## Facts

- QMECT, Inc. operated an electroplating business that generated accounts receivable and some inventory in the ordinary course.
- QMECT filed for bankruptcy, and a trustee later pursued avoidance claims on behalf of the estate.
- Burlingame Capital Partners II, L.P. was a junior secured creditor with a security interest in QMECT’s assets, including inventory, accounts receivable, and after-acquired property.
- Under the parties’ security agreement, Burlingame’s lien attached automatically to newly created/acquired accounts receivable (and related collateral) as QMECT generated them.
- During the 90 days before the bankruptcy filing, QMECT generated new accounts receivable, which caused a corresponding increase in the value of collateral subject to Burlingame’s lien.
- Throughout that 90-day period, Burlingame remained undersecured: the collateral value was less than the debt owed to Burlingame.
- During the same period, QMECT’s debt to Burlingame increased by more than the increase in the value of Burlingame’s collateral.
- The trustee sought to avoid, as preferential transfers under 11 U.S.C. § 547(b), the value increases attributable to the attachment of Burlingame’s floating lien to newly generated receivables (and related inventory/receivables collateral).
- Burlingame moved for summary judgment, arguing that the trustee could not satisfy § 547(b)(5) and that, in any event, § 547(c)(5)’s floating-lien defense barred avoidance.

## Issues

1. Whether Burlingame was entitled to summary judgment that the trustee could not prove § 547(b)(5), i.e., that the challenged transfers (lien attachments to after-acquired receivables/inventory during the preference period) enabled Burlingame to receive more than it would have received in a hypothetical Chapter 7 liquidation absent those transfers.
2. Whether Burlingame was entitled to summary judgment on its § 547(c)(5) defense that the transfers were protected as a floating lien in inventory and receivables because Burlingame did not (as a matter of law) improve its position during the preference period.

## Decision

- The court denied Burlingame’s motion for summary judgment.
- The court held Burlingame had not shown, as a matter of law, that the trustee could not satisfy § 547(b)(5) based on the preference-period attachment of Burlingame’s lien to newly generated receivables/inventory collateral.
- The court held Burlingame had not established, as a matter of law, a complete defense under § 547(c)(5) because the record did not conclusively resolve whether (and to what extent) Burlingame’s position improved during the preference period.
- The trustee’s preference claims were allowed to proceed.

## Legal Principles

- Summary judgment is appropriate only when there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law. In avoidance litigation, a defendant seeking summary judgment must either negate an element of the claim or establish an affirmative defense as a matter of law.
- For a security interest that reaches after-acquired property, each attachment to property the debtor acquires during the preference period can constitute a separate “transfer” for § 547 purposes; under § 547(e)(3), a transfer is not made until the debtor acquires rights in the collateral.
- Section 547(b)(5) applies a hypothetical Chapter 7 liquidation comparison: the question is whether the challenged transfer improved the creditor’s recovery compared to what it would have received if the transfer had not occurred. A creditor’s undersecured status does not, by itself, eliminate the possibility that a transfer allowed the creditor to receive more than in the liquidation baseline.
- A lender’s characterization of its lien as “blanket” does not automatically defeat § 547(b)(5) at summary judgment where the effect of preference-period collateral turnover and new collateral generation on liquidation recoveries is not conclusively established on the record.
- Section 547(c)(5) protects certain perfected floating liens in inventory and receivables only to the extent the creditor does not improve its secured position during the preference period beyond what the statute permits; the inquiry generally requires comparing the creditor’s collateral position at the beginning and end of the period using evidence of debt and collateral values.
- In assessing floating-lien and related arguments, the nature of the debtor’s operations may matter to whether later-generated receivables/inventory are treated as continuations of the preexisting collateral base, and whether value changes can be resolved without factual development.

## Conclusion

In re QMECT, Inc. held that a junior secured lender was not entitled to summary judgment against a trustee’s preference claim where the lender’s after-acquired floating lien automatically attached to newly generated receivables (and related collateral) during the 90-day preference period; the court ruled that the trustee was not foreclosed from proving § 547(b)(5) and that the lender had not established a complete § 547(c)(5) defense as a matter of law.


In re QMECT, Inc., 373 B.R. 100 (2007)