-petition sale by itself and concluded that TCFC must have received a greater amount because of the payments. Some bankruptcy courts have used the same "add-back" method employed by the trustee to determine the status of a creditor on the petition date. See In re Al-Ben, Inc., 156 B.R. 72, 75 (Bankr. N.D. Ala. 1991) (adding alleged preferences to the amount of unpaid balance at the petition date to find the creditor's secured status); In re Estate of Ascot Mortgage, Inc., 153 B.R. 1002, 1018 (Bankr. N.D. Ga. 1993) (adding pre-petition amounts received to what would have...

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