## Facts

- Tusa Office Solutions, Inc. sold new furniture and long operated as a major retailer of furniture manufactured by Knoll, Inc.
- Under a payment agreement (later amended in 2008), Tusa granted Knoll a valid, perfected first-priority security interest in substantially all assets, including accounts receivable.
- Tusa’s acquisition of a poorly performing used-furniture business strained Tusa’s finances.
- After Tusa-Expo Holdings filed Chapter 11, it obtained approximately $6.5 million in post-petition financing from Textron Financial, Inc., secured by a first-priority lien on substantially all assets, including receivables that had secured Knoll.
- Textron and Knoll entered a subordination agreement under which Knoll retained first priority in certain accounts receivable but subordinated its interest in the remainder of the collateral to Textron.
- Customer payments on receivables went to a Textron-controlled lockbox; Textron swept the funds daily to reduce its loan balance and advanced funds to Tusa’s operating account as needed, from which Tusa paid Knoll.
- The loan documents stated the lockbox and its contents were owned by Tusa.
- After conversion to Chapter 7, the trustee sought to avoid about $4.5 million in payments made to Knoll during the 90-day prepetition period as preferences under 11 U.S.C. § 547(b).
- The bankruptcy court and district court held the payments were not avoidable because Knoll was fully secured and therefore did not receive more than it would have received in a Chapter 7 liquidation.

## Issues

1. Whether, for purposes of 11 U.S.C. § 547(b)(5), Knoll was fully secured during the preference period so that the challenged payments did not allow it to receive more than in a hypothetical Chapter 7 liquidation.
2. Whether Textron’s post-petition financing and the intercreditor subordination arrangement could be treated as supplying Knoll with sufficient collateral value to keep it fully secured.
3. Whether funds collected in the Textron-controlled lockbox were property of the debtor (and thus part of the estate) for the hypothetical liquidation analysis under § 547(b)(5).

## Decision

- The Fifth Circuit reversed and remanded.
- The court held the trustee satisfied § 547(b)(5) because Knoll was undersecured during the preference period and the payments enabled Knoll to receive more than it would have received in a Chapter 7 liquidation absent the transfers.
- The court treated the lockbox receipts as proceeds of the debtor’s accounts receivable and therefore property of the estate, notwithstanding Textron’s control and sweeping rights.
- The court rejected the view that Textron’s financing or the subordination agreement rendered Knoll fully secured for preference purposes.

## Legal Principles

- Under 11 U.S.C. § 547(b)(5), a transfer is preferential if it enables the creditor to receive more than it would receive in a hypothetical Chapter 7 liquidation in which the transfer had not been made.
- Payments to a fully secured creditor typically are not preferential under § 547(b)(5); payments to an undersecured creditor can be preferential to the extent they reduce the unsecured portion of the claim.
- A subordination agreement reallocates priorities among creditors but does not create additional collateral or increase collateral value for the beneficiary creditor.
- Cash in a lockbox may remain the debtor’s property (and estate property) even when a lender controls the account and sweeps funds, where the governing documents establish debtor ownership.
- Preference analysis requires a collateral-value-and-priority assessment consistent with the hypothetical Chapter 7 distribution scheme, rather than assumptions based on overall financing structure.

## Conclusion

The Fifth Circuit held that Knoll, impaired by Textron’s senior lien and limited first-priority collateral after subordination, was undersecured during the preference period; because the lockbox funds were estate property, the prepetition payments to Knoll allowed it to receive more than in a hypothetical Chapter 7 liquidation and were avoidable preferences under § 547(b).


In re Tusa-Expo Holdings, Inc., 811 F.3d 786 (5th Cir. 2016)