In Re Smith's Home Furnishings, Inc.

265 F.3d 959 (2001)

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Nature of the Case

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Facts

Smith's Home Furnishings, Inc. (Smith's), sold furniture, electronic goods, and appliances at 19 stores in Oregon, Washington, and Idaho. D was one of Smith's primary lenders and financed Smith's purchase of some merchandise (prime inventory), consisting mainly of electronic goods and appliances. The loans were secured by a first-priority floating lien on the prime inventory and the proceeds from it. D extended credit by granting approval to various manufacturers who then shipped merchandise to Smith's. When that product was sold, Smith's paid D the wholesale price of that product. Smith's deposited all its sales proceeds into commingled bank accounts. First Interstate Bank (Bank), Smith's revolving-line-of-credit financier, swept the accounts daily, leaving overnight balances of zero. The next day, Bank advanced new funds if sufficient collateral was available. Smith's then paid its operating expenses and creditors, including D. D reduced Smith's line of credit from $25 million to $13 million. D also required substantial paydowns of Smith's debt. Smith's paid D more than $ 12 million, between May 24, 1995, and August 22, 1995. On August 18, 1995, D declared a final default, accelerated the entire debt, and sought a receiver for the company. D also sought to require Smith's to segregate the proceeds from its collateral. Smith's voluntarily initiated chapter 11 on August 22, 1995. Smith's owed $ 10,728,809.96 to D. D took possession of its collateral and liquidated it, receiving $10,823,010.58. On October 11, 1995, the case was converted to a chapter 7 and P was appointed as trustee. P discovered the $12,842,438.96 in payments that Smith's had made to D during the 90 days before the petition date (the preference period). P claimed the payments were preferential, and initiated this proceeding, seeking to avoid the payments as preferential transfers, under 11 U.S.C. § 547(b), and to recover the money for the benefit of other creditors of Smith's, under 11 U.S.C. § 550(a). The bankruptcy court ruled that P had failed to meet his burden of proof. It reasoned that because the value of the collateral exceeded the amount of D's claim on the petition date D was oversecured by $94,200.62. Because D was a floating-lien creditor, P was required to prove that D was undersecured at some time during the preference period in order to avoid the transfers. P appealed. The district court affirmed the bankruptcy court's decision 'in all respects.' P appealed again.