Improvement In Position Test Fails Creditor’s Defense

August 30, 2011- Lange v. Innova Capital Funding, LLC (In re Qualia Clinical Serv.), 2011 U.S. App. LEXIS 18020 (8th Cir. Aug. 30, 2011). In this case, Appellant Creditors, Inova Capital Funding, LLC and Innova Capital Funding, Inc. (collectively “Innova”) entered into an invoice purchase agreement (the agreement) providing Debtor Qualia Clinical Service, Inc. financing in the form of advance payment of outstanding customer invoices. As collateral, the agreement gave Innova a security interest in the Qualia’s property including its accounts receivable. Innova had filed a UCC-1 financing statement one month before the bankruptcy filing. The bankruptcy court and BAP held that § 547(c)(5) did not apply because Inova’s security interest was unperfected until the UCC-1 filing which necessarily improved its position. Innova sought review of the decision of the U.S. Bankruptcy Appellate Panel (BAP) for the U.S. Court of Appeals for the Eighth Circuit which upheld a bankruptcy court’s decision in favor of Appellee Trustee Lange in his petition sought to avoid as a preferential transfer under 11 U.S.C.S. § 547(c)(5) a security interest recorded by Innova shortly before the bankruptcy petition. The court agreed that the Innova’s lien was avoidable as a preference holding that the statutory “improvement in position” test presupposed Innova’s holding a perfected security interest as of the date of the first testing period. The improvement in position test was confined to floating liens perfected outside the 90 days before the filing of a bankruptcy petition. The Court also held that the preferential transfer was not exempt from avoidance because it improved Innova’s position as against other creditors. The court also held that due to prior transfers under the IPA, Innova did not qualify under § 547(c)(5)(B).