In re Qualia Clinical Service, Inc.

Qualia Clinical Service, Inc. (Qualia) (debtor) was in the business of conducting clinical studies for pharmaceutical companies. In 2007 Qualia secured financing from Inova Capital Funding (Inova) (creditor). Per Qualia’s agreement with Inova, Qualia secured financing by having Inova pay certain overdue invoices from Qualia’s customers. Inova then endeavored to collect from the customers. If Inova could not collect the full balance, then Qualia was required to pay the additional amount owed. Inova took a security interest in Qualia’s accounts receivables and other property. Inova perfected its interest by filing a financing statement on February 19, 2009. Unfortunately, Qualia filed for bankruptcy not long after, such that Inova’s perfection date fell within 90 days of the bankruptcy petition. Under 11 U.S.C. § 547, a bankruptcy trustee can avoid property transfers by a debtor made to creditors within 90 days of filing for bankruptcy, with some exceptions. The bankruptcy trustee filed suit against Inova, seeking to avoid its security interest as a preference. Inova argued that although it did perfect within 90 days, it qualified for an exemption from avoidance because Inova did not improve its position within the 90-day period, considering that Qualia’s debt to Inova was exceeded by the value of Qualia’s accounts receivables. Inova and the bankruptcy trustee each moved for summary judgment. The bankruptcy court ruled in favor of the bankruptcy trustee on the ground that the very act of perfecting an unperfected interest is an improvement in a creditor’s position. Inova appealed, and the appellate panel affirmed. Then, Inova appealed to the Eighth Circuit. The critical question was whether Inova had improved its position by perfection, making its security interest avoidable.