32: Preference defenses© Charles Tabb 2010

Role defenses play

1st -- the trustee must prove a prima facie case for avoidance under 547(b)

2nd -- the burden then shifts to the creditor-defendant to prove any of the defenses (or safe harbors, or exceptions) to preference liability under 547(c)

See 547(g) for burdens of proof

What are the defenses?

contemporaneous exchanges of new value, (c)(1) ordinary course transfers, (c)(2) enabling loans, (c)(3) subsequent advances of new value, (c)(4) floating liens, (c)(5) statutory liens, (c)(6) domestic relations debts, (c)(7) transfers of less than $600 by an individual debtor

whose debts are primarily consumer debts, (c)(8) transfers of less than $5,475 by non-consumer debtors,

(c)(9). transfers made as part of an alternative repayment

schedule created by an approved nonprofit budgeting and credit counseling agency, § 547(h)

Most important

1st – no preference liability if transfer < $5475 Business Dr ((c)(9)) floor = $600 for consumer Dr

For unsecured creditors: $5475 immunity, of course “ordinary course”, (c)(2) New value, (c)(4) Contemporaneous exchange, (c)(1)

For secured creditors: Enabling loans, (c)(3) Floating liens, (c)(5)

“ordinary course” defense Until the addition of the $5475 floor for

business preferences in 2005, the most important preference exception – by far – was “ordinary course” exception under (c)(2)

A 1997 national preference survey conducted by the American Bankruptcy Institute found that the ordinary course defense was raised in 73.4% of all preference cases. http://www.abiworld.org/Content/NavigationMenu/

NewsRoom/BankruptcyResearchCenter/BankruptcyReportsResearchandTestimony/ABI/Report_on_the_ABI_P1.htm

impact

Practical reality was that even if “equality” was perverted by an eve-of-bankruptcy transfer, was not avoidable if payment was in the ordinary course

And fact-intensive nature of divining what = “ordinary” made preference litigation very uncertain, and put pressure to settle on both trustee and creditor-defendants

example

Original hypo, where Dr has $6K in assets and owes $6K each to creditors A, B, and C Assume all are regular business creditors, debts

arose in normal business operations And, debts all coming due in normal time period

Day before bankruptcy, Dr chooses to use last assets to pay A in full, and nothing to B or C

Payment to A was in standard manner & time A gets to keep the $ -- not avoidable

What happened to “equality”?

As this simple example shows, the “ordinary course” exception completely eviscerates any serious notion that “equality” is a meaningful norm supporting preference avoidance

On very eve of bankruptcy, one Cr gets paid in full, and all other creditors get nothing

justification

Given the evisceration of equality, what policy supports the ordinary course defense?

Congress said “deterrence”: “The purpose of the exception is to leave

undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy.”

Resurrecting “bad” vs “good” preferences

The statement in the legislative history suggests that an eve-of-bankruptcy transfer is voidable as a preference ONLY if it is motivated by “bad” intentions – i.e., only if the transfer was made due to “unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy.”

Bad only?

This policy harkens back to the ancient notion that a preference was “bad” only if, variously over time: Dr had an intent to prefer, or Cr had an intent to obtain a preference,

or Cr had (1898 Act) “reasonable cause to

believe the Dr was insolvent”

Leave the “good”

Whereas nothing ‘wrong” when no one was motivated by “unusual action”, instead, as legislative history said, should

“leave undisturbed normal financial relations”

-> trade creditors feel VERY strongly that they should be immunized from preference attack if they didn’t exert unusual pressure on the Dr to get paid – and now that’s the law!

So, what is “ordinary”?

1st, debt had to be incurred in ordinary course Almost never an issue

2nd, the payment must be ordinary Ordinary as to what? Here is where the pre-2005 and

post-2005 versions of the law differ importantly

Pre-2005: Cr must prove BOTH▪ the transfer was made in the ordinary course of the business

or financial affairs of the debtor and the transferee;

and ▪ the transfer was made according to ordinary business terms.

Meaning what …?

Courts struggled to figure out what those two tests meant

Tolona Pizza leading case announcing that they state both a SUBJECTIVE test – what is “ordinary” as

between this Dr and this CR

AND OBJECTIVE (the “ordinary business terms”) –

i.e., what is ordinary in the industry

Tolona illustrates

payment terms: “net 7 days” – no one did that

Actual practice between Dr and Rose (sausage supplier) – for 34 months before, Dr paid from 26 to 46 days late

As to others Rose sold to – norm paid in 21 days, if paid > 28-30 days, Rose withheld So Dr one of “exceptional” customers

8 payments to Rose in preference period – from 12 to 32 days, average = 22 days

issue

Did Rose have to prove only that the 8 payments made to it during the preference period were “ordinary” as compared with the prior practice as between Dr and Rose, or ALSO that the payments conformed to the industry norm?

Court held: BOTH required

Why both?

1st, need “subjective” ordinariness – The “discourage unusual action,” not race point

2nd – need “objective” confirmation of same: b/c is evidentiary of actual subjective

ordinariness – if ≠ objectively ordinary, raises doubts as to credibility of claim of subjective ordinariness

AND allay concerns of other Crs that this Cr cut a “special deal” with Dr that will favor this Cr in times of financial distress

Application?

1st, Subjective – clearly okay – Rose was paid well within (indeed, slightly better than) previously – 12 to 32 days, average 22, versus prior practice Rose-Tolona of 26-46

2nd – Objective – ends up being a VERY lenient test: “that "ordinary business terms" refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary”

Met objective test

On these facts, met objective too 21 days a goal, but up to 30 days is fine And average here was 22 days No “single set of terms”

Trade creditors HATED objective 1997 ABI Preference study found that trade

creditors believed vehemently that the ordinary course exception did not work well in practice – was both vague and inconsistently applied, and gave insufficient protection

Creditors felt was unfair and hard to prove compliance with unknown “industry” norms – even under a lenient Tolona approach

Commission recommendation

Accordingly, 1997 Commission Report recommended changing the requirement that Cr prove compliance with BOTH subjective & objective tests, to need to prove compliance with EITHER

Intent was for “subjective” to control if was provable

Commission, cont.

“the conduct between the parties should prevail to the extent that there was sufficient prepetition conduct to establish a course of dealing”

only “[i]n the event there is not sufficient prepetition conduct to establish a course of dealing, then industry standards should supply the ordinary course benchmark.”

this approach would eliminate need for a preference defendant to prove elusive industry standards, and it is “more accurate to rely on the relationship between the parties.”

2005 amendment

BAPCPA – changed the “and” to an “or”

now Cr need prove ONLY compliance with EITHER the subjective or objective tests

Means that Cr will be safe if simply stays consistent with its established practices with Dr

Applying the new “disjunctive” test

Hypo: invoices require payment in 20 days Creditor and Debtor have a longstanding

practice of 40-45 days for payment -- [subjective]

Industry standard (which we will assume is easily established) requires strict compliance with the 20-day invoice terms -- [objective]

Creditor, however, gets paid at days 43, 40, and 45 during the preference period.

What result?

Subjective suffices

Cr wins Payments at days 43, 40 and 45 fell

squarely within the parties’ subjective practice

Totally irrelevant that industry norm was 20 days

Problem 9.11

Facts: Supplier & Dr had unusual but longstanding

practice – Dr would send check with the P.O., but Supplier would hold check for several weeks before presented to bank for honor

In 90-day preference period, Dr delivered $72K of checks to Supplier, which were honored by bank within 40-45 days after goods delivered▪ Consistent with prior subjective practice▪ Also within industry time-to-payment norm▪ But no one else in industry had a “hold-the-check-from-

the-start” sort of safeguard

What result?

Analysis 9.11

BEFORE 2005: Supplier faced a serious risk of losing the ordinary

course defense, because their deal (getting checks in hand in advance of the normal time for payment, as a form of payment security) was not ordinary for the industry – even if, as it happened, Supplier did not actually present the “security” checks early

As a matter of policy (remember Posner’s 2nd justification for objective test in Tolona), why should this Supplier be allowed to put in place such a special deal that gave it the option to get a jump on other creditors if the Dr’s financial affairs turned ugly?

9.11 post-2005

But under the new law, since Supplier put its special deal in place well before the actual onset of the debtor’s insolvency and then bankruptcy, and the parties then adhered to that special deal so as to create a course of dealing, Supplier likely will prevail by proving conformity to subjective ordinary course, under § 547(c)(2)(A).

The fact of non-conformity to objective industry standards supposedly would be irrelevant

But this means we allow Crs to set up “special deals” well in advance as “bankruptcy protectors”

new value defense, 547(c)(4)

Subsequent advances of new value from CR to Dr are credited against prior preferential transfers

In effect, Cr’s preference liability is reduced to the extent Cr returns value to DR after receiving a preference.

Justified: Dr’s estate has been replenished to the extent of the new value,

and thus other creditors have not been harmed.

Encourages creditors to continue doing business with a financially troubled debtor.

In practice, 547(c)(4) has been applied most often in a trade credit situation, involving ongoing extensions of credit on open account

Requirements of (c)(4) defense 1) after a preferential transfer, Cr gives new

value to or for the benefit of Dr, 547(c)(4);

2) that new value is not secured by an otherwise unavoidable security interest, 547(c)(4)(A); and

3) Dr does not make an otherwise unavoidable transfer to or for the benefit of Cr on account of that new value, 547(c)(4)(B)

Problem 9.12(a)

Cr a trade supplier of Dr, sells on open account, & owed $10K on April 1

April 1 – Dr pay $8,500 to Cr April 15: Cr ships $4K in goods to Dr

on credit May 1: bankruptcy

How much, if any, is preference liability?

Answer 9.12(a)

$4,500 preference liability:

$8500 payment April 1 (assuming n other defenses, such as ordinary course, and meets 547(b) elements)

MINUS $4k in “new value” – the credit for new goods shipped by Cr on April 15

Note that Cr’s bk “claim” is thus = $10K –> the $4500 repays as preference + $4k unpaid on April 15 shipment + $1,500 never was paid on original $10K

* makes sense – Cr never intended to be > $10K exposure

Fair?

Easy to justify this defense – 1st, Cr likely never would have shipped more goods on credit on April 15 if it had not gotten the payment on account on April 1 Recall, Cr never wanted to be exposed > $10K

… but if not have new value defense, Cr debt = $14K

Encourages trade creditors to keep doing business on credit with Dr even if Dr may be in financial trouble

9.12(b)

Now reverse times, i.e, Cr ships $4k credit new goods April 1, then April 15 Dr pays $8,500

Now the preference = $8,500

No new value defense – only applies if new value given AFTER the Dr’s preferential transfer Makes sense – neither the “replenishment” nor the

“incentive” rationale applies where Cr ships 1st

9.12(c)

PREFERENCE

April 1: Dr pay $8,500 $8,500 April 15: Cr ship $4K credit goods 4,500 April 20: Dr pay $3K

7,500

Now preference = $7,500

Only get credit for $1k in new value, b/c of 547(c)(4)(B) – Dr made “an otherwise unavoidable transfer to ... such Cr” – the $3K is protected under (c)(9)’s $5475 safe harbor

9.12(d)

PREFERENCE

April 1: : Dr pay $8,500 8,500 April 15: Cr ship $4K credit goods 4,500 April 20: Dr pay $3K 7,500 April 25: Cr ship $7500 credit goods 0

Zero preference

Final credit shipment of new value on April 25 canceled out the remaining $7,500 in then-existing preference liability Shows can apply new value to all prior transfers by Dr

9.12(e)

April 1: Dr pays Cr $5k April 5: Dr pays Cr another $5k

Issue is whether (c)(9) safe harbor works

Turns on question of whether or not aggregate all the transfers by Dr to Cr during preference period If so, no (c)(9) defense, b/c total = $10K > $5475 If not, good (c)(9) defense - both transfers <

$5475

Analysis 9.12(e)

Statutory language: “such transfer” in (c)(9) – against

aggregation?▪ but 102(7) says “singular includes plural”

Avoid “any transfer”, (b) – same? “aggregate value” in (c)(9) – for aggregation▪ But does this work across different transfers?

Policy: If not aggregate, easy to circumvent –

endless series of transfers each < $5475

Outcome?

Result: AGGREGATE So here, avoid BOTH transfers, $10K

Note – Cr WORSE off when got 2nd transfer – was fully protected as to 1st $5k transfer – but after 2nd transfer kicks up aggregate total to 410K, no defense at all!* (c)(9) is NOT a “credit” against liability – it’s an either-or defense

Secured creditors & time of transfer

for a Secured Cr, have 2 possible times when might deem the “transfer” of the lien to be made for preference purposes: 1st – when effective as between the DR and

the SP▪ Only need valid transfer of lien Dr to SP, & debt▪ i.e. = “attachment” under article 9

2nd – when effective as against 3rd parties▪ Need public recordation

Policy? Secret liens the concern If just use the 1st option, and say lien is

transferred when effective Dr –SP, whether or not in public records, would allow secret liens

As long as SP record any time before bankruptcy, would be safe – not avoid under strong arm clause 544(a), b/c that

focuses solely on time of bk filing Not avoid as preference b/c would not have an

antecedent debt – ▪ And possibly outside 90-day period as well

Rule? compromise

The preference rule for timing for transfer of a lien is a compromise between the “only when recorded” and the “when effective against Dr” options

1st -- the “timing” of a lien transfer for preference purposes is when the transfer is recorded (547(e)(1)) i.e., when effective vs 3rd parties▪ Realty – beat bfp – (e)(1)(A)▪ Personalty – beat lien Cr – (e)(1)(B)

HOWEVER -- subject to 30-day grace period, after transfer effective as between Dr and SP, 547(e)(2) If record within 30-days, deem “transfer” to have occurred

back when effective between Dr-SP

Another timing problem for SP

Fixing the transfer time alone, however, may not fully protect legitimate interests of SP

Why? b/c in some scenarios the “debt” arises before the time the lien is transferred – and thus have an artificial “antecedent debt” problem Even if no delay in perfection, or relates

back to when 1st effective as between Dr & SP

Enabling loan example

To see this, consider a common scenario: May 1: Lender loans Dr $25K to enable Debtor to purchase

certain equipment, Debtor grants Lender a security interest in that equipment, and Lender immediately perfects

June 1: Dr purchases the equipment▪ Under the UCC, the security interest in the equipment does not

“attach” until June 1, when the Debtor has acquired rights in the collateral. U.C.C. § 9-203(b).

▪ Likewise, in bankruptcy, “transfer” of security interest in equipment to Lender under 547(e)(2) would be deemed to occur on June 1, when the security interest first became effective as between Lender and Debtor.

The debt, though, arose on May 1, when the loan was made, and May 1 is antecedent to June 1, when transfer deemed made

Unfair?

Would obviously be unfair to avoid Lender’s security interest as a preference, b/c of artificial construction that the lien “transfer” occurred after the “debt” arose, when no one under non-bankruptcy law could

ever have possibly beaten Lender Lender did everything it possibly could

do

Solution? 547(c)(3) enabling loan

Solution is in 547(c)(3)’s safe harbor for enabling loans

Assuming meet requisites of an enabling loan

SP has a statutory grace period to perfect (now, 30 days) after Dr receives possession

Outcome in true enabling loan case

In case like our hypo, where the SP filed to perfect on May 1 (when the loan was made), but Dr did not get collateral and thus no attachment until June 1, SP is fully protected under (c)(3): Meets all requisites of enabling loan Was perfected “on or before 30 days

after Dr receives possession of such property” ▪ Perfected May 1, Dr possession June 1

But what about delayed perfection?

As it happened, though, 547(c)(3) proved less apt for saving the SP when it delayed perfecting for some period of time after security interest 1st attached

Recall, though, that non-bk law might give the SP a grace period here as well Example– UCC 9-317(e) – PMSI valid against

intervening Crs if SP perfects within 20 days after Dr receives possession of collateral

Congress (almost) tracking non-bankruptcy grace periods

What happened over time was that 547(c)(3), as originally enacted in 1978, did not track precisely 9-317(e)’s grace period, and thus a legitimate PMSI might be exposed

So Congress kept amending (c)(3) to try to conform it to UCC rule Changed trigger date from “attachment” to when Dr

receives possession of collateral Expanded grace period from 10 days to 20 days (like

UCC 9-317(e)), and now is 30 days BUT did not simply incorporate by reference valid non-

bk relation back rules

Another puzzle piece: (c)(1) Final piece in the “time of transfer” morass re

secured creditors 547(c)(1), which has defense if a “substantially contemporaneous exchange”

Predicated on Dean v Davis preference prong – time of the lien to the brother-in-law (Dean) and the loan from Dean to farmer Jones – while loan came 1st, and thus technically “antecedent,” Court suggested that were intended to be and were in fact “substantially contemporaneous” and thus should not be set aside

So, in slightly delayed perfection cases, can SP argue (c)(1) defense?

Problem 9.13(a)

Facts: April 1: Dr buy new car, gives Cr note for

price, grants Cr security interest in car, Dr takes possession of car

April 25: Cr perfects June 1: bankruptcy State law: Cr perfection “relates back” if

perfect within 20 days of Dr possession

Analysis 9.13(a)

When was security interest effective between Dr & Cr? April 1 (attachment under Art. 9 – agreement for security, SP

gave value, Dr had rights in collateral)

When was security interest perfected? April 25 (when SP filed financing statement)

Is date of perfection (April 25) within 30 days of date effective between Dr & SP (April 1)? Yes

Since “yes,” deem time of transfer of security interest as date effective Dr & SP (April 1) under 547(e)(2)(A)

date of debt (April 1 loan) is not “antecedent” to date of security interest transfer (April 1) and thus NOT preference – not satisfy 547(b)(2)

Enabling loan

Furthermore, since the loan did enable Dr to buy the car, and was in fact so used for that purpose, is protected form preference avoidance under “enabling loan” safe harbor of 547(c)(3), since perfected within 30 days after Dr received possession Even though the state law PMSI rule only gives

20 days! The federal time period controls, irrespective

of what the state law says

oddity

Note that under the sort of facts have in 9.13(a), for preference purposes the Cr is the fortunate beneficiary of a bankruptcy law “relation back” rule (547(e)(2)(A)) even though: It delayed perfecting, and thus during the 90-

day preference period enjoyed a “secret lien” for some time, and

Did NOT qualify for a state law relation-back grace period, since missed the 20-day state period

9.13(b)

Same facts as (a), except not an enabling loan So under state law, no “grace period”

whatsoever for perfection to “relate back”

Still not a preference Same timing result under 547(e), since

perfected within 30 days of when effective between Dr & Cr

And thus no “antecedent debt”

9.13(c)

Same facts as (a) (April 1 loan & security grant, Dr takes possession, security interest attaches)

State law gives CR 45 days to perfect with relation back effect

Cr perfects at day 35 (May 6) Bankruptcy June 1

Analysis 9.13(c)

PREFERENCE! This is the Fink case, SCOTUS Even though now Cr DID comply with state law!

Time of transfer security interest = May 6 > 30 days after effective Dr-Cr

So IS = “antecedent debt” Debt = April 1; Security interest = May 6

Not saved by enabling loan defense, b/c > 30 days, 547(c)(3)(B) Purely a FEDERAL rule

Not saved by contemporaneous exchange (c)(1) Courts say “specific” [viz, subsec (e) and (c)(3)] control general [(c)(1)]

“floating” liens – 547(c)(5) What? 547(c)(5) protects secured creditors with

"floating liens" in inventory and receivables

A lien is said to "float" when it attaches to collateral that Dr acquires after the initial security transaction

(c)(5) exempts floating lien that attaches to inventory or receivables during the preference period, EXCEPT to extent Cr has improved its position during the 90-day preference period. Thus, the fifth exception requires a comparison of the

creditor's security position at the beginning of the preference period with its position at the time of bankruptcy.

Why a problem?

Problem arises b/c a Cr’s security interest cannot attach to collateral until Dr has rights in that collateral True under state law, U.C.C. 9-203(a), (b)(2). And also true in bankruptcy, see 547(e)(3)

Yet, some types of collateral (e.g., inventory, receivables) are expected to and do “turn over” in course of Dr’s business Old inventory sold, but new inventory acquired Collect old receivables, generate new ones

Dr’s bargain with SP is that its security interest will “float” to attach to the new inventory or receivables that Dr acquires in normal course Outside of bankruptcy, under Article 9, generally other Crs cannot beat a

previously perfected inventory or receivables SP

But absent a saving rule, the “new” collateral would be deemed “transferred” to SP for the “antecedent” debt, & thus = preference

Pre-Code solutions

Courts knew that it was unfair to nail the SP in these floating lien cases, but pre-Code had to do some tricky legerdemain to escape

9th Circuit held for SP in 1969 in DuBay v. Williams -- concluded that the "transfer" of the security interest occurred for preference purposes when SP perfected the security interest by filing a financing statement, not later when the debtor acquired the collateral Under current Code, reject that view in 547(e)(3)

Pre-Code, cont.

Grain Merchants v. Union Bank, also 1969 -- 7th Circuit 2 rationales for upholding SP’s lien:

1st: a "relaxed substitution of collateral" theory: Under 547(c)(1), CR is protected from preference if one item of collateral is

substituted for another; the release of the lien on the original collateral is "new value" for the transfer of the security interest in the replacement

However, substitution approach does not work well for floating liens b/c is difficult to trace the replacement-item-for-released-item linkage.

2nd: "entity" theory, or, more colorfully, the "Mississippi River" theory: Cr has security interest, not in specific items of collateral, but in the "entity"

that is Dr’s “inventory” or “receivables.” Analogy drawn to Mississippi River: the specific molecules of water present

from time to time vary, but it is still the Mississippi River. Just so, SP’s security interest may vary from time to time with regard to the precise items of collateral covered, but the "collateral" viewed as an entity is still the same.

Also put out of court by 547(e)(3)

Problems those theories

Not only were the 9th and 7th Circuit theories formally really strained, but, more importantly, they posed a real preference risk

Say 90 days before bk SP is under-secured, then demands buildup in collateral before bk arrives Example: 90 days before – debt = $100K, collateral =

60K (so 40 short) ; by time bk filed, collateral = 100

Even though SP obviously seems to be $40k better off, not able to avoid under either “transferred when perfected” or “Mississippi”

Code solution

1. no “transfer” of collateral until Dr has interest – 547(e)(3) Thus potentially is for “antecedent debt” and

prima facie preference under 547(b)

2. safe harbor defense = 547(c)(5) – the “2-point improvement in position” test Compare SP’s security position 90 days before

bankruptcy and see if “improved” by time of bankruptcy – so, in hypo, have a preference = 40

547(c)(5) rule

547(c)(5) uses two-point improvement-in-position test: security interest in inventory or receivables is only avoided to extent that

CR improves its position from point one to point two. Interim fluctuations are ignored.

Point One is the beginning of the preference period only exception is if Cr does not make loan until a later date; in that

event, the date new value is first extended will be point one

Point Two is the date of bankruptcy

Comparison between these two points: extent Cr is undersecured, i.e., the amount that the debt exceeds the value of the collateral.

Preference: only found to extent Cr’s unsecured claim gets smaller, i.e., its deficiency decreases, from point one to point two.

formula

Point One deficiency (debt minus collateral value)

minus

Point Two deficiency (debt minus collateral value)

= amount avoided

Problem 9.14(a)

Note meet requisites for application (c)(5) – inventory financing, turned over entirely during preference period

Dates: bankruptcy filed June 30 (point tw0), so 90 days before (point one) = April 1

Point one: debt = $100, inventory value = 100

Point two: debt = $100, inventory value = 100

Analysis 9.14(a)

No preference

Not possible b/c NO DEFICIENCY AT POINT ONE!

Since Cr was fully secured at point one (90 days before), it cannot “improve its position”

9.14(b)

Point one: debt = 100, collateral = 100

Point two: debt = 100, collateral = 115

Still no preference Even though did “build up” inventory,

not matter, b/c since Cr was fully secured at point one, it can’t improve its position under (c)(5)▪ Of course, Cr IS better off b/c now can get

postpetition interest under 506(b)!

9.14(c)

Point one: debt = 125, collateral = 100

Point two: debt = 125, collateral = 115

Now preference = 15 The Cr was undersecured by 25 at point

one, but is only undersecured by 10 at point two

Thus has improved its position by 15

9.14(d)

Point one: debt = 125, collateral 100 15 days before bankruptcy: debt

125, coll = 50 Point two: debt = 125, collateral 100

NO preference Only compare points one and two Undersecured by same amount at both

(25) Ignore interim fluctuations

9.14(e)

Point one: debt = 125, collateral = 100 Day later: payment of 20 Point two: debt = 105, collateral = 100

BE CAREFUL! Simple “deficiency at pt 1 vs deficiency at pt 2”

comparison might suggest should avoid 20 of lien, since deficiency is 20 less

But that is b/c Dr made a payment What happens if Trustee avoids and recovers that

$20 payment? – Cr’s claim is back to 125 at point two, so really did NOT improve position