Roemelmeyer v. Walter E. Heller & Co. Southeast (In Re Lackow Bros., Inc.)
1982 Bankr. LEXIS 4237, 8 Bankr. Ct. Dec. (CRR) 1367, 19 B.R. 601 (1982)
Rule of Law:
Payments received by a fully secured creditor with a floating lien on inventory and accounts receivable within 90 days of bankruptcy are not voidable preferences if the creditor’s position did not improve at the expense of the estate, and the collateral’s value for this determination should be based on an "ongoing concern" valuation rather than a liquidation value.
Facts:
- Lackow Brothers, Inc. was a manufacturer of moderately-priced jewelry, with inventory consisting mainly of gold jewelry items.
- Walter E. Heller & Company Southeast, Inc. (Heller) held a lien on Lackow's inventory and accounts receivable under an Inventory Loan Security Agreement and an Accounts Financing Security Agreement, both dated September 24, 1980.
- Heller advanced monies to Lackow and, in return, collected Lackow’s accounts receivable.
- On January 1, 1981 (90 days prior to bankruptcy), Lackow's total obligation to Heller was $1,994,511.00, and the total value of collateral pledged to Heller was $4,735,395.00.
- On March 31, 1981 (the eve of bankruptcy), Lackow's total obligation to Heller was $1,627,078.00, and the total value of collateral pledged to Heller was $3,903,819.00.
- Lackow Brothers, Inc. filed its Voluntary Petition under Chapter 11 of the Bankruptcy Code on April 1, 1981.
- At the time of bankruptcy, Heller was owed approximately $1.6 million, and its lien was perfected.
Procedural Posture:
- Lackow Brothers, Inc. filed a voluntary petition under Chapter 11 of the Bankruptcy Code on April 1, 1981, becoming the Debtor.
- Walter E. Heller & Company Southeast, Inc. (Heller) initiated a prior adversary proceeding (Adv. 81-0386-BKC-SMW-A) against the Co-Trustees, seeking relief from stay and, in the alternative, adequate protection.
- In that prior adversary proceeding, the U.S. Bankruptcy Court determined the total value of Heller’s collateral to be $922,000.
- Co-Trustees of the Debtor's estate (Lackow Brothers, Inc.) initiated the current adversary proceeding against Heller in the U.S. Bankruptcy Court, seeking to avoid a transfer of property of the Debtor as a preference pursuant to 11 U.S.C. § 547(b).
- Heller raised the defense of res judicata and estoppel by judgment, contending that the Co-Trustees were required to assert their preference claim as a compulsory counterclaim in the prior adversary proceeding.
- The U.S. Bankruptcy Court found that the Co-Trustees were not barred by any prior proceedings from bringing their current preference claim.
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Issue:
Does a fully secured creditor holding a floating lien on inventory and accounts receivable receive a voidable preference under 11 U.S.C. § 547(b) when it receives payments from the debtor within ninety days prior to bankruptcy, if the creditor's position did not improve at the expense of the estate during that period as measured by an 'ongoing concern' valuation?
Opinions:
Majority - Sidney M. Weaver
No, a fully secured creditor holding a floating lien on inventory and accounts receivable does not receive a voidable preference under 11 U.S.C. § 547(b) if its position did not improve at the expense of the estate during the 90-day preference period, as evaluated using an 'ongoing concern' valuation of collateral. The court found that Heller was a fully secured creditor on both the 90th day prior to bankruptcy and on the petition date, meaning the value of its collateral consistently exceeded the amount of the debt. Therefore, payments received by Heller during this period were applied to its secured claim and did not prejudice other unsecured creditors. The Co-Trustees' reliance on the `Barash` case, which bifurcates claims for undersecured creditors, was deemed a misapplication because Heller was not undersecured. The court also determined that the valuation of collateral previously established in an adequate protection hearing (a liquidation value after the debtor ceased operating) was not appropriate for a preference claim involving pre-bankruptcy payments to an operating debtor. Instead, an "ongoing concern" valuation, reflected in the debtor's routine accounting reports, was the proper standard. This approach aligns with 11 U.S.C. § 547(c)(5), which expressly excepts floating liens on inventory or receivables from preference attack, unless the creditor improved its position at the expense of the estate during the preference period, which Heller did not do under the two-point test.
Analysis:
This case provides crucial guidance on the application of the 'improvement in position' test under 11 U.S.C. § 547(c)(5) for secured creditors with floating liens on inventory and accounts receivable. It clarifies that payments to a fully secured creditor are not preferential if the creditor's collateral value consistently exceeds the debt, highlighting that the primary goal of preference provisions is to ensure equal distribution among creditors of the same class. Furthermore, the decision emphasizes the variable nature of collateral valuation, establishing that an 'ongoing concern' value is appropriate for preference claims concerning a still-operating debtor, as opposed to a liquidation value. This distinction is vital for future cases in determining the proper standard of collateral valuation within different bankruptcy contexts.
