## Facts

- Smith’s Home Furnishings, Inc. operated a multi-state retail chain selling furniture, electronics, and appliances.
- Transamerica Commercial Finance Corporation (TCFC) financed Smith’s “prime inventory” (primarily electronics and appliances) through a floorplan-type arrangement.
- TCFC held a first-priority floating lien on the prime inventory and its proceeds, plus a blanket (junior) security interest in other assets.
- Smith’s deposited daily sales receipts into commingled bank accounts; the bank “swept” the accounts daily to a zero balance and re-advanced funds the next day based on collateral availability.
- Smith’s suffered significant losses; TCFC reduced Smith’s credit line multiple times in 1995.
- Within the 90 days before bankruptcy, Smith’s made 36 payments to TCFC on account of the floorplan debt.
- Smith’s filed Chapter 11, later converted to Chapter 7; TCFC liquidated its collateral and recovered more than the amount owed.
- The trustee sued to avoid the 36 payments as preferences; the parties stipulated that § 547(b)(1)–(4) were satisfied, leaving only § 547(b)(5) disputed.

## Issues

1. Whether the trustee proved under 11 U.S.C. § 547(b)(5) that the 90-day payments enabled TCFC to receive more than it would have received in a hypothetical Chapter 7 liquidation if the transfers had not been made.
2. Whether commingling of proceeds and daily account sweeps altered the § 547(b)(5) analysis for a creditor with liens on inventory and proceeds that fully secured (or oversecured) its claim.

## Decision

- The Ninth Circuit affirmed judgment for TCFC.
- The trustee failed to carry the burden of proving § 547(b)(5)’s “greater amount” element.
- Because the trustee did not establish an avoidable preference, the courts did not reach TCFC’s affirmative defenses under § 547(c).

## Legal Principles

- The trustee bears the burden to prove each element of an avoidable preference under § 547(b), including § 547(b)(5).
- Under § 547(b)(5), the court compares what the creditor actually received from the challenged transfers with what the creditor would have received in a hypothetical Chapter 7 liquidation had the transfers not occurred.
- A fully secured (including oversecured) creditor generally does not receive a preference from prepetition payments because, in a hypothetical Chapter 7 liquidation, it would be paid in full from its collateral up to the value of its secured claim.
- Where the creditor’s collateral position would have yielded full payment in the hypothetical liquidation, commingling of cash proceeds and account-sweep mechanics do not, by themselves, establish that the creditor received “more” for § 547(b)(5) purposes.

## Conclusion

The Ninth Circuit held that the trustee did not prove the § 547(b)(5) “greater amount” requirement because TCFC’s secured collateral position meant it would have been paid in full in a hypothetical Chapter 7 liquidation even without the 90-day payments, so the transfers were not avoidable preferences.


In re Smith’s Home Furnishings, Inc., 265 F.3d 959 (9th Cir. 2001)