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

                       United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT


                                        No. 11-1201


In re: Qualia Clinical Service, Inc.,        *
                                             *
             Debtor.                         *
                                             *
                                             *
Rick D. Lange, as Chapter 7 Trustee          *
for the Bankruptcy Estate of Qualia          * Appeal from the Bankruptcy
Clinical Service, Inc.,                      * Appellate Panel for the
                                             * Eighth Circuit.
             Appellee,                       *
                                             *
v.                                           *
                                             *
Inova Capital Funding, LLC,                  *
Inova Capital Funding, Inc.,                 *
                                             *
             Appellants.                     *



                                Submitted:      June 14, 2011
                                    Filed:      August 30, 2011


Before COLLOTON, CLEVENGER,1 and BENTON, Circuit Judges.




      1
       The Honorable Raymond C. Clevenger III, Circuit Judge for the United States
Court of Appeals for the Federal Circuit, sitting by designation.
CLEVENGER, Circuit Judge.

       This case concerns the bankruptcy estate of Qualia Clinical Service, Inc.
(“Qualia”). The estate’s Chapter 7 Trustee (“Trustee”) seeks to avoid as a preferential
transfer a security interest recorded by one of Qualia’s creditors shortly before the
bankruptcy petition. The bankruptcy court2 and the Bankruptcy Appellate Panel of
this court (“BAP”) held the security interest avoidable. Lange v. Inova Capital
Funding, LLC (In re Qualia Clinical Serv., Inc.), No. 09-8041, 2010 WL 1441495
(Bankr. D. Neb. Apr. 6, 2010) [hereinafter Bankr. Ct. Op.], aff’d, 441 B.R. 325
(B.A.P. 8th Cir. 2011) [hereinafter BAP Op.]. We agree, and so affirm.

                                           I

      Before it ceased operations and entered bankruptcy, Qualia’s business was
providing clinical studies and related services to pharmaceutical companies. From
time to time, Qualia sent invoices to its customers and tracked their outstanding
obligations as part of its accounts receivable. It is these invoices and these accounts
receivable that occupy the center of this case.

      On or about December 11, 2007, Qualia entered into an agreement with Inova
Capital Funding.3 Invoice Purchase Agreement (“IPA”), J.A. 49. The IPA gave


      2
        The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for the
District of Nebraska.
      3
        The contract as written is between Qualia and “Inova Capital Funding.”
Defendants are Inova Capital Funding, Inc. and Inova Capital Funding, LLC. The
bankruptcy court applied its analysis to the entity “Inova,” which it understood to
mean Inova Capital Funding, Inc., “as well as the entity that executed the invoice
purchase agreement.” Bankr. Ct. Op., 2010 WL 1441495, at *2. It declined
Defendants’ request for a holding that Inova Capital Funding, LLC was the successor-
in-interest to Inova Capital Funding, Inc. Defendants asked the BAP to reverse, but
the BAP declined to address the issue. BAP Op., 441 B.R. at 332. In their briefing

                                         -2-
Qualia the opportunity to obtain financing from Inova in the form of advance payment
on Qualia’s outstanding customer invoices. If Qualia wanted to receive advance
payment on a given outstanding invoice, Qualia could propose to “sell” the invoice
to Inova using an online system. If it agreed to the transaction, Inova would wire the
advance funds to Qualia. Inova would then take over efforts to collect on the invoice.

       The agreement included, however, a “Full Recourse” provision under which
Qualia remained liable to Inova for the full face value of each invoice “sold” to Inova.
IPA sec. 7.02, J.A. at 53. If Inova was unable to collect the full value of the invoice
on its own, it could recover that value from Qualia. As collateral, the agreement
conferred to Inova a security interest in Qualia’s property, including its accounts
receivable. Id. sec. 3, J.A. at 51–52.

      Months passed. From time to time, Qualia used the online system to identify
invoices for “sale” to Inova, and Inova paid Qualia advances on those invoices.

      Then, on February 19, 2009, about eighteen months after execution of the IPA,
Inova filed a UCC-1 financing statement in Nevada, Qualia’s state of incorporation.4
Nevada UCC-1, J.A. 375 (dated Feb. 19, 2009). Qualia filed for bankruptcy
protection about a month later, on March 18, 2009.


to this court, Defendants again referred to Inova Capital Funding, LLC as the
successor-in-interest to Inova Capital Funding, Inc., but did not ask for relief and did
not elaborate. Appellants Br. 9. For our part, we make no holding on the issue, and
use the name “Inova” in the same manner as the bankruptcy court and the BAP.
       4
        Inova had previously and erroneously filed such a statement in Nebraska,
Qualia’s principal place of business. The California Commercial Code provies the
governing state law for this case. It states that a security interest is perfected by filing
a financing statement in the debtor’s location, which is where the debtor is organized.
Cal. Com. Code §§ 9301, 9307(e), 9308, 9310. Neither party at this stage disputes
that the Nebraska filing was insufficient to perfect Inova’s security interest because
Nevada is where Qualia is organized.

                                            -3-
       Shortly thereafter, the Trustee began an adversarial proceeding against Inova
seeking to avoid Inova’s lien on Qualia’s accounts receivable as a preference under
section 547 of the Bankruptcy Code. Compl., Dkt. #1, Qualia Clinical Serv. (Bankr.
D. Neb. Jun. 25, 2009). Section 547 permits trustees to recover certain “preferential”
liens entered against a debtor shortly before the debtor’s bankruptcy:

      “Under the Bankruptcy Code’s preference avoidance section, 11 U.S.C.
      § 547, the trustee is permitted to recover, with certain exceptions,
      transfers of property made by the debtor within 90 days before the date
      the bankruptcy petition was filed.” Barnhill v. Johnson, 503 U.S. 393,
      394 (1992). “This rule ‘is intended to discourage creditors from racing
      to dismember a debtor sliding into bankruptcy and to promote equality
      of distribution to creditors in bankruptcy.’” Lindquist v. Dorholt (In re
      Dorholt, Inc.), 224 F.3d 871, 873 (8th Cir. 2000) (quoting Jones Truck
      Lines, Inc. v. Cent. States Se. & Sw. Areas Pension Fund (In re Jones
      Truck Lines, Inc.), 130 F.3d 323, 326 (8th Cir. 1997)).

Wells Fargo Home Mortg., Inc. v. Lindquist, 592 F.3d 838, 842 (8th Cir. 2010).

       Inova moved the bankruptcy court for summary judgment that the lien was not
avoidable. In its supporting brief, Inova argued that it had an affirmative defense
under section 547(c)(5). That subsection excludes from avoidance liens placed on a
debtor’s inventory or accounts receivable, so long as the lien did not improve the
creditor’s position during the statutory test period . Braunstein v. Karger (In re Melon
Produce, Inc.), 976 F.2d 71, 75 (1st Cir. 1992). Inova argued that its lien was immune
from avoidance under either or both of subsections 547(c)(5)(A) (which looks for an
improvement in position in the three months before the bankruptcy petition) and
(c)(5)(B) (which looks for improvement between the first date on which “new value”
was given and the petition). Inova claimed that it did not improve its position in the
test period because the value of the receivables at all times exceeded the amount that
had been advanced against the receivables. Inova’s brief also included repeated

                                          -4-
suggestions that the IPA between Inova and Qualia was not a financing agreement at
all, but a “true sale” of invoices, although Inova did not articulate a defense along
these grounds. See Defs. Br. Supp. Mot. Summ. J., Dkt. #34, Qualia Clinical Serv.
(Bankr. D. Neb. Feb. 12, 2010).

       The Trustee opposed Inova’s motion and cross-moved for summary judgment
that the lien was avoidable. The Trustee strongly disputed any suggestion that the IPA
was a “sale” rather than a financing agreement, and attacked Inova’s reliance on
section 547(c)(5), though it did not draw any strong distinction between subsections
(c)(5)(A) and (c)(5)(B). See Br. Supp. Trustee Mot. Summ. J. & Opp. Defs.’ Mot.
Summ. J., Dkt. #43, Qualia Clinical Serv. (Bankr. D. Neb. Mar. 4, 2010).

       In its opposition to the Trustee’s cross-motion, Inova renewed its arguments
that the lien was immune from avoidance under section 547(c)(5). Inova also added
a new argument that the lien was not a preferential transfer at all because the IPA set
up “true sales” of invoices from Qualia to Inova. Inova argued that because the lien
merely reflected a transfer that occurred upon “sale” of the invoice, it was not “for or
on account of an antecedent debt owed by the debtor before such transfer was made”
as required by section 547(b)(2). Defs.’ Br. Opp. Trustee Mot. Summ. J., Dkt. #53,
Qualia Clinical Serv. (Bankr. D. Neb. Mar. 25, 2010).

        The bankruptcy court granted summary judgment to the Trustee. It rejected
Inova’s contention that the IPA was a true sale, holding that it was, “in substance, a
financing arrangement,” citing the IPA’s recourse provision, and concluding that the
lien therefore fell within the scope of section 547. Bankr. Ct. Op., 2010 WL 1441495,
at *3–4. The court went on to hold that the exclusion set up in section 547(c)(5) did
not apply to Inova. The court reasoned that Inova’s security interest was unperfected
at all times prior to the February 19, 2009 financing statement, the filing of which
necessarily improved Inova’s position. Id. at *6.



                                          -5-
       Inova timely appealed to the BAP, where it presented essentially the same
arguments. The BAP agreed that Inova could not benefit from section 547(c)(5).
BAP Op., 441 B.R. at 332. It also interpreted the IPA as a financing agreement, not
a true sale. Id. at 330–31. It further noted that even if the IPA were a true sale,
Inova’s February 19, 2009 filing created a preference. This is so because under
California law, the debtor retained rights and title to the accounts until the time the
security interest in them was perfected. Id. at 331 n.3 (citing Cal. Com. Code
§ 9318(b)). Inova timely appealed. This court has jurisdiction over appeals from the
judgments of the BAP. 28 U.S.C. § 158(d)(1).

                                           II

       In reviewing a decision of the BAP, this court “appl[ies] the same standard of
review as the BAP.” Morgan v. Goldman (In re Morgan), 573 F.3d 615, 623 (8th Cir.
2009). That is, this court reviews the factual findings of the bankruptcy court for clear
error and its legal conclusions de novo. Id.

                                           III

       In its briefing on appeal, Inova presented the same arguments it had to the
bankruptcy court and the BAP: Inova viewed the IPA as a true sale and not a
financing agreement, which it contended removed the lien from section 547’s domain;
and it asserted an affirmative defense under sections 547(c)(5)(A) and 547(c)(5)(B).
During oral argument, however, the dispute boiled down to a single inquiry: as a result
of the perfection of its security interest by the February 19, 2009 filing, did Inova
improve its position as a creditor under section 547(c)(5)(A)? If so, the affirmative
defense fails, the Trustee wins, and the lien is avoidable as a preference. If not, Inova
wins, and section 547(c)(5) excludes the lien from avoidance.

       We agree with the bankruptcy court and the BAP that Inova’s lien is avoidable
as a preference, for the following reasons.

                                          -6-
                                            A

       Section 547(c)(5) sets forth what is commonly known as the “improvement in
position” test. The statutory language creating the test is somewhat complicated, but
in application the test is straightforward. The statute reads:

      (c) The trustee may not avoid under this section a transfer—
      ...
          (5) that creates a perfected security interest in inventory or a
          receivable or the proceeds of either, except to the extent that the
          aggregate of all such transfers to the transferee caused a reduction, as
          of the date of the filing of the petition and to the prejudice of other
          creditors holding unsecured claims, of any amount by which the debt
          secured by such security interest exceeded the value of all security
          interests for such debt on the later of—
              (A)(i) with respect to a transfer to which subsection (b)(4)(A) of
              this section applies, 90 days before the date of the filing of the
              petition; or
                  (ii) with respect to a transfer to which subsection (b)(4)(B) of
                  this section applies, one year before the date of the filing of the
                  petition; or
              (B) the date on which new value was first given under the security
              agreement creating such interest[.]

11 U.S.C. § 547(c).

       The test in section 547(c)(5)(A) compares the situation of the creditor at
different times. In all instances, one point in time is the date of filing of the
bankruptcy petition. When the creditor is related to the debtor, he is deemed an
“insider,” see 11 U.S.C. § 101(31) (defining “insider”), and the second point in time
for the test is one year before the date of filing the petition under section
547(c)(5)(A)(ii). This case does not involve insiders, so that second test date is



                                           -7-
inapplicable. For application of the section 547(c)(5)(A) test to this case, the second
date is 90 days before filing of the petition under section 547(c)(5)(A)(i).5

       The first step in application of the 547(c)(5)(A) test is to determine the amount
of the debt to the creditor and the value of the property securing the debt as of 90 days
before the filing of the bankruptcy petition. The difference between those two
numbers is established. The same determinations are made as of the date of the filing
of the bankruptcy petition. The position of the creditor at the two points in time is
compared. If during that time there has been a reduction of the amount by which the
debt exceeded the value of the security, the creditor’s position has been improved.
Preferential transfers that create perfected floating liens are thus voidable to the extent
of such improvement. See Samson v. Alton Banking & Trust Co. (In re Ebbler
Furniture & Appliances, Inc.), 804 F.2d 87, 89–90 (7th Cir. 1986); 5 Collier on
Bankruptcy ¶ 547.04[5] (2011).

       A simple hypothetical demonstrates the situation in which a creditor’s position
may be improved. Assume on the 90th day before filing of a bankruptcy petition, a
creditor is owed $1000, secured by a floating lien on inventory with the inventory then
valued at $500, and as of the date of filing, the debt is the same but the inventory is
valued at $1000. The creditor’s position has improved in the 90 day period by $500,
and that amount of the lien is voidable by the trustee. On the other hand, if the value
of the security equals or exceeds the amount of the debt 90 days before the filing of
a bankruptcy petition, the creditor’s position is not improved as of the date of filing,
even if the value of the security is greater as of that date.

      Inova recognizes that the perfection of its security interest on February 19,
2009, within the 90 day time before the bankruptcy petition was filed, constituted a


      5
       The relationship of the test in section 547(c)(5)(B) to this case is discussed in
part B-2 below.

                                           -8-
voidable preference unless excused by section 547(c)(5). This is because “[t]he
creation of a perfected security interest is itself a preference when the creation or
perfection takes place during the preference period.” Braunstein, 976 F.2d at 74.
Inova thus seeks relief under section 547(c)(5)(A) because it contends that it was
oversecured 90 days before the bankruptcy petition was filed, and thus could not have
improved its position. Specifically, Inova contends that on the 90th day before
bankruptcy, Qualia’s debt of $1,084,012.80 was secured by accounts receivable
valued at $1,246,091.23. Appellants Br. 12. Even accepting those values as correct,
the bankruptcy court and the BAP deemed that Inova’s shift from unperfected to
perfected status had improved its position 100% vis-à-vis unsecured creditors.
Whereas the bankruptcy court and the BAP in essence assigned zero value to Inova’s
unperfected security interest when applying the 547(c)(5)(A) test, Inova argues that
its interest should be given full face value. Inova contends that the lack of perfection
of its security interest as of the 90th day before bankruptcy is irrelevant for purposes
of the section 547(c)(5)(A) “improvement in position” test, because the test measures
the value of “all security interests,” including even unperfected security interests, as
of the 90th day before bankruptcy. Were we to adopt Inova’s position, Inova would
be deemed to have not improved its position by the February 19, 2009 perfection, and
would enter the safe harbor of section 547(c)(5).

       The Trustee has consistently maintained that the “improvement in position” test
measures the relative positions of perfected secured parties, and consequently an
unperfected secured party as of 90 days before bankruptcy improves its position if the
security interest is perfected as of the date of filing. He would deny Inova the safe
harbor of section 547(c)(5), on the logic that the value of a perfected security interest
necessarily exceeds that of an unperfected interest, so there has been an “improvement
in position.” The purpose for which section 547(c)(5) was enacted, the greater weight
of judicial authority, and the informed commentators all agree with the Trustee, as do
we.



                                          -9-
        Section 547(c)(5) was enacted to limit the rights of creditors holding floating
liens over receivables or inventory. The legislative history of the measure reflects
Congressional understanding of the benefit provided to creditors by perfected floating
liens, and a felt need to limit those benefits in the 90 day period preceding bankruptcy.
The legislative history specifically referenced two leading cases that were thought to
have given perfected lien holders complete protection from preference challenge
regardless of improvement in position in the 90 days preceding bankruptcy. H.R. Rep.
95-595, at 208 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6168 (discussing DuBay
v. Williams, 417 F.2d 1277, 1289 (9th Cir. 1969); and Grain Merchants of Ind., Inc.
v. Union Bank & Sav. Co., 408 F.2d 209, 218 (7th Cir. 1969)). Both cases dealt with
creditors whose floating liens were perfected long before 90 days preceding
bankruptcy. Id.; see also Vern Countryman, The Concept of a Voidable Preference
in Bankruptcy, 38 Vand. L. Rev. 713, 797–98 (1985) (discussing DuBay, Grain
Merchants, and the Congressional response). The purpose of the “improvement in
position” test was to limit the rights of perfected floating lienholders vis-à-vis
unsecured creditors, not to enhance the rights of unperfected security interest holders
vis-à-vis unsecured creditors.

        This history contrasts sharply with the present appeal. Inova seeks to gain the
benefit, under the “improvement in position” test, of an unrecorded (and thus
unperfected) lien of which other would-be creditors were unaware. Its argument
presupposes that Congress meant the term “all security interests” in the 547(c)(5)(A)
test to include unperfected security interests. We reject that supposition. Recognizing
the reason why Congress enacted the “improvement in position” test, and the great
prejudice to other creditors inherent in Inova’s position, we hold that the statutory
“improvement in position” tests presuppose a creditor holding a perfected security
interest as of the date of the first testing point. A creditor who, like Inova, enters the
test period unperfected is properly deemed, for purposes of section 547(c)(5), to have
an interest of zero value.



                                          -10-
       The greater weight of judicial authority implicitly or explicitly adopts this
position and confines the “improvement in position” test of section 547(c)(5)(A) to
floating liens perfected outside the 90 days before filing of a bankruptcy petition. As
early as 1980, it was held that the access to the “improvement in position” test for a
creditor depended on its having a perfected security interest prior to the preference
period. See Meyers v. Vt. Nat’l Bank (In re The Music House, Inc.), 11 B.R. 139, 140
(Bankr. D. Vt. 1980). In a case quite similar to this one, Markie v. Phillips (In re
Phillips), 24 B.R. 712 (Bankr. E.D. Cal. 1982), an individual creditor perfected his
inventory lien four days before the debtor’s bankruptcy petition was filed. The
bankruptcy court rejected the creditor’s claim to “the safe harbor” of section
547(c)(5), which it held “is directed to floating liens that have been perfected outside
the ninety day to one year avoiding period of 547(b) so as to limit the amount of
security that they can encumber and not the instant situation of a transfer that occurs
when a security interest is perfected within the voidable preference period.” 24 B.R.
at 715. Indeed, the court noted that “[t]his case is the classic situation that Section 547
seeks to remedy; the recording of secret loans and security agreements on the eve of
bankruptcy to the detriment of unsecured creditors who made advances based on the
apparent unencumbered inventory of the debtor.” Id. A district court in Tennessee,
also in 1982, reached the same conclusion, barring the “exception dealing with
inventory, receivables and proceeds . . . because of the lack of perfection” of the
security interest. Ford Motor Credit Co. v. Ken Gardner Ford Sales, Inc. (In re Ken
Gardner Ford Sales, Inc.), 23 B.R. 743, 747 (E.D. Tenn. 1982). Likewise, the district
court in the Southern District of New York opined, in reliance on Markie v. Phillips,
that Ҥ 547(c)(5) presupposes that the lien on receivables be perfected prior to the
preference period.” U.S. Lines (S.A.), Inc. v. United States (In re McLean Indus.,
Inc.), 162 B.R. 410, 424 (S.D.N.Y. 1993), rev’d on other grounds, 30 F.3d 385 (2d
Cir. 1994).

       Notwithstanding the significant authority that presupposes, for purposes of the
section 547(c)(5) improvement in position tests, the existence of a perfected security
interest at the date of the first calculation under the tests, Inova relies on two

                                           -11-
bankruptcy court decisions which gave creditors relief under section 547(c) even
though their security interests were perfected within the 90 day preference period.
The first case on which Inova relies is In re American Ambulance Service, Inc., 46
B.R. 658 (Bankr. S.D. Cal. 1985). In that case, the creditor advanced $35,000 to the
debtor on October 1, 1982, and took a floating lien over the debtor’s receivables and
inventory. The creditor, however, failed to file the financing statement on time, and
later did so within the 90 day time before the debtor filed for bankruptcy. The trustee
sought to avoid the preference created by perfection of the security interest, under
section 547(b). The bankruptcy court held that the creditor was entitled to seek relief
under section 547(c)(5)(B), because first new value had been given within the 90 day
preference period. The trustee however failed to offer any proof that the creditor had
improved its position between October 1 and December 9, 1982, when the bankruptcy
petition was filed. Consequently, the trustee’s challenge was rejected.

        To the extent that American Ambulance permits a creditor to avail itself of
section 547(c)(5) relief even when its security interest is unperfected at the date of the
first calculation under the improvement in position tests, we reject it as authority. We
think the greater weight of authority is correct. It is beyond cavil that the perfection
of a security interest within the 90 day preference period itself constitutes a
preference. Before perfection, other would-be creditors are unaware of the interest
held by the unperfected creditor. To give the value of a secret lien credit in
computation of the improvement in position tests turns the safe harbor of section
547(c)(5) on its head. The safe harbor exists to protect floating liens, to be sure, but
only to the extent that the lienholder’s position is not improved in the pre-bankruptcy
testing periods. Because American Ambulance would credit the value of a secret lien
against an unsuspecting world, we decline to follow its lead.6


      6
        We also note that American Ambulance is technically inapplicable to analyzing
Inova’s claim for relief under section 547(c)(5)(A), because in that case the first new
value was given within the 90 day preference period, meaning that the improvement
in position test must be measured comparing the position of the creditor on the date

                                          -12-
       Inova’s reliance on Brown v. General Electric Capital Corp. (In re Foxmeyer
Corp.), 286 B.R. 546 (Bankr. D. Del. 2002), is misplaced. In that case, the debtor
entered into a credit facility agreement on June 19, 1996, and secured the debt with
a floating lien on inventory and other property. The security interest was perfected
by proper filing on the same day. The debtor entered bankruptcy on August 27, 1996.
The trustee sought to void the perfected security interest as a preference. The creditor
sought access to the safe harbor in section 547(c)(5), in the light of its first new value
given within the preference period and its properly perfected lien. The trustee argued
that only security interests perfected outside the 90-day period could find safe harbor
relief. The bankruptcy court correctly rejected the trustee’s view, based on the
structure of 547(c)(5)(B), which contemplates that a creditor may advance first new
value against a perfected security interest on the eve of bankruptcy. 286 B.R. at
568–69; see also, e.g., Countryman, supra, at 797; 5 Collier, supra, ¶ 547.04[5] n.123.

        In Foxmeyer, because the trustee conceded that the creditor did not improve its
position between the date of the perfection of the security interest and the bankruptcy
filing, the bankruptcy court gave relief to the creditor under section 547(c)(5)(B). As
such, the decision is correct, but it affords no relief to Inova on its section
547(c)(5)(B) argument, as explained below in section B-2. For purposes of Inova’s
section 547(c)(5)(A) argument, Foxmeyer is only noteworthy in that it stated
agreement in dictum with the view of the bankruptcy judge in American Ambulance
that application of the improvement in position test under section 547(c)(5)(A) does
not presuppose the existence of a perfected security interest on the 90th day before
bankruptcy.



the first new value was given to its position as of the bankruptcy filing. In that case,
the trustee had made no showing that the creditor had improved its position, and for
that reason the bankruptcy court rejected the trustee’s attempt to void the untimely
perfection of the security interest. In this case, to the contrary, the Trustee has carried
his burden to show that Inova improved its position during the test period.

                                           -13-
       The leading treatise on bankruptcy explains that the “improvement in position”
test set forth in section 547(c)(5)(A) is “aimed at the creditor holding a secured
interest or ‘floating lien’ on the debtor’s inventory or receivables that was perfected
prior to the preference period. If the secured party’s position does not improve relative
to what it was 90 days preceding bankruptcy, [ ] there will be no preference.” 5
Collier, supra, ¶ 547.04[5]. A leading academic in the field came to the same
conclusion: “A creditor whose after acquired property clause picks up inventory or
receivables obtained within the ninety day period cannot invoke [section 547(c)(5)]
if his interest in the after-acquired property is not perfected because he failed to
perfect the basic security interest.” Countryman, supra, at 798. Countryman noted
favorably both In re Phillips and In re Ken Gardner Ford Sales, Inc., and recognized
American Ambulance to the contrary. Id. at 798 n.438. The White & Summers
treatise argues that American Ambulance “incorrectly interprets 547(c)(5).” 4 James
J. White & Robert S. Summers, Uniform Commercial Code § 32-7 n.11 (6th ed.
2009). The treatise explains that when the new value was given in American
Ambulance, the creditor’s security interest was not perfected, and the act of perfection
within the 90 day period necessarily improved the creditor’s position. To the extent
the creditor’s position is improved by perfection within the 90 day period, the treatise
concludes that section 547(c)(5) “should not help the creditor at all.” Id.

      We therefore hold that the bankruptcy court and the BAP properly applied
section 547(c)(5)(A) to conclude that the preferential transfer in this case, though it
concerned an interest in accounts receivable, improved Inova’s position as against
Qualia’s other creditors and so was not exempt from avoidance under that subsection.

                                           B

      As to Inova’s remaining arguments, which it briefed but largely abandoned
during oral argument, we find them unpersuasive.



                                          -14-
                                            1

       First, we find the question of whether the IPA was a “true sale” or a financing
agreement immaterial to this case. As the Trustee pointed out—and as Inova
acknowledged at oral argument—in this case the characterization of the IPA as a
“sale” or a financing agreement makes no practical difference. Even were the
transaction a “sale,” under California law (which the IPA specifically invokes) it could
nevertheless be treated as a transfer by the debtor “for or on account of an antecedent
debt” if Inova failed to timely file a financing statement, which in this case it did. See
Cal. Com. Code § 9318(a), (b); see also 11 U.S.C. § 547(b)(2). We therefore hold this
question irrelevant to our overall analysis.

       Even if the issue mattered, we see no error in the conclusions of the bankruptcy
court and the BAP that the transaction was a financing agreement and not a sale. The
record indicates that Qualia remained liable to Inova for the full face value of any
invoices transferred in the event Inova was unable to collect. We thus agree with the
BAP’s conclusion that “[t]his agreement, which shifts all risk to Qualia, is a disguised
loan rather than a true sale.” BAP Op., 441 B.R. at 330.

                                            2

      Second, we reject Inova’s attempts in its briefing to find benefit under
subsection (c)(5)(B) of section 547.

       Subsection (c)(5)(B) applies in cases where a creditor’s first transfer of “new
value” to the debtor occurs within the preference period. It “mandates that, if an
inventory/receivables lien is obtained during the preference period, then improvement
in a creditor’s secured position is measured from the date of such acquisition to the
point of a bankruptcy petition filing.” Foxmeyer, 286 B.R. at 568.




                                          -15-
        Inova argues that it gave “new value” within the meaning of subsection
(c)(5)(B) on February 5, 2009, just two weeks before it filed its financing statement.
Inova points to evidence that on that date, Qualia used Inova’s online system to “sell”
its final invoice to Inova. Inova contends that its payment to Qualia that same day of
85% of that invoice’s face value was “new value” within the meaning of subsection
(c)(5)(B). Inova thus contends that the transfer of a security interest in Qualia’s
accounts receivable to Inova should be deemed to have occurred on February 5, 2009,
and not at any point prior to the start of the preference period.

        The problem with Inova’s argument is that subsection (c)(5)(B) turns not on the
date of any “new value” but the date on which “new value was first given under the
security agreement.” 11 U.S.C. § 547(c)(5)(B) (emphasis added); see also Foxmeyer,
286 B.R. at 568. The record before us demonstrates that the February 5, 2009, invoice
was not the first such invoice transferred to Inova under the IPA. Indeed, the record
shows at least five previous transfers, including some occurring before the start of the
preference period, and Inova claims to have advanced $1,084,012.80 to Qualia as of
90 days before bankruptcy. We therefore do not agree with Inova that the February
5 invoice, or indeed any of the invoices conveyed during the preference period,
constitute “new value . . . first given under the security agreement.” For that reason,
relief for Inova under subsection (c)(5)(B) is unavailable.

      For the above-stated reasons, the opinions of the BAP and the bankruptcy court
are without legal error or clear factual error. We therefore affirm.




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