In re Tusa-Expo Holdings, Inc.

Tusa Office Solutions, Incorporated (Tusa) (debtor) filed for Chapter 11 bankruptcy. Tusa’s bankruptcy trustee brought an adversary proceeding against Knoll, Incorporated (creditor) to avoid certain transfers to Knoll from Tusa as impermissible preferences under the Bankruptcy Code. Tusa was a furniture retailer, and it would order furniture from Knoll, receive and deliver that furniture, bill the purchaser, and then pay Knoll. The working relationship was governed by a payment agreement between Tusa and Knoll that gave Knoll a first-priority security interest in all present and after-acquired assets, including accounts receivable. Tusa filed for Chapter 11 bankruptcy in November 2008; in July 2009, Tusa acquired additional financing from Textron Financial, Incorporated (Textron). Under their agreement, Textron received a first-priority security interest in all current and after-acquired assets, including the specific collateral encumbered previously by Knoll. In return, Textron gave Tusa a $6.5 million loan. Concurrently, Textron and Knoll entered a subordination agreement under which Knoll kept a first-priority security interest in certain of Tusa’s accounts receivable and subordinated its remaining security interest to second priority to Textron on all other Tusa assets. Under the terms of the agreements, Tusa’s accounts receivable were paid into a lockbox by customers. While Textron had control over the lockbox and withdrew daily funds and applied them to the credit available to Tusa on its loan, the loan agreement indicated that the lockbox and its contents were owned by Tusa. When Tusa so requested, Textron would advance new funds to Tusa’s operating account, which Tusa used to pay Knoll, among other functions. In Tusa’s bankruptcy, Knoll filed a proof of claim of over $6.9 million. In July 2009, Tusa converted its Chapter 11 petition to a Chapter 7 petition. In November 2010, the bankruptcy trustee filed the adversary proceeding against Knoll, seeking to avoid $4.5 million in transfers from Tusa to Knoll during the 90-day preference period before filing bankruptcy. The bankruptcy court ruled that the payments were not avoidable preferences. The trustee appealed to the district court, which affirmed the bankruptcy court, and the trustee then appealed to the United States Court of Appeals for the Fifth Circuit. There was no dispute that the transfers were made within 90 days of filing for the benefit of the creditor, were due to an antecedent debt, and were made while Tusa was insolvent. The issue was whether the transfers enabled Knoll to receive more than Knoll would have received had the case been filed as a Chapter 7 bankruptcy and had the transfer not been previously made.