In Re Qmect, Inc.

373 B.R. 100 (2007)

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Nature of the Case

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Facts

Debtor filed chapter 11. Debtor operated an electroplating business and generated inventory and accounts receivable. At the beginning of the Preference Period--on December 27, 2003--Debtor had two secured creditors. The senior secured creditor was Comerica Bank. The junior secured creditor was D. Both Comerica and D had security interests in virtually all of the Debtor's assets, which included accounts receivable and inventory. At all times during the Preference Period, D was undersecured. During the Preference Period, some, if not all, of the accounts receivable and inventory in which D held a security interest at the beginning of the Preference Period generated cash proceeds. These proceeds were then spent in the continued operation of the business, and new inventory and accounts receivable were generated. D automatically acquired liens in the new accounts receivable and inventory generated. During the preference period, D's position improved as far as the value of the security interest but Debtor’s debt to P rose by a greater amount than the increase in the value of the collateral. P claimed the increases in the value were preferential transfers under §547(b). D moved for summary judgment, contending that, as a matter of law: (1) P will be unable to establish the fifth element of a preference claim under 11 U.S.C. § 547(b)(5); and (2) even if he can, D is entitled to a complete defense under 11 U.S.C. § 547(c)(5).