Law School Case Brief
Batlan v. Transamerica Commer. Fin. Corp. (In re Smith's Home Furnishings, Inc.) - 265 F.3d 959 (9th Cir. 2001)
The appellate court reviews de novo the district court's decision on appeal from a bankruptcy court. That is, the appellate court independently reviews the bankruptcy court's decision and does not give deference to the district court's determinations. The appellate court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Finally, the appellate court reviews the bankruptcy court's evidentiary rulings for abuse of discretion.
11 U.S.C.S. § 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 (1) the case were a case under Chapter 7, (2) the transfer had not been made, and (3) such creditor received payment of such debt to the extent provided by the provisions of the bankruptcy Code. 11 U.S.C.S. § 547(b)(5).
Trustee 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). On appeal, the district court affirmed the decision of the bankruptcy court.
Did the bankruptcy court err in concluding that the trustee failed to prove liquidation costs?
The appellate court concluded that the addback method did not satisfy the trustee's burden under 11 U.S.C.S. § 547(b)(5) when the payments came from collateral secured by the creditor's floating lien in merchandise provided to the debtor because the trustee had not shown that the creditor was under-secured at any point during the 90-day preference period and the bankruptcy court had determined that the creditor was fully secured as of the petition date. Moreover, the burden of tracing the funds used to make the preferential payments was on the trustee given the language in § 547(b)(5). Thus, it was up to the trustee to show that the payments had not come from the creditor's collateral before he could have used the addback method to satisfy his § 547(b)(5) burden. The bankruptcy court had not erred in concluding that the trustee failed to prove liquidation costs because the evidence failed to establish the amounts and the bankruptcy court was not obligated to estimate the amounts.
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