Lange v. Inova Capital Funding, LLC (In re Qualia Clinical Service, Inc.)

No 11-1201
Eighth Circuit held that the affirmative defense of 547(c)(5) is unavailable to creditors not holding a perfected security interest at the onset of the preference period. The court explained that any perfections within the preference period, absent the contemporaneous exchange of new value, was inherently improved by transforming its unsecured interest into a secured interest. The Eighth Circuit further examined the statutory language and purpose in support of its finding that the provision was only applicable to secured creditors. The court expressly stated that it was siding with the majority and rejected the creditor's argument that a perfected security interest was not a pre-requisite for application of the 547(c)(5) defense. Accordingly, the Eighth Circuit deemed the creditor's filing of the corrective UCC-1 as an inherent improvement and that its entire lien was voidable as such. The Eighth Circuit also rejected the creditor's arguments that new value had been extended in the 90 day period because the balance extended to the debtor at the onset of the preference period was substantially higher than what was transacted during the 90 day period. The Eighth Circuit further affirmed the BAP's decision that the transaction at issue was in fact a disguised financing agreement and not a true sale of the underlying invoices. Accordingly, the Eighth Circuit deemed the transaction to fall within the ambit of 547 and was avoidable as such.
Procedural context:
Trustee commenced an adversary proceeding against creditor to avoid its lien on debtor's accounts receivable that was perfected in the 90 days prior to the bankruptcy as a preference. Creditor moved for summary judgment on the basis of an affirmative defense under 547(c)(5) and asserted that there had not been improvement during the 90 day period (547(c)(5)(A)) or since new value was given (547(c)(5)(B)). Trustee filed a cross motion for summary judgment asserting that the lien was avoidable. Bankruptcy court granted summary judgment to Trustee. Bankruptcy court rejected creditor's contention that agreement with debtor was a true sale and deemed it a disguised financing agreement that fell under section 547. Bankruptcy court further held that the exclusion set up in 547(c)(5) was not available to this creditor since it was unperfected from the onset and its position was inherently improved by the corrective UCC-1 filed during the preference period. Creditor appealed to the BAP. BAP affirmed that 547(c)(5) was not available to creditor and that the contract was actually a financing agreement not a sale (thus falling under the ambit of 547). Creditor appealed to the Eighth Circuit.
Debtor and creditor were parties to a pre-petition agreement which provided for creditor to advance funds to debtor on its outstanding receivables. Under the terms of the contract, debtor remained liable to creditor for any receivables that were not fully paid by the third party. Creditor was given a security interest in debtor's receivables as part of the agreement, but initially filed its UCC-1 in the wrong state under the governing law specified by the contract. Debtor and creditor engaged in the transfer of these receivables pursuant to the terms of the contract and creditor did not file its UCC-1 in the correct state until eighteen months had passed. Debtor filed bankruptcy about a month after the corrective UCC-1 was filed.
Colloton, Clevenger, and Benton

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