Cheese as collateral/inventory cheese increases in value as it ripens (due to bacteria)… thus, generally NO prejudice to other Cs on equipment AND Mixed collateral lien” inventory/AR “blanket Assume debt is $1M on 90th day before bankruptcy, remains constant… assume is $600K on 90th day before bankruptcy, inventory/AR increases in value to $900K appears (as per preferential exception to § 547(c)(5))… BUT, if equipment is $300K on 90th day before bankruptcy, … AND decreases in value to $0 NO change in ($100K at deficiency all times)… thus, even though there is increase in (“such inventory/AR … there is corresponding decrease in other collateral security interest”), (equipment)… AND, as such, NO decrease in security “all (equipment AND so, NO preference interests” inventory/AR)… liability (as per general rule of § 547(c)(5)) Assume debt is $1M at all times… assume is worth $600K on inventory/AR 90th day before bankruptcy, decreases in value to $300K… assume equipment is worth $300K on 90th day before bankruptcy, increases in value to $600K NO change in ($100K at all times)… deficiency thus, is NOT (NO increase in value)… inventory/AR preferential … BUT, equipment IS (at least, barring another preferential § 547(c) … defense) preference liability of $300K is written ONLY for equipment does § 547(c)(5) inventory/AR NOT fluctuate the same way… thus, equipment is NOT entitled to special protection (again, … view collateral on item-by-item basis) Assume decreases b/c $$ is taken from to purchase equipment MAY AR trace proceeds to invoke (proceeds of transmuted into § 547(c)(5) AR equipment) payments from customers go into special joint bank Lockbox account (over which C has some control), instead of going to D (to avoid commingling/tracing problems) D sells to customers, customers pay collections/ $$ inventory AR goes into lockbox… C (w/ in D’s then sweeps/collects from D’s SI AR) lockbox … loan obligations reduced accordingly
Cheese as collateral/inventory cheese increases in value as it ripens (due to bacteria)… thus, generally NO prejudice to other Cs Mixed collateral “blanket lien” on equipment AND inventory/AR Assume debt is $1M on 90th day before bankruptcy, remains constant… assume inventory/AR is $600K on 90th day before bankruptcy, increases in value to $900K appears preferential (as per exception to § 547(c)(5))… … BUT, if equipment is $300K on 90th day before bankruptcy, AND decreases in value to $0 NO change in deficiency ($100K at all times)… … thus, even though there is increase in inventory/AR (“such security interest”), there is corresponding decrease in other collateral (equipment)… AND, as such, NO decrease in “all security interests” (equipment AND inventory/AR)… so, NO preference liability (as per general rule of § 547(c)(5)) Assume debt is $1M at all times… assume inventory/AR is worth $600K on 90th day before bankruptcy, decreases in value to $300K… assume equipment is worth $300K on 90th day before bankruptcy, increases in value to $600K NO change in deficiency ($100K at all times)… … thus, inventory/AR is NOT preferential (NO increase in value)… … BUT, equipment IS preferential (at least, barring another § 547(c) defense) preference liability of $300K § 547(c)(5) is written ONLY for inventory/AR equipment does NOT fluctuate the same way… … thus, equipment is NOT entitled to special protection (again, view collateral on item-by-item basis) Assume AR decreases b/c $$ is taken from to purchase equipment MAY trace proceeds to invoke § 547(c)(5) (proceeds of AR transmuted into equipment) Lockbox payments from customers go into special joint bank account (over which C has some control), instead of going to D (to avoid commingling/tracing problems) D sells inventory to customers, customers pay AR collections/ $$ goes into lockbox… … C (w/ SI in D’s AR) then sweeps/collects from lockbox D’s loan obligations reduced accordingly