                          PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT


In Re: JKJ CHEVROLET,                  
INCORPORATED,
                            Debtor.


RICHARD G. HALL, Trustee,
                Plaintiff-Appellant,
                and                           No. 04-2374

FORD MOTOR CREDIT COMPANY,
                       Plaintiff,
                 v.
CHRYSLER CREDIT CORPORATION,
               Defendant-Appellee.
                                       
RICHARD G. HALL, Trustee,              
                Plaintiff-Appellant,
                 v.                           No. 04-2458
CHRYSLER CREDIT CORPORATION,
               Defendant-Appellee.
                                       
         Appeals from the United States District Court
       for the Eastern District of Virginia, at Alexandria.
            James C. Cacheris, Senior District Judge.
(CA-03-1501; CA-03-1502; CA-04-93; BK-91-14535; AP-94-1321)

                      Argued: May 27, 2005

                      Decided: June 22, 2005

   Before LUTTIG, MICHAEL, and TRAXLER, Circuit Judges.
2                     IN RE: JKJ CHEVROLET, INC.
Vacated and remanded by published opinion. Judge Luttig wrote the
opinion, in which Judge Michael and Judge Traxler joined.


                             COUNSEL

ARGUED: George Richard Pitts, DICKSTEIN, SHAPIRO, MORIN
& OSHINSKY, L.L.P., Washington, D.C., for Appellant. Joel S.
Aronson, RIDBERG, SHERBILL & ARONSON, L.L.P., Bethesda,
Maryland, for Appellee. ON BRIEF: Janet R. Fallon, DICKSTEIN,
SHAPIRO, MORIN & OSHINSKY, L.L.P., Washington, D.C., for
Appellant. Theodore R. Goldstock, Jennifer B. Wellman, RIDBERG,
SHERBILL & ARONSON, L.L.P., Bethesda, Maryland, for Appel-
lee.


                              OPINION

LUTTIG, Circuit Judge:

   In 1991, a number of car dealerships owned and controlled by John
W. Koons, Jr., filed bankruptcy petitions under Chapter 11 of the
Bankruptcy Code. J.A. 561. The consolidated proceedings were sub-
sequently converted to a Chapter 7 case with Richard Hall serving as
trustee. Id.1 Hall commenced an adversary proceeding against Chrys-
ler Credit to recover alleged "preference payments" made to Chrysler
Credit by three of the debtor-dealerships, Koons Chrysler Plymouth,
Inc. ("Koons"), Brandnewco, Inc., and JKJ Chrysler Plymouth, Inc.
("JKJ CP"), prior to the filing of those dealerships’ Chapter 11 peti-
tions. Id. The bankruptcy court held that the trustee was entitled to
recover the payments from JKJ CP but not from Koons or Brand-
newco. The district court affirmed the bankruptcy court’s judgment as
to the Koons and the Brandnewco payments. The district court ini-
tially decided to remand the dispute pertaining to the JKJ CP pay-
ments, but ultimately certified that issue for interlocutory appeal. For
    1
   In April 2000, the Bankruptcy Court approved an agreement assign-
ing to Ford Motor Credit Company the responsibilities for prosecuting
the claims at issue in this appeal.
                     IN RE: JKJ CHEVROLET, INC.                      3
the reasons set forth below, we vacate the judgment of the district
court as to the Koons and Brandnewco payments, and we remand the
entire case for further proceedings consistent with this opinion.

                                  I.

   The disputed payments in the instant case arose from a "floor plan"
financing arrangement between Chrysler Credit and the debtor-
dealerships. As the bankruptcy court explained, the Chrysler Credit
floor plan agreement operated in the following way:

    1) As vehicles were shipped to the dealerships, Chrysler
    [Credit] paid the manufacturer for them and added the cost
    of those vehicles to the dealerships’ line of credit. 2) The
    purchased vehicles became additional collateral. Interest
    accrued on each vehicle until Chrysler was repaid the princi-
    pal. 3) Repayment was due five days after a vehicle was
    sold, and a dealership received purchase funds. . . . 4) A
    dealership could continue to add vehicles to its inventory as
    long as it did not reach the maximum amount of its loan and
    was not in default. 5) As Chrysler received payment for
    each vehicle the loan amount was reduced, which made
    room for additional inventory. Under this arrangement, the
    collateral security and the loan balance were constantly
    moving up and down as vehicles were added to inventory
    and sold.

J.A. 436.

   In the ninety days preceding the Koons and Brandnewco bankrupt-
cies, Chrysler Credit was paid $6,462,585.70 by those dealerships
pursuant to the floor plan financing agreement. J.A. 437. The trustee
sought to avoid those payments under 11 U.S.C. § 547(b), which pro-
vides as follows:

    Except as provided in subsection (c) 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;
4                       IN RE: JKJ CHEVROLET, INC.
        (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 fil-
            ing of the petition;

                                  *****

        (5) that enables such creditor to receive more than such
        creditor would receive if —

            (A) the case were a case under chapter 7 of this
            title;

            (B) the transfer had not been made; and

            (C) such creditor received payment of such debt to
            the extent provided by the provisions of this title.

11 U.S.C. § 547(b) (emphasis added). Section 547(g) provides that
"the trustee has the burden of proving the avoidability of a transfer
under subsection (b)." The parties agreed that the payments in ques-
tion satisfied the first four elements of section 547(b), confining their
dispute to whether the trustee had established that the payments satis-
fied the requirements of (b)(5). J.A. 442.

   Chrysler Credit maintained that the disputed payments did not
exceed what it would have received in a Chapter 7 proceeding
because the funds that formed the basis of those payments were pro-
ceeds from the sale of vehicles and, as such, under Virginia law
adopting the Uniform Commercial Code, Chrysler Credit acquired a
security interest in those proceeds. See Va. Code Ann. § 8.9-306(2)
(repealed 2001) ("a security interest . . . continues in any identifiable
proceeds" from the sale of collateral).2 Under Chrysler Credit’s view,
    2
   Because the transactions and bankruptcy proccedings at issue in this
case occurred prior to 2001, we consult Virginia’s codification of the for-
mer version of Article 9 of the Uniform Commercial Code.
                       IN RE: JKJ CHEVROLET, INC.                        5
if the disputed payments had not been made, it would have retained
that security interest and received priority in that amount in any Chap-
ter 7 proceeding.3 In other words, according to Chrysler Credit, its
security interest at the time of the preference payments was the same
as it would have been in a Chapter 7 proceeding and thus the amount
of the preference payments did not exceed what it would have
received in a Chapter 7 proceeding.

   The trustee, on the other hand, maintained that Chrysler received
more from the preference payments than it would have for its under-
secured claims in a Chapter 7 proceeding. The trustee alleged that the
payments to Chrysler Credit came from bank accounts where the pro-
ceeds from vehicle sales had been commingled with other funds and
that, as such, under Virginia law, Chrysler Credit could not establish
a perfected security interest in the funds unless it could "trace" the
payments it received from Koons and Brandnewco to the proceeds
from the sale of the vehicles. See Va. Code Ann. § 8.9-306(2)
(repealed 2001) ("a security interest . . . continues in any identifiable
proceeds") (emphasis added). Under this theory, because Chrysler
Credit could not establish that it did, in fact, have a perfected security
interest in the commingled funds, Chrysler Credit would have
received far less in a Chapter 7 proceeding than it received from the
pre-petition payments.

  The bankruptcy court determined that the proceeds had been com-
mingled, J.A. 490, and that Chrysler Credit would normally bear the
   3
     Notably, the bankruptcy court found that "Chrysler was undersecured
as to each company both at the beginning of the 90 day preference period
and on the date the Chapter 11 petitions were filed." J.A. 489. If Chrysler
Credit had been fully secured during those time periods then it would be
impossible for the trustee to establish that Chrysler Credit received more
from the preference payments than it would in a Chapter 7 proceeding.
However, because Chrysler Credit was undersecured at all relevant
times, the trustee may prevail by establishing that the amount of the pref-
erence payments to Chrysler Credit exceeded the amount of Chrysler
Credit’s security interest at the time of a Chapter 7 proceeding. Chrysler
Credit’s recovery in a Chapter 7 proceeding would likely be limited to
the amount of its security interest because the estate was administratively
insolvent, and thus Chrysler Credit could only recover collateral (or the
proceeds therefrom) retained by the estate.
6                     IN RE: JKJ CHEVROLET, INC.
burden of "tracing" to establish a perfected security interest in the
commingled proceeds under the UCC and other state law, J.A. 493.
The bankruptcy court concluded, however, that section 547(g) sup-
planted the state law burden of proof, expressly placing it on the
trustee, and that the trustee had failed to satisfy that burden because
he could not establish that the funds that formed the basis of the pref-
erence payments were not proceeds from the sale of collateral. J.A.
497. Because the trustee could not disprove the existence of Chrysler
Credit’s security interest, he could not establish that Chrysler Credit
would have received less in a Chapter 7 proceeding. Id. The district
court affirmed the bankruptcy court’s judgment. J.A. 552-53
("Tracing is a method for the Trustee to carry its burden; by tracing
the funds, the Trustee may show that the transfers did not come from
the secured creditor’s collateral in the commingled account. The
bankruptcy court correctly held that the trustee failed" to carry this
burden.).

    The parties and the lower courts are correct that section 547(b)
calls for a comparison between the amount that Chrysler Credit
received in alleged preference payments and the perfected security
interest that it would have enjoyed in a Chapter 7 proceeding. See
Hager v. Gibson, 109 F.3d 201, 210 (4th Cir. 1997) ("Section 547(b)
. . . protects only those creditors, secure or unsecured, who can estab-
lish that they received no more by the payment than they would have
received as claimants in a Chapter 7 liquidation."). The parties and
lower courts are also correct that state law determines the extent of
the perfected security interest that Chrysler Credit would enjoy in a
Chapter 7 proceeding. See Butner v. United States, 440 U.S. 48, 55
(1979) (holding that "[u]nless some federal interest requires a differ-
ent result," "property interests [in bankruptcy proceedings] are created
and defined by state law."); In Re: The Wallace & Gale Co., 385 F.3d
820, 830 (4th Cir. 2004). But both the parties and lower courts are
incorrect in asserting that the "tracing" principles that would have
determined Chrysler Credit’s perfected security interest at the time of
the preference payments are relevant to the trustee’s claims. Section
547(b)(5) is not concerned with whether the preference payments can
be traced to the proceeds of collateral; rather that section calls for a
comparison of the amount of the preference payments to the amount
the creditor would receive in a hypothetical Chapter 7 proceeding.
And, more importantly, a secured creditor’s perfected security interest
                      IN RE: JKJ CHEVROLET, INC.                      7
in commingled proceeds is calculated differently in an insolvency
proceeding, such as a case under Chapter 7, than it is before the insti-
gation of insolvency proceedings, such as at the time of the preference
payments. Thus, the amount Chrysler Credit would have received in
a Chapter 7 proceeding cannot be determined by reference to any
security interest Chrysler Credit might have enjoyed at the time of the
preference payments.

   In a Chapter 7 proceeding, hypothetical or otherwise, the determi-
nation of Chrysler Credit’s security interest in proceeds from the sale
of collateral would have been determined by Va. Code Ann. § 8.9-
306(4) (repealed 2001), which provided as follows:

    In the event of insolvency proceedings instituted by or
    against a debtor, a secured party with a perfected security
    interest in proceeds has a perfected interest only in the fol-
    lowing proceeds:

    (a) in identifiable non-cash proceeds and in separate deposit
    accounts containing only proceeds;

    (b) in identifiable cash proceeds in the form of money
    which is neither commingled with other money nor depos-
    ited in a deposit account prior to the insolvency proceed-
    ings;

    (c) in identifiable cash proceeds in the form of checks and
    the like which are not deposited in a deposit account prior
    to the insolvency proceedings; and

    (d) in all cash and deposit accounts of the debtor in which
    proceeds have been commingled with other funds, but the
    perfected security interest under this paragraph (d) is

       (i) subject to any right to set-off; and

      (ii) limited to an amount not greater than the amount of
    any cash proceeds received by the debtor within ten days
    before the institution of the insolvency proceedings less the
8                       IN RE: JKJ CHEVROLET, INC.
        sum of (I) the payments to the secured party on account of
        cash proceeds received by the debtor during such period
        and (II) the cash proceeds received by the debtor during
        such period to which the secured party is entitled under
        paragraphs (a) through (c) of this subsection (4).

Va. Code Ann. § 8.9-306(4) (repealed 2001) (emphasis added); see
also In Re Bumper Sales, Inc., 907 F.2d 1430, 1438 (4th Cir. 1990)
(holding that section 9-306(4) "governs the extent of a creditor’s
interest in commingled proceeds only up to and including the instant
of commencement of the insolvency proceedings" and thus "specifi-
cally deals with the cases in which funds are commingled prior to fil-
ing bankruptcy"). Because the bankruptcy court found that the trustee
established that the debtor-dealerships commingled the proceeds of
their vehicle sales with other funds, subsections (a) through (c) are
inapplicable. See J.A. 497 ("[D]ebtors had other funds in their operat-
ing accounts"); id. at 490 ("Chrysler’s factual argument that the pay-
ments could only have come from its collateral proceeds is not
supported in the record."). Accordingly, the extent of Chrysler Cred-
it’s security interest in a Chapter 7 proceeding in the funds commin-
gled by the debtor-dealerships would have been exclusively
determined by applying the formula set forth in section 8.9-306(4)(d),
a formula that does not depend on identifying or tracing the proceeds
of collateral. See Harley-Davidson Motor Co. Inc. v. Bank of New
England-Old Colony, 897 F.2d 611, 621 (1st Cir. 1990) (Breyer, J.,)
("The provision’s [9-306(4)] objective is to provide rules for dividing
the funds in a debtor’s commingled bank account that are more defi-
nite, more readily usable, than the common law tracing rules that, say,
a bankruptcy court might otherwise try to apply."); Maxl Sales Co. v.
Critiques, Inc., 796 F.2d 1293, 1300 (10th Cir. 1986) ("While the
Code [UCC] has not eliminated common law tracing principles in sit-
uations not involving insolvency, we conclude that the specific provi-
sions of [9-306(4)] . . . provide[ ] new rules for insolvency
proceedings. . . . The drafters of the Code apparently believed that
these hard and fast rules of identification were preferable to the
imprecise and time consuming tracing theories.").4 Rather, section
    4
   The bankruptcy court did not attempt to apply the formula set forth
in section 8.9-306(4)(d). It did, however, reference 8.9-306(4), noting
                       IN RE: JKJ CHEVROLET, INC.                         9
8.9-306(4)(d) merely requires a determination of the amount of cash
proceeds received by the dealerships in the ten days preceding the fil-
ing of the Chapter 11 petitions minus any payments to Chrysler Credit
"on account of" those proceeds during that time period. Id.5

   As this comparison has never been performed, we vacate the judg-
ment of the district court on this issue and remand the case so that the
trustee may have an opportunity, consistent with his burden under
section 547(g), to establish that Chrysler Credit received more from
the pre-petition payments than it would have received in a Chapter 7
proceeding.

                                    II.

   As with Koons and Brandnewco, Chrysler Credit entered into a
floor plan financing agreement with JKJ CP. In the ninety days pre-
ceding the JKJ CP bankruptcy, Chrysler Credit received
$2,109,274.26 from JKJ CP. J.A. 243. Because Chrysler Credit failed
to perfect its security interest pertaining to its financing arrangement
with JKJ CP, J.A. 532, it conceded that the disputed payments were

that that provision, notwithstanding the burden shift imposed by section
547(g), "puts the burden on the creditor to identify the source of the pro-
ceeds." J.A. 493 (emphasis added). While this observation is correct, it
is not at issue here because the trustee has conceded that the source of
some of the proceeds deposited into the debtor-dealerships’ accounts was
from the sale of collateral. And, because the trustee has established that
those proceeds were commingled with other funds, the formula set forth
in 8.9-306(d), which does not require the identification of collateral pro-
ceeds, sets forth the exclusive test for determining Chrysler Credit’s per-
fected security interest in a Chapter 7 proceeding.
   5
     Appellant, counter to its own self-interest, maintains that section "9-
306(4) . . . is not applicable because the transfers at issue in this case
took place before the bankruptcy filings of KCP and Brandnewco."
Appellant’s Br. at 20 n.10. But, as explained above, the transfers that
constituted the preference payments are only relevant insofar as they
establish an amount to be compared to a hypothetical Chapter 7 proceed-
ing, a proceeding where Chrysler Credit’s security interest in commin-
gled proceeds would have been determined pursuant to section 8.9-
306(4)(d).
10                     IN RE: JKJ CHEVROLET, INC.
preferential as defined in section 547(b). Chrysler Credit maintained,
however, that it was not obligated to return those payments because,
subsequent to those payments, it continued to extend credit to JKJ CP.
Chrysler contended that its subsequent extension of credit entitled it
to the subsequent new value defense enumerated in section 547(c)(4),
which provides as follows:

     The trustee may not avoid under this section a transfer . . .
     (4) to or for the benefit of a creditor, to the extent that, after
     such transfer, such creditor gave new value to or for the
     benefit of the debtor — (A) not secured by an otherwise
     unavoidable security interest; and (B) on account of which
     new value the debtor did not make an otherwise unavoid-
     able transfer to or for the benefit of such creditor.

11 U.S.C. § 547(c)(4) (emphasis added). The bankruptcy court found
that Chrysler Credit was not entitled to the defense because JKJ CP
paid Chrysler Credit for its subsequent extensions of credit; in other
words, it held that all of the new value was repaid by the debtor,
thereby depriving Chrysler Credit of its section 547(c)(4) defense.
J.A. 245 ("[T]he § 547(c)(4) defense is not available to a creditor that
has received payment for the advances it contends represent subse-
quent new value."). In the view of the bankruptcy court and the
trustee, subsequent new value must remain unpaid in order for a cred-
itor to take advantage of the 547(c)(4) defense. See Kroh Brothers
Development Co. v. Continental Construction Engineers, Inc., 930
F.2d 648 (8th Cir. 1991) ("The debtor who makes a preferential trans-
fer to a creditor who subsequently advances new value . . . has not
depleted the bankruptcy estate to the disadvantage of other creditors.
. . . But when a debtor pays for new value . . . there is in effect no
return of the preference.") (emphasis added).

   The district court rejected the bankruptcy court’s interpretation of
section 547(c)(4). It determined that "the requirement that the new
value remain unpaid is inaccurate and confusing paraphrase" and that
"the proper inquiry is whether the new value has been paid for by an
‘otherwise unavoidable transfer.’" J.A. 543 (emphasis added). While
the district court initially indicated it would remand the case for a
determination of "whether JKJ CP made otherwise unavoidable trans-
fers to Chrysler Credit," J.A. 546, it ultimately certified the dispute
                      IN RE: JKJ CHEVROLET, INC.                       11
pertaining to the proper interpretation of section 547(c)(4) for inter-
locutory appeal. J.A. 572.

   The district court’s initial interpretation of the statute was correct.
A creditor is entitled to offset preference payments through the exten-
sion of new value to the debtor so long as the debtor does not make
an otherwise unavoidable transfer on account of the new value. Thus,
even if JKJ CP repaid all of the new value, under the plain terms of
the statute whether those payments deprive Chrysler Credit of its new
value defense depends on whether the payments were otherwise
unavoidable. Appellant appears to concede that the trustee could have
— but did not seek to — avoided these payments during the bank-
ruptcy proceedings. Appellant’s Br. at 34. Notwithstanding this con-
cession, appellant nevertheless maintains that because the trustee did
not in fact seek to avoid the payments and because the time has
passed for such a challenge, that the payments are "otherwise
unavoidable." Id.; Appellant’s Reply Br. at 11 ("If a payment, once
avoidable, becomes unavoidable, then the new value should no longer
be eligible for the defense."). Appellant contends that a contrary con-
clusion would frustrate the purpose of the statute by permitting Chrys-
ler Credit both to offset the preference payments in the amount of the
new value and to keep subsequent payments made on account of that
new value.

   Appellant’s position is not supported by the statute. The trustee’s
failure to avoid JKJ CP’s post-new value payments to Chrysler Credit
does not convert those payments from avoidable to unavoidable trans-
fers. Indeed, the plain and ordinary meaning of an "avoidable" trans-
fer is a transfer "that can be avoided." See Webster’s Third New
International Dictionary 151 (1987) (emphasis added). Because the
trustee could have avoided the transfers, those transfers were not "oth-
erwise unavoidable," and thus have no bearing on Chrysler Credit’s
new value defense. And, even though such a result may frustrate the
intended operation of section 547(c)(4), such is only the case because
of the trustee’s failure to recover the avoidable post-new value pay-
ments.

   Having determined that the district court’s initial reading of the
statute was correct, we remand this portion of the case so that the
bankruptcy court, consistent with this opinion, may determine
12                   IN RE: JKJ CHEVROLET, INC.
whether any of the repayments were "otherwise unavoidable trans-
fers." While it appears that they were not, the bankruptcy court is in
the best position to apply the foregoing interpretation of section
547(c)(4) to each individual transfer. Indeed, some of the challenged
transfers occurred after JKJ CP filed for bankruptcy and these trans-
fers may in fact be "otherwise unavoidable." See J.A. 245 ("[S]ome
of these repayments may have occurred postpetition. . .").6

                           CONCLUSION

   The judgment of the district court as to the Koons and Brandnewco
payments is vacated and the entire case remanded for further proceed-
ings.

                                       VACATED AND REMANDED
  6
    While post-petition transfers may be considered under section
547(c)(4)(B), see In re Login Bros. Book Co., Inc., 294 B.R. 297, 300
(N.D. Ill. 2003) ("[B]oth the plain language and the policy behind the
statute indicate that the timing of a repayment of new value is irrele-
vant"), neither party has addressed whether the post-petition transfers
that occurred in the instant case were unavoidable.
