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change over the life of the security interest. Examples of floating liens are those that attach to inventory and to accounts receivable. Inventory turns over as it is sold; accounts receivable turn over as they are collected and the cash is used to, among other purposes, purchase more inventory. The Uniform Commercial Code expressly authorizes the creation of "floating liens" by authorizing the present creation of a security interest in after-acquired property (that is, property acquired by the Debtor after the initial attachment of the security interest): See UCC § 9-204(a).
Congress attempted to craft a middle ground between creditors and debtors in section 547(c)(5). As to the timing issue, section 547(c)(5), essentially, carves out an exception to the general rule that a security interest does not pass to a creditor until the Debtor has rights in the relevant collateral. Creditors with floating liens on a continually-evolving collateral mass need not worry that they will lose their secured position if the Debtor's entire inventory or all of its accounts receivable turn over during the 90-day look-back period.
As to fluctuations in value, Congress recognized that some improvements in position harm unsecured creditors, and some do not. Consequently, they enacted a test that permits a trustee to recover as a preference the amount by which the secured creditor improved its secured position during the 90-day look-back period, but only to the extent the creditor's secured status as of the petition date is better than it was as of the 90th day prior to the petition date - interim fluctuations during the period are ignored; and only if such improvement was to the prejudice of other unsecured creditors.
3. Elements of Defense.
The defense applies only to secured creditors with security interests in inventory and accounts receivable. A security interest transferred in after-acquired equipment, for example, during the 90-day look back period would not be sheltered by section 547(c)(5). As to the issue of fluctuations in the value of the collateral mass, the defendant must demonstrate (I) whether or not there was an improvement in its position
