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If, however, the creditor does not actually release collateral upon application of the payment, then the payment is ipso facto a payment on the unsecured portion of the claim.
In determining whether a secured creditor with a "floating lien" in inventory and receivables and a revolving loan was undersecured or oversecured at a point in history is especially complex, both legally and factually. In Batlan v. TransAmerica Commercial Finance Corp. (In re Smith's Home Furnishings, Inc.), 265 F.3d 959 (9th Cir. 2001). The Court determined that the existence of a floating lien does not shift the burden of showing avoidability to the creditor; that burden remains with the trustee. The Court did recognize that two opinions of the eleventh circuit have evaluated floating lien cases by proceeding directly to the affirmative defenses provision of section 547(c)(5) without a discussion of the requirements of 547(b)(5) that the trustee must prove that the defendant received more than it would have received in a hypothetical liquidating bankruptcy. Galloway v. First Ala. Bank (In re Wesley Indus. Inc.), 30 F.3d 1438, 1443 (11th Cir. 1994); Roemelmeyer v. Walter E. Heller & Co., Se. (In re Lackow Bros.), 752 F.2d 1529, 1530 -31 (11th Cir. 1985). However, the Court differentiated those cases by noting that the parties had stipulated to the fact that the creditor was undersecured.
The court also held that the Trustee could not use the "add-back" method, by adding amount of allegedly preferential payments to amount that creditor received as a result of postpetition sale of remaining inventory subject to its floating lien, and then comparing this amount to the smaller amount of postpetition sale by itself, to show that the transfers enabled the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation absent showing by trustee that debtor's payments came from some source other than inventory securing the creditor's claim.
Despite the significant power given to debtors and trustees, a company facing a preference lawsuit has numerous defenses. Proper analysis of a company's defenses can save the company significant costs, both in litigating and resolving such a case. The Bankruptcy Code creates numerous exceptions to preference avoidance. Although seven exceptions to avoidance of a preference exist, the most common defenses are the contemporaneous exchange for new value; ordinary course of business; and subsequent new value.
The defenses under section 547(c) are designed to encourage creditors to continue to deal with troubled debtors on normal business terms by obviating any worry that a subsequent bankruptcy filing might require the creditor to disgorge a preferential payment. HallMark Elecs. Corp. v. Sims (In re Lee), 108 F.3d 239 (9th Cir. 1997).
