               United States Bankruptcy Appellate Panel
                            FOR THE EIGHTH CIRCUIT
                                 _______________

                                   No. 07-6036EM
                                  ________________

In re:                                    *
                                          *
Falcon Products, Inc., et al.,            *
                                          *
         Debtors.                         *
                                          *
Falcon Creditor Trust,                    *
                                          * Appeal from the United States
         Plaintiff - Appellant,           * Bankruptcy Court for the Eastern
                                          * District of Missouri
               v.                         *
                                          *
First Insurance Funding,                  *
                                          *
         Defendant - Appellee.            *
                                        _____

                             Submitted: December 10, 2007
                                Filed: January 28, 2008
                                         _____

Before MAHONEY, FEDERMAN and VENTERS, Bankruptcy Judges.
                           _____

VENTERS, Bankruptcy Judge.

       This is an appeal of the bankruptcy court’s determination on summary judgment
that certain payments made to the Defendant by Debtor Falcon Products, Inc., within
the 90-day preference period were not preferential under 11 U.S.C. § 547. We have
jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth
below, we reverse the decision of the bankruptcy court and remand this case for
further proceedings consistent with this opinion.

                            I. STANDARD OF REVIEW
         We review the bankruptcy court's grant of summary judgment de novo,
applying the same standard used by the bankruptcy court and viewing the evidence
in the light most favorable to the Plaintiff as the nonmoving party. Summary judgment
is appropriate if the record shows that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a matter of law.1

                              II. BACKGROUND
      The Panel adopts the factual findings of the bankruptcy court, which findings
are undisputed.

       First Insurance Funding (“First Insurance”) is engaged in the business of
financing commercial insurance premiums. In November 2004, Falcon Products, Inc.
("Falcon") entered into a commercial premium finance agreement with First Insurance
to finance several insurance policies (“Policies”). The premiums for the Policies
totaled $1,889,409.68. Under its agreement with First Insurance, Falcon made a
$472,584.85 down payment on the Policies and agreed to repay the balance of
$1,416,824.83, plus interest, in ten monthly installments of $144,943.05, with the first
installment due December 1, 2004. Falcon granted First Insurance a security interest
in the unearned premiums under the Policies to secure the premiums financed. The
value of unearned premiums diminished each day by approximately $5,175.62 – the
value of the daily insurance coverage provided under the Policies. In the event Falcon
failed to make a payment to First Insurance, First Insurance had the right to



      1
        Fed. R. Civ. P. 56(c), made applicable in bankruptcy cases by Fed. R.
Bankr. P. 7056; Williams v. Marlar (In re Marlar), 252 B.R. 743, 750 (B.A.P. 8th
Cir. 2000) (citing Dulany v. Carnahan, 132 F.3d 1234, 1237 (8th Cir. 1997)).
                                           2
cancel the Policies and to apply any unearned premiums to the unpaid balance owed
to First Insurance.

       On December 6, 2004, Falcon paid the first monthly installment of $144,943.05
to First Insurance. Immediately prior to this payment, Falcon owed First Insurance
$1,449,430.50, and the unearned premiums had a value of $1,690,422.54. Therefore,
the value of the unearned premiums (First Insurance's collateral) exceeded the debt
owed by Falcon by $240,992.04.

      On January 10, 2005, Falcon paid the second monthly installment of
$144,943.04, plus a late charge of $7,247.08, for a total payment of $152,193.12.
Immediately prior to this payment, Falcon owed First Insurance $1,304,473.45, and
the unearned premiums had a value of $1,519,868.12. Therefore, the value of First
Insurance's collateral exceeded the debt by $215,394.67.

       On January 31, 2005, Falcon Products, Inc.; Epic Furniture Group, Inc.; The
Falcon Companies International, Inc.; Falcon Holdings, Inc.; Howe Furniture
Corporation; Johnson Industries, Inc.; Madison Furniture Industries, Inc.; Sellers &
Josephson, Inc.; and Shelby Williams Industries, Inc. (collectively, "Debtors") filed
petitions for relief under Chapter 11 of the Bankruptcy Code. On the petition date,
Falcon owed First Insurance $1,159,527.41, and the unearned premiums had a value
of $1,418,601.44. Therefore, the value of the unearned premiums exceeded the debt
owed to First Insurance by Falcon by $259,074.03.

      On October 18, 2005, the bankruptcy court confirmed the Debtors' Third
Amended Joint Plan of Reorganization pursuant to which the Debtors' cases were
substantively consolidated. Under the Plan, the authority to prosecute avoidance
actions under Chapter 5 of the Bankruptcy Code vested in the Falcon Creditor Trust
(“Trust”).



                                         3
       On January 12, 2007, the Trust filed a complaint to avoid and recover under
§§ 547 and 550 of the Bankruptcy Code Falcon’s December and January Payments
to First Insurance, totaling $297,136.17.

                                 III. DISCUSSION
      To avoid a transfer as a preference, a trustee (or entity imbued with the powers
thereof) must establish every element of 11 U.S.C. § 547(b),2 which provides:

      Except as provided in subsections (c) and (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 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.

       In this case, only the last element is in dispute – whether the $297,136.17 in
payments the Debtor made to First Insurance in December 2006 and January 2007
enabled First Insurance to receive more than it would have received under a
hypothetical Chapter 7 liquidation had those transfers not been made. The resolution
of this dispute turns on an issue over which the courts are divided, namely: For

      2
          11 U.S.C. § 547(g).
                                          4
purposes of applying the hypothetical liquidation test to an allegedly preferential
payment made to a secured creditor, should the collateral be valued as of the date of
the transfer(s) or as of the petition date?3 Or, expressed in the terms of the statute,
should the hypothetical liquidation test of § 547(b)(5) be conducted as of the transfer
date or as of the petition date?

       The bankruptcy court sided with the courts holding that the hypothetical
liquidation test should be conducted as of the date of the allegedly preferential
transfer. And in this case, because the undisputed evidence established that the value
of First Insurance’s collateral – the unearned insurance premiums – exceeded the
amount of debt owed to First Insurance on the dates of both of the allegedly
preferential transfers, the bankruptcy court concluded that neither of the transfers
sought to be avoided by the Trust enabled First Insurance to receive anything more
than it would have if the Debtor had been liquidated under Chapter 7 of the
Bankruptcy Code and the transfers had not been made. The bankruptcy court granted
summary judgment in favor of First Insurance accordingly.



      3
         Compare In re Rocor Intern., Inc., 2007 WL 4376026 (B.A.P. 10th Cir.
December 17, 2007) (“Rocor”)(conducting hypothetical liquidation test as of the
transfer date); Savage & Assoc. P.C. v. A.I. Credit Corp. (In re Teligent) 337 B.R.
39, 47 (Bankr. S.D. N.Y. 2005) (same); Telesphere Liquidating Trust v. Galesi (In
re Telesphere), 229 B.R. 173 (Bankr. N.D. Ill. 1999) (same); Schwinn Plan
Committee v. Transamerica Insurance Finance Corp. (In re Schwinn Bicycle Co.),
200 B.R. 980 (Bankr. N.D. Ill. 1996) (same) (“Schwinn”), with Sloan v. Zions First
National Bank (In re Castletons, Inc.) 900 F.2d 551 (10th Cir. 1993) (conducting
hypothetical liquidation test as of the petition date); Gray v. A.I. Credit Corp. (In re
Paris Industries Corp.), 130 B.R. 1 (Bankr. D. Me. 1991) (same); Kroh Brothers
Development Co. v. Commerce Bank of Kansas City, N.A. (In re Kroh Brothers
Development Co.), 86 B.R. 186 (Bankr. W.D. Mo. 1983) (same). See also, Palmer
Clay Products Co. v. Brown, 297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936)
(stating that the hypothetical liquidation test must be conducted as of the date of
the petition); Barry v. Crancer, 192 F.2d 939 (8th Cir. 1951) (same).
                                           5
       The Trust, on the other hand, argues that Supreme Court and Eighth Circuit
Court of Appeals precedent require, and the better reasoned case law supports,
conducting the § 547(b)(5) hypothetical liquidation test as of the petition date. As of
the petition date, the unearned premiums had a value of $1,418,601.44, and the debt
owed to First Insurance totaled $1,456,663.58, representing the then current debt
($1,159,527.41) plus the amount of the transfers assumed not to have been made
($297,136.17). Because the amount of the debt exceeded the amount of the collateral
(by $38,062.14), the Trust concludes, the transfers at issue enabled First Insurance to
receive more than it would have in a Chapter 7 case, and the bankruptcy court's order
granting summary judgment in favor of First Insurance should be reversed.

       Upon review of the statutory language of § 547(b) and the case law applying
it and its predecessor provision in the Bankruptcy Act, the Panel concludes that the
hypothetical liquidation test must be conducted as of the petition date. Consequently,
the record in this case supports a finding that the $297,136.17 in transfers received by
First Insurance within the 90 days prior to the petition date enabled it to receive more
as a result of those transfers than First Insurance would have received if this was a
case under Chapter 7 and the transfers had not been made.

       When a statute's language is plain, “the sole function of the courts is to enforce
it according to its terms.”4 Here, § 547(b)(5) does not specifically indicate whether
the hypothetical liquidation test should be conducted as of the transfer date or as of
the petition date, but it does state unequivocally that the test assumes that the transfers
had not been made.5 Recognition of this assumption, which has been referred to as
the “add-back” method, is important because it forecloses one of the arguments used


      4
       United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct.
1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470,
485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)).
      5
          11 U.S.C. §547(b)(5)(B).
                                            6
against conducting the test as of the petition date. For reasons that are unclear, several
cases have conclusorily determined that the add-back method does not apply to
transfers to fully secured creditors because payments to a fully secured creditor cannot
be preferential.6 But this statement still begs the question: Should transfer-date or
petition-date values be used to determine a secured creditor’s status? Moreover, the
plain language of § 547(b)(5) simply does not support a departure from the add-back
method.

      Upon inspection, the rejection of the add-back method in these cases is more
of a veiled rejection of a petition-date hypothetical liquidation test than a true
objection to the add-back method since the status of the secured creditors in these
cases was determined using the add-back method, i.e., by considering the creditor’s
secured status immediately prior to the transfer.7 Therefore, the only real issue is the
timing of the hypothetical liquidation test, and Supreme Court precedent requires that
the hypothetical liquidation test be conducted as of the petition date.

     This precedent is found in Palmer Clay Products Co. v. Brown,8 wherein the
Supreme Court stated:

      Whether a creditor has received a preference is to be determined, not by
      what the situation would have been if the debtor's assets had been
      liquidated and distributed among his creditors at the time the alleged


      6
        See In re Rocor, 2007 WL 4376026, *3; In re Schwinn Bicycle Co., 200
B.R. at 990 (citations omitted).
      7
       In re Rocor Int’l, Inc., 2007 WL 4376026 , *3; In re Schwinn Bicycle Co.,
200 B.R. at 990.
      8
        297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936). See also, Barry v.
Crancer, 192 F.2d 939, 941 (8th Cir. 1941) (stating that Palmer settled the issue of
whether the effect of a preference is to be determined on the transfer date or as of
the date of the petition).
                                            7
      preferential payment was made, but by the actual effect of the payment
      as determined when bankruptcy results.
                                      * * *
      We may not assume that Congress intended to disregard the actual result,
      and to introduce the impractical rule of requiring the determination, as
      of the date of each payment, of the hypothetical question: What would
      have been the financial result if the assets had then been liquidated and
      the proceeds distributed among the then creditors?9

        Despite this apparently unequivocal statement that the preferential effect of a
preference – i.e., the hypothetical liquidation test – is to be determined as of the
petition date, the bankruptcy court did not address Palmer, and First Insurance argues
that it is not applicable to transfers to secured creditors.

      First Insurance and the cases upon which it relies contend Palmer is not
controlling because it dealt only with payments on unsecured claims.10 But there is
nothing in the language of Palmer which expresses such a limitation, and the Panel
finds no basis to impart or create one. The law applied in Palmer – § 60a of the
Bankruptcy Act – is substantially similar to § 547(b) of the Bankruptcy Code,11 and
the concern raised by the Supreme Court over the “impracticality” of conducting the
hypothetical liquidation test on the date of each payment is no less (and is probably
greater) when payments on secured claims are involved.


      9
          Palmer, 297 U.S. at 229.
      10
           See, e.g., In re Telesphere, 229 B.R. at 179; In re Schwinn, 200 B.R. 990.
      11
         Bankruptcy Act § 60a provides in pertinent part: “A person shall be
deemed to have given preference if, being insolvent, he has, within four months
before the filing of the petition, or after the filing of the petition and before the
adjudication * * * made a transfer of any of his property, and the effect of the
enforcement of such * * * transfer will be to enable any one of his creditors to
obtain a greater percentage of his debt than any other of such creditors of the same
class.”
                                            8
       The impetus to limit Palmer to situations involving payments on unsecured
claims is understandable – it seems almost illogical to find that a payment on a claim
fully secured at the time of the transfer might be preferential under § 547(b). But the
resolution of that illogic does not lie in refashioning the hypothetical liquidation test
of § 547(b)(5) to incorporate elements of § 547(c) preference defenses, as many courts
have done; rather, it comes in the separate application of those defenses to the
preferential transfer at issue.

       A case recently decided by the Bankruptcy Appellate Panel for the Tenth
Circuit, In re Rocor,12 which relies on many of the same cases cited by the bankruptcy
court, illustrates how courts have improperly conflated a preference analysis with a
preference defense analysis. In determining that a creditor (also an insurance
premium financier) did not receive a preference because it was fully secured by
unearned insurance premiums on the date of the transfer, even though it would have
been under-secured as of the petition date, the Rocor court reasoned:

       If a creditor is fully secured, then it follows that a payment to that
       creditor merely reduces the secured claim, and releases from the
       security interest the same amount of the collateral. . . . If the payment to
       the creditor results in a release of an equivalent value of collateral, then
       the newly released value would theoretically be made available to the
       rest of the bankruptcy estate. Under such circumstances, there is no
       such diminution to the estate by the payment, and the secured creditor
       did not receive anything more than it would have received had the
       payment not been made.13
      The logic applied here is sound, but it is misplaced. To wit, it improperly
conflates a preference analysis with the analysis implicated by the “contemporaneous


      12
           2007 WL 4376026 (B.A.P. 10th Cir. December 17, 2007).
      13
         Id. at *4-5 (citing In re Schwinn Bicycle Co., 200 B.R. at 993). See also,
In re Telesphere, 229 B.R. at 180.
                                           9
exchange for new value” defense set forth in 11 U.S.C. § 547(c)(1).14 Section 547(b),
by itself, does not contemplate any consideration of what a debtor receives in
exchange for a transfer. As Palmer instructs, it is concerned solely with the impact
the transfer has on the bankruptcy estate as of the petition date.15 A consideration of
what a debtor may have received in exchange for the transfer – contemporaneously
or subsequently – comes into play only when the appropriate preference defense is
raised.16 Conflating these two analyses might be expedient, in that payments on fully
secured claims will likely be shielded from avoidance under § 547(c)(1) because, as
noted above, “the payment to the creditor results in a release of an equivalent value
of collateral,” but it is important to keep them separate – as an analytical and a
practical matter, especially where (as in this case) the case is before a court on
summary judgment under § 547(b), and neither party has had an opportunity to
advance or refute the applicability of preference defenses under § 547(c).

       Finally, the bankruptcy court grounded its decision to conduct the hypothetical
liquidation test as of the time of the transfers in dispute on the assumption that First
Insurance would have asserted its right to cancel the Policies and to obtain the




      14
        Section 547(c)(1) provides:
The trustee may not avoid under this section a transfer—
      (1) to the extent that such transfer was--
             (A) intended by the debtor and the creditor to or for whose benefit
             such transfer was made to be a contemporaneous exchange for new
             value given to the debtor; and
             (B) in fact a substantially contemporaneous exchange.
      15
           Palmer, 297 U.S. at 229.
      16
           11 U.S.C. § 547(c)(1) and (4).
                                            10
unearned premiums if Falcon failed to make either of the payments in dispute. But
this assumption is not warranted by the law or supported by the record.17

                                  IV. CONCLUSION
       For the reasons stated above, we reverse the bankruptcy court’s decision on
summary judgment and remand this case so that the bankruptcy court may consider
any evidence in support of the Defendant’s § 547(c) defenses and determine the actual
effect of the transfers, as directed by the Supreme Court in Palmer Clay Products v.
Brown.




      17
         Cf. Schwinn, 200 B.R. at 994-95 (“[T]here is nothing in the Bankruptcy
Code that prohibits the court from considering what actually would have occurred
had an allegedly preferential transfer not been made.”). The Panel is not persuaded
that the absence of such a prohibition is justification for engaging in speculation
about what a creditor would have done if it had not been paid, especially in light of
Palmer’s directive to conduct the hypothetical liquidation test as of the petition
date.
                                         11
