Preferential Transfers, the Floating Lien, and Section 547(c)(5) of the Bankruptcy Reform Act of 1978

Case law under the Former Act provided nearly absolute protection to perfected security interests attaching to collateral during the preference period pursuant to after-acquired property clauses in valid pre-existing security agreements. The Bankruptcy Reform Act replaced this case law with a legislative compromise that first treats most, if not all, security interests attaching to after-acquired collateral within ninety days of bankruptcy as preferences, and then exempts from preference attack security interests in inventory and receivables collateral to the extent that the floating lien financer has not improved its secured position at the end of the ninety-day period. Although section 547(c)(5) is capable of complex applications, it is, in general, an efficient and workable response to the perceived unfairness of the case law under the Former Act. This article has discussed certain factual situations which, when analyzed under section 547(c)(5), may produce results not clearly in accord with fundamental notions of bankruptcy preference policy. However, purposive construction of section 547(c)(5) by the courts and creative lawyering by counsel for floating lien financers could eliminate most, if not all, of these difficulties. Finally, the article suggests that Congress consider amending section 547(c)(5) by adding a good faith requirement designed to eliminate potential secured party abuse of the two-point improvement in position test