## Facts

- In September 1980, Clark Pipe & Supply Company, Inc. (Clark) entered a revolving-loan arrangement with Associates Commercial Corporation (ACC).
- ACC’s loans were secured by Clark’s accounts receivable and inventory (including an inventory mortgage).
- Clark deposited receivable collections into an account controlled by ACC.
- ACC’s advances were set by a borrowing-base formula tied to a percentage of eligible accounts receivable plus a percentage of inventory cost.
- The contract gave ACC a unilateral right to reduce the percentage advance rate at any time.
- In late 1981 and early 1982, the oil industry declined and Clark’s business deteriorated.
- Beginning in February 1982, ACC reduced advance rates. The trustee later contended ACC did so intentionally to keep Clark operating only enough to convert inventory into receivables and repay ACC, while leaving no extra cash to pay other creditors.
- ACC did not expressly direct Clark which creditors to pay.
- Clark continued operating and selling inventory, but was unable to pay many other creditors.
- In May 1982, after several creditors initiated foreclosure proceedings, Clark filed Chapter 11.
- In August 1982, the case was converted to Chapter 7 and a trustee was appointed.
- The trustee brought an adversary proceeding seeking (1) avoidance and recovery of alleged preferential transfers under 11 U.S.C. § 547 (including an “improvement in position” theory under § 547(c)(5)) and (2) equitable subordination of ACC’s claim under 11 U.S.C. § 510(c).
- The bankruptcy court ordered ACC to turn over payments found preferential (reported as $370,505) and equitably subordinated ACC’s claim; the district court affirmed.
- A Fifth Circuit panel initially affirmed, but ACC obtained rehearing. The rehearing decision at 893 F.2d 693 vacated the prior panel result.

## Issues

1. Whether ACC received an avoidable preference based on an “improvement in position” during the 90-day prepetition period under 11 U.S.C. § 547(c)(5), including what collateral valuation approach should be used to apply the net-improvement test.
2. Whether ACC’s conduct in reducing advance rates and continuing to fund limited operations constituted “inequitable conduct” sufficient to equitably subordinate a non-insider secured lender’s claim under 11 U.S.C. § 510(c).

## Decision

- The Fifth Circuit, on rehearing, reversed the judgments for the trustee.
- The court set aside the preference recovery, concluding that ACC did not receive an avoidable “improvement in position” within the meaning of § 547(c)(5) when the collateral and the debtor’s operating condition were properly valued for the two-point comparison.
- The court rejected equitable subordination, holding that ACC’s actions reflected enforcement of contractual rights in an arm’s-length lending relationship and did not amount to the level of wrongful conduct required to subordinate a non-insider lender’s claim.
- Because the trustee failed on both the preference theory and the misconduct-based subordination theory, ACC’s secured claim was not reordered under § 510(c).

## Legal Principles

- A trustee seeking to avoid a transfer as preferential must satisfy § 547(b) and overcome applicable defenses; for floating liens on receivables and inventory, § 547(c)(5) focuses on whether the secured creditor improved its net position during the 90-day period.
- The § 547(c)(5) analysis compares the creditor’s secured status at two points (90 days prepetition and at filing) and turns on case-specific valuation of the collateral; valuation should reflect the debtor’s actual condition and the economic reality of the collateral during the period being compared.
- Equitable subordination under § 510(c) generally follows the Mobile Steel framework: (1) inequitable conduct, (2) resulting injury to creditors or unfair advantage, and (3) subordination that is consistent with the Bankruptcy Code’s distribution scheme.
- When the claimant is a non-insider, non-fiduciary commercial lender, equitable subordination requires serious misconduct (such as fraud, overreaching, or comparable wrongdoing); aggressive self-protection and hard bargaining within contract rights, without more, is not enough.
- A lender’s use of borrowing-base controls, advance-rate reductions authorized by contract, and continued limited funding to protect repayment prospects does not alone establish the wrongful conduct needed for § 510(c) relief.

## Conclusion

Matter of Clark Pipe & Supply Co. holds that, on rehearing, the Fifth Circuit would not treat a secured lender’s contract-authorized tightening of credit and receipt of collateral proceeds as either a § 547(c)(5) “improvement in position” preference or the kind of misconduct required to equitably subordinate a non-insider lender under § 510(c), and it therefore reversed the trustee’s preference recovery and subordination judgment against ACC.


Matter of Clark Pipe & Supply Co., 893 F.2d 693 (1990)