Garner et al v. Knoll, Inc.

Filing 20

Memorandum Opinion and Order: The court ORDERS that he bankruptcy court's August 5, 2014 final judgment denying trustee any relief against Knoll based on Count I of Trustee's first amended complaint be, and is hereby, affirmed. (Ordered by Judge John McBryde on 3/4/2015) (ewd)

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IN RE :
TUSA -EXPO HOLDINGS , INC .,

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Case No . 08 -45057-DML-7

ET AL .,

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(
Jointly Administered)

Debtors ,

MARILYN D . GARNER, CHAPTER 7
TRUSTEE FOR TUSA OFFICE
SOLUTIONS , INC .,
Appellant ,

VS .
KNOLL , INC .,

Appellee .

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Adversary No . 10-042 71-DML

D istrict Court Case
No . 4 :14 -CV -961-A

MEMORANDUM OPIN ION
and
ORDER

The above -captioned act ion is be fore the court by way o f an
appe al by Marilyn D . Garner , Chapter 7 Trustee for Tusa Office

Solutions, Inc . (
uTrustee' , from the bankruptcy court's
')

August 5, 2014 final judgmentl denying Trustee any relief based
on Count I o f Trustee 's first amended complaint against Knoll ,

Inc . ('Kno11') filed in Adversary No. 10-0427I-DML on January 27,
'
'

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2011. After having considered the appellate briefs filed by the
parties , pertinent parts of the record in Adversary No . 10-04271DML , and relevant legal authorities, the court has concluded that

the bankruptcy court's August 5, 2014 final judgment should be
affirmed .
1.

Nature of the Claim Made by Trustee 's Count I
Allegations of Trustee 's first amended complaint that
constitute her Count I claim against Knoll are as follows :

On Novee er 5, 2008, Tusa Office Solutions, Inc . ('
'
Tusa
Office'), a debtor, filed a voluntary petition for relief in the
'
bankruptcy court under Chapter 11 of the Bankruptcy Code . The
Chapter 11 case was converted by the bankruptcy court to a

Chapter 7 proceeding on July 16 , 2 009 , on which date Trustee was

appointed as Chapter 7 Trustee for Tusa Office 's estate .
Trustee sought by Count I to avoid pursuant to the authority

of 11 U.S . . 5 547 ( prepetition transfers to Knoll of Tusa
C
b)
Office 's interest in property in the total amount of

$4 ,592,483 .90 (
collectively, nPrepetition Payments ,' and
'
individually, uPrepetition Pam ent'). By way of background,
'
Trustee alleged that :

11. Knoll manufactures and sells office furniture
and related products . Tusa Office operated as a full
service furniture dealer and management company and was
one of the nation 's largest dealerships of furniture
2

'

manufactured by Knoll . Pursuant to certain purchase
orders and dealership agreements , Knoll sold to Tusa
Office certain office furniture and related products.
12 . On June 27, 2008, Knoll, Tusa Office , TusaExpo Holdings , Inc w and Office Expo, Inc .
(
collectively, Tusa Office, Tusa-Expo Holdings, and

Office Expo, Incw the u
Debtors') entered into that
'
certain Amended and Restated Payment and Security
Agreement (
the n
Amended Payment Agreement' . In the
o
Amended Payment Agreement , among other things , the
Debtors acknowledged that they had purchased and
received products from Knoll . The Debtors further
acknowledged that they owed to Knoll certain trade
obligations for those products , which had been paid for
pursuant to that certain Payment and Security Agreement
dated April 30, 2002 , between Tusa Office and Knoll, as

amended by ( that certain First Amendment to Payment
a)
and Security Agreement dated June 19, 2003 between Tusa

Office and Knoll, ( that certain Second Amendment to
b)
Payment and Security Agreement dated December 2, 2003,

between Tusa Office and Knoll, and ( that certain
c)
Third Amendment to Payment and Security Agreement ,
dated August 8, 2005 , between Tusa Office , Office Expo ,
Inc ., and Knoll (
collectively, the nPrior Agreementr
')
13 . Pursuant to the Prior Agreement , Tusa Office

and Office Expo, Inc. (uoffice Expo') had a credit
'
limit in the aggregate amount of $3,500,000.00. The

credit limit was thereafter raised to $5,000,000.00.
According to the Amended Payment Agreement, as of
June 27, 2008, the Debtors were indebted to Knoll in

the amount of $5,567,853.89, consisting of
$2,863,898.60 less than 90 days past invoice date (
the
'Current Indebtedness'), and $2,703,955. more than 90
'
/
29
days past invoice date (
the uPastDue Indebtedness').
'
14 . Under the Amended Payment Agreement , Knoll
extended the terms of payment on the Current
Indebtedness owed by Debtors to Knoll, and Knoll agreed

to make additional sales of its products upon credit ,
upon the condition that the Debtors amend and restate
the terms of the Prior Agreement pursuant to the terms
of the Amended Payment Agreement .

15. The Prepetition Payments that Tusa Office
made to Knoll, which Trustee seeks to avoid in Count I
as preferences, were payments applied to certain
outstanding invoices that Knoll had issued to Tusa
Office on account of products sold to it by Knoll .
Attached as Exhibit B is a chart that indicates, for
each Prepetition Payment, the corresponding invoice
dates , invoice numbers, and invoice amounts paid by the
Prepetition Payment . Because each Prepetition Payment
paid an outstanding invoice, it was a payment on
account of an antecedent debt . In addition , the
Prepetition Payments reduced the amount of debt that
Tusa Office owed to Knoll pursuant to the Amended
Payment Agreement . The Prepetition Payments were

payments on account of an antecedent debt (
the debt
owing from Tusa Office to Knoll under the Amended

Payment Agreement) for that reason as well.

Doc. 17 at 3-5, !! 11-15 ( 434R.
36) (
foot
note omitted).
:

Trustee alleged that each Prepetition Payment ( was a
1)

ï

transfer of an interest of Tusa Office in property, ( was made
2)
to and for the benefit of Knoll, ( was made for or on account
3)

r

of an antecedent debt owed by Tusa Office to Knoll before the

Prepetition Pam ent was made, ( ) was made at a time when Knoll
4
was a creditor of Tusa Office , ( was made while Tusa Office was
5)
insolvent, ( ) was made on or within ninety days before Tusa
6
Office filed its petition for relief under Chapter 11 (
the
'Preference Period'), and ( ) enabled Knoll to receive more than
'
'
7
Knoll would receive if ( Tusa Office's bankruptcy case were a
a)
case under Chapter 7 , ( the Prepetition Pam ent had not been
b)
made , and ( Knoll received pam ent of such debt to the extent
c)
provided by the provisions of the Bankruptcy Code . Therefore ,
4

Trustee alleged , the Prepetition Payments are avoidab le pursuant

to

U . C. 5 547 (
S.
b).
II .
Bankruptcv Court 's Memorandum Opinion
-

On August 5 , 2013 , the bankruptcy court issued a memorandum
op inion in which it made the findings and conclusions that led to
the Augu st

2014 final judgment. Garner v. Knoll ( re Tusa
In

Expo Holdings, Inc .), 496 B. . 388 (
R
Bankr. N . Tex 2013). The
D.
Background section of the opinion gives a full description of the
historical events .

Id . at 391-398 . Because the court has seen

nothing to cause it to believe that the bankruptcy court 's
Background description is not supported by the record of the
proceedings in the bankruptcy court, this court adopts that
description by reference .

The Discussion section of the op inion starts with a

quotation from Union Bank v . Wolas, 502

151, 160-61 (
1991)

that u E preference is a transfer that enables a creditor to
al
receive a payment of a greater percentage of his claim against
the debtor than he would have received if the transfer had not
been made and he had participated in the distribution of the
assets of the bankrupt estate .' Garner , 496 B .R . at 398. A s the
'

bankruptcy court noted , id w the elements of a preference are set
*

forth in 5 547 ( of the Bankruptcy Code, which reads as follows:
b)
(
b) Except as provided in subsections ( and (
cL
i)
of this section , the trustee may avoid any transfer of
an interest of the debtor in property -(
1) to or for the benefit of a creditor;

(
2) for or on account of an antecedent debt
owed by the debtor before such transfer was made ;

(
3) made while the debtor was insolvent;
(
4) made-(
A) on or within 90 days before the date of
the filing of the petition ; or
(
B) between ninety days and one year
before the date of the filing of the
petition , if such creditor at the time of
such transfer was an insider ; and

(
5) that enables such creditor to receive more
than such creditor would receive if-(
A) the case were a case under chapter 7
of E
the Code);

(
B) the transfer had not been made; and
(
C) such creditor received payment of
such debt to the extent provided by the

provisions of E
the Code) .
11 U.S. 5 547( (
C.
b) emphasis added).
Then , the bankruptcy court proceeded with a scholarly
analysis that 1ed to the court's conclusion that 'Knoll's receipt
'
of the Preference Period Payments did not result in a voidable
preference ./ Garner, 496 B .R . at 400.
'z

In the course of

reaching that ultimate conclusion , the bankruptcy court found

that ( ' tqhe Trustee did not satisfy her burden to prove that
1) 'l

z
Thebankr c coud us het dpr er nceperodpa
upt y
edt e= t ef e
i
yment' nr er
s'i ef encet hes m e
ot a
paym ent t tt Tr t caled tpr ii Pa
s ha he usee l t epetton yment ' i t fr tam e
s' n he is
nded com pl nt
ai .
6

Knoll received more as a result of the Preference Period Payments
than it would have received in a hypothetical liquidation z' id .
'

at 4037 ( nl
2) tlhe Preference Period Payments did not diminish
Tusa Office 's estate because the Preference Period Payments would
not have been available to pay Tusa Office 's general creditors in

a hypothetical liquidation,' id. at 405; and
'

ul
Tusa Office's)

:

estate was not diminished because Knoll's receipt of the
Preference Period Payments was not done at the expense of general
unsecured creditors,' id . at 406 .
'

A fter giving full explanations as to why

concluded that

the Preference Period Payments did not result in voidable

preferences within the meaning of 5 547 (
b), the bankruptcy court

turned to a consideration of the 5 547 ( 5)3 exception to the
c)(
voidable preference provisions of 5 547(
b). Id . The bankruptcy
court found the existence of the facts that would cause the
exception to be applicable , finding that nKnoll's deficiency

S cin 5 c ( )pr vi si p ri n pa4a f lws
se to 47()5 o de n e tne t l s olo :
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r te y t voi nd r hi e to r nse**+ **

( )t a c e t sape fce s c rt it r s i i e t r orar c i bl or
5 h t r ae
re td e u iy n e e t n nv n o y
e eva e
t pr eedsofeiher exceptt t e entt tt aggr t of#l s t a f s
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educton,asoft da e oft flng oft pe ii and
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he t
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he tton

t t prj dieofot rc e ior h di u e ur dcams ofa y a ntb
o he e u c
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whi t debts ed by s h s iy i e es exce
ch he
ecur
uc ecurt nt r t
eded t val ofal
he ue
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s iy i er t f s de on t l erof
ecurt nt ess or uch bt he at -

( ()wih rs e tt ata frt whih s s cin ( ( ( o t s
A)i t e p c o r nse o c ub e to b)4)A) f hi
s ton apples 90 daysbef et dat oft fii oft petton ....
ec i
i ,
or he e he lng he ii

11U. C. 5 c ( )A)i.
S. j 47()5 ( ()

increased by $971,833 from the Preference Date to the Petition
Date ,' thus leading to the conclusion that nKnoll 's secured
'
position did not improve, but actually deteriorated throughout
the Preference Period .' Id .
'
I II .

Issues Raised on Appeal

The parties disagree as to the proper definition of the
issues presented for rev iew . Am . Appellant 's Br . at 1-3 ;
Appellee 's Br . at 1-2 . Because this court 's affirmance of the

August 5, 2014 final judgment is predicated on the bankruptcy
L

court 's ruling that the 5 547 ( ( exception to applicability of
c) 5)

:

5 547 ( applies, the court is not concerning itself with the
b)

r

disputes between the parties as to issues presented on appeal

t

other than those related to applicability of 5 547 ( ( .
c) 5)
Trustee defines the j 547 ( issues as follows :
c)
4.

Did the Court err in concluding that the

affirmative defense under 11 U.S . . 5 547 ( ( applied
C
c) 5)
to defend the Preference Pam ents that the Trustee

seeks to avoid in Count l, where ( Knoll did not
i)
assert the section 547 ( ( affirmative defense until
c) 5)
after trial , and the Court granted Knoll 's post-trial
motion for leave to amend its answer; and (
ii) the
plain language of section 547 ( ( , as well as its
c) 5)
purpose , make clear that it applies only to transfers
that create perfectqd liens in receivables or
inventory , and not to the pam ents that the Trustee
seeks to avoid in Count 1 . The Court 's decision to
grant Knoll's motion for leave to amend its answer to

assert the section 547 ( ( affirmative defense is
c) 5)
reviewed for abuse of discretion . The interpretation
8

of section 547( 5) is a question of law that is
c)(
reviewed 4q novo.

Am. Appellant's Br. at 3, ! 4 (
footnotes omitted). Knoll's
version of the 5 547( issues presented for review is as
c)
follows :

D . Whether the Bankruptcy Court abused its
discretion by granting the Motion to Amend when :

(i) Appellant failed to object to and/or present
evidence as to Section 547( 5) during the Bifurcated
c)(
Trial; (
ii) the amendment allowed the Answer to conform
to the evidence presented during the Bifurcated Trial;

(
iii) Appellant's Closing Argument addressed the
applicability of Section 547( 5) to Count 1; (
c)(
iv) the
amendment assisted the Bankruptcy Court in deciding

Count I on the merits; and ( Appellant's burden of
v)
proof under Section 547( was not affected . The
b)
standard of rev iew for this issue is abuse of
discretion .

)

E. Whether 547( 5) applies to Count I when
c)(
Fifth Circuit law applies Section 547( 5) to shield
c)(
cash payment to creditors with floating liens on
accounts receivable and inventory . This issue presents

a question of law; thus, the standard of review is 4q
nOVO .

Appellee' Br. at 1- !! D-E ( ootnotes omitte
s
2,
f
d). The c
ourt
considers Knoll 's version to more accurately define the

5 547 ( ( issues to be resolved .
c) 5)
IV .

Analy sis
The court has concluded that nothing would be gained by a
discussion of any of the issues the parties say are presented by

this appeal other than the 5 547 ( (5) issues . The court has
c)
9

concluded that the 5 547( ( issues should be resolved in
c) 5)
Knoll's favor and that such a resolution is dispositive,
requiring an affirmance of the bankruptcy court 's August 5, 2014

final judgment.
A.

The Bankruptcy Court Did Not Abuse Its Discretion in
Allowinq the j 547( ( Amendment
c) 5)
The first prong of Trustee's complaint with the bankruptcy

court's 5 547 ( ( holding is that the bankruptcy court erred in
c) 5)
granting Knoll's motion for leave to amend post-trial its answer

to assert the 5 547( ( defense to the Count I claims.
c) 5)
While Knoll alleged in its answer to the first amended

;

complaint that 5 547 ( 5) was an affirmative defense to
c)(
Tru stee 's preference claims in Count 11 of her first amended

complaint, Doc. 19 at 14-15, ! 75 ( 486-87), Knoll did not
R.
plead the 5 547( 5) exception to 5 547 ( as to Trustee's Count
c)(
b)
I claim until given permission by the bankruptcy court to do so
post-trial.

The court has concluded that the bankruptcy court

did not abuse its discretion in granting that permission .
On February 11, 2013, Knoll filed its motion for leave to

amend its answer to assert 5 547 ( 5) as a defense to the
c)(
Count I claims. Doc. 2O1 ( 2110). The post-trial amendment
R.
was sought pursuant to the authority of Rule 15 ( of the Federal
b)

10

Rules of Civil Procedure. Doc . 201 at 3 ( 2112). Trustee
4
R.
filed a written response opposing the motion for leave . Doc . 203

( 2120). On April 10, 2013, the bankruptcy court had a hearing
R.
on the motion, Doc. 272 ( 457), and on April 24, 2013, the
R.
bankruptcy court issued an order granting the motion for leave,

Doc. 205 ( 2150), expressing the findings in the order uthat
R.
notice was proper under the circumstances; and

that

sufficient cause exists to grant the Motion,' Doc. 2O5 at 2 ( .
'
R
2151).
A s both parties acknowledged, the standard of rev iew on this
appeal is abuse of discretion . That was the holding of the Fifth

Circuit in Deere & Co. v . Johnson, 271 F.3d 613, 621 (
5th Cir.
2001) (
stating that ' wqe review Rule 15 ( amendments for abuse
'E
b)

4 el b)oft Fe e a Rulso Ci l oc d er a sa f lws
Ru1 5(
he d r l e f viPr e ur e d s olo :
( AM ENDM ENTSDURI AND AFTER TI
b)
NG
UAL.

( ) Bae ona Obici a Tral l, ttilapat o jcst te de c i no
l
sd n e ton t i . fa ra, ry be t ha vi n e s t

w ihi t i uesr s i t pl ngs,t courtmay per tt pl ngst be
t n he ss aied n he eadi
he
mi he eadi o
am ended.The courts d feel per i a amendm e when doi s wilai i
houl r y m t n
nt
ng o l d n

prsni t meisa dt o jci pat fist stsytec urta t e de e
ee tng he rt n he be tng ry al o aif h o th the vi nc
woul peudc t tpat sa to o d fns o t meis Thec urma ga ta
d rj ie ha ry' cin r ee e n he rt.
o t y rn
c tnua et e bl t obeci pat t mett e d nc .
oni nc o na e he j tng ry o e he vie e
( Fo ls e Tre b Con e .W h n a is n tr s db t epla i si
2)
r s u s id y s nt e n sue o aie y h e dng s
ti by t pari e es ori i conse ,i m us be tea ed i al r pec sasi
red he tes' xpr s mpled
nt t t r t n l es t
f

rie i t pla ngs A p ryma mo -a a ytme e natrud n-t a nd
asd n he e di . at y ve t n i , ve fe j gme t o me
t pl ngst conf m t t t evi
he eadi o
or hem o he dence and t r s an unpl
o aie
eaded i s But
s ue.
f l e t a end doesnotafec t r ul oft ti oft i ue.
aiur o m
f t he es t he ral hat ss

Fe R. v. l ( )
d. Ci P. 5 b .

of discretion'
'). In Deere & Co., the Fifth Circuit explained the

purpose of Rule 15( as follows:
b)
As has been often said , the principal purpose of

Rule 15( is judicial economy. If the parties either
b)
expressly or imp licitly consented to hav ing a matter
litigated, and the evidence provides the court with
sufficient guidance to resolve the matter , amending the

pleadings saves judicial resources.
Id . at 621-22 . However, the Fifth Circuit went on to note that
usaving resources usually takes a back seat to procedural due
process .'
'

Id . at 622 . The Court added that '
'in the absence of

express consent, trial of unpled issues by imp lied consent is not

likely to be inferred under Rule 15 (
b), and such inferences are
t

to be v iewed on a case-by -case basis and in light of notice

t

demands of procedural due process.' Id. (
'
internal quotation

:

marks and brackets omitted). The Fifth Circuit quoted with

(

approval from Morqan and Culpepper, Inc . v . Occupational Safety &

Health Review Comm' 676 F. 1065, 1068 (
n,
2d
5th Cir. 1982), that
'
'
while it is true that amendments . . . should be freely granted ,

it is just as certain that the company charged should be given an
opportunity to fully respond to the new theories presented .'
'

Deere & Co., 27l F. at 622 (
3d
internal quotation marks and
brackets omitted).
In the instant action , potential due process concerns were
addressed . The bankruptcy court found in the order granting

12

leave that notice was proper and that sufficient cause exists .

Doc. 205 at 2 ( 2151). They also were addressed at the hearing
R.
on the motion for leave when , after announcing his intent to

grant leave to amend, the bankruptcy judge informed counsel for
Trustee that the judge would entertain a motion to allow the
Trustee to reopen the record and add evidence to the record if
the Trustee wished to file such a motion . Doc . 272 at 14

( 5470). And, the judge went on to say that he would accept
R.
further briefing that either side w ished to file , id w and that
he would consider a motion to add to the record either party
w ished to file , to the extent that the party thought that there
was ev idence that would overcome or affect his decision to grant

the motion for leave, Doc. 272 at 14-15 ( . 5470-71).
R
In exp lanation of his decision to grant the léave , the

bankruptcy judge said that the assignment he had given the
attorneys to begin w ith , when they were in Chambers prior to the
development of the scheduling order , should have put the parties

on notice that 5 547 ( 5) could play a role in Count 1. Doc.
c)(

272 at 15 ( 5471). The bankruptcy judge undoubtedly had in
R.
mind the following statement he made at an April 4 , 2012 pretrial
status conference :

I just want to get around to diminution. And,
basically , with respect to the preference claims,
almost on a 553 analysis, that you had -- 90 days out
13

you guys had a $600,000 deficiency and on the date of
filing you had a $200,000 deficiency , and if that's the
case , then it appears there 's diminution . I mean, I
want you to prove it up as you would b0th for the
preference or to the extent you have to under 553 . I
want you to go through the proper motions . But I mean,
that's sort of what I ' looking at ... I mean , I want
m
you to put on your case in term s of improvement of
position or diminution of value ...

Doc. 152 at 7-8 ( . 4133-34)(
R
emphasis and footnote omitted).

Although the bankruptcy judge referred to 5 553, the analysis he
described basically is the same analysis the Fifth Circuit has
said should be used to determine whether payments to creditors

with floating liens are avoidable, in other words, a 5 547( 5)
c)(

)

analysis. see Wilson v. First Nat'l Bank Lubbock, Yex. ( re
In
Missionarv Baptist Found . of Am ., Inc.), 796 F.2d 752, 759-60

:
.

(
5th Cir. 1986)7 see also Smith v. Assocs. Commercial Corp . (
In
re Clark Pipe & Supplv Co.), 893 F. 693, 697 (
2d
5th Cir. 1990)(
on
reh'
g). So that counsel for Trustee would not misunderstand what

the bankruptcy judge had in mind, at that same status conference
the bankruptcy judge pointedly directed the following remark to
Trustee's counsel :

'l mean , I want you to put on your case in
'

term s of the improvement of position or diminution of value or

14

fairing better than you would have in a Chapter
152 at

Doc .

( 4134).
R.
5

It should have been apparent to Trustee from the outset that

there was the potential the j 547 ( 5) exception could exist to
c)(
Trustee's Count I 5 547 ( claims. The fact that Knoll pleaded
:)
the 5 547 (
c)

exception as an affirmative defense to Trustee's

Count 11 claims should have highlighted to Trustee that she could
well be faced with an argument that the exception app lied as Well
to her Count I claims .
A s the bankruptcy court's opinion reflects, during the trial
Knoll presented evidence that its position was not improved as a
result of having received the Preference Period Payments, a
circumstance that was a proper factor for the bankruptcy court to
consider . See In re Remes Glass, Inc ., 136 B .R . 132, 139-40

( . . Mich . Jan.
W D

1992). During closing arguments, counsel

for Knoll argued that 5 547 ( 5) applied to both Counts I and
c)(
II. Doc. 193 at 24, 43-44 ( 5429, 5448-49). Rather than to
R.
address the factual merits of the 5 547( 5) exception as to
c)(
Count

counsel for Trustee responded that he would discuss the

matter further in post-trial briefing . Doc . 193 at 48

5453).

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47 c fns
wo dbee e tie frti ia i t ttea al i heha i mi wa aj54 c a al i, .1 2
ul ntran d, is nd c tng ha h n yss
d n nd s
7( ) n yss Doc 5
a 5( 41 l,a d lt rr s ndi t tt ywe eno tyig j5 4 )afr tved f n e , .l 2a 7
t R. 3 ) n ae e po ng ha he r t r n 47 c fima i e e s s Doc 5 t
( 41 .
R. 33)

Each side took advantage of the opportunity for further

briefing on the applicability of the 5 547( 5) exception as it
c)(
pertained to Count 1. Docs. 208 & 209 ( 2199, 2268). Trustee
R.
could have taken advantage of the bankruptcy court 's offer to

favorably entertain a motion to reopen the record and to allow

further evidence to be presented on the 5 547 ( 5) issue as to
c)(
Count I if desired . There is no basis for a due process concern

in this action. The bankruptcy judge's invitation to Trustee to
request to open the trial record eliminated any possible concern
that she did not have adequate notice or did not have an

opportunity to present evidence on the 5 547 ( 5) exception to
c)(
applicability of 5 547( as to Count 1. Trustee has not shown
b)

that she suffered any prejudice by the bankruptcy judge's
decision to allow an amendment to Knoll's pleading that would

conform its defenses to the trial evidence . The record indicates
that she suffered none .

Apropos here is the following explanation given by the Fifth

Circuit of the goal and proper application of Rule 15(
b):
In allowing for the amendment of pleadings, Rule 15 (
b)
is designed to ensure that poor foresight on the part
of scriveners is not converted into tunnelvision on the

part of judges. The amendment process prevents
technicalities in pleading from impeding the just
resolution of the merits of cases . . . .

To effectuate

the policy underlying Rule 15 (
b), and in recognition of
the spirit of the Federal Rules of Civil Procedure ,

16

this Circuit has pursued a course of strong liberality
in allowing amendments.
M ineral Industr., Etc. v . Occupational Safety , 639 F.
2d 1289,
-

1292 (
éth Cir. 1981) (
citations, internal quotation marks, and
internal ellipses omittedl.
6
To have denied Knoll's request for leave to amend its answer
would have converted poor foresight on the part of the author of

Knoll's answer to the first amended complaint into tunnelvision

on the part of the bankruptcy judge that would have impeded the
just resolution of the merits of Trustee's Count I claims.
For the reasons stated , the court concludes that the

bankruptcy court did not abuse its discretion by granting Knoll's
motion for leave to amend . The amendment served to secure the

:

lust and speedy determination of the Count I claims as Rules 1
and l5 ( of the Federal Rules of Civil Procedure envision .
b)
B.

The Other Pronq of Trustee 's Complaint W ith the Bankruptc y
Court's 5 547( ( Holding Likewise Lacks Merit
c) 5)
--

-

Trustee does not take issue with the bankruptcy court's
finding that Knoll's deficiency increased from the Preference
Date to the Petition Date , nbut actually deteriorated throughout
the Preference Period .' Garner, 496 B .R . at 406.
'

Instead , other

6n M i alI t i e Et ,t Fit Cicui adde t expl ton t çan i ple amendm e
1 ner ndus res c. he fh r t
d he
ana i hat t m id
nt
oft pl ngs s d notbe pe m it whe e i woul oper t t de a part a f ropport t t
he eadi
houl
r ted
r t
d
a e o ny
y ai
uniy o
pr ente de mat i t ne l adde i ues.' 639 F. at1293. Asnot i t t ,Tr t was
es vi nce eral o w y- d ss '
2d
ed n he ext us ee

n td nidaf i o ru t t p e e e de c mae il ot j5 c ( )e e to t a plc biiyof
o e e ar ppo tniy o r s nt vi n e tra t he 47()5 xc p in o p ia lt
j5
47*)ast Tr te' Cou lcams
o use s nt li .
17

than Tru stee 's contention that the bankruptcy court erred in
granting Knoll's motion for leave to amend , her only comp laint

directed at the bankruptcy court's 5 547( 5) holding as to
c)(
Count I is her contention that the financing arrangement existing
between Knoll and Tusa Office during the Preference Period was

not of a kind that would qualify for the 5 547 ( 5) exception.
c)(
The court has concluded that Trustee is incorrect in her

interpretation of the intent of 5 547 ( 5), and that the
c)(
bankruptcy court did not err in giving it effect as to Trustee 's
Count I claims .

The financing arrangement between Tusa Office and Knoll
during the ninety -day period before Tusa O ffice filed its
bankruptcy case is Fhat has been referred to in court decisions
as a nfloating lien' financing dev ice, which the Ninth Circuit
'
described as follows :
A floating lien is a financing dev ice where the
creditor claim s an interest in property acquired after
the original extension of the loan and extends its
security interest to cover further advances . The
floating lien is a lien against a constantly changing
mass of collateral for a loan value that will change as
payments are received and further advances are made .

Batlan v . TransAmerica Commercial Fin . Corp . ( re Smith's Home
In

Furnishings, Inc.), 265 F.3d 959, 964 (9th Cir . 2001). As the

18

Eleventh Circuit held, 5 547( ( applies to such a nfloating
c) 5)
lien' arrangement , explaining :
'

Since Creditor had a ufloating lien' on Debtor 's
'
inventory and accounts receivable , the section

547( ( exception to preferential transfers applies
c) 5)
and our inqu iry should be whether Creditor 's position
uimproved' relative to what it was preceding
'
bankruptcy .
Roemelmever v . Walter E . Heller & Co . Se . ( re Lackow Bros .,
In

Inc.), 752 F. 1529, 1531 (
2d
11th Cir. 1985). In Galloway v .
First Alabama Bank ( re Weslev Indus., Inc. , the Eleventh
In
i
Circuit elaborated, explaining :

Section 547( ( of the Act carves out an exception
c) 5)
for inventory or accounts receivable that protects the
transfer of a security interest in after-acquired
property , i . ., a nfloating lien ,' prov ided that the
e
'
creditor does not improve its position within the
vulnerable period prior to bankruptcy . This exception :
permits a creditor with , say , a '
floating
lien ' on the '
receivables ' of such a company
to maintain that lien as the specific
accounts receivable are paid off, and
replaced by new ones , without fear that a
future bankruptcy trustee will mount a
preference attack on new accounts receivable
arising during the '
preference' period . . . .
Insofar as the grant of a security interest

in the new collateral (
receivables or
inventory that comes into existence during

the preference period) improves the
creditor's position (
compared to his position
at the beginning of the preference period),
the grant of security constitutes a
preference to the extent of the improvement .
Braunstein v . Karger (In re Melon Produce,

19

Inc.), 976 F. 71, 75 (
2d
1st Cir.
1992) (
citation omitted).

30 F.3d 1438, 1442 (
11th Cir. 1994).
Fifth Circuit law is consistent with the 1aw of the Eleventh
Circuit . see Smith , 893 F .
2d at 696-977 see also W ilson, 796
F .2d at 759-60.

The court has concluded that the bankruptcy court did not

err in giving effect to the 5 547 ( 5) exception as to Trustee's
c)(
Count 1 .

C.

Conclusion

Having concluded that the substantive 5 547 ( 5) ruling of
c)(
?

the bankruptcy court as to Count I was not error , and that the

bankruptcy court did not err in granting Knoll leave to amend its

answer to allege the 5 547( 5) exception as ah affirmative
c)(
t

defense, the court has determined that the bankruptcy court did

not err in its 5 547( 5) holdings. Inasmuch as those holdings
c)(
are dispositive against Trustee of Trustee's Count I claims, the
court does not find a need to discuss any of the other issues
Trustee has designated in her appellate brief as issues for
appellate review .

20

V.

Order

For the reasons stated above ,

The court ORDERS that the bankruptcy court's August 5, 2014

final judgment denying Trustee any relief against Knoll based on
Count I of Trustee's first amended complaint be, and is hereby ,
affirmed .
SIGNED March 4, 2015 .

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