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over the course of the 90-day look-back period and (II) to the extent there was an improvement of position, establish that any improvement was not to the prejudice of unsecured creditors - that is, that the amount of unencumbered assets in the estate was not reduced as a result of the improvement in the creditor's position.
Not all fluctuations in value harm unsecured creditors. For example: fluctuations due solely to market forces (e.g., the prevailing market price for the Debtor's inventory rose during the 90-day look-back period) do not prejudice unsecured creditors, because they would not be entitled to that increase in value in any event; the secured creditor would be entitled to the proceeds of its collateral, whatever amounts that collateral commanded in the marketplace.
If the secured creditor is fully secured or oversecured as of the 90th day prepetition, as a matter of law, its position could not have improved as of the petition date to the prejudice of unsecured creditors - the creditor was entitled to be paid its full claim out of the collateral 90 days prior to the bankruptcy filing. If the secured creditor has a blanket lien on all of the Debtor's assets, then even an improvement in position caused by the Debtor's using other assets to fund purchases of inventory would not have prejudiced unsecured creditors, because those other assets would also have been subject to the secured creditor's lien.
To determine if the creditor's position has improved, section 547(c)(5) dictates the use of the "two-point net improvement test"; under that test, the court compares the degree to which the creditor's claim exceeds the value of its collateral (what the section refers to as the creditor's "deficiency") as of the date of the filing of the petition with that same deficiency calculation as of 90 days prior to the filing of the petition. If the creditor has improved its position within the 90-day period - that is, if its deficiency is smaller as of the petition date than it was 90 days before - only the amount by which the creditor's position was enhanced is subject to preference attack, and only if the increase prejudiced unsecured creditors.
For an interesting discussion of the burden of proof under § 547(b)(5) when commingled funds are involved. See In re Chrysler Credit Corp., 312 B.R. 797 (E.D. Va. 2004).
