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In re QMECT, Inc.

United States Bankruptcy Court for the Northern District of California
373 B.R. 100 (2007)


Facts

QMECT, Inc. (debtor) operated an electroplating business. QMCET filed for bankruptcy. Burlingame (creditor) was a junior secured creditor with a security interest in QMECT’s assets. Burlingame’s security interest including inventory, accounts receivable, and after-acquired property. Under the terms of the parties’ security agreement, the value of Burlingame’s security interest automatically increased when QMECT acquired new accounts receivable. In the 90 days leading up to QMCET’s bankruptcy, QMCET acquired new accounts receivable, which caused a corresponding increase in the value of Burlingame’s security interest. At all times in the 90 days preceding QMCET’s bankruptcy, Burlingame was undersecured, meaning that the value of QMCET’s collateral was less than the debt QMCET owed to Burlingame. Additionally, QMCET’s debt to Burlingame rose by a greater amount than the increase in the value of the collateral. The trustee sought to avoid the value increases in Burlingame’s security interest as a preferential transfer under § 547(b) of the bankruptcy code. Burlingame filed a motion for summary judgment, arguing that the increases in value fell under under an exception for floating liens in inventory and accounts receivable.

Rule of Law

Issue

Holding and Reasoning (Tchaikovsky, J.)

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