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In Re: Qualia Clinical Service, Inc v. Inova Capital Funding

January 14, 2011

IN RE: QUALIA CLINICAL SERVICE, INC., DEBTOR. RICK D. LANGE, TRUSTEE OF THE CHAPTER 7 BANKRUPTCY ESTATE OF QUALIA CLINICAL SERVICE, INC., PLAINTIFF -- APPELLEE,
v.
INOVA CAPITAL FUNDING, LLC; INOVA CAPITAL FUNDING, INC., DEFENDANTS -- APPELLANTS.



Appeal from the United States Bankruptcy Court for the District of Nebraska

Submitted: December 3, 2010

Before KRESSEL, Chief Judge, SCHERMER and NAIL, Bankruptcy Judges.

KRESSEL, Chief Judge.

Inova*fn1 appeals from the bankruptcy court's*fn2 order of April 6, 2010 denying its motion for summary judgment, granting the trustee's motion for summary judgment, and avoiding Inova's security interest as a preferential transfer. We affirm.

BACKGROUND

Qualia Clinical Services, Inc. is a Nevada corporation. Its principal place of business is in Omaha, Nebraska. Inova Capital Funding, Inc. was incorporated in California on January 4, 2007. Inova Capital Funding, LLC was formed in Delaware on September 30, 2008.

On December 11, 2007, Inova and Qualia entered into a contract referred to as the "Invoice Purchase Agreement." The agreement provided that Inova would purchase "acceptable accounts receivable at a discount below the face value thereof," and provided for an ongoing security interest in Qualia's property such as accounts, inventory, instruments, records, and general intangibles, in order to protect Inova from any chargeback of disputed or unpaid invoices or accounts and any liability resulting from any breach of Qualia's warranties.

Inova Capital Funding, Inc. filed a U.C.C. financing statement with the Nebraska Secretary of State on December 12, 2007. That financing statement named it as the secured party and Qualia as the debtor and covered accounts, inventory, instruments, records, and general intangibles. Inova last gave new value to Qualia on February 5, 2009 when it purchased invoices. Inova Capital Funding, Inc. filed another U.C.C. financing statement on February 19, 2009 naming itself as the secured party and Qualia as the debtor and covering accounts, inventory, instruments, records, and general intangibles. The second financing statement was filed with the Nevada Secretary of State on February 19, 2009.

Qualia filed a chapter 11 bankruptcy petition on March 18, 2009. The case was converted to one under chapter 7 in October of 2009 on the motion of the United States Trustee, and Rick D. Lange was appointed trustee. The trustee initiated this adversary proceeding against Inova Capital Funding, LLC and Inova Capital Funding, Inc. The trustee alleged that the invoice purchase agreement between Qualia and Inova was a financing arrangement and not a true sale, and he sought to avoid as a preference the lien Inova received by filing its February 19, 2009 financing statement within 90 days of Qualia's bankruptcy filing.

Inova moved for summary judgment, solely on the basis of 11 U.S.C. § 547(c)(5). Inova argued that it could not have improved its position to the detriment of Qualia's unsecured creditors because Inova was fully secured on the 90th day before Qualia's bankruptcy, on the dates of transfers during the preference period, and on the date that it filed its U.C.C. financing statement. On March 4, the trustee moved for "summary judgment or partial summary in his favor and against Defendants on all of Trustee's claims."

On April 6, 2010, the bankruptcy court denied the Inova's motion for summary judgment, granted the trustee's motion for summary judgment, and avoided the February 19, 2009 U.C.C. filing as a preferential transfer. The bankruptcy court found that the invoice purchase agreement was clearly and unambiguously a financing arrangement. The court made that finding on the terms of the agreement itself. In particular, the court noted the recourse provisions contained in section 7.02 of the agreement, which shift all collection risks to Qualia. The court found that because the agreement was a financing arrangement and not a sale, Inova's actions to perfect its security interest could constitute a preference if the elements were otherwise demonstrated.

The bankruptcy court applied California law because the invoice purchase agreement designated that as the applicable law and Nebraska courts generally give effect to the parties' choice of law. DCS Sanitation Mgmt., Inc. v. Castillo, 435 F.3d 892, 895096 (8th Cir. 2006); Rest. (2d) Conflicts of Laws § 187(1). The court found that under the California Commercial Code, when the debtor is a registered organization, the security interest must be perfected by filing a financing statement where it was organized. Because Qualia was organized in Nevada, the Nebraska filing was ineffective. The Nevada filing was filed within 90 days preceding Qualia's bankruptcy, and the court concluded it was therefore preferential. The court rejected Inova's § 547(c)(5) defense, noting that § 547(c)(5) is intended to protect holders of floating liens. The court found that Inova had improved its position to the detriment of unsecured creditors because its security interest was unperfected 90 days prior to the bankruptcy filing and on the date it last gave new value to Qualia.

The Inova parties appeal from the bankruptcy court's ...


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