In re Ebbler Furniture and Appliances, Inc.

Furniture store Ebbler Furniture and Appliances, Inc. (Ebbler) (debtor) filed for bankruptcy. Ninety days before Ebbler’s filing, Ebbler owed $204,000 to a bank that had a floating lien on Ebbler’s inventory and accounts receivable. Ebbler had $125,000 in inventory, $19,000 in accounts receivable, and $43,000 cash that was subject to the bank’s security interest to the extent that the cash was proceeds of inventory or accounts receivable. Ebbler subsequently held a going-out-of-business sale and paid off all but $50,000 of the bank’s debt. When Ebbler closed its business, the bank took possession of inventory valued at a cost of $50,000 and sold that inventory to pay the rest of the debt. Ebbler filed for bankruptcy one week after the bank sold the inventory. The bankruptcy court found that the bank had received a $60,000 avoidable preference because 90 days before the petition date, the bank had been undersecured by $60,000 (i.e., the $204,000 debt minus the $144,000 total of Ebbler’s inventory and accounts receivable). Because the debt had been paid off by the time of Ebbler’s bankruptcy filing, the bank’s undersecurity had improved by $60,000, and that amount was avoidable under 11 U.S.C. § 547(c)(5). The bankruptcy court valued the inventory using a cost method after finding that the parties had been relying on the cost basis of the inventory to evaluate Ebbler’s indebtedness. The bank appealed, arguing that the bankruptcy court should have valued the inventory using an ongoing-concern value that included a 60 percent markup over the inventory’s cost. Had that valuation method been used, the bank would have been oversecured 90 days before the filing, and thus there would not have been any improvement in undersecurity that could have been avoided as a preference.