In re Clark Pipe & Supply Co. - 893 F.2d 693 (5th Cir. 1990)

Rule:

Under 11 U.S.C.S. § 547(c)(5), improvement in position, standing alone, does not establish a preferential transfer, the transfer must be to the prejudice of other creditors holding unsecured claims. Under § 547(c)(5) the trustee must show that the effect of the improvement was to decrease the amount of property otherwise available for liquidation and distribution to unsecured creditors.

Facts:

Appellee-debtor, Clark Pipe and Supply Co., Inc., bought and sold pipes used in offshore platforms. Appellee had an agreement appellant-lender, Associates Commercial Corporation, to deposit all collections from accounts receivable in the appellant's bank account, and appellant made revolving loans secured by an assignment of accounts receivable and inventory mortgage. Appellant loaned on a formula consisting of a percentage of accounts receivable plus a certain percentage of the cost of inventory. When the oil business slumped, appellant reduced the percentage advances so that appellee had enough only to sell inventory, thereby converting the inventory to accounts receivable. Appellant who had extended to appellee revolving loans secured by an assignment of accounts receivable and an inventory mortgage, sought review of a judgment by the district court which determined that payments to appellant were preferential under 11 U.S.C.S. § 547(c)(5). Appellant also challenged the equitable subordination of its claims. On appeal, the court determined that the lower court had correctly valued the collateral at the liquidation value, not the going concern value, to measure improvement in position under 11 U.S.C.S. § 547(b).

Issue:

Did the district court err in its judgment that payments to appellant were preferential under US Constitution?

Answer:

No.

Conclusion:

The court held that the lower court correctly valued the collateral at the liquidation value, not the going concern value, to measure improvement in position under 11 U.S.C.S. § 547(b). However, the court remanded the cause to determine whether a preferential transfer had taken place. The court then reversed the appellant's claim on equitable subordination finding that the agreement between appellee and appellant was made before appellee became insolvent and appellant did no more than it was allowed by the agreement.