## Facts

- A bank provided a car dealership inventory “floor-plan” line of credit and filed a 1977 UCC financing statement against the original dealership entity covering “all new cars and demonstrators.”
- In 1979, the dealership’s assets were sold to a new corporation (the debtor), but the bank did not file a new financing statement reflecting the new debtor entity.
- By April 1981, the debtor had sold vehicles “out of trust” and owed the bank over $232,000.
- On April 9, 1981, the debtor obtained a $250,000 SBA-guaranteed loan from the bank; the loan documents included a security agreement and a UCC filing describing collateral including “all inventory.”
- On October 8, 1981, the bank filed another financing statement covering “all new and used vehicles” in the debtor’s inventory.
- The debtor filed Chapter 11 on January 5, 1982.
- Within the 90-day period before the petition, the debtor paid the bank $91,950.31 in principal and $10,545.54 in interest, and later remitted $23,938.87 in inventory-sale proceeds.
- As debtor-in-possession, the debtor sued to avoid the bank’s liens and to recover the 90-day payments as preferences under 11 U.S.C. § 547(b).
- The bankruptcy court avoided the liens and awarded recovery; the district court affirmed.

## Issues

1. Whether the bank held a perfected security interest in the debtor’s vehicle inventory during the relevant period despite the change in debtor entity and the timing/content of later UCC filings.
2. Whether the debtor established all elements of an avoidable preferential transfer under 11 U.S.C. § 547(b) for payments made within 90 days before the bankruptcy filing.
3. Whether the bank proved any defense under 11 U.S.C. § 547(c), including theories tied to secured status, ordinary-course transfers, or new value.

## Decision

- The Sixth Circuit affirmed the district court and bankruptcy court.
- The court concluded the bank was not perfected as to the inventory to the extent necessary to avoid preference exposure, given defects in perfection following the debtor’s change in corporate identity and limits on the asserted collateral coverage.
- The court held the 90-day payments and related transfers satisfied § 547(b), including the “greater-than-Chapter-7” requirement.
- The court rejected the bank’s asserted § 547(c) defenses and allowed avoidance and recovery.

## Legal Principles

- A creditor’s failure to maintain proper perfection of a security interest under applicable UCC rules can result in treatment as unsecured for bankruptcy preference analysis.
- Under 11 U.S.C. § 547(b), a debtor-in-possession may avoid transfers to a creditor on account of antecedent debt made while the debtor is presumed insolvent within 90 days prepetition when the transfers allow the creditor to receive more than in a hypothetical Chapter 7 liquidation.
- A creditor cannot defeat § 547(b)(5) by claiming secured status when its security interest is not perfected as to the relevant collateral at the critical times.
- A broadly worded collateral description in a later transaction (e.g., “all inventory”) does not necessarily establish a perfected lien in specific inventory if the overall documentation and perfection history do not support that coverage.
- Defenses under 11 U.S.C. § 547(c) require proof of the statutory elements; where the creditor’s secured-position premise fails and the transfer pattern does not satisfy the exception requirements, the defenses do not bar avoidance.

## Conclusion

The Sixth Circuit held that the bank’s inventory lien position was insufficiently perfected and that the debtor’s 90-day prepetition payments and related transfers were avoidable preferences under § 547(b), with no applicable § 547(c) defense, so the debtor-in-possession could avoid the liens and recover the transfers.


In re Bluegrass Ford-Mercury, Inc., 942 F.2d 381 (6th Cir. 1991)