Case: 15-10274     Document: 00513359812    Page: 1   Date Filed: 01/28/2016




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                   United States Court of Appeals

                                  No. 15-10274
                                                                            Fifth Circuit

                                                                          FILED
                                                                    January 28, 2016

In Re: TUSA-EXPO HOLDINGS, INCORPORATED,                             Lyle W. Cayce
                                                                          Clerk
             Debtor

MARILYN D. GARNER,

             Appellant

v.

KNOLL, INCORPORATED,

             Appellee




                 Appeal from the United States District Court
                      for the Northern District of Texas


Before SMITH, WIENER, and GRAVES, Circuit Judges.
WIENER, Circuit Judge:
      This adversary action was brought by Appellant Marilyn D. Garner (the
“Trustee”) against Appellee Knoll, Incorporated (“Knoll”). Specifically, the
Trustee seeks to avoid transfers from Tusa Office Solutions, Incorporated
(“Tusa Office”), the debtor, to Knoll, its creditor, as preferences under § 547 of
the Bankruptcy Code.
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                                     FACTS & PROCEEDINGS

                                        I.     FACTS1

       For many years, Tusa Office was the largest retail dealer in new
furniture manufactured by Knoll. Tusa Office and Knoll’s relationship was
embodied in several contractual arrangements, only one of which is relevant
here. Under it, (1) a customer would order furniture from Tusa Office, (2) Tusa
Office would then order that furniture from Knoll, (3) Knoll would deliver the
furniture to Tusa Office, (4) Tusa Office would deliver the furniture to the
customer and install it, (5) Tusa Office would invoice the customer, (6) the
customer would pay Tusa Office, and (7) Tusa Office would pay Knoll. This
arrangement was initially governed by an April 30, 2002, Payment Agreement
between Tusa Office and Knoll. Under that agreement, Tusa Office granted
Knoll a first-priority security interest in, among other things, all of its present
and after-acquired assets, including its accounts receivable.
       In 2005, Tusa Office acquired Office Expo, Incorporated (“Office Expo”),
a dealer in used furniture. After a reorganization, Tusa Office and Office Expo
became wholly-owned subsidiaries of Tusa-Expo Holdings, Incorporated.
Although Tusa Office continued to operate profitably, Office Expo did not. To
bolster Office Expo’s flagging performance, Tusa Office began to transfer funds
to Office Expo regularly, which caused Tusa Office problems of its own.



       1 We rely on the findings of fact in the bankruptcy court’s opinion. Thibodeaux v.
Olivier (In re Olivier), 

, 552 (5th Cir. 1987) (“In bankruptcy proceedings, [this
court] review[s] findings of fact—including those based on credibility determinations, on
physical and documentary evidence, and on inferences from other facts—under the clearly
erroneous standard.”); see FED. R. BANKR. P. 7052. (“[Federal Rule of Civil Procedure 52]
applies in adversary proceedings . . . .”); FED. R. CIV. P. 52(a)(1) (“In an action tried on the
facts without a jury . . . , the court must find the facts specially and state its conclusions of
law separately. The findings and conclusions may be stated on the record after the close of
the evidence or may appear in an opinion or a memorandum of decision filed by the court.”).


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      Tusa Office and Knoll eventually entered into an Amended Payment
Agreement (the “APA”) in June 2008, which restructured Tusa Office’s debt to
Knoll. Under the APA, Tusa Office’s current indebtedness to Knoll (that is, the
part of its debt that was more than 90 days old) could not exceed $3.1 million
until its past-due indebtedness (that is, the part of its debt that was more than
90 days old) was less than $1.9 million. The APA again granted Knoll a first-
priority security interest in substantially all of Tusa Office’s present and after-
acquired assets, including its accounts receivable. When Tusa Office and Knoll
entered into the APA, Tusa Office’s current indebtedness to Knoll was
$2,863,898.60 and its past-due indebtedness was $2,703,955.29.23.
      In addition to restructuring its debt to Knoll, Tusa Office obtained
financing from Textron Financial, Incorporated (“Textron”). Specifically, Tusa
Office and Textron entered into an agreement (the “Loan Agreement”) in July
2009, under which Textron provided Tusa Office with a $6.5 million revolving
loan in exchange for a first-priority security interest in all of Tusa Office’s
current and after-acquired assets, including Knoll’s collateral. The Loan
Agreement also required Tusa Office to have its customers make payments
directly to a bank deposit account (the “lockbox”) that was controlled by
Textron.
      As a condition precedent to the Loan Agreement, Textron and Knoll
entered a separate Subordination Agreement, under which Knoll retained a
first-priority security interest in specified accounts receivable of Tusa Office
and a second-priority security interest in all other current and after-acquired
assets of Tusa Office. With the exception of those specified accounts receivable,
Textron received a first-priority security interest in all remaining current and
after-acquired assets of Tusa Office. Textron and Knoll subsequently entered
an Amended Subordination Agreement.



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      Under these several agreements, Tusa Office’s accounts receivable were
paid directly into the lockbox by its customers. Having control of the lockbox,
Textron withdrew the deposited funds daily and applied them to increase the
available credit to Tusa Office on its revolving loan. On request, Textron would
advance new revolving loan funds to Tusa Office’s operating account. Tusa
Office used those funds to, among other things, pay Knoll. By paying Knoll,
Tusa Office reduced its indebtedness under the APA, allowing it to fill new
orders from its customers.

                             II.    PROCEEDINGS

A.    BANKRUPTCY COURT
      In November 2008, Tusa Office filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code. Shortly thereafter, Knoll filed its proof of
claim in the amount of $6,929,783.87. In July 2009, the bankruptcy court
granted Tusa Office’s motion to convert its Chapter 11 petition for
reorganization to a Chapter 7 petition for liquidation.
      In November 2010, the Trustee filed a complaint, initiating this
adversary action. She sought to avoid as preferences $4,592,483.90.55 in
transfers made by Tusa Office to Knoll during the 90-day preference period,
pursuant to 11 U.S.C. § 547(b). The bankruptcy court bifurcated the first and
second counts of the adversary action in April 2012, then tried those counts
over nine nonconsecutive days between August 2012 and January 2013. The
next month, Knoll filed a motion for leave to amend its answer to assert an
exception under § 547(c) as a new affirmative defense to the first count. The
Trustee filed a response. Following a hearing, the court issued an order
granting Knoll’s motion, and the amended answer was entered into the record.
      The bankruptcy court issued its findings of fact and conclusions of law in
August 2013. It entered its final judgment on the first count a year later. The


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Trustee then filed a timely notice of appeal in the bankruptcy court and, in the
following days, filed an amended notice of appeal, but only sought review of the
judgment on the first count.

B.     DISTRICT COURT
       In March 2015, the district court issued its order and judgment,
affirming the bankruptcy court. Although the parties had raised other issues,
the district court stated that “nothing would be gained by a discussion of any
of the issues the parties say are presented by this appeal other than the
§ 547(c)(5) issues.” Specifically, it concluded that the bankruptcy court had not
abused its discretion in granting Knoll’s motion to amend its answer and that
it had not erred in concluding alternatively that, even if the transfers were
preferences, Knoll had established that the exception to avoidance under
§ 547(c)(5) applied. Later that month, the Trustee timely filed notice of appeal
to this court.

                                             ANALYSIS

                              I.      STANDARD OF REVIEW

       We review the bankruptcy court’s findings of fact and conclusions of law
“under the same standards employed by the district court hearing the appeal
from bankruptcy court; conclusions of law are reviewed de novo, findings of fact
are reviewed for clear error, and mixed questions of fact and law are reviewed
de novo.” 2 “Under a clear error standard, this court will reverse only if, on the
entire evidence, we are left with the definite and firm conviction that a mistake


       2 Century Indem. Co. v. NGC Settlement Trust (In re Nat’l Gypsum Co.), 

,
504 (5th Cir. 2000); see Templeton v. O’Cheskey (In re Am. Hous. Found.), 

, 152
(5th Cir. 2015) ("This court reviews the bankruptcy court's findings of fact for clear error and
its conclusions of law de novo."). The bankruptcy court’s order granting Knoll leave to amend,
which we do not review, is subject to a different standard of review. See Deere & Co. v.
Johnson, 

, 621 (5th Cir. 2001).


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has been made.” 3 “Strict application of the clearly erroneous rule is particularly
important where, as here, the district court has affirmed the bankruptcy
judge’s findings.” 4

                          II.      THE REQUIREMENTS OF § 547(B)

A.     THE VARIOUS ANALYSES
       The Trustee complains that the bankruptcy court erred in holding that
the transfers from Tusa Office to Knoll were not preferences under § 547(b) of
the Bankruptcy Code. Section 547(b) specifies, in the conjunctive:
                [T]he trustee may avoid any transfer of an interest of
                the debtor in property—
                (1)     to or for the benefit of a creditor;
                (2)     for or on account of an antecedent debt owed by
                        the debtor before such transfer was made;
                (3)     made while the debtor was insolvent;
                (4)     made . . . on or within 90 days before the date of
                        the filing of the petition [viz., the preference
                        period] . . . ; and
                 (5)    that enables such creditor to receive more than
                        such creditor would receive if—
                        (A)      the case were a case under chapter 7 of
                                 this title;
                        (B)      the transfer had not been made; and
                        (C)      such creditor received payment of such
                                 debt to the extent provided by the
                                 [Bankruptcy Code]. 5



       3Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 

, 480 (5th
Cir.2009) (internal quotation marks omitted).
       

. Huffman (In re Missionary Baptist Found. of Am., Inc.), 

, 209
(5th Cir. 1983).
       5   11 U.S.C. § 547(b).


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If a trustee establishes each of the requirements of § 547(b), the transfer is a
preference, which must be returned to the bankruptcy estate unless the
creditor establishes an exception to avoidance under § 547(c). 6
       The instant dispute concerns the last of the § 547(b) requirements,
namely, subsection (b)(5). “This is the requirement that before a trustee in
bankruptcy can [sic] avoid a preferential [transfer], the trustee must establish
that the [transfer] enabled the creditor to receive more than the creditor would
have received upon liquidation under Chapter 7 of the [B]ankruptcy [C]ode.” 7
       To determine whether a trustee has established this requirement, a
court typically uses the so-called “hypothetical Chapter 7 liquidation analysis”
inherent in § 547(b)(5) itself. To do so, the court (1) constructs a hypothetical
Chapter 7 liquidation in which the creditor retains the disputed transfers, viz.,
the transfers-retained hypothetical, and (2) constructs another in which the
creditor returns those transfers, viz., the transfers-returned hypothetical. To
establish the requirement of § 547(b)(5) under this analysis, the sum of (1) the
disputed transfers and (2) the creditor’s distribution in the transfers-retained
hypothetical must be “more” than the creditor’s distribution in the transfers-
returned hypothetical.




       6 Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery), 

, 253 (5th
Cir. 1999); see 11 U.S.C. § 547(g) (“For the purposes of [§ 547], the trustee has the burden of
proving the avoidability of a transfer under [§ 547(b)], and the creditor or party in interest
against whom recovery or avoidance is sought has the burden of proving the nonavoidability
of a transfer under [§ 547(c)].”). In addition to the requirements enumerated in § 547(b)(1)
through § 547(b)(5), there is an unenumerated requirement in § 547(b) itself that such a
transfer must have been made from “an interest of the debtor in property.” That is, to be
avoidable, the transfer must have diminished the debtor’s estate. Because we hold that the
trustee has not established another of the requirements of § 547(b), we do not consider the
unenumerated requirment.
       7Braniff Airways, Inc. v. Exxon Co., U.S.A., 

, 1034 (5th Cir. 1987); see
11 U.S.C. § 547(b)(5).


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       But a court may occasionally circumvent the often arduous hypothetical
Chapter 7 liquidation analysis by employing the abbreviated El Paso Refinery
analysis. 8 This analysis considers only the disputed transfer itself. It is
premised on the truism that, if a creditor receives a transfer which, by its very
nature, would not have been available to any of the other secured or unsecured
creditors, it could never receive “more” under the hypothetical Chapter 7
liquidation analysis. 9 Specifically, the El Paso Refinery analysis states:
                       To determine whether an undersecured creditor
                 received a greater percentage recovery [read: “more”]
                 on its debt than it would have under [C]hapter 7 the
                 following two issues must first be resolved: (1) to what
                 claim the [transfer] is applied and (2) from what source
                 the [transfer] comes. Both aspects must be examined
                 before the issue of greater percentage recovery can be
                 decided. 10
These are referred to as the application aspect and the source aspect,
respectively.
       If the disputed transfer (1) reduced the creditor’s collateral under the
application aspect of the El Paso Refinery analysis or (2) was made from the
debtor’s collateral under the source aspect of that analysis, the trustee could
never establish that the creditor received “more” under the hypothetical
Chapter 7 liquidation analysis. But only in such an instance is the El Paso
Refinery analysis dispositive. If, conversely, the disputed transfer (1) did not
reduce the creditor’s collateral under the application aspect and (2) was not
made from the debtor’s collateral under the source aspect, the trustee might



       8   El Paso 

.
       9See, e.g., Missionary 

(“It is a commonplace that preference
law exempts fully secured creditors from its grasp.”).
       10   El Paso 

(citation omitted).


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still be able to establish that the creditor received “more” under the
hypothetical Chapter 7 liquidation analysis. Simply put, the El Paso Refinery
analysis provides a threshold. It is intended to aid the hypothetical Chapter 7
liquidation analysis under § 547(b)(5), not to replace it. Nor could it. As the
hypothetical Chapter 7 liquidation analysis is embodied in § 547(b)(5), it must
control.
       Here, in a belt-and-suspenders approach, the bankruptcy court
undertook both the El Paso Refinery analysis and the hypothetical Chapter 7
liquidation analysis. It began by determining that the Trustee had failed to
establish the requirement of § 547(b)(5) under the El Paso Refinery analysis
because she had not satisfied the source aspect. 11 Although it did not need to
have done so, the bankruptcy court went on to determine that the Trustee had
also failed to establish the requirement of § 547(b)(5) under the hypothetical
Chapter 7 liquidation analysis: Even if the transfers had not been made from
Knoll’s collateral, Knoll still did not receive “more.”
       The district court did not use either analysis, however. Instead it
determined that, even if the Trustee had established all of the requirements of
§ 547(b), Knoll itself had established an exception to avoidance under
§ 547(c)(5).

B.     THE EL PASO REFINERY ANALYSIS
       We begin, as did the bankruptcy court, with the El Paso Refinery
analysis. The Trustee contends that the bankruptcy court erred in deciding
that the Trustee did not satisfy the source aspect of the El Paso Refinery
analysis. This analysis specifies that “[e]ven if the [transfer] in question was



       11 The parties do not appear to dispute that the trustee established the application
aspect of the analysis because the transfers from Tusa Office to Knoll did not reduce Knoll’s
collateral.


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applied to the unsecured portion of an undersecured creditor’s claim, the
creditor will not be deemed to have received a greater percentage [read: “more”]
as a result of the [transfer] if the source of the [transfer] is the creditor’s own
collateral.” 12 Accordingly, “[a] creditor who merely recovers its own collateral
receives no more as a result than it would have received anyway had the
[transfer] been retained by the debtor, subject to the creditor’s security
interest.” 13
       The Trustee asserts that the transfers from Tusa Office to Knoll were
not made from the proceeds of Knoll’s collateral. Knoll disputes this. We note
that “[p]roperty interests are created and defined by state law” and that,
“[u]nless some federal interest requires a different result, there is no reason
why such interests should be analyzed differently simply because an interested
party is involved in a bankruptcy proceeding.” 14 “It is [therefore] common in
the bankruptcy context to look to state law to define security interests created
under state law.” 15 The parties do not contest the applicability of state law,
here that of Texas.
       Texas has adopted the Uniform Commercial Code (“UCC”), which
governs this dispute. 16 The term “proceeds” is defined under § 9.102 of the UCC
as including “whatever is acquired upon the sale, lease, license, exchange, or




       12El Paso 

–55; see 5 COLLIER ON BANKRUPTCY ¶ 547.09 (16th
ed. 2009).
       13   El Paso 

–55; see 5 COLLIER ON BANKRUPTCY ¶ 547.09.
       14   Butner v. United States, 

, 55 (1979).
       15   Ford Motor Credit Co., LLC v. Dale (In re Dale), 

, 573 (5th Cir. 2009).
       16See TEX. BUS. & COM. CODE ANN. § 1.101 (“This title [the Texas Business and
Commercial Code] may be cited as the Uniform Commercial Code.”); Coburn Supply Co. v.
Kohler Co., 

, 376 (5th Cir. 2003) (“Texas has adopted the UCC . . . .”).


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other disposition of collateral.” 17 Under § 9.315, “a security interest attaches to
any identifiable proceeds of collateral.” 18 Further, “[a] security interest in
[those] proceeds is a perfected security interest if the interest in the original
collateral was perfected.” 19 Knoll had a first-priority security interest in Tusa
Office’s accounts receivable, so they were Knoll’s first-priority collateral. By
extension, Knoll’s first-priority collateral included both the accounts receivable
and any proceeds of those accounts receivable. 20 To determine whether the
Trustee satisfied El Paso Refinery’s source aspect, we must consider whether
those accounts receivable and proceeds remained Knoll’s collateral after being
transferred (1) first into the lockbox by Tusa Office’s customers, then (2) out of
the lockbox by Textron, and finally (3) by Textron to Tusa Office’s operating
account.

                 1.      TRANSFERS FROM TUSA OFFICE’S CUSTOMERS INTO THE
                         LOCKBOX

       The Trustee does not dispute that the payments Tusa Office’s customers
deposited into the lockbox were proceeds of Tusa Office’s accounts receivable.
She argues instead that, because this constituted a transfer of money, Knoll’s
first-priority security interest in the payments was “stripped” by operation of
§ 9.332(a): “A transferee of money takes the money free of a security



       17   TEX. BUS. & COMM. CODE ANN. §§ 9.102(65), 9.102(65)(a).
       18   

       19   

       20 Knoll also had a second-priority security interest, after Textron’s first-priority
security interest, in Tusa Office’s “now existing and hereafter acquired or arising
Accounts, . . . Receivables,    General      Intangibles,    Payment      Intangibles,       Deposit
Accounts, . . . Letters of Credit, Letter-of-Credit Rights, advices of credit, money, . . . together
with all products of and Accessions to any of the forgoing, and all Proceeds of any of the
forgoing . . . .” These things constituted Knoll’s second-priority collateral. This second-
priority collateral is not relevant to the El Paso Refinery analysis.


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interest . . . .” 21 The comments explain that “the debtor itself is not a
transferee,” 22 meaning that § 9.332(a) does not apply if such a transfer of
money was made to the debtor. The Trustee therefore insists that Textron, not
Tusa Office, was the transferee. In so doing, the Trustee contends that the
lockbox was “owned and controlled by Textron.”
       Knoll disputes this contention. Specifically, Knoll explains that (1) the
deposit by Tusa Office’s customers into the lockbox corresponded with
reductions in Tusa Office’s accounts receivable and (2) the transfers out of the
lockbox to Textron corresponded with reductions in Tusa Office’s debt to
Textron under the revolving loan. Knoll also observes that the bankruptcy
court never expressly found that Textron owned the lockbox. The Trustee
counters that Tusa Office’s former controller testified that the lockbox
“belonged to Textron” and that there is no reference to the lockbox in Tusa
Office’s bankruptcy schedules.
       Regardless of the Trustee’s and Knoll’s competing assertions, the Loan
Agreement is clear. It specifies that “[Tusa Office] shall utilize a lockbox
arrangement for collection of Accounts at a bank designated by [Textron] . . . .”
and, as a condition precedent to the Loan Agreement, “[Tusa Office] shall have
established a blocked account or lockbox . . . for its collections and the transfer
thereof to [Textron] . . . .” The Loan Agreement also states that “[Tusa Office]
shall have possession of [Textron’s] Collateral” and “will cooperate with and
assist [Textron] in obtaining control . . . with respect to [c]ollateral consisting
of . . . Deposit Accounts . . . .”




       21   TEX. BUS. & COMM. CODE ANN. § 9.332(a).
       22   

cmt. 2.


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       Because Tusa Office, not Textron, owned the lockbox, § 9.332(a) does not
apply. Therefore, Knoll’s first-priority security interest in the proceeds of Tusa
Office’s accounts receivable survived the deposit into the lockbox.

                2.      TRANSFERS FROM THE LOCKBOX TO TEXTRON

       The Trustee next contends that Knoll’s first-priority security interest in
the proceeds of Tusa Office’s accounts receivable, initially paid into the lockbox,
did not then transfer from the lockbox to Textron. She states specifically that
§ 9.332(b) of the UCC stripped Knoll’s first-priority security interest when they
were transferred from the lockbox to Textron.
       Knoll responds that § 9.332(b) only concerns a security interest in the
deposit account itself, not a security interest in the funds contained in it.
Accordingly, Knoll insists that, even though § 9.332(b) would have prevented
a security interest in the lockbox itself from transferring, it did not prevent the
transfer of Knoll’s first-priority security interest in the proceeds of its
collateral.
       The plain language of § 9.332(b) states that a “transferee of funds from
a deposit account takes the funds free of a security interest in the deposit
account.” 23 Although § 9.332(a)—which applies to transfers of “money”—and
§ 9.332(b)—which applies to transfers of “funds”—are similar, they are not
identical. 24 Specifically, § 9.332(a) provides that “[a] transferee of money takes



       23   

(emphasis added).
       24  As used in the UCC, “money” and “funds” are not synonymous. The UCC defines
“money” as “a medium of exchange currently authorized or adopted by a domestic or foreign
government.” 

As the comments to § 9.201 explain: “‘[M]oney’ is limited
essentially to currency . . . . ‘[F]unds’ is a broader concept (although the term is not defined
[by the UCC]).” 

cmt. 5. The comments to § 9.332 explain that “[a] transfer of
funds . . . , to which [§ 9.332(b)] applies, normally will be made by check, by funds transfer,
or by debiting the debtor’s deposit account and crediting another depositor’s account.” 

cmt. 2.


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the money free of a [read: any] security interest.” 25 By contrast, § 9.332(b)
provides that “[a] transferee of funds from a deposit account takes the funds
free of a security interest in the deposit account . . . .” 26 This difference must
have been intentional. The drafters could have specified, but did not, that “a
transferee of funds from a deposit account takes the funds free of a [read: any]
security interest” as they did in § 9.332(a). Or they could have specified that “a
transferee of funds from a deposit account takes the funds free of a security
interest in the funds themselves.” The comments to § 9.332 bolster this
distinction between a deposit account itself and the funds contained in it. In
particular, the comments explain that § 9.332(b) “applies to transfers of funds
from [a] deposit account” but “does not apply to transfers of the deposit account
itself or of [a security] interest therein.” 27 (Of course, the question whether
§ 9.332(b) applies is distinct from the subsequent question whether § 9.332(b)
then strips a particular security interest.)
      The comments to § 9.332 further explain that “[b]road protection for
transferees helps to ensure that security interests in deposit accounts do not
impair the free flow of funds.” 28 It is clear to us that § 9.332(b) ensures that the
funds in a deposit account remain unencumbered by a security interest in the
deposit account itself. Section 9.332(b) does not even address, must less strip,
a security interest that encumbers the funds contained in the deposit account.
Stated simply, § 9.332(b) protects Knoll from Textron’s first-priority security
interest in the deposit account; it does not, however, protect Textron from
Knoll’s first-priority security interest in the funds contained in that account.


      25   

(emphasis added).
      26   

(emphasis added).
      27   

cmt. 2 (emphasis in original).
      28   

cmt. 3.


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       Because § 9.332 is a recent addition to the UCC, the jurisprudence
interpreting it is scarce. Nevertheless, the Trustee and Knoll each proffer cases
to support their respective positions. 29 Knoll relies on Madisonville State Bank
v. Canterbury, in which a state appeals court held that § 9.332 strips the
security interests in the deposit account itself but not the security interest in
the funds in it. 30 By contrast, the Trustee notes that this holding was
disregarded as “unsound” by a federal district court in City Bank v. Compass
Bank, which determined that § 9.332 strips the security interest from both the
deposit account and the funds in it. 31 But, in doing so, that court disregarded
the plain language of § 9.332 in favor of the comments. It reasoned that the
comments to § 9.332 “specifically define[ ] encumbered accounts as being not
only those subject to a direct security interest [in] the account itself, but also
‘deposit accounts containing collections from accounts receivable.’” 32




       29 Knoll also relies on a district court’s decision in Western National Bank v. United
States, which held that funds deposited by a debtor’s customers into a lockbox remained
subject to a security interest. W. Nat’l Bank, Odessa v. United States, 

, 706
(W.D. Tex. 1993) (“[T]he corresponding receivable was immediately impressed with the
[federal] tax lien. Therefore, the lien followed the payments into the lockbox and could not be
severed. . . . Although [the debtor] could no longer physically obtain the funds once they
passed into the lock box, it still had an interest in the funds. The funds were payments from
[the debtor’s] customers. Such funds were credited to [the debtor’s] account with [its creditor].
If a customer failed to pay, [the debtor] had a legal remedy to ensure payment. Moreover, if
[the creditor] removed the funds and did not apply the proceeds to [the debtor’s] account, [the
debtor] would have a cause of action against [the creditor] for misappropriation of funds.
Thus, . . . [the debtor] had a sufficient interest in the funds deposited in the lock box for the
[federal tax] lien to attach.”). But this holding was premised on federal law: “under the
Treasury Regulations, property subject to a federal tax lien which has been sold or otherwise
transferred by the taxpayer may be seized while in the hands of the transferee or any
subsequent transferee.” 

therefore inapposite.
       30   

, 258 (Tex. Ct. App. 2006).
       31   

, 616 (W.D. Tex. 2010).
       32 City 

(quoting TEX. BUS. & COMM. CODE ANN.
§ 9.332, cmt. 3.)


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       But this so-called “explicit statement of legislative intent” is nothing of
the sort. In context, the comments merely explain that § 9.332 is justified
because “payments of funds from encumbered deposit accounts (e.g., deposit
accounts containing collections from accounts receivable) occur with great
regularity.” 33 This simply suggests that transfers of funds from deposit
accounts, “including deposit accounts containing collections from accounts
receivable,” are taken “free of a security interest in the deposit account.” City
Bank’s assertion, which may very well be dicta, 34 is incorrect. In any event, it
does not bind us.
       The plain language of § 9.332(b) is unambiguous. Knoll’s first-priority
security interest in the proceeds of Tusa Office’s accounts receivable survived
the transfer from the lockbox to Textron. Not only is this consistent with
§ 9.332(b), but it is also consistent with the Subordination Agreement between
Knoll and Textron. 35


       33   TEX. BUS. & COMM. CODE ANN. § 9.332, cmt. 3.
       34Ultimately, the district court “decline[d] to decide this uncertain point of state law”
after remarking that “there [we]re adequate alternative grounds to decide the overall issue
of conversion . . . .” City 

.
       35 Neither party addresses the applicability of § 9.339, which provides that § 9.332
“does not preclude subordination by agreement by a person entitled to priority.” TEX. BUS. &
COMM. CODE ANN. § 9.339. As the comments to § 9.339 explain: “The preceding sections
[including § 9.332] deal elaborately with questions of priority. This section [§ 9.339] makes it
entirely clear that a person entitled to priority may effectively agree to subordinate its claim.
Only the person entitled to priority may make such an agreement: a person’s rights cannot
be adversely affected by an agreement to which the person is not a party.” Notably, the
comments to § 9.332 further provide that “[§ 9.332] sets forth the circumstances under which
certain transferees of money or funds take free of security interests. It does not determine
the rights of a transferee who does not take free of a security interest.” It is clear to us, as it
was to the bankruptcy court, that Textron and Knoll did not intend for Knoll’s first-priority
security interest to be preserved only to be destroyed by § 9.332(a) or § 9.332(b).The Loan
Agreement between Textron and Tusa Office provides that “[Tusa] has a perfected first
priority security interest in the Collateral and the Collateral is free of any lien, encumbrance
or adverse interest of any kind whatsoever, with the exception of . . . liens permitted under
the terms of [the Subordination Agreement with Knoll].”


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                3.     TRANSFERS FROM TEXTRON TO TUSA OFFICE

      The Trustee also urges that, even if Knoll’s first-priority security interest
in the proceeds of Tusa Office’s accounts receivable did survive the transfer
into and out of the lockbox, it did not survive the transfer from Textron to Tusa
Office’s operating account. Specifically, the Trustee insists that the proceeds
were commingled. Knoll responds that, unless the Trustee establishes that the
proceeds were commingled, they are presumed to be identifiable. Knoll
suggests that the Trustee never established, and the bankruptcy court never
found, that the funds transferred by Textron into Tusa Office’s operating
account were commingled.
      As a preliminary matter, § 9.315(b)(2) of the UCC specifies that
“[p]roceeds that are commingled with other property are identifiable
proceeds . . . to the extent that the secured party identifies the proceeds by a
method of tracing, including application of equitable principles, that is
permitted under law . . . .” 36 Knoll argues that § 9.315(b)(2)’s requirement that
“the secured party identif[y] the proceeds by a method of tracing” 37 is
inconsistent with the § 547(g)’s instruction that “the trustee has the burden of
proving the avoidability of a transfer under [§ 547(b)].” 38 Knoll relies on Batlan
v. TransAmerica Commercial Finance Corp. (In re Smith’s Home Furnishings,
Inc.), 39 in which the Ninth Circuit explained that “it is part of the trustee’s §
547(b)(5) burden to trace the funds used to make the payments to [funds] not




      36   TEX. BUS. & COMM. CODE ANN. § 9.315(b)(2).
      37   

(emphasis added).
      38   11 U.S.C. § 547(g) (emphasis added).
      39   

, 967 (9th Cir. 2001).


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subject to [the creditor’s] liens.” 40 In so doing, that court observed that “in
bankruptcy, it is the trustee who accedes to the debtor’s books and records and
has easier access and a better ability to divine the financial activities of the
debtor in its last months of operation.” The Smith’s court also clarified that,
“[r]egardless of [whether the creditor or trustee] is better equipped to decipher
the debtor’s final financial actions, we hold that the language of [§ 547(g)]
places the burden of demonstrating the source of such preferential payments
squarely on the trustee.” 41
      The Trustee responds that this was merely dicta because the Ninth
Circuit had already held that the debt owed to the creditor was completely
secured, so the transfer could not be a preference. This, however, ignores the
Ninth Circuit’s clear signal to the contrary, viz., “we hold.” It also ignores the
fact that the Ninth Circuit relied on the same reasoning for its holdings that
(1) the creditor was completely secured and (2) the trustee had the burden of
tracing. In deciding that the debt owed to the creditor was completely secured,
the Ninth Circuit explained: “Under § 547(b)(5), the trustee must show that
the amount of indebtedness under the floating lien was greater than the
amount of collateral . . . . A floating lien does not shift the burden of showing
avoidability to the creditor. The trustee still has to satisfy his burden under
§ 547(b)(5).” 42 Thus, the Ninth Circuit’s decision in Smith’s stands for the
proposition that a trustee has the burden of showing that the source of any
transfers from a debtor to a creditor was not the proceeds of the creditor’s




      40   

      41   

      42   

.


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collateral. That court’s reasoning in this respect is strongly persuasive. The
UCC applies “[u]nless some federal interest requires a different result.” 43
      The Trustee also suggests that the lockbox arrangement between the
lender and debtor in Smith’s was different from the one between Textron and
Tusa Office. She argues expressly that, in Smith’s, the lender swept the lockbox
daily and advanced funds the next day, but that here Textron swept the funds
daily, but only advanced funds at Tusa Office’s request.
      The Ninth Circuit’s description of the arrangement in Smith’s is broad
enough to encompass the instant arrangement. There, the court explained that
“[the lender] . . . swept the [lockbox] accounts daily, leaving the accounts with
overnight balances of zero,” that “[t]he next day, the [lender] advanced new
funds to [the debtor] if sufficient collateral was available,” and that “[the
debtor] then paid its operating expenses and creditors . . . .” 44 It observed that,
“[b]ecause of these procedures, the allegedly preferential payments . . . were
not made directly from the proceeds of the sales of [the creditor’s] collateral.” 45
The Trustee seems to suggest that, because Tusa Office did not request such
transfers each day, and because Textron did not make such transfers each day,
the arrangement in Smith’s is distinguishable. But this is not entirely relevant,
especially because the contractual arrangement between Tusa Office and
Textron expressly permitted Tusa Office to request funds more frequently than
once a day. 46




      43   

.
      44   

.
      45   

n.2.
      46  Specifically, it provides that “[Tusa Office] shall make no more than three (3)
requests for Revolving Loans per business day.”


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       Because § 547(g) is clear and Smith’s is persuasive, we hold that it was
the Trustee’s burden to establish that the funds in the operating account were
not the proceeds of Tusa Office’s accounts receivable and that she failed to do
so. 47 The definition of “proceeds” in the UCC is broad. It includes “whatever is
acquired upon the sale, lease, license, exchange, or other disposition of
collateral,” “whatever is collected on, or distributed on account of, collateral,”
and “rights arising out of collateral.” 48 Absent any reasonable indication to the
contrary, it follows that, but for the transfers from the lockbox to Textron, no
transfers from Textron to Tusa Office would have been possible. The
bankruptcy court did not err in determining that “Tusa Office acquired funds
from Textron upon the disposition of Knoll's Collateral.”
       Because the Trustee did not satisfy the source aspect of the El Paso
Refinery analysis, testing under the hypothetical Chapter 7 liquidation
analysis is unnecessary. The Trustee did not establish the requirement of
§ 547(b)(5), so we hold that the transfers from Tusa Office to Knoll were not
preferences.

                         III.   THE EXCEPTION UNDER 547(C)(5)

       We would normally stop here without addressing the exception to
avoidance under § 547(c)(5). However, the district court went on to consider
that exception and to hold that Knoll had established it. As we shall explain,
we disagree.
       In pertinent part, § 547(c)(5) states that “[t]he trustee may not avoid
under [§ 547] a transfer . . . that creates a perfected security interest in



       47The trustee herself states that “tracing is not possible under these circumstances,”
which seems to be an acknowledgment that, if that burden is hers, she cannot meet it.
       48   TEX. BUS. & COMM. CODE. ANN. § 9.102(65).


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inventory or a receivable or the proceeds of either . . . .” 49 As she did in the
bankruptcy court and in the district court, the Trustee again argues that the
exception under § 547(c)(5) does not apply to the disputed transfers from Tusa
Office to Knoll because those transfers did not create any security interest. She
also notes that neither the bankruptcy court nor the district court considered
whether the transfers created such a security interest.
      The Trustee properly distinguishes the Eleventh Circuit’s decisions on
which the district court relied. In Galloway v. First Alabama Bank (In re
Wesley Industries Inc.), the Eleventh Circuit applied § 547(c)(5) to determine
that a debtor’s transfer of a perfected security interest in its accounts
receivable under a ‘floating lien’ was not avoidable because the creditor’s
position had not improved as a result. 50 This allowed that court to use
§ 547(b)(5) to conclude that a debtor’s transfer of the proceeds of the accounts
receivable themselves was not a preference because the creditor merely
received its own collateral. 51 Although the decision is admittedly vague in its
analysis, it did not hold that § 547(c)(5) applies to transfers of accounts
receivable themselves. Instead, it expressly states that § 547(c)(5) “protects the
transfer of a security interest in after-acquired property . . . .” 52
      In Roemelmeyer v. Walter E. Heller & Co., Southeast, Inc. (In re Lackow
Brothers, Inc.), the Eleventh Circuit determined the appropriate method of
valuation of under § 547, but it did not consider whether § 547(c)(5) applies to
transfers of accounts receivable. 53 Further, § 547(c)(5) could not have applied


      49   11 U.S.C. § 547(c).
      50   

, 14-38-42 (11th Cir. 1994).
      51   

at 1442 (emphasis added).
      53   

(11th Cir. 1985).


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to the transfers there because the creditor was fully secured. As this court has
held, “[i]t is . . . commonplace that preference law exempts fully secured
creditors from its grasp.” 54 We agree with the Trustee that, even if these
opinions were binding on us, they are nonetheless inapplicable here.
      In response, Knoll relies primarily on this court’s decision in Wilson v.
Huffman (In re Missionary Baptist Foundation of America, Inc.) for the
proposition that the exception to § 547(c)(5) applies here. 55 In that decision, we
discussed the exception under § 547(c)(5) at some length, but remanded
without deciding whether it applied to transfers of funds because the district
court’s analysis was so “conclusory and unilluminating” that we had “no basis
for meaningful review at all.” 56 Despite this, Knoll advances that Missionary
Baptist nonetheless held that if, on remand, the district court were to conclude
that the creditor had not improved its position, then the transfers would be
unavoidable pursuant to the exception under § 547(c)(5).
      Regardless, this court’s 1986 decision in Missionary Baptist and the
Eleventh Circuit’s 1985 decision in Lackow are inapplicable for another, more
significant reason. In reciting § 547(c)(5), both courts stated that it applies to
a transfer “of a perfected security interest in inventory or a receivable or the
proceeds of either.” 57 Yet, as explained above, § 547(c)(5), as it now exists,
applies only to a transfer “that creates a perfected security interest in inventory
or a receivable or the proceeds of either.” 58 The amendment that replaced “of”



      

.
      

.
      56   

at 759 (emphasis added) (quoting 11 U.S.C. § 547(c)(5)); 

n.2 (emphasis added) (quoting 11 U.S.C. § 547(c)(5)).
      58   11 U.S.C. § 547(c)(5) (emphasis added).


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with “that creates” was enacted in 1984 and codified in 1985. 59 Missionary
Baptist and Lackow might very well have interpreted the exception under
§ 547(c)(5) as it then existed to apply to a transfer of accounts receivable
themselves and any proceeds thereof. But, as it now exists, the exception under
§ 547(c)(5) only applies to a transfer that creates a perfected security interest
in such things. As we recently held, “the Bankruptcy Code must be read
literally . . . .” 60 Read literally—as it must be—the exception under § 547(c)(5)
does not apply to the transfers at issue here. This does not, however, affect our
outcome, which is grounded in the requirement of § 547(b)(5) and the
attendant El Paso Refinery analysis.

                                              CONCLUSION

       For the forgoing reasons, we hold that the Trustee failed to establish the
requirement of § 547(b)(5) because the source aspect of the El Paso Refinery
analysis demonstrates that the transfer from Tusa Office to Knoll was made
from the proceeds of Knoll’s own collateral. 61 The judgment of the district court,
affirming the bankruptcy court, is AFFIRMED.




       59    98 Stat. 355, 377 (July 10, 1985) (current version at 11 U.S.C. § 547).
       60    In re Vill. at Camp Bowie I, L.P., 

, 246 (5th Cir. 2013) (emphasis in
original).
       61 To the extent we address the exception under § 547(c)(5), we do so in dicta. The
trustee’s failure to establish the requirement of § 547(b)(5) alone is dispositive.


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