Official Committee of Unsecured Creditors of Toy King Distributors, Inc. v. Liberty Savings Bank, FSB (In Re Toy King Distributors, Inc.)

MEMORANDUM OF DECISION

This adversary proceeding represents convoluted and complicated disputes between a failed toy retailer, Toy King Distributors, Inc. (“Debtor” or “Toy King”), on the one hand, and the retailer’s insiders, co-guarantors, and a bank, on the other hand. It involves events occurring over the retailer’s two bankruptcy cases. This retailer failed promptly after confirming a Chapter 11 plan of reorganization in the first case. The confirmed Chapter 11 plan in the second case involved liquidating the retailer. In the liquidation, the unsecured creditors received nothing whatsoever.

The court authorized the official committee of unsecured creditors in the second Chapter 11 case to pursue this adversary proceeding. In the proceeding, the committee seeks to recover against the debt- or’s insiders, co-guarantors, and principal lender, thereby ensuring some recovery for the creditors. Although the committee has not proven all of its claims, the court concludes that the committee has established entitlement to recover $2,903,844.00.

I.TABLE OF CONTENTS.

I. TABLE OF CONTENTS.

II.INTRODUCTION .

III. JURISDICTION.

IV. GENERAL FACTS OF THE CASE .

A. BACKGROUND.

B. MORROW LOOKS AT TOY KING.

C. T.K. ACQUISITIONS ACQUIRES TOY KING ..

D. THE TOY KING I CASE.

1. Toy King files bankruptcy.

2. The First Union claims.

3. The Touche Ross pro forma.

4. The Liberty loan.

5. The C & S line of credit.

*30 6. Confirmation of Toy King I. ^ to

E. POST-CONFIRMATION EVENTS. Ü1 O

1. Another draw on the C & S line of credit. O

2. The Touche Ross pro forma is finalized. OI O

3. Liberty waives the requirement to obtain a Touche Ross opinion letter.. Ü1 H*

4. The debtor does not have $2 million in equity following the Toy King I confirmation 57

5. The Liberty loan closes. 58

F. TOY KING’S FINANCIAL CONDITION. 60

1. Immediate borrowings. 62

2. Balance sheets . 62

3. Asset valuation. 62

4. Toy King is insolvent. 63

5. Inventory reports. 64

G. OTHER POST-CONFIRMATION DEVELOPMENTS. 66

1. The Liberty credit line is exhausted. 68

2. The C & S line is drawn again. 71

3. Toy King makes plan payments to creditors. 71

4. Trade credit is king. 77

5. The Nintendo loan. 78

H. THE FINAL CHAPTER. 79

1. Christmas is no help . 79

2. Preparing for the inevitable. 81

3. VMI makes an offer. 81

I. THE TOY KING II CASE. 95

1. The trade creditors file an involuntary Chapter 7 petition. 95

2. Closing the Toy King I case. 96

3. Toy King II becomes a Chapter 11 case.

V. CONSIDERATION OF INDIVIDUAL CLAIMS AND MORE SPECIFIC FACTS . CO oo

A. INTRODUCTION . CO oo

B. THRESHOLD LEGAL ISSUES. ^ oo

1. What is the effect of the commitment letter as included in the order of confirmation in Toy King I?. 00 ifs*.

2. Is the debtor the obligor or a guarantor on the Liberty loan?. 00 O)

C. PREFERENCE CLAIMS. 00 ÍO

1. Introduction . 00 CO

2. Payments by the debtor to TKA made during the 90 days immediately before the filing of Toy King II.

a. Introduction.

b. Do the payments to TKA constitute transfers?.

c. Was each transfer to or for the benefit of a creditor?.

d. Were the transfers for or on account of an antecedent debt?.

e. Was the debtor insolvent at the time of the transfers?.

i. Presumption of insolvency.

ii. Liquidation valuation test.

iii. Going concern valuation test.

f. Did the transfers occur on or within 90 days of the filing of the petition?. <o

g. Did TKA receive more than it would have received in a Chapter 7 liquidation?. M>l>O0

i. Secured claims or unsecured claims?. Oí

ii. Liquidation scenario. Oí

h. Summary for transfers to TKA during the 90-day preference period. Oí

3. Payments by the debtor to TKA made between 90 days before the commencement of Toy King II and the date of confirmation of Toy King I. 52

a. Introduction. 54

b. Was TKA an insider of the debtor?. 57

e. Was the debtor insolvent at the time of the transfers?. 57

*31 i. Introduction. CD OO

ii. Going concern valuation test. CD OO

iii. Retrojection analysis. CD CD

d.Summary for transfers to TKA during the insider preference period.■. O o

4. Payment by the debtor to M & D made during the 90 days immediately before the filing of Toy King II. rH

a. Introduction. rH

b. Does the payment constitute a transfer of the debtor’s property?.. rH

i. Whose money was it?. tH

ii. Conversion vs. a new filing. tH

iii. National bankruptcy policy. rH

c. Was the transfer to or for the benefit of a creditor?. rH

d. Was the transfer for or on account of an antecedent debt?. rH

e. Was the debtor insolvent at the time of the transfer?. rH

f. Did the transfer occur on or within 90 days of the filing of the petition? . CD O

g. Did M & D receive more than it would have received in a Chapter 7 liquidation?. CD O

h. Summary for transfer to M & D during the 90-day preference period. O

5. Recording of UCC-1 financing statements by Liberty during the 90 days immediately before the filing of Toy King II. to i — I

a. Introduction. t> o rH

b. Does the re-filing of UCC-1 financing statements that specify proceeds for the first time constitute transfers?. o

c. Does the filing of UCC-1 financing statements more than 30 days after inventory has been moved constitute transfers?.

d. Summary for recording of UCC-1 financing statements by Liberty during the 90-day preference period.

6. Execution of amended security agreement by the debtor to Liberty between 90 days before the commencement of Toy King II and the date of confirmation of Toy King I.

a. Introduction.

b. Was Liberty an insider of the debtor?.

e. Summary for the execution of the amended security agreement during the insider preference period. 03 rH

7. Ordinary course of business affirmative defenses to preference claims.. 03 rH

a. Introduction. 03 rH

b. Were the debts incurred in the ordinary course of both the debtor’s and the creditor’s businesses?. TP t — 1 1 — I

i. Debts to TKA. ^ tH i — I

(1) Introduction. rH rH

(2) The Liberty loan. rH rH

(3) The C & S line of credit. CD rH rH

(4) The Nintendo loan. rH rH

(5) The guaranty fees for the C & S line of credit. OO rH rH

(6) Summary for whether debts to TKA were incurred in the ordinary course of business. OO rH 1 — I

ii. Debt to M & D . OO rH rH

e.Were the payments made in the ordinary course of the businesses of both the debtor and the creditors?. rH

i. Introduction. rH

ii. Payments to TKA. rH

(1) Introduction. rH

(2) Payments of interest. rH

(3) Payments of guaranty fees. i — 1

(4) Payments of principal. rH

iii. Payment to M & D. rH

d. Were the payments made in accordance with ordinary business 5

*32 i. Introduction. 125

ii. Payments to TKA.. 126

iii. Payment to M & D. 126

e. Summary for the ordinary course of business affirmative defenses... 126

FRAUDULENT TRANSFER CLAIMS. 126

1. Transfers by the debtor to TKA and M & D made between the confirmation of Toy King I and the commencement of Toy King II... 126

2. Actual fraud . 127

a. Badges of fraud. 127

i. Introduction. 127

ii. Transfers to insiders. 128

iii. Concealment of transfers. 129

(1) Collective action. 129

(2) During Toy King I. 130

(3) Touche Ross pro forma. 130

(4) Financial statements. 131

(5) First Union claims. 132

(6) December transfers. 132

(7) Conclusion. 133

iv. Transfers for less than reasonably equivalent value. 133

(1) Alternative approaches. 133

(2) Payments to TKA and M & D of principal. 134

(3) Payment to TKA of loan fees and expenses. 135

(4) Payments to TKA and M & D of interest. 135

(5) Payments to TKA of guaranty fees on the C & S line of credit. 138

(6) Summary. 139

v. Insolvency at the time of the transfers. 139

vi. Summary. 139

b. Subjective evaluation of the debtor’s motive. 139

c. Conclusion . 141

3. Constructive fraud. 141

a. Introduction. 141

b. Unreasonably small capital. 142

c. Summary. 143

4. Summary. 143

LIABILITY OF TRANSFEREES OF AVOIDED TRANSFERS. 143 E.

143

Who are the initial transferees?. 144

a. The conduit theory. 144

b. Who is a conduit? . 145

c. Equitable considerations. 147

d. Conclusion. 148

Who are the beneficiaries or immediate transferees of the transfers?.. 148

Liberty’s “good faith” defense to transferee liability. 148

a. Introduction. 148

b. Was Liberty a transferee who took for value, in good faith, and without knowledge of the voidability of the transfers?. 149

i. Introduction. 149

ii. For value. 149

iii. Good faith. 149

iv. Without knowledge of voidability. 152

c. Conclusion. 153

Summarv. 153

6. Liability under Florida law. 154

OTHER STATE LAW CLAIMS. 156

1. Introduction: Section 544 . 156

2. Breach of the Toy King I confirmed plan... 156

a. Introduction. 156

b. Did Liberty breach the confirmed plan? 157

i. Introduction. 157

*33 ii. Making the Liberty loan. .157

iii. Making the Nintendo loan. .160

iv. Conclusion. .160

c. Did TKA breach the confirmed plan? . .160

i. Introduction. .160

ii. Failing to make a $1 million capital contribution. .160

iii. Charging fees and costs on the Liberty loan. .162

iv. Charging interest upeharges and guaranty fees. . 162

v. Conclusion. . 163

d. Did M & D breach the confirmed plan?. . 164

e. Summary. . 164

Payment of dividends by an insolvent corporation. .164

Breach of fiduciary duties. .165

a. Introduction. . 165

b. Woodward, Hunsaker II, Hunsaker III, and Ranney. . 165

e. Morrow, Angle, and King. . 165

i. Introduction. .165

ii. The duties of care and loyalty. . 166

iii. The business judgment rule. . 168

iv. Did they breach their duties of care? . . 168

(1) Introduction. .168

(2) Causing Toy King to make impermissible dividend distributions or fraudulent financial transactions. .169

(3) Failing to make the $500,000 capital contribution. .169

v. Did they breach their duties of loyalty?. . 170

(1) Introduction. .170

(2) Acquiring the First Union claims. . 171

(3) Inapplicability of the business judgment rule. .173

(4) The Toy King I confirmation order does not insulate the First Union transaction . . 174

(5) Other transfers to Morrow, Angle, and King. . 175

d. Summary. .177

Aiding and abetting the breaches of fiduciary duties. .178

Discharge of Toy King’s guaranty of TKA’s Liberty loan. .179

Toy King’s right of contribution from its co-guarantors. .181

Toy King’s right of subrogation against Liberty. .183

Claims for Toy King’s payment of rent and prepetition salary. .184

.184

G. POST-PETITION CLAIM FOR EXCESS SALARY. .185

1. Introduction . .185

2. Toy King’s payment of salary to Morrow during Toy King II in excess of approved amounts. .185

H. THE SECURED STATUS OF LIBERTY’S CLAIM AND THE AMOUNTS TO WHICH LIBERTY IS ENTITLED TO BE PAID ON ITS SECURED CLAIM. 186

1. Introduction . 186

2. Determining the secured status of Liberty’s claim. 187

3. Does Liberty have a perfected security interest in all of Toy King’s inventory?. 187

a. Inventory in Pennsylvania and Maryland. 187

b. Inventory in Mississippi. 187

i. Effect of the bankruptcy filing when a financing statement was not filed in Mississippi. 187

ii. Who has priority if the perfection lapses? The debtor or the secured party, Liberty?. 189

iii. Conclusion. 189

4. What is the value of Liberty’s collateral?. 190

5. Is Liberty entitled to interest as an oversecured creditor?. 192

6. Is Liberty entitled to attorney’s fees as an oversecured creditor?. 192

7. May the debtor surcharge Liberty? . 193

8. Summary. 194

*34 EQUITABLE SUBORDINATION I.

1. Introduction .

Equitable subordination theory: a higher standard to subordinate non-insiders and non-fiduciaries. M Ol

The claim against Liberty. M <3

The claims against TKA and M&D. H 00

a. Introduction. H 00

b. Inequitable conduct. H 00

c. Resulting harm or unfair advantage . M M

d. Consistency with the provisions of the Bankruptcy Code.

e. Conclusion.

The claims against the individual defendants .

a. King.

i. Inequitable conduct.

ii. Resulting harm or unfair advantage.

iii. Consistency with the provisions of the Bankruptcy Code.

iv. Conclusion.

b. Morrow, Angle, Woodward, Hunsaker II, Hunsaker III, and Ran-

6. Summary.

7. The appropriate remedy.

J. THE PLAINTIFF’S RECOVERIES.

1. Introduction .

2. Summary of plaintiffs recoveries .

3. Summary of judgment provisions.

4. Allowance of costs to the plaintiff as prevailing party

VI. CONCLUSION.

II. INTRODUCTION.

The debtor first filed for relief under Chapter 11 of the Bankruptcy Code on July 6, 1988, Case No. 88-1663 (“Toy King I”). Toy King I ultimately resulted in the confirmation of a plan on May 23, 1989. The plan provided for a pro rata distribution to unsecured creditors, most of whom were toy manufacturers. The only shareholder of the reorganized debtor was the corporate parent of the debtor, T.K. Acquisitions, Inc. (“TKA”). The debtor funded the plan with monies borrowed by TKA from Liberty Savings Bank, F.S.B. (“Liberty”). Liberty also loaned monies on a line of credit to TKA which, in turn, made the funds available to the debtor for its operations. Liberty secured its loans by a lien on Toy King’s inventory and other collateral.

The reorganized debtor continued in business, closing some stores and opening others, but operated at a loss through 1989. Toy King was therefore unable to continue as a viable entity. Creditors of the company filed an involuntary Chapter 7 bankruptcy petition on February 12, 1990, Case No. 90-528 (“Toy King II”), the case in which this adversary proceeding is brought. The court converted the case to a case under Chapter 11 and ultimately confirmed a liquidating plan. In the liquidation, Liberty received full payment for its secured claim. The unsecured creditors, however, most of which were also unsecured creditors in Toy King I, received no dividend in the liquidation.

As part of the confirmed liquidating plan, the court authorized the Official Committee of Unsecured Creditors (“creditors committee”) to prosecute the debtor’s claims against entities and persons involved with the debtor. Accordingly, the creditors committee filed this adversary proceeding against Liberty Savings Bank, F.S.B. (“Liberty”), T.K. Acquisitions, Inc. (“TKA”), Don S. Morrow (“Morrow”), Michael Angle (“Angle”), M&D Financial, Inc. (“M & D”), Robert King (“King”), Constance L. Woodward (“Woodward”), Jerome Hunsaker II (“Hunsaker II”), Jerome Hunsaker III (“Hunsaker III”), and *35 Melanie Ranney (“Ranney”). Drawn in 16 counts, the complaint seeks to recover monies for the benefit of the estate from the defendants on various theories, including preferences, fraudulent transfers, equitable subordination, and various state law claims, including breach of the confirmed plan in Toy King I and breach of fiduciary duties.

After the filing of this adversary proceeding, the creditors committee also filed an objection to the claim of Liberty Savings Bank (Main Case Document No. 338). On June 7, 1991, the court entered a stipulated order (Main Case Document No. 343) consolidating the objection to claim with this adversary proceeding.

The defendants, other than Liberty, filed an answer that included affirmative defenses and counterclaims. Liberty also filed an answer and counterclaim. The individual defendants abandoned some counterclaims in the pretrial stipulation (Document No. 43). In its final pretrial order (Document No. 59), the court dismissed all remaining counterclaims raised by both the individual defendants and Liberty for reasons stated orally and recorded in open court. In the final pretrial order, the court also narrowed the issues for trial to those as described in the pretrial stipulation (Document No. 43). 1

The trial on these issues occurred over 17 days during a period of more than seven months. The evidence included the testimony of 14 witnesses and the utilization of more than 20 volumes of documents. After considering all of the testimony, particularly the demeanor and credibility of the witnesses, the exhibits admitted at trial, pleadings and stipulations filed by the parties, and oral and written arguments of counsel, including the authorities cited by the parties, the court determines, by a preponderance of the evidence, the facts and issues as more specifically delineated below as required by F.R.B.P. 7052.

This is a lengthy decision. Much of the financial and other factual detail is set forth in the notes. Because the notes themselves are lengthy, the court has prepared the notes as endnotes rather than as footnotes. These notes, of course, are an integral part of the decision.

III. JURISDICTION.

The court has jurisdiction of the parties and the subject matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and the standing order of reference entered by the district court. This proceeding is a core proceeding within the meaning of 28 U.S.C. § 157(b), and the parties have consented to the entry of final orders and judgment by this court subject, of course, to appellate review under 28 U.S.C. § 158.

IV. GENERAL FACTS OF THE CASE.

A. BACKGROUND.

Sam Levy incorporated Toy King Distributors, Inc., in Florida in 1959. He was the principal shareholder. Toy King’s primary business was the sale of toys at retail through leased space in shopping centers. The company’s headquarters and distribution warehouse were in Orlando, Florida. Its retail stores were in several states.

Between 1984 and 1986, the company grew rapidly from 34 stores to 62 stores located primarily in the Southeast. In addition to the retail sale of toys, Toy King expanded its business to include the sale of children’s apparel. The company also acquired a fleet of trucks and undertook the transport of its goods throughout the *36 Southeast from its warehouse facility in Orlando. The company initially received inventory at this warehouse and, from there, distributed it to the various stores. Inventory for new stores was specially segregated in the warehouse.

By the end of 1986, largely due to its rapid expansion, Toy King was experiencing chronic business problems. The company posted a loss of $965,919 at the end of its 1986 fiscal year. 2 At the same time, Mr. Levy’s health was failing. Mr. Levy died in early 1987. His estate owned approximately 75 percent of the debtor’s stock, and family litigation ensued with respect to the ownership of the company.

In an effort to resurrect the troubled business, the estate’s executor hired Robert 0. King as president of Toy King that same year. King was well known in the trade, having been chief toy buyer and marketing man for A.M. Best for more than ten years. 3 King had developed, and continued to have, a good working relationship with many of the toy manufacturers’ credit managers. King had no prior relationship with Toy King.

King took a number of steps to improve the profitability of the debtor. He replaced the corporate comptroller and implemented a computer supported inventory control system. He also discontinued the children’s clothing operations and liquidated the inventory connected with those operations. Finally, he discontinued the trucking operation and began to utilize commercial freight lines to transport inventory.

B. MORROW LOOKS AT TOY KING.

Despite these improvements, by the end of 1987 the company was still operating at a loss. Following the 1987 Christmas season, Toy King’s trade and other credit was substantially curtailed, and it had drawn down most of its lines of credit. In the spring of 1988, King placed an advertisement in the Wall Street Journal seeking investors.

Don S. Morrow was one of the respondents. Morrow was a certified public accountant in Florida and Georgia. 4 He had over five years of experience both as an auditor and accountant with Haskins & Sells, a nationally recognized accounting firm. He also had at least ten years of experience in evaluating acquisition prospects and turnaround candidates. He had no experience, however, in the retail toy industry.

King and Morrow met for the first time in April 1988. At that time, Morrow examined the books, records, and business of Toy King. Morrow determined that the financial difficulties of the company required a voluntary arrangement with the major toy manufacturers and supplier creditors.

Accordingly, King and Morrow attended the Toy Manufacturers of America Credit Managers annual convention in New York City on June 23, 1988. The Toy Manufacturers of America is a trade association, and most toy manufacturers are members. Once a year, there is a convention to showcase new products and take orders. Credit managers employed by the toy manufacturers also meet with toy retailers at the convention to negotiate credit lines and terms for the upcoming year.

These credit lines are of vital importance in the industry because toy retailers characteristically operate at a loss for most of the year. The toy retail business is seasonal, and historically toy retailers recoup losses and turn a profit from sales that occur in November and December. It is not uncommon for 40 to 50 percent of *37 the industry’s sales to occur in the month of December.

Because of the seasonality of the industry, toy retailers generally do not pay for inventory purchases under a 30, 60, or 90-day term arrangement as is common with other kinds of retailers. Instead, toy manufacturers routinely make available favorable dating terms to accommodate the historical sales pattern. When dating terms are used, the seller ships goods to the buyer and bills for those goods at a later date agreed upon by the seller and buyer. For example, goods shipped in August through November would be billed in January, and goods shipped in December through February would be billed in late spring or early summer. Thus, a toy retailer is able to receive inventory during the loss months and pay for it following the profit months.

Although most toy retailers utilize short term credit lines to fund their operations during the months they are operating at a loss, it is virtually impossible to operate a toy retail concern without trade credit. The amount of cash needed to fund operations and purchase inventory during loss months is prohibitive.

Consequently, Morrow hoped to determine whether the toy manufacturers attending the convention would extend credit to Toy King if it were under new management. King and Morrow participated in several meetings at the convention with credit managers of major toy manufacturers. The consensus reached as a result of these meetings was that Toy King needed to be reorganized under Chapter 11. The credit managers agreed to work with King and Morrow to attempt to create a viable plan of reorganization.

C. T.K. ACQUISITIONS ACQUIRES TOY KING.

In July 1988, Morrow exercised his option to purchase 75 percent of the stock of Toy King Distributors, Inc., from the estate of Sam Levy. He paid $50,000. 5 He later transferred his stock in Toy King to T.K. Acquisitions, Inc., a corporation incorporated for this purpose. 6 At this time, Morrow and Michael Angle were the principal shareholders of TKA, and each owned more than 20 percent of the stock of that company. Angle, like Morrow, was a certified public accountant. Morrow and Angle were also directors and officers of Toy King. Both were responsible for the financial management of the debtor, including the preparation of the debtor’s internal balance sheets.

King was also a director and officer of Toy King and, at some point, acquired stock in the debtor, although his stock comprised less than ten percent of the shares. He was responsible for the day-to-day operations of the debtor.

Around this time, Morrow and Angle also incorporated Acquisition Management, Inc. (“AMI”). 7 This company provided management services to both TKA and the debtor for a fee.

D. THE TOY KING I CASE.

1. Toy King files bankruptcy.

On July 8, 1988, Toy King filed a Chapter 11 petition in this court, Case No. 88-1663. The United States trustee appointed an unsecured creditors committee. Toy manufacturers comprised the entirety of the unsecured creditors committee. The committee retained counsel and an accountant.

*38 The debtor’s only secured creditor was First Union National Bank (“First Union”). First Union held a mortgage on the debtor’s warehouse and also had a security interest in some personalty. In addition, First Union was the largest unsecured creditor. Other than First Union, the majority of the unsecured creditors were manufacturers and suppliers in the toy industry.

Following the filing of the bankruptcy case, the unsecured creditors committee and principals of the debtor began to negotiate a consensual plan. The debtor promulgated a proposed plan of reorganization and submitted it to its creditors by the end of September 1988. Thereafter, there were a number of meetings, extensive and often heated, to negotiate the proposed dividend to unsecured creditors. As part of the process, the debtor provided several different plans that included projections and possible capitalization for a reorganized debtor. 8 At several of these meetings, Morrow indicated there was a likelihood of further investment in TKA by himself and others following a successful confirmation of the Toy King bankruptcy case.

During these meetings, the unsecured creditors negotiated for a plan that would enable the debtor to continue as a going concern and preserve it as a potential customer. The unsecured creditors, therefore, balanced the net dividend to be paid through the plan, together with the potential profit that would accrue to the unsecured creditors from an ongoing relationship with the debtor, with what they would receive if the debtor were liquidated. Had the unsecured creditors believed that the reorganized debtor would not be viable as an ongoing customer, they would have negotiated for a dividend commensurate with liquidation value or sought to have the case converted to a case under Chapter 7 for the purpose of liquidation. Because future credit relations with the debtor were important to the unsecured creditors, however, they were prepared to accept a dividend that was something less than liquidation value.

Ultimately, in December 1988, after much deliberation and negotiation, a 17.5 percent “pot” plan was agreed between the debtor and the unsecured creditors committee. Under this agreement, an amount equal to 17.5 percent of the debtor’s unsecured debt would be placed in a “pot” and distributed to unsecured creditors on a pro rata basis. The debtor estimated that these prepetition dividends would total $1.6 million. Following this agreement, the accountant and counsel for the unsecured creditors committee became much less active in the case. After this point, the work performed for the unsecured creditors committee by these professionals was in furtherance of confirming the agreed plan rather than in evaluating feasibility and operations of the debtor.

During the bankruptcy case, the debtor maintained its operations and obtained inventory on new credit advances secured by a court-approved super-priority lien in favor of the toy manufacturers. 9 This super-priority lien secured post-petition credit advances by toy manufacturers with a lien on assets of the debtor acquired post-petition and proceeds from those assets that was superior to the claims of administrative expense claimants and superior to the liens of any others holding a lien on those assets. The debtor also sought court approval of a special arrangement with Nintendo whereby the super-priority lien of that creditor would secure prepetition debt of approximately $200,000 as well as post- *39 petition advances used for new purchases. As part of this accommodation, the debtor also agreed to dismiss a pending preference action against Nintendo in which the debtor sought repayment of $90,000. The court disapproved this arrangement. 10 As a consequence, Nintendo refused to extend credit to the debtor during the bankruptcy case notwithstanding the super-priority hen protection in place.

The debtor also obtained inventory from the parent company, TKA. TKA purchased this inventory directly from manufacturers and then transferred it to the debtor at cost. TKA did not receive a super-priority hen for these purchases on the debtor’s behalf. The debtor, however, paid TKA a $50,000 “surety fee.” TKA incorporated this “surety fee” into advertising costs that it charged to the debtor. The debtor paid these advertising “costs” to TKA in the usual course of its business during the pendency of the bankruptcy case. There is no evidence that this “surety fee” was disclosed to creditors or approved by the court.

Toy King filed its proposed plan of reorganization and its disclosure statement on December 27, 1988. The disclosure statement stated that 10,000 shares of $10 par value stock would be created following confirmation and 1,000 of the shares would be purchased by TKA after confirmation for the total sum of $10,000. Neither the plan nor the disclosure statement provided for any other infusion of new capital into the debtor. Under “Means for Executing the Plan” at Article V, on page four, the plan provided that “[t]he Debtor plans to use TK Acquisitions, Inc., to make a loan or arrange a loan to be made by another entity in order to fund the Plan.” (Emphasis added). There was no mention of preferred stock in either the plan or the disclosure statement.

The disclosure statement also reflected that operating losses of almost $700,000 were anticipated for the 1989 fiscal year. In addition, the disclosure statement contained a section that listed compensation for officers. 11 This section listed the name, title, and amount of compensation without explanation or elaboration. Morrow’s compensation was stated as $60,000, Angle’s was $15,000, and King’s was $115,000.

2. The First Union claims.

Following the conclusion of negotiations with the committee, First Union, the un-dersecured holder of various mortgages on the debtor’s warehouse, approached the debtor and struck a bargain with regard to its claims. According to Morrow and Angle, First Union was anxious to sever its connection with the debtor and did not wish to wait until confirmation for distribution on its claims. The debtor agreed to transfer to the bank the real property and fixtures encumbered by the lien and security interest of First Union and to arrange for the immediate payment of First Union’s unsecured claims at a discount.

Morrow and Angle formed and incorporated M & D Financial, Inc. (“M & D”), for the purpose of purchasing the unsecured claims of First Union. Both were officers and directors of M & D, and each owned more than 20 percent of the common voting stock of that company until December *40 23, 1989. On that date, Angle sold his interest in TKA and M & D to Morrow and resigned as an officer and director of M & D and the debtor. At some point, Woodward obtained a five percent interest in M & D.

First Union agreed to sell its unsecured claims totaling $2,373,615 to M & D for the sum of $125,000. Under this arrangement, M & D would pay $125,000 for the right to receive under the plan $415,382.62, representing 17.5 percent of the face amount of the total First Union unsecured claims, for a net “profit” to M & D of $290,382.62. This equates to a 232 percent profit on M & D’s investment. Although First Union made this favorable opportunity available to the debtor, Morrow and Angle structured the transaction for their personal benefit.

Debtor’s counsel sent a letter dated December 29, 1988, to counsel for the unsecured creditors committee advising him of the proposed sale. 12 The specifics of the sale, most importantly the anticipated profit that would accrue to the purchaser, were not contained in the letter. The letter stated without elaboration that “[t]he deal with First Union must be done by tomorrow.” The closing was scheduled for the next day, Friday, December 30, 1988. The timing of the closing on a Friday in the midst of the holiday season, 24 hours or less from the date the letter was sent, effectively eliminated any opposition on the part of the creditors committee. 13 The record is devoid of any evidence that anyone received actual notice of the proposed sale prior to the scheduled closing date.

The debtor filed a motion for substitution of claimant, seeking to substitute M & D for First Union as the holder of the claims, on January 9, 1989 (Main Case Document No. 261 in Toy King I). 14 The motion was supported by a stipulation executed by First Union. The motion did not disclose M & D’s close connection with the debtor, nor did it disclose the financial details of the substitution. 15 The court *41 granted the motion on an ex parte basis on January 12, 1989 (Document No. 263 in Toy King I).

Notwithstanding the principals’ representations of urgency and First Union’s alleged impatience, M & D did not actually make the payment to First Union for the claims until April 11, 1989. At the time M & D paid First Union for the acquisition of its unsecured claims, Morrow and Angle had been in active negotiations for more than a month to obtain financing for the debtor’s plan. In fact, M & D made the payment to First Union on the very day that the court approved the debtor’s disclosure statement and thus at a point when there appeared to be little significant risk of non-payment of the underlying claims. The defendants offered no explanation for the almost three month delay in making the payment to First Union.

Although M & D made the $125,000 payment to First Union, it did so with funds provided by Morrow and Angle that they borrowed individually from a commercial lender. M & D gave Morrow and Angle a promissory note to document their loan to M & D.

3. The Touche Ross proforma.

Morrow, on behalf of the debtor, engaged the services of the Touche Ross 16 accounting firm to prepare a financial statement reflecting the effect of the Toy King confirmation on the debtor’s balance sheet. Morrow planned to use this statement to obtain monies to fund the plan and for post-confirmation trade credit.

Touche Ross made pro forma adjustments to the debtor’s audited statements that it had prepared for the 1988 fiscal year to reflect the effect of the bankruptcy confirmation as if it occurred at the end of that fiscal year. Touche Ross made these adjustments based upon information and assumptions provided by Morrow.

For example, Morrow estimated that the debtor would have prepetition liabilities immediately following confirmation in the amount of $1,168,107 and a subordinated note of $294,382 for a total of $1,462,489 in projected liabilities to be paid under the plan. Morrow also indicated that the debtor’s assets would be increased by $1,010,000 in cash through capital contributions, $1 million of which would be through preferred stock and $10,000 of which would be through common stock. Morrow anticipated that TKA would purchase the preferred stock using post-confirmation borrowings.

Morrow also requested that Touche Ross use the “quasi-reorganization” accounting convention to restate the debtor’s reorganized debt as new shareholder’s equity. After considerable research into the propriety of using this accounting convention in the debtor’s circumstances, Touche Ross acceded to Morrow’s request.

Under the “quasi-reorganization” accounting convention, assets are carried on the balance sheet at their historical values. The company’s liabilities that are discharged through the reorganization, however, are zeroed out of the balance sheet, with a corresponding increase in shareholder’s equity, first reducing net losses and next creating net equity.

The use of “quasi-reorganization” accounting was controversial at the time. It was disapproved by the Financial Accounting Standards Board and the Auditing Standards Board for use by companies subject to scrutiny by the Securities and Exchange Commission. At the time of the confirmation of Toy King, however, it was not prohibited for use by closely held companies. Because Toy King was a closely held company, the debtor’s use of “quasi-reorganization” accounting was permitted by accounting standards. Long after the events in question here, the use of “quasi- *42 reorganization” accounting fell into complete disfavor. It is not acceptable for use in any circumstances at the present time.

Touche Ross completed its preliminary pro forma report on April 21, 1989. Although Touche Ross had prepared six footnotes that provided additional information about the debtor and the assumptions upon which the pro forma was based, it did not include these footnotes in its completed preliminary report.

The preliminary pro forma showed that, if the reorganization occurred on January 29, 1989, the debtor would have $2,935,777 in net worth; $1,925,777 from the “quasi-reorganization” accounting methodology and $1,010,000 from additional paid-in capital and new common stock.

4. The Liberty loan.

During the pendency of the bankruptcy case, the debtor had been engaged in negotiations with various banks in an effort to obtain further financing to fund the plan. Preliminary negotiations with Liberty began in March 1989. Although Liberty had no prior connection with the debtor, it had a business relationship with Morrow and Angle and respected both as members of the local business community in Macon, Georgia.

Steve Horne (“Horne”) was the bank officer charged with negotiating with the debtor. Horne was a senior loan officer with lending authority of $250,000. He was also a certified public accountant. At this time, Horne’s department was thinly staffed. He therefore did the loan analysis himself. Horne conducted an initial investigation, including reviewing the loan application package, interviewing the debtor’s principals and management, and conducting a personal inspection of the debtor’s office, warehouse, and other facilities. Morrow provided to Horne projections of the debtor’s operations post-reorganization that showed a best-case scenario of a $464,000 profit and a worst-case scenario of a $20,000 loss. Morrow also provided a copy of the preliminary Touche Ross pro forma balance sheet showing $1.9 million in equity in the debtor post-reorganization as a consequence of the “quasi-reorganization” accounting methodology.

Horne prepared a credit approval/credit memorandum on May 3, 1989, in furtherance of the loan application. In that memorandum, Horne listed the debtor as having a net worth of $1,942,912 as of December 31, 1988. Horne wrote that the loan would be collateralized by cash or cash equivalents in the amount of $660,000; store fixtures with a value of $150,000; $300,000 in real estate; and inventory in the amount of $2,795,000. He further wrote that Morrow would provide an unlimited guaranty, and Woodward and Hunsaker would provide a limited guaranty of $450,000 each.

Horne stated as strengths the debtor’s new management, minimal reliance on inventory by the bank resulting from the pledge of additional collateral, the debtor’s relationship with suppliers, and $2 million in equity that would be in the debtor following confirmation. Horne stated as weaknesses the bank’s partial reliance on inventory, the location of the inventory, the seasonality of the business, and the recurring losses of past years. He graded the prospective loan as a 2S 17 with some risk. He recommended approval, however, of a $1.5 million line of credit to fund the debtor’s plan of reorganization and to provide additional operating funds. On May 4, 1989, Horne sent a memorandum to the senior loan committee to that effect. *43 In his May 4, 1989, memorandum, Horne stated that “[o]nee the Company comes out of Chapter 11 bankruptcy, it will have net worth in excess of $2,000,000.... ”

The bank’s senior loan committee met on May 10, 1989, to consider the loan. At the meeting, Horne updated the committee on the collateral being offered to secure the loan. Horne indicated that the cash collateral had been increased to $750,000, real estate collateral had been decreased to $250,000, and inventory was still valued at $2,795,000. There was no mention of fixtures offered as collateral to secure the loan. Horne further indicated that Morrow, Angle, and King would sign unconditional guaranties of the loan, while Woodward and Hunsaker would offer limited guaranties of $450,000 each. The senior loan committee approved the loan as described.

Prior to the granting of this loan, Liberty was principally in the business of residential mortgage lending. Its loan to TKA was one of its early forays into commercial lending. The TKA loan was the first to be made by Liberty in aid of a debtor in the midst of a Chapter 11 reorganization.

There was initial discussion between Liberty, TKA, and the debtor about the structure of the Liberty loan. Liberty intended the loan to be made directly to the debtor as obligor but was dissuaded from doing so by TKA and the debtor. 18 There was evidence presented at trial that TKA and the debtor believed that struc-taring the loan with TKA, rather than the debtor, as obligor was more consistent with the disclosure statement and also would inure to the benefit of the debtor by providing some tax benefits. Structuring the loan with TKA as obligor also avoided possible scrutiny by bank examiners because the obligor was not a company in bankruptcy. This tangentially benefited Liberty.

Accordingly, TKA was denominated as the borrower on the Liberty loan. 19 TKA was a shell company with no assets except its stock in the debtor and receivables owed to it by the debtor. All parties to the transaction understood that the monies from the borrowing would ultimately be used by and for the benefit of the debtor. All parties also understood that the debt- or’s revenues from its operations would ultimately be used to service the loan. Toy King and TKA’s shareholders, Morrow, Angle, Woodward, the Hunsakers, and Ranney, were to be guarantors.

Following the final approval of the loan, Liberty issued a commitment letter. This commitment letter, dated May 19, 1989, stipulated that up to $1 million of the total $1.5 million proceeds was to be used to pay plan dividends to prepetition unsecured creditors of the debtor. The remaining monies were to be used by the borrower, TKA, solely to make capital contributions to the debtor for “general corporate purposes.” 20 (Emphasis added). The loan *47 was to be secured by TKA’s stock in the debtor, the debtor’s inventory, and other collateral owned by the individual guarantors. The debtor, Morrow, Angle, and King were unconditional guarantors of the loan, while Woodward, the Hunsakers, and Ranney were limited guarantors. 21 The commitment letter provided that TKA would pay a loan fee of $5,000 to Liberty in addition to all other costs.

The commitment letter also contained a number of conditions and prohibitions that Liberty sought to impose on both TKA and the debtor. The inclusion of these conditions and prohibitions was intended to protect Liberty’s position. For example, Liberty required that TKA pay down the outstanding balance on a line of credit it had just established with Citizens and Southern Bank (“C & S”) that was secured by its stock in the debtor and its accounts receivable. At the time the parties negotiated the loan commitment, TKA owed C & S approximately $180,000. 22 Liberty included this condition to ensure the priority of its secured status.

Liberty also required that both TKA and the debtor maintain their operating accounts at Liberty Bank so that it would be able to monitor both companies closely. In addition, Liberty prohibited TEA and the debtor from paying to themselves any dividends or bonuses, other than dividends to service the loan itself, except by written permission of Liberty. Liberty intended these prohibitions to prevent TKA or the debtor from making payments without the bank’s knowledge and to keep cash in the debtor and its parent. 23

In addition to the conditions and prohibitions imposed on TKA and the debtor, Liberty required M & D to subordinate to Liberty’s debt $294,382 of its dividend on the claims it acquired from First Union. 24 With this prohibition, Liberty sought to keep cash in the debtor as well as ensure that its claim against TKA and the debtor would be superior to any other.

Finally, Liberty required that TKA was to obtain an opinion letter from Touche Ross stating that, immediately following the successful confirmation of Toy King I, there would be “at least $2,000,000 of *48 stockholder’s equity in Toy King.” The bank required this opinion letter as objective assurance that the debtor’s net worth after confirmation would be substantially as represented by Morrow and Angle at the time the Liberty loan was negotiated and as shown by the preliminary pro for-ma. Although Horne testified that this equity requirement was of little importance to Liberty in making the loan, the evidence itself contradicts this assertion. The court does not credit this testimony.

The commitment letter provided that the letter was “a commitment only” and was not a “substitute for the definite loan agreement.” The same paragraph explained that Liberty’s “obligation to loan funds to borrower shall arise only under the terms of such definitive loan agreement and other documentation.”

With regard to the treatment of the Liberty loan proceeds used by TKA to make a capital contribution in the debtor, the commitment letter was inconsistent with the preliminary draft of the Touche Ross pro forma. According to the commitment letter, the funds for TKA’s capital contribution were to come from a $500,000 line of credit. The remaining funds were to be used by the debtor under a letter of credit to pay plan dividends to Toy King I unsecured creditors.

The preliminary draft of the pro forma, however, provided that $1 million was to be infused as a capital contribution in the debtor. Although the pro forma contained no notation as to the source of the $1 million capital contribution, Horne, Morrow, and Michael Zychinski, the Touche Ross accountant, all testified that they understood that the funds for the $1 million capital contribution were to come from proceeds of the Liberty loan. The preliminary pro forma did not include any notation as to the use of the remaining $500,000 of the Liberty facility or indicate how those proceeds would be treated on the debtor’s internal balance sheets.

Horne, Morrow, and Zychinski understood that the Touche Ross pro forma and the Liberty commitment letter were critical documents that were intended to define the structure of the Liberty loan and how it would affect the debtor’s financial condition. They knew also that the debtor’s trade creditors were to receive copies of these documents and would make credit decisions on the basis of the information they contained. Horne and Morrow testified that they believed trade credit was essential to the debtor’s ability to sustain its operations post-confirmation.

5. The C & S line of credit

The court approved the debtor’s disclosure statement on April 11, 1989. 25 As the date of the confirmation hearing approached, the debtor was in a precarious financial posture. In the midst of TKA’s final negotiations with Liberty, the debtor was overdrawn on its debtor-in-possession account and was at the low ebb of the sales cycle.

TKA obtained a line of credit from C & 5 on May 8, 1989, for the purpose of funding the debtor. TKA executed a promissory note in favor of C & S that provided for a $400,000 line of credit with a maturity date of December 15, 1989, and interest payments due quarterly on the third day of the month, beginning in June, 1989. The C & S line of credit was secured by the accounts receivable of TKA and unconditionally guarantied by Morrow, Angle, and Constance L. Woodward, another TKA shareholder. The debtor had no liability on the C & S line of credit, either as obligor or guarantor.

TKA made an immediate draw on the C 6 S line of credit in the amount of $180,000 and made the proceeds available to the debtor. The debtor in turn execut *49 ed an unsecured note, Note 1, in favor of TKA at an interest rate that exceeded the interest rate being paid by TKA on the underlying C & S obligation by at least one percent. The promissory note executed by the debtor was a demand note without a specific due date for the payment of principal. 26

The debtor did not seek the court’s approval of this post-petition borrowing, although Morrow testified that he was aware that such approval was required. It appears from the record that creditors did not receive notice of this post-petition borrowing. This borrowing was also not reflected as a liability on the debtor’s financial statement filed in the pending bankruptcy case and signed under penalty of perjury by King.

6. Confirmation of Toy King I.

In connection with confirmation of the plan, the debtor mailed ballots to all creditors with a ballot return deadline of May 16,1989. Counsel for the unsecured creditors committee wrote a solicitation letter to unsecured creditors urging acceptance of the plan. The plan was overwhelmingly approved. Of 101 unsecured creditors, 96 voted in favor of the plan, and only five, representing less than $6,000 in unsecured debt, voted against the plan. M & D voted its claims, which it had acquired from First Union, in favor of the plan.

The confirmation hearing in Toy King I took place on May 23, 1989. Morrow testified at the confirmation hearing on behalf of the debtor. He testified that the debtor would effectuate the plan with a $10,000 capital stock purchase and a loan commitment from the parent company. Morrow also testified that all creditors were to be paid as proposed by the plan. Morrow testified that the plan proposed to pay unsecured creditors under a letter of credit 90 days after the confirmation of the debtor’s plan. When directly asked if the debtor had made promises to any creditors, other than what was to be paid through the plan, Morrow testified: “No, it has not.” The debtor’s evidence with respect to feasibility was uncontroverted at the hearing.

The debtor offered the commitment letter into evidence at the confirmation hearing. There was no discussion or testimony about the specifics of Liberty’s loan or the terms and provisions of Liberty’s commitment letter. The commitment letter had not been distributed or made available to creditors prior to the confirmation hearing. The debtor had not made the commitment letter a part of the debtor’s plan of reorganization. Nevertheless, the loan described in the commitment letter is what made the plan feasible and thereby confirmable. 27 There was no discussion at the hearing about, nor did the plan or commitment letter mention, the debtor’s borrowing from TKA on TKA’s C & S line of credit.

The court expressed concern at the hearing that the plan made no provision for the payment of interest to those unsecured creditors who were to be paid 90 days or more after confirmation. The court confirmed the plan subject to a modification that provided for the payment of interest at the rate of nine percent to unsecured creditors who were not paid immediately upon confirmation.

The court entered the order confirming the plan on May 23, 1989, the same day as the confirmation hearing. The effective date of the plan was June 12, 1989. The order of confirmation provided:

(B) that the Debtor shall be authorized to execute and to deliver to Liberty Savings Bank, FSB, Macon, Georgia any instruments and documents necessary to evidence, secure and relate to Debtor’s guaranty or obligations in connection with the proposed letter of credit to be provided to Debtor and line of credit to be provided T.K. Acquisitions, Inc. pur *50 suant to and in accordance with the terms of that certain commitment letter of Lender to T.K. Acquisitions, Inc. dated May 19, 1989, which is incorporated herein by reference.

(Emphasis added).

The court added this language to the confirmation order at the specific request of Liberty.

Through some error, the commitment letter was not attached to the order confirming the plan as was contemplated by the terms of the confirmation order. Nevertheless, the parties to this proceeding have stipulated that the commitment letter in evidence is a true and accurate copy of the commitment letter that was intended to be attached to the confirmation order. Although the debtor did not mail the commitment letter to creditors with a copy of the confirmation order, the parties stipulated that most creditors of the debtor received or obtained a copy of the commitment letter at some point in time close to the date of the Toy King I confirmation.

No party took an appeal from the May 23, 1989, confirmation order or sought to modify it. The plan was then substantially consummated.

E. POST-CONFIRMATION EVENTS.

1. Another draw on the C & S line of credit.

One week after the confirmation of Toy King I, TKA again drew on the C & S line of credit in the amount of $80,000. TKA loaned the proceeds to the debtor which in turn gave a promissory note to TKA on the same terms as the first note. This note was Note 2. During this period, TKA also made other draws on the C & S line of credit and made the funds available to the debtor without any written documentation. 28

2. The Touche Ross pro forma is finalized.

Touche Ross finalized its pro forma by June 4, 1989. The final version of the pro forma included the six footnotes omitted from the preliminary pro forma. These footnotes provided additional information about the debtor and the assumptions upon which the pro forma was based. For example, one of the footnotes stated that Touche Ross did not include contingent liabilities of the debtor for rejection of certain leases in its balance sheet in an amount of up to $414,000.

The final version of the pro forma also included two new footnotes. The first new footnote was a going concern qualification. A going concern qualification reflects a reasonable doubt that the entity in question has the ability to survive for a one-year period without additional capital or debt financing. 29 The second new footnote noted that the debtor’s case had been confirmed and that no objections to the confir *51 mation had been filed within the ten-day appeal period.

Touche Ross appended to the pro forma an independent auditor’s report of historical financial statements. In that report, dated April 21, 1989, Touche Ross rendered an opinion that “the financial statements referred to above present fairly, in all material respects, the financial position of Toy King Distributors, Inc. as of January 29, 1989, and the results of its operations and cash flows for the year (52 weeks) then ended in conformity with generally accepted accounting principles.”

Touche Ross also appended to the pro forma an independent auditor’s review report on pro forma financial information. In that report, dated June 5, 1989, Touche Ross cautioned that “[a] review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management’s assumptions, the pro forma adjustments and the application of those adjustments to historical financial information. Accordingly, we do not express such an opinion.”

In the finalized pro forma, therefore, Touche Ross rendered an opinion only as to the accuracy and reasonableness of the debtor’s historical financial information as of January 29, 1989, that came from its audited books and records. Touche Ross did not render an opinion about the accuracy, reasonableness, or propriety of management’s assumptions concerning the effect of a reorganization on the debtor’s financial condition, although it did indicate that “nothing came to our attention that caused us to believe that management’s assumptions do not provide a reasonable basis” for the pro forma adjustments.

Liberty received a copy of the finalized pro forma in its entirety prior to the closing of the Liberty loan.

In early June 1989, TKA paid into the debtor the $10,000 new capital, 30 the debt- or cancelled the old stock, and the newly reorganized debtor acquired right and title to all of debtor’s property subject to the confirmed plan of reorganization.

3. Liberty waives the requirement to obtain a Touche Ross opinion letter.

Prior to the closing of the Liberty loan, a representative from Touche Ross called Horne and asked him whether the bank required the opinion letter. Horne reviewed the finalized pro forma and compared it to the debtor’s internal balance sheets. The debtor’s May 28, 1989, balance sheet included both the $1,010,000 capital contributions and the $1.9 million equity derived from use of the “quasi-reorganization” accounting methodology that were assumptions used in the pro forma. The May 28, 1989, internal balance sheet showed a net loss of $421,000, resulting in a corresponding reduction in the net equity. Thus, the May 28, 1989, balance sheet showed net equity in the debtor in the approximate amount of $2.5 million. Horne understood that $1 million of this equity was to be funded through the Liberty loan.

After reviewing these papers, Horne concluded that the debtor’s balance sheets corroborated the information and assumptions used in drafting the pro forma. He therefore determined that the opinion letter was unnecessary. Accordingly, TKA did not engage Touche Ross to prepare an opinion letter, and Touche Ross did no further work on behalf of TKA or the debtor that is relevant to this proceeding.

During these events, Liberty knew it was entering uncharted waters by making *52 a large loan for the use of a company emerging from bankruptcy reorganization. Liberty also knew that the loan was for the benefit of, and would be repaid from, the operations of the debtor. The net equity covenant contained in the commitment letter was critical to the debtor’s ability to pay that loan in the event that the debtor did not perform as expected. Liberty knew that the debtor had lost money for the three years prior to the reorganization and that there was a going concern qualification with respect to the debtor’s future performance stated in the pro forma.

Liberty had confidence in Morrow and Angle, however, and relied upon their representations as to the debtor’s financial condition as assurance that the bank was protected in making the loan to TKA.

Willard M. Iman (“Iman”) testified as the plaintiffs banking expert. He opined that Liberty was imprudent in making the Liberty loan to TKA without first obtaining an opinion letter from Touche Ross that corroborated the net worth that was projected to be in the debtor after its reorganization. Iman stated that Liberty was especially imprudent in the face of losses before confirmation that caused a 20 percent erosion of the equity as shown in the pro forma and in light of the going concern qualification. The court credits this testimony on all of these points.

4. The debtor does not have $2 million in equity following the Toy King I confirmation.

Although both sides stipulated that the commitment letter contained a net worth covenant as a condition of the Liberty loan, there is a dispute as to the what the debtor’s equity was to include. The defendants assert that the equity requirement included the capital contribution from the loan proceeds anticipated to occur after the closing of the loan and shown on the pro forma and debtor’s balance sheet under assets as a stock subscription receivable and under shareholder’s equity as preferred stock. Horne testified repeatedly throughout the trial to that effect.

The plaintiff, on the other hand, asserts that a plain reading of the commitment letter in conjunction with generally accepted accounting principles mandate a conclusion that the equity requirement did not include the $1 million capital contribution shown in the pro forma and the balance sheet. Robert J. McCarthy (“McCarthy”), the plaintiffs accounting expert, testified that generally accepted accounting principles would not permit the debtor to put $1 million into assets until the event occurred that caused that money to be available to the debtor. Accordingly, the debtor could not show $1 million in assets prior to the funding of the Liberty loan to satisfy a condition of the loan itself. The court credits this testimony and does not credit Horne’s testimony on this point.

In addition, the evidence suggests that in fact Horne himself did not look to the $1 million capital contribution arising from the Liberty loan to satisfy Liberty’s equity requirement. For example, Horne’s notes made in furtherance of the loan approval exclude the $1 million capital contribution from his estimation of the debtor’s net equity.

Moreover, it is clear from the evidence that the parties to the Liberty loan could not have reasonably believed under any set of facts that $1 million of the loan could be infused into the debtor as a lump sum capital contribution as part of a single transaction or event even after the Liberty loan closed. The parties knew that $1 million of the loan was to be held in a letter of credit in favor of the debtor to be incrementally drawn down to pay the plan dividends to unsecured creditors. All parties to the loan understood that the letter of credit would be drawn down over a period of at least 90 days. Horne, Morrow, Angle, and Zychinski, the Touche Ross accountant, were all certified public accountants with a better than average understanding of basic accounting princi- *53 pies. Each one knew or should have known that the letter of credit could not be posted as an asset on TKA’s or the debt- or’s balance sheets until it was actually drawn upon and then only in the amount of the specific draw. Accordingly, Liberty, TKA, the debtor and all individuals involved in negotiating and executing the Liberty loan knew or should have known that the $1 million capital contribution shown as a stock receivable creating $1 million in shareholder’s equity was not accurate or realistic.

In addition, the parties to the Liberty loan knew or should have known that it was unlikely that the debtor could service the Liberty loan through dividend payments on its stock owned by its shareholder, TKA. The parties understood that the debtor was projected to post a loss for every month and would therefore be unable to declare dividends in any amount. McCarthy testified as to all of these points, and the court credits his testimony.

On the other hand, it would have been feasible from an accounting perspective for TKA to use $500,000 of the Liberty loan proceeds to make a capital contribution in the debtor after the Liberty loan closed. This could have been effected by TKA taking an immediate draw in the full amount on that line of credit and then using the proceeds to make a purchase of preferred stock in the debtor in the amount of $500,000. This treatment would also have been completely consistent with the requirements of the commitment letter.

TKA could not structure its capital contribution in the debtor in this way, however, because TKA had a direct obligation to C & S that had to be satisfied from the $500,000 line of credit proceeds at the closing of the Liberty loan. TKA was required to draw down the line of credit to pay C & S directly and thus could not use those monies to purchase preferred stock in the debtor. Horne, Morrow, and Angle all knew that TKA had an obligation to C & S in some amount. Each knew therefore that TKA could not make a capital contribution in the debtor using the full proceeds of the $500,000 line of credit.

For the foregoing reasons, the court concludes that the $2 million equity required as a condition of making the Liberty loan was to exclude any monies from the Liberty loan itself.

As stated in Section IV.E.3. above, Horne relied upon the Touche Ross pro forma as verification of the debtor’s net equity following the Toy King I confirmation. The net equity shown in the pro forma derived solely from the adjustments made as a consequence of management’s projections and assumptions provided to Touche Ross, including the “quasi-reorganization” accounting convention. Without those adjustments the debtor’s historical financial statements, which were audited and as to which Touche Ross rendered an opinion, showed the debtor as having a substantial negative net worth. Accordingly, the equity that Liberty was relying on in its loan analysis came solely from assumptions and projections provided by Morrow. Touche Ross offered no opinion as to the management assumptions used in formulating the pro forma.

As to the Touche Ross pro forma and the assumptions upon which it is based, it is clear from the evidence that Morrow crafted the assumptions provided to Touche Ross for its use in drafting the pro forma in a way that would give maximum positive effect to the debtor’s net worth while at the same time ignoring or discounting anything that would have an adverse effect.

As the court noted above, Morrow was inaccurate and unrealistic in his projections of a $1 million cash or cash equivalent capital contribution. Morrow also projected the prepetition dividend liabilities in an amount that was $200,000 less than he estimated in the debtor’s disclosure statement prepared at around the same time, and substantially less than the claims that were filed and allowed as of *54 that date. Morrow used, instead, an arbitrary amount that he estimated would be the debtor’s full liability after the debtor completed its claims litigation. These adjustments served to depress the debtor’s liabilities and inflate the debtor’s assets.

Morrow fixed the debtor’s post-petition liabilities at a point in time when the debt- or’s sale cycle had come full circle, thereby ignoring the liabilities and losses that he knew the debtor would incur in the pre-Christmas months. He also refused to estimate the debtor’s liabilities ensuing from lease rejection damages because they were “contingent,” a specious and somewhat ironic reason considering that the pro forma was prepared at a time when the only fact that was not “contingent” was that the debtor would operate at a loss. Finally, Morrow failed to show as a liability of the debtor the $500,000 that TKA was to loan the debtor from the proceeds of the Liberty loan.

Thus, Morrow was able to create an inflated statement of the debtor’s net worth by giving an exaggerated and unrealistic effect to the capital contribution through the stock subscription receivable while at the same time omitting or downplaying projected liabilities.

Had TKA engaged Touche Ross to prepare an opinion letter that attested to the reasonableness of management’s assumptions and the debtor’s financial statements as to the debtor’s net worth, Touche Ross would have conducted an examination that would have looked at these assumptions and financial records in depth. McCarthy testified that such an examination would have included an examination of TKA’s and the debtor’s financial statements to determine the propriety of the related transaction shown as a $1 million capital contribution. He also testified that an examination would have required scrutiny of the debtor’s books and records to determine with specificity the debtor’s actual liabilities in existence at the time of the examination. The court credits all of McCarthy’s testimony on those points.

It is reasonable to conclude, therefore, that, had Touche Ross conducted such an examination, it would have adjusted the pro forma balance sheet to exclude the $1 million capital contribution, while at the same time increasing the liabilities in some amount. These adjustments, together with the $421,000 net loss that the debtor posted between January 29,1989, and May 28, 1989, would have shown net equity in the debtor in an amount much less than the required $2 million. 31 McCarthy also testified that, in his expert opinion, the debtor did not have $2 million in equity following the Toy King I confirmation. The court credits McCarthy’s testimony on this point.

Accordingly, the court determines that the debtor did not have $2 million in equity immediately following the Toy King I confirmation and prior to closing the Liberty loan. The court further concludes that Touche Ross would have been unable to render an opinion that verified equity of $2 million in the debtor as required by the commitment letter.

5. The Liberty loan closes.

TKA and Liberty finalized the Liberty loan in mid-June following the completion and release of the Touche Ross pro forma. TKA and Liberty executed a master promissory note that provided for the payment of interest, on the first day of each calendar month, at a fixed rate on the first $700,000 and at two percent above the prime rate on the remaining balance due. The principal was due and payable on June 30,1990, although there was no penalty for prepayment. The defendants represented that the parties had a verbal agreement that at least $900,000 of the principal *55 would be paid prior to December 31, 1989, notwithstanding the June 30, 1990, maturity date. The master promissory note further provided that it was to be construed and enforced according to the laws of the State of Georgia.

TKA, Liberty, and Toy King also executed a revolving credit and security agreement on June 9, 1989, which incorporated by reference the master note. The documents included provisions for loan supplements or extensions to be incorporated within the terms of the documents with a borrowing limit of no more than $1.5 million in aggregate indebtedness at any time.

The debtor pledged inventory, account balances, stock, and all products and/or proceeds of any of the foregoing as security for the payment of the master note and “all obligations whatsoever of borrower or Toy King.” Liberty filed Uniform Commercial Code financing statements in Alabama, Florida, South Carolina, Virginia, and Wisconsin in June 1989. These financing statements did not specifically identify proceeds and products as part of the bank’s collateral.

Toy King, Morrow, and Angle signed joint and several unconditional guaranties. As collateral for the loan, Morrow pledged undeveloped real property, two life insurance policies, and shares of stock in an acquisition company. Angle pledged undeveloped real property 32 and two life insurance policies. King did not sign a guaranty-

Woodward, the Hunsakers, and Ranney all signed limited guaranties. Each limited guaranty was capped: Woodward’s in the amount of $350,000; Hunsaker II’s in the amount of $175,000; and Hunsaker Ill’s and Ranney’s in the amount of $87,500 each. These limited guaranties totaled $700,000. Each of the limited guarantors pledged as collateral a master repurchase agreement with a face amount of the capped limited guaranty exposure. Accordingly, Liberty held cash, cash equivalents, or real estate as collateral in the undisputed amount of at least $1 million.

.Liberty did not denominate any of the pledged collateral as primary or secondary. Every guarantor was jointly and severally liable to Liberty. 33 Each guaranty was identical in its language with the exception of the dollar limitation contained in the limited guaranties. The provisions of each guaranty were applicable to “all renewals, amendments, extensions, consolidations and modifications” to the loan documents. 34 Also, each guaranty specifically provided that the guarantor waived and agreed not to assert or take advantage of

... any defense based on the failure of Lender to give notice of the existence, creation or incurring of any new or additional indebtedness or obligation or of any action or non-action on the part of any other persons or non-action on the part of any other person whosoever, in connection with any obligation hereby guaranteed ... any defense based upon failure of Lender to commence an action *56 against Borrower ... the failure of Lender to perfect any security or to extend or renew the perfection of any security; or ... any other legal or equitable defenses whatsoever to which Guarantor might otherwise be entitled. 35

Finally, each guaranty stated that it was a “guaranty of payment and performance and not of collection. The liability of Guarantor under this Guaranty shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against Borrower.... ”

As additional protection for Liberty, the guarantor defendants pledged a life insurance policy on King’s life.

Finally, M & D executed an agreement that subordinated to Liberty $294,382 of its right to payment on the claims it had acquired from First Union. This represented the balance that would remain after an initial payment of $121,000.62. 36

Thus, the loan as finalized differed in several material ways from the loan that was approved by the senior loan committee. The most important change, of course, was the change in obligor from the debtor to TKA with the debtor becoming an unconditional guarantor of the loan. The finalized loan was also not supported by an unconditional guaranty by King. In addition, the finalized loan was supported by limited guaranties in an amount $200,000 less than approved. 37

Iman testified that, in his opinion, Liberty was imprudent in making a loan on terms different than those approved and *57 memorialized in the May 10, 1989, senior loan committee minutes. The court credits this testimony.

The loan closed on June 14, 1989. At about this time, Woodward acquired 20 percent or more of the shares of TKA, and the Hunsakers and Ranney each acquired less than 20 percent of the shares of TKA stock. 38

F. TOY KING’S SUBSEQUENT FINANCIAL CONDITION.

1. Immediate borrowings.

The debtor operated at a loss throughout the pendency of the Toy King I bankruptcy case. 39 As discussed earlier, its financial condition worsened before confirmation, necessitating further borrowing from the parent. 40 This borrowing enabled the debtor to operate through confirmation and until the closing of the Liberty loan.

At the closing of the Liberty loan, TKA immediately drew on the $500,000 line of credit in the amount of $320,530.15. Of this sum, $18,707.22 was paid out in closing fees and costs, including attorney’s fees. Liberty also made a direct payment to C & 5 in the amount of $301,822.93 to pay down TKA’s obligation to C & S. As a result of this payment, TKA had no obligation to C 6 S after this date, although the line of credit remained open.

Despite the pay down of the C & S line of credit, TKA did not execute or deliver to the debtor a satisfaction of Notes 1 and 2. Instead, it continued to hold those notes, allocating them as being supported by the Liberty loan instead of the C & S line of credit. Essentially, TKA substituted the Liberty loan indebtedness for the C & S line of credit indebtedness as the underlying obligation of the parent.

After payment of loan-related expenses and the payment to C & S, only $179,469.85 remained on the Liberty line of credit to be used for the ordinary operating expenses of the reorganized debtor. Because the bulk of the $500,000 line of credit simply replaced the borrowing on the C & S line of credit that occurred immediately before and after confirmation, the Liberty loan resulted in scant positive net effect on the debtor’s financial condition.

2. Balance sheets.

According to the debtor’s balance sheets, however, the financial condition of the debtor appeared to be healthy. The balance sheet of May 28, 1989, stated the debtor’s assets as $5,222,483, liabilities as only $2,718,146, and shareholder’s equity as $2,504,336. It appeared from the balance sheet, therefore, that the debtor had substantial equity and was in a good position to weather the slow sales months to come.

The court, however, credits the testimony of McCarthy that the debtor’s balance sheets are not credible or reliable evidence of the debtor’s true financial condition. McCarthy based his opinion, in part, on the debtor’s use of the “quasi-reorganization” accounting convention. Because that convention overstates assets while reducing liabilities, the shareholder’s equity that results from the application of the “quasi-reorganization” accounting convention is phantom equity. It is essentially unrealizable. In McCarthy’s opinion that the court credits, therefore, the debtor’s use of the “quasi-reorganization” accounting con *58 vention resulted in a substantial exaggeration of the debtor’s net worth.

McCarthy testified that “purchase” or “fresh start” accounting would more accurately state the debtor’s true financial position upon confirmation. Using “fresh start” accounting, the assets of the debtor would have been valued at their allocable part of the amount used to purchase the company, in this case $10,000, representing what a willing buyer, here the new shareholders, were willing to pay for the business. 41 The court credits this testimony for the purpose of determining the solvency or insolvency of the debtor.

McCarthy also opined that the debtor’s balance sheets contained material omissions or misrepresentations that resulted in an overstatement of assets and an understatement of liabilities.

He testified that the balance sheets should have excluded the “stock subscription receivable” or “parent company receivable” shown as an asset. 42 McCarthy also testified that inventory was inflated, shrinkage was not reflected accurately, and the debtor improperly listed unearned discounts and allowances.

McCarthy testified further that liabilities shown on the balance sheets understated the debtor’s borrowings from the parent company, unamortized loan costs, sales taxes, expenses associated with opening of new stores, and lease rejection expenses in connection with closing of old stores.

In addition, the debtor’s balance sheets booked some of the monies received from TKA from the Liberty loan as liabilities, some as equity, and some not at all. For purposes of payment, however, the debtor repaid all of the monies received from or on behalf of TKA as if they were loans or liabilities. McCarthy testified that liability cannot be equity and the monies the debt- or received from the parent company were therefore not consistently or accurately reflected on the balance sheets.

Finally, McCarthy opined that, at the very least, the debtor was thinly capitalized at all times following confirmation. The court credits McCarthy’s testimony on all of these points.

3. Asset valuation.

R. Steven Haas, plaintiffs expert on valuation, testified that the debtor’s inventory and fixed assets, as reflected on its balance sheets, were overstated in value. Haas testified that the debtor’s inventory as of January 28, 1990, was comprised of a substantial amount of stale or seasonal goods that were saleable only at greatly reduced prices, if at all. He opined that the debt- or’s inventory as of January 28, 1990, was worth only 50 percent of the amount stated *59 on the debtor’s balance sheet on that date. Haas formulated this opinion using extensive information from the debtor’s books and records from the months of January and February 1990. Haas testified at trial that this opinion was “absolute.” The court credits this opinion.

Haas also opined that the debtor’s inventory on July 30, 1989 — an earlier date — was worth 70 percent of the amount stated on the debtor’s balance sheet on that date. Haas testified further that it was appropriate to use the same valuation for the May 28, 1989, inventory because the debtor’s sales figures between May 28, 1989, and July 30, 1989, suggested that its inventory mixture did not change between those dates. Accordingly, Haas opined that the debtor’s inventory on May 28, 1989, was also worth 70 percent of the amount stated on the debtor’s balance sheet of the same date.

Haas acknowledged at trial that his opinion as to the worth of the debtor’s inventory in May and July 1989 was only a “ballpark figure” because he did not have access to all the information needed to reach a firm valuation. 43

The court credits Haas’ testimony with respect to his observation that he did not see an appreciable difference between the value of the debtor’s inventory between May and July 1989. The court does not, however, credit Haas’ opinion as to a valuation of 70 percent of the stated worth of the debtor’s inventory in May and July 1989. Instead, the court credits McCarthy’s opinion that a retailer coming out of a successful reorganization is left with a substantial amount of residual inventory that cannot be sold at a normal margin. McCarthy testified that this occurs because the debtor expedites sales and tries to turn over its inventory more rapidly during a reorganization than during normal operations.

For reasons that will be more fully explicated in Section IV.G.4. of this opinion, the court concludes that the debtor’s inventory from May 23, 1989, and at all times thereafter was inventory that in substantial part was not susceptible to sale at a normal mark up. Accordingly, the court concludes that the debtor’s inventory at all times after the confirmation of Toy King I was overstated on its balance sheets by 50 percent. 44

Haas also testified as to the value of the debtor’s fixed assets. Haas opined that, at all times between the confirmation of Toy King I and the filing of Toy King II, the debtor’s furniture, fixtures, and equipment had a value that did not exceed $52,000. He further opined that the debtor’s permanent assets, including leasehold improvements and point of sale equipment, and this $52,000 of furniture, fixtures, and equipment, had a value that did not exceed $130,000 at any time during this period. 45 *60 The court credits this opinion for the purpose of determining the debtor’s financial condition.

4. Toy King is insolvent.

Based upon the credited testimony of these experts, the court is required to adjust the balance sheets presented by the debtor. Where the evidence permits, the court has made adjustments to the debt- or’s balance sheets in accordance with this expert testimony. As shown in the notes, the court adopts these adjusted balance sheets as illustrative of the debtor’s true financial condition. 46 These balance sheets *61 do not reflect “purchase” or “fresh start” accounting. 47 The court notes, however, *62 that use of this accounting convention would reflect an even graver financial posture for the debtor dating from the confirmation of Toy King I on May 23, 1989, through the filing of Toy King II on February 12,1990.

Adjusting the May 28, 1989, balance sheet in accordance with these findings, the court determines that the debtor showed a negative net worth of at least $450,036.41 at the time of confirmation. The debtor plainly was insolvent then. As these figures clearly illustrate, the little cash remaining on the Liberty line of credit was inadequate for the debtor’s needs.

5. Inventory reports.

Haas also testified that the debtor prepared inventory reports that valued its inventory by pricing it at its retail price, rather than the lowest sale price or cost. This retail price was calculated by multiplying cost by an anticipated gross margin of 41.8 percent, or approximately 174 percent of the initial cost of goods. The margin used exceeded even the most favorable projections used by the debtor and was unrealistic, especially given the fact that 30 to 34 percent of the debtor’s inventory was comprised of stale or obsolete merchandise. In addition, the debtor included defective, return, and “field destroy” merchandise in its inventory counts, thereby further inflating the value of the inventory. Haas opined that the debtor’s use of this methodology in valuing its inventory was “unusual.”

The debtor’s use of a retail valuation methodology, particularly with this 41.8 percent margin, substantially inflated the calculated value of its inventory in its reports. The debtor sent these inventory reports to Liberty each month with its balance sheets. The debtor also sent these reports to McCarthy. It is unclear from the evidence whether the trade creditors received these inventory reports. 48

G. OTHER POST-CONFIRMATION DEVELOPMENTS.

1. The Liberty line of credit is exhausted.

Although it appeared that the debtor had navigated the shoals of bankruptcy, the future was not clear sailing, and the debtor was ill-equipped to handle the approaching storms. The debtor was in the down cycle for sales and was also attempting to open new stores in Mississippi, Pennsylvania, and Maryland. It had very little capital to sustain its operations. At the same time, it needed inventory to stock its stores for the coming Christmas season.

By mid-July, TKA had drawn most of the money remaining on the $500,000 line of credit. 49 All of the monies in turn were *63 made available to the debtor and in most cases, the debtor executed unsecured notes in favor of TKA. The interest rate on the TK notes was in all eases at least one percent more than TKA was obligated to pay to Liberty. 50 All of these notes were demand notes.

Despite its rapidly dwindling cash, the debtor continued to make interest payments to TKA, including the additional interest upcharge of one percent, on every penny it received from the parent’s borrowing from Liberty and C & S. The debt- or also paid TKA guaranty fees tied to the parent’s C & S line of credit indebtedness.

In addition, Morrow and Angle received salaries that exceeded the salaries paid during the pendency of Toy King I. Both Morrow and Angle worked part-time for the debtor, and each received an annual salary of $75,000 following the confirmation of Toy King I. 51

The debtor also paid fees to AMI for management services. There is no evidence in the record as to the specific services that AMI provided to the debtor or the amount of fees it received for those services. AMI, TKA, and M & D each had its office at the debtor’s business premises. The evidence, however, does not show how the premises were divided or who paid the operating costs for those premises.

2. The C & S line is drawn again.

As the Liberty line of credit was exhausted, the debtor began to look for a new source of capital. The debtor approached Liberty for an additional loan as early as June 27, 1989. Liberty, however, declined. Nevertheless, Liberty did consent to waive the prohibition contained in the commitment letter and its loan documents against further borrowing and sent a letter to that effect to TKA.

Accordingly, between August 7, 1989, and September 8, 1989, TKA drew on the C & S line in the amount of $250,000 and in turn made the money available to the debtor to pay its ordinary operating expenses. 52 The debtor executed unsecured demand notes in favor of TKA at a rate of interest, to be paid monthly, that was at least one percent more than the interest paid by TKA to C & S. 53 As stated earlier, *64 TKA s promissory note to C & S required interest payments to be made quarterly and the principal to be paid on December 30,1989.

In addition, TKA charged the debtor “guaranty fees” ostensibly tied to the C & S line of credit. These fees were essentially funneled through TKA, the actual obligor on the C & S line of credit, and distributed equally to the individual guarantors on the C & S line of credit, Morrow, Angle, and Woodward. 54 There was no writing between the debtor and TKA with respect to these “guaranty fees.”

Initially, the “guaranty fees” were one percent, but beginning in September all “guaranty fees” were increased to two percent. The “guaranty fees” were tied to specific notes executed by the debtor, and accordingly the debtor paid “guaranty fees” even during months in which TKA owed no money to C & S and the actual guarantors were m no danger of being called upon to perform on their guaranties. 55

The defendants put forward no credible explanation for why the debtor, neither obligor nor guarantor of the C & S obligation, paid these fees to the parent company, TKA, the actual obligor on the note. The court credits the testimony and opinion of Iman, plaintiffs banking expert, that these “guaranty fees” were excessive and unreasonable.

3. Toy King makes plan payments to creditors.

During this time, the debtor also began making payments to creditors from the $1 million Liberty letter of credit pursuant to its confirmed plan. These payments were effected by sending a list of the payees and amounts to Liberty who in turn made the payments and debited the letter of credit. 56 The debtor did not execute any note to *65 memorialize an indebtedness owed by Toy King to TKA on the $1 million letter of credit. Notwithstanding this lack of documentation, the debtor made regular interest payments to TKA that it credited in service of the $1 million letter of credit obligation. The interest rate that the debt- or paid to TKA was at least one percent more than the rate that TKA paid Liberty. 57

Virtually the first dividend paid under the plan was to M & D in the amount of $138,500 in partial payment of its right to payment under the original First Union claims. (The total amount of that right to payment was $415,382.62, representing 17.5 percent of the face amount of First Union’s original claims.) 58 The payment to M & D, in turn, was distributed to Morrow, Angle, and Woodward as princi *66 pal, interest, and “profit” and, as a practical matter, reimbursed Morrow and Angle for their purchase of the First Union claims in addition to their equity contribution in the debtor. 59 From this time forward, Morrow and Angle’s financial risk on account of the debtor was therefore limited to their personal guaranties.

4. Trade credit is king.

Although the debtor continued to operate, it was beset with problems. It could not open its new stores as scheduled. 60 Much of its inventory was stale and inadequately advertised. Inventory shrinkage exceeded industry norms. Most importantly, the debtor’s actual sales were below projections, and the gross margin realized by the debtor was not even close to the anticipated 40 percent. 61

At the same time, the debtor had a continuing need for inventory. Trade credit was therefore the linchpin of the debtor’s post-confirmation operations. After Toy King I was confirmed, each toy manufacturer made an independent credit decision about the debtor, based upon the debtor’s current financial status. Many, if not all, of these creditors received a copy of the finalized Touche Ross pro forma. They also received periodic copies of the debtor’s internal balance sheets. Each creditor placed primary rebanee on the financial reports of the debtor in deter *67 mining whether and how much credit to advance the debtor. In addition, each creditor relied on informal reports of the debtor’s financial situation provided periodically by Morrow, Angle, and King.

Joseph Stewart, Director of Credit and Collections for Hasbro Industries, Thomas R. Mauntel, Director of Credit Administration for Kenner Products, and James E. Brown, Credit Manager for Fisher Price, Inc., all testified at trial on the above points. Each also testified that, based upon the information provided by the debt- or, he believed that the debtor had substantial equity following the confirmation of Toy King I. 62 Each witness testified that he would not have extended credit to the debtor, after the confirmation of Toy King I, absent the equity cushion as shown in the debtor’s balance sheets and the Touche Ross pro forma. The court credits this testimony.

Following confirmation, toy manufacturers were initially cautious in extending credit to the debtor. Lines of credit were lower than requested, terms were less generous, and the debtor was encouraged to buy on anticipation. 63 The debtor began placing its orders for the Christmas season beginning in late July. Most of its Christmas inventory needed to be ordered during August for shipment during September and October. 64 Consequently, it was essential that the debtor increase its lines of credit with the toy manufacturers to accommodate its greater inventory needs.

Morrow, Angle, and King sent optimistic letters to the toy manufacturers to induce them to increase the debtor’s credit lines. In these letters, they stated that the debt- or was exceeding projections and performing well. Angle and King reinforced that message in personal phone calls placed to credit managers.

The gist of these communications was that expenses were below budget and sales were holding steady or higher than projected, thereby allowing the debtor to show a smaller loss than anticipated for the summer months. 65 There was no mention of the fact that the cost of goods used to generate budgeted sales exceeded projections. In addition, Morrow based his calculations of actual versus projected performance using the financial information contained in the debtor’s balance sheets, and therefore understated the expenses. Also, none of these communications gave any indication that the debtor was suffering from an extreme shortage of cash. Accordingly, all of these communications were misleading with respect to the financial condition of the debtor at the time they were made. 66

*68 These communications were further buttressed by the debtor’s balance sheets reflecting a positive net equity. As stated earlier, each of these balance sheets utilized “quasi-reorganization” accounting, omitted liabilities, and most importantly, showed $1 million of the Liberty loan as paid-in capital or equity.

Many of the toy manufacturers responded favorably to the debtor’s requests for credit line increases, although the total credit was still inadequate to meet the debtor’s needs. Nintendo was a notable exception.

5. The Nintendo loan.

Nintendo products were an integral component of the debtor’s business plan. At that time, Nintendo was the leading manufacturer of electronic games and game cartridges and enjoyed a substantial percentage of the market share for such products. 67 Electronic games and game cartridges were very popular and thus sold quickly and with little advertising. Because Nintendo did not produce enough product to satisfy demand, its product could be marked up by the seller more than other kinds of inventory, thereby enhancing the gross margin.

While formulating projections in connection with the confirmation of Toy King I, the debtor projected that 26 percent of its sales would be from Nintendo products. Toy King was unable, however, to negotiate credit terms with Nintendo following confirmation due to the debtor’s negative history with Nintendo. Accordingly, all orders placed with Nintendo were on a “cash in advance” basis. In view of Toy King’s severely limited cash position, this represented a significant problem. 68

At the same time, the debtor was forced to purchase a substantial percentage of its general inventory from toy wholesalers, rather than toy manufacturers, with a concomitant increase in the cost of goods. This was due to the debtor’s inability to obtain adequate credit from toy manufacturers. The debtor filled in with closeout inventory. 69 Because this kind of inventory was relatively inexpensive, the markup at sale was greater resulting in a higher gross margin. Unfortunately, closeout goods, by their very nature unpopular with the public, also had the potential to depress the gross margin if they could not be sold.

Notwithstanding its limited cash reserves and its anticipated increase in operating costs, the debtor continued faithfully to make its payments of interest to TKA, including the interest upcharge of one percent. The debtor also paid the “guaranty fees” to TKA without fail. 70

The debtor’s cash flow problem became acute. The C & S line of credit had an available balance of $210,000 at this time. The line was inadequate, however, to address fully the debtor’s cash flow problems. In addition, Morrow and Angle were keenly aware of their personal exposure on that line and sought to limit that exposure as much as possible.

TKA turned instead to Liberty and, on August 10,1989, requested additional cred *69 it, the stated purpose of which was to purchase Nintendo products. On August 30, 1989, Horne prepared a three page memorandum to the Liberty loan committee recommending extension of a new $600,000 short-term line of credit to benefit the debtor. The senior loan committee considered the loan request on August 31, 1989. The committee deferred its decision pending further investigation.

Even though Liberty had not yet approved the loan request, TKA executed a promissory note on September 12, 1989. That note granted Liberty a security interest in the same collateral that secured the original Liberty loan, including the debt- or’s inventory. The note contemplated monthly interest payments with the principal being retired by TKA on December 31, 1989. Morrow and Angle signed the note as officers of TKA.

The debtor was not a signatory on that note. The defendants testified that the note was executed on this date as an accommodation to Liberty because Morrow and Angle were frequently out of town. The court finds this testimony incredible in view of subsequent events.

On September 13,1989, Liberty received a request from TKA to draw $100,000 from the $500,000 line of credit. The request exceeded the amount available on the line of credit. 71 Liberty made funds available to TKA, notwithstanding the unavailability of funds on the line of credit, and charged it against the $1 million portion of the Liberty loan. TKA, in turn, made those funds available to the debtor. In effect, therefore, the debtor utilized these monies for operating funds with Liberty’s full knowledge and consent. Although the $1 million letter of credit had expired by its own terms two days earlier, the loan documents nevertheless limited the $1 million portion of the loan for the sole use of making payments to creditors under the confirmed plan.

There were a number of meetings between Horne and the senior loan committee to discuss the Nintendo loan request, and the committee sought additional information. Horne ultimately prepared a credit approval/credit memorandum on September 27, 1989, in furtherance of the Nintendo loan request. In that memorandum, Horne wrote that the Nintendo loan would be secured by the same collateral that secured the Liberty loan except that all guarantors would unconditionally guaranty the Nintendo loan and there would be a $350,000 letter of credit to secure advances in excess of $350,000. Horne also recommended that the loan be effected through a letter of credit made payable to Nintendo.

The senior loan committee met on September 27, 1989, to consider the Nintendo loan. At that meeting, the senior loan committee approved the Nintendo loan on the terms submitted by Horne with two exceptions. First, the senior loan committee did not require that the loan be disbursed through a letter of credit to Nintendo. 72 Second, the senior loan committee did not require all guarantors to guaranty unconditionally the Nintendo loan. Instead, the senior loan committee required unconditional guaranties from Woodward and Hunsaker II. The Nintendo loan approval on these terms was memorialized in the senior loan committee’s minutes.

Thus, there were significant differences between the Nintendo loan and the Liberty loan. First, the Nintendo loan was short-term and required payment of the entire balance within three months. Second, the loan contained no provisions for *70 further extensions or repayment of principal. Third, the loan was to be secured with an additional letter of credit in the amount of $350,000. Finally, the loan was to be unconditionally guarantied by two additional guarantors, Woodward and Hunsaker II.

The loan as ultimately structured was not in accord with the terms approved by the senior loan committee, except that it did not permit further extensions or advances and was to be repaid on December 31, 1989. After the approval of the Nintendo loan, TKA informed Liberty that the individual guarantors were unwilling to provide a letter of credit to secure the loan. 73 Although Liberty prepared and sent for execution the paperwork that would have expanded the guaranties, none of the paperwork that would have effected those changes was ever signed. Instead, the debtor, Morrow, Angle, Hunsaker II, Hunsaker III, and Ranney signed amendments that simply carried over their guaranties from the Liberty loan. Woodward did not sign an amended guaranty.

Liberty charged a loan fee of .005 percent of the total indebtedness, or $3,500. It is unclear from the record whether this fee was ever paid or, if so, who paid it.

On September 30, 1989, Liberty posted and established a note with a maximum availability of $700,000 effective September 12, 1989, and maturing on December 31, 1989. Also on that date, Liberty posted the $100,000 line of credit “overdraw” advances of September 13 to the Nintendo loan effective September 13, 1989. At the same time, Liberty debited the debtor’s letter of credit for the charge posted on September 13,1989.

Iman, the plaintiffs banking expert, testified that Liberty’s actions in advancing funds prior to the receipt of signed loan documents and on terms different and materially less advantageous than those that the senior loan committee approved were imprudent. The court credits this testimony.

The Nintendo loan was fully drawn down by October 17, 1989. TKA disbursed the monies to Toy King as they were drawn. 74 Toy King in turn executed unsecured notes in favor of TICA. The interest rate on the Toy King notes exceeded the interest rate charged to TKA by Liberty by at least one percent. 75 All of the notes were demand notes.

Notably, Toy King used less than a quarter of the monies obtained through the Nintendo loan to purchase Nintendo *71 products. 76 The rest of the monies were used to pay ordinary operating expenses.

H. THE FINAL CHAPTER.

1. Christmas is no help.

As the debtor moved into the 1989 Christmas season, the debtor’s financial situation worsened dramatically. November’s actual sales were much lower than projected by the debtor. 77 Because this was the debtor’s peak sales season, the disparity between projected gross margin and actual gross margin, attributable in part to higher acquisition costs and poor product, was more marked. 78 In short, all of the previous bad business decisions and siphoning of cash by management, in the guise of interest upcharges and guaranty fees, 79 was coming home to roost with a vengeance.

During the 1989 Christmas season, all toy retailers experienced slow sales, and most discounted their sale prices early in the season. The debtor was reluctant to do this for fear that it would further reduce its gross margin. The debtor did not discount until right before Christmas and consequently had little opportunity to boost its sales.

This delay in discounting, coupled with poor inventory mix, inadequate capital, and the continuous bleeding of the debtor’s scant cash, sounded the death knell for the debtor. 80 It became clear to Morrow, Angle, and King that the debtor was going to post a substantial loss for the year and would not be able to meet its deferred obligations to its trade creditors. The debtor’s days as an independent operating entity were clearly numbered. At the same time, the due dates for payment to trade creditors for the debtor’s inventory were fast approaching. 81 As important to Morrow and Angle, the due dates for payment of principal by TKA on the C & S and the Liberty Nintendo obligations were imminent.

Morrow wrote a letter to Liberty dated October 17, 1989, and advised the bank that the debtor was experiencing a downturn in sales. Horne met with Morrow and Angle on November 17, 1989, and learned that a loss was projected for the year and that TKA did not believe that it would be able to make any principal prepayments on the $1.5 million loan.

As shown in the notes, the debtor’s liabilities exceeded its assets throughout this period as they had from the date of eonfir- *72 mation. 82 By October 29, 1989, the debt- or’s liabilities exceeded its assets by at *75 least $1,860,956.05. 83 The November 26, 1989, balance sheet posted the $1 million *76 letter of credit as a liability rather than as preferred stock for the first time. By this time, the debtor’s trade creditors had shipped to the debtor all of its inventory for the Christmas selling season. The debtor’s liabilities continued to exceed its assets throughout the Christmas season. 84

*77 Morrow testified that he knew in December that the debtor would be unable to pay all of its debts as they came due. On December 14, 1989, Morrow began advertising the availability of the debtor for sale or merger in the Wall Street Journal. On December 18, 1989, Morrow wrote a letter to Liberty stating that the debtor was now projecting a “sizable” loss and was beginning a deep discount program. In addition, Morrow advised the bank that he had put the company up for sale or merger.

2. Preparing for the inevitable.

As the end drew inevitably nearer, the debtor began making payments of principal to TKA on its demand notes for the stated purpose of enabling TICA to pay down its secured debt on the underlying transactions. 85 The debtor made all of these payments by check drawn on the debtor’s operating account and signed by both Morrow and King. There is no evidence in the record that TKA made formal demand on the debtor for these payments of principal.

The debtor also paid to M & D the remaining amount due on the First Union claims in contravention of the subordination agreement and without the written consent of Liberty. 86 The debtor made this payment by check drawn on the debt- or’s operating account and signed by Morrow. 87 King questioned the propriety of this payment. 88 Morrow and Woodward ultimately received substantially all of the proceeds of this payment. 89 The debtor *78 paid the dividend claim of at least one other Toy King I unsecured creditor during this same period. 90 By this time, the debtor had paid at lest $1,270,256.39 in Toy King I dividends. 91

The debtor did not prepare a balance sheet for December, even though Morrow had advertised the company for sale or merger. Although the debtor prepared its balance sheets on an inconsistent and irregular schedule dating from the confirmation of Toy King I, this was the first time that the debtor failed to prepare any balance sheet. 92

Angle divested himself of his interest in TKA and all related companies, including M & D, by selling his shares to Morrow on or about December 23, 1989. 93 At the same time, he resigned his position as an officer and director of the debtor, TKA, and M & D. Angle remained personally liable on TKA’s obligations to Liberty and C&S.

In January, Liberty filed Uniform Commercial Code financing statements in all states with Toy King stores except Mississippi. 94 All of these financing statements for the first time specifically included proceeds and products in the description of collateral.

On January 22, 1990, Liberty sent' formal notice to TKA that it was closing the open-ended provision in the Liberty loan note. That provision allowed TKA to make additional draws against the line of credit equivalent to the amount of principal repayments, provided that TKA was not in default of its obligations. The letter simply recognized the financial realties facing both TKA and the debtor, even though TKA was not in default and $500,000 was technically available on the line.

3. VMI makes an offer.

There were several responses to the Wall Street Journal advertisement, among them a response by Wisconsin Toy, Inc. (later known as Value Merchants, Inc., or “VMI”). In mid-January, VMI made an offer to buy the debtor for $1.5 million. Under the terms of the offer, shareholders were to receive stock in VMI with an approximate value of $50,000 while general unsecured creditors were to receive payment of 24 percent of their debts. The offer was effective only until February 8, 1990, and contained numerous contingencies. One of these contingencies was the entry of a final decree in Toy King I.

The trade creditors were dissatisfied with the terms of the proposed merger agreement, principally because it contained an equity distribution in favor of the individual defendants. The creditors felt that any equity distribution to the debtor’s *79 principals was unwarranted and unconscionable under the circumstances.

Most of the trade creditors had been creditors of Toy King I. Although these creditors did receive from the debtor payment in satisfaction of their Toy King I claims, that payment represented only 17.5 percent of each creditor’s total claim in that case. The merger agreement contemplated payment to unsecured creditors that was only marginally better than the Toy King I dividend, making many of the unsecured creditors two time losers.

At the same time, some of the facts relating to the debtor’s actual financial situation were coming to light. Consequently, unsecured creditors were beginning to learn about the debtor’s early payment of principal to TKA, payment of subordinated debt to M & D, and the true nature of the debtor’s financial arrangements with TKA.

In addition, the trade creditors correctly believed that it was unlikely that the proposed merger could be consummated because of the many contingencies. Both YMI and the debtor lacked the ability to satisfy all of the contingencies. For example, neither VMI nor the debtor had the means to effect the court’s entry of a final decree in Toy King I. Indeed, the court itself had no ability to enter a final decree because there was an appeal pending of the bankruptcy court’s order awarding attorney’s fees. The court could not enter a final decree until that appeal was determined.

I. THE TOY KING II CASE.

1. The trade creditors file an involuntary Chapter 7 petition.

The relationship between the unsecured creditors and the principals of the debtor became very hostile at this point. When it became apparent that an accord could not be reached, several toy manufacturers filed an involuntary Chapter 7 against the debtor on February 12, 1990, commencing this case — Toy King II.

Even though the debtor operated continuously at a loss during the almost nine month period between the confirmation of Toy King I and the filing of Toy King II, TKA and M & D profited handsomely from their relationship with the debtor. The debtor paid TKA 95 $13,342.60 in interest upcharges and $20,283.22 in guaranty fees during that time. Morrow and Angle, of course, received the lion’s share of these profits by virtue of their ownership interests in TKA. In addition, the debtor paid generous salaries to both. Finally, both received a handsome profit on their acquisition of the First Union claims in Toy King I through M & D. After the debtor completed all payments on those claims, M & D received $314,506.17 more than it paid for the claims. This represented a “profit” of more than 250 percent, most of which ended up in Morrow’s pocket. 96

The debtor terminated King’s employment on January 31, 1990. King resigned as director on February 13, 1990. He subsequently filed a proof of claim (Claim No. 21) on April 24, 1990, for monies owed on his employment contract in the amount of $77,591.89, $2,000 of which he claimed as priority and $75,591.89 of which he claimed as unsecured.

At the time the creditors filed the involuntary petition initiating this case, the debtor’s liabilities exceeded its assets. 97 Both the debtor’s tax return for 1989 and its balance sheets for January 28, 1990, corroborate the debtor’s financial condition. The debtor’s 1989 tax return reflects *80 net income as a negative $2,673,287 before taking the net operating loss deduction and a negative $5,085,341 after posting the net operating loss deduction. As shown in the notes, the January 28, 1990, balance sheet reflects that, at a minimuni, the debtor’s liabilities exceeded its assets by at least $1,675,317.83. 98

*81 2. Closing the Toy King I case.

The Toy King I case continued to be active long after the filing of Toy King II. The Toy King I debtor filed an application for final decree on January 25, 1990 (Main Case Document No. 428 in Toy King I). The court could not enter the decree, however, because there were matters pending in the case, including objections to claims and a pending appeal of one of the court’s orders approving attorney’s fees.

The debtor filed a motion for special consideration of application for final decree (Main Case Document No. 480 in Toy King I) on January 31, 1990, in a final bid to consummate the VMI sale before the offer lapsed. The court denied that motion (Main Case Document No. 449 in Toy King I) on June 28, 1990, however, because of the pending matters.

The clerk docketed a notice of the district court’s transmittal of the appeal to the court of appeals on August 28, 1990 (Main Case Document No. 450 in Toy King I). The court of appeals dismissed the appeal on January 30, 1991, and the clerk docketed a notice of entry of the dismissal of the appeal on February 6, 1991 (Main Case Document No. 450A in Toy King I). Subsequently, the debtor filed a renewed motion for final decree (Main Case Document No. 451 in Toy King I), and the court entered a final decree (Main Case Document No. 452 in Toy King I) on June 1, 1992.

3. Toy King II becomes a Chapter 11 case.

After several of the debtor’s unsecured creditors filed the involuntary petition under Chapter 7 on behalf of the debtor (Case No. 90-528), the debtor filed a motion to dismiss the case and a motion to convert the case to one under Chapter 11. The petitioners and the debtor ultimately stipulated to the entry of an order for relief and to the conversion of the case to Chapter 11. The court conducted an evi-dentiary hearing of the joint motion for order of relief and the motion to convert on April 10, 1990. On April 13, 1990, the court entered an order for relief, effective April 10, 1990, and converted the case to a case under Chapter 11 (Main Case Document No. 52).

The debtor filed its statement of financial affairs and schedules (Main Case Document No. 43) on April 11, 1990. It listed secured debt in the amount of $932,818.97, priority unsecured debt in the amount of $177,295.67, and unsecured debt in the amount of $2,372,118.59. 99

The same counsel who represented the debtor in the Toy King I case represented the debtor in the Toy King II case. On April 30, 1990, the debtor filed a motion to approve Morrow’s salary of $90,000 per year (Main Case Document No. 78A). Several of the debtor’s unsecured creditors filed an objection to the motion.

The debtor also immediately filed a motion to approve a sale to VMI of substantially all of the debtor’s assets (Main Case Document No. 56A). The proposed sale contemplated that VMI would pay $1.5 million for these assets. The terms of the sale required VMI to pay $1.2 million for the debtor’s inventory, $299,000 for the debtor’s fixed assets, $500 to assume eight leases, and $500 for the right to purchase goods from Nintendo. The purchase price for the debtor’s inventory was subject to adjustment for diminution.

The United States trustee appointed an unsecured creditors committee on May 29, 1990. Many of the creditors on that committee had previously been members of the unsecured creditors committee during the pendency of Toy King I.

*82 Although the debtor continued its operations while the motion to sell was pending, it immediately began to close its stores and consolidate its inventory. To further this effort, the debtor filed a number of motions to reject leases.

The court conducted a hearing on the motion to sell the debtor’s assets on May 1, 1990. The court heard certain objections and resolved all issues, orally approving the sale on terms substantially the same as those proposed. The court entered its findings of facts and conclusions of law and an order approving the sale on May 11, 1990 (Main Case Documents Nos. 102 and 103). That order required the sale to be concluded no later than noon on May 15, 1990. By this date, the debtor had effectively ceased all operations.

The parties appeared in court on May 15, 1990, and announced that they were unable to consummate the sale on the terms and by the deadline set forth in the court’s order. VMI offered at that hearing to purchase the debtor’s inventory and fixed assets and to assume three leases for the reduced price of $1,050,000. VMI reduced its offer largely because the debtor’s inventory had diminished. On May 17, 1990, the court entered an order approving the sale on the terms announced at the May 15, 1990, hearing (Main Case Document No. 119).

VMI and the debtor completed the sale, and the parties filed a closing statement (Main Case Document No. 169) on June 25, 1990. The debtor received all the proceeds of the sale. Comparing the original VMI offer with the reduced offer ultimately consummated, and considering the fact that VMI reduced its offer because of the diminution in the debtor’s inventory, the court concludes that $750,000 of the sale proceeds represented the debtor’s inventory, $299,000 represented the debtor’s fixed assets, and the remaining $1,000 represented the lease assignments and purchase rights.

The defendants have suggested at various times throughout this proceeding that, through their actions, the petitioning creditors or the official committee of unsecured creditors interfered with the consummation of the original VMI sale and/or delayed the consummation of the second VMI offer. They have further suggested that these actions caused a diminution of the amount ultimately realized by the debtor from its sale of assets to VMI. These assertions are wholly without merit. The actions of the petitioning creditors and the official committee of unsecured creditors in advancing their interests were not wrongful in any respect. Moreover, nothing these creditors did delayed the sale to any material degree. The fact is that the sale occurred as quickly as the bankruptcy process would permit.

The court conducted a contested hearing on June 26, 1990, of the debtor’s motion to pay compensation to Morrow. The court subsequently entered an order authorizing the debtor to pay Morrow compensation in the reduced amount of $5,000 per month, or $60,000 per year, only from April 10, 1990, to May 18, 1990. (Main Case Document No. 192) The court further directed Morrow to return to the debtor any compensation that the debtor paid him prior to the entry of the order in excess of the allowed amount.

Morrow was entitled to compensation under that order in the amount of $6,333.33. 100 The debtor’s financial reports, filed under penalty of perjury, reflect that Morrow received $20,769.24 in compensation between the dates of April 10, 1990, and June 30, 1990. 101 The debt- or’s July financial report, reflecting the debtor’s business from July 1, 1990, through July 31, 1990, shows a repayment by Morrow pursuant to court order in the *83 amount of $12,014.62. The court concludes, therefore, that Morrow received and continues to hold $2,421.29 in compensation more than the amount to which he was entitled. 102

Liberty filed a motion for payment of its secured claim (Main Case Document No. 217) on August 15, 1990. The unsecured creditors committee and several unsecured creditors vehemently opposed the motion. The court denied the motion for payment after a hearing.

The court approved the debtor’s disclosure statement on November 1, 1990. The court conducted a confirmation hearing on January 29, 1991, and entered a confirmation order on February 12, 1991, exactly one year after the petitioning creditors filed the involuntary petition.

Under the terms of the confirmed plan, the debtor was to pay Liberty’s secured claim. The plan further provided that unsecured creditors would be paid any funds remaining up to the full amount of their claims. The debtor ultimately paid Liberty on its secured claim in the amount of $1,049,008.33 on August 2, 1991. This payment was comprised of $900,000 in principal and $149,008.33 in interest. 103 There were no remaining funds, and, therefore, the debtor made no distribution to priority or unsecured creditors. There are pending in this case allowed priority claims in the approximate amount of $273,973.39 and allowed general unsecured claims in the approximate amount of $2,889,908.52. 104

The court authorized the unsecured creditors committee to pursue any and all of the debtor’s claims for the benefit of the priority and unsecured creditors. Liberty was to retain all collateral pledged by the individual guarantors pending the court’s determination of the adversary proceeding, if filed. The committee then filed this adversary proceeding by the deadline fixed by the court to do so.

V. CONSIDERATION OF INDIVIDUAL CLAIMS AND MORE SPECIFIC FACTS.

A. INTRODUCTION.

The complaint in this adversary proceeding contained claims stated in 16 sepa *84 rate counts. In addition, the committee objected to the claim of Liberty, and the court consolidated that contested matter with this adversary proceeding. Later, the parties filed several stipulations of fact and law (Document Nos. 31, 43, 87A, 104) that restated, recharacterized, modified, and expanded the claims somewhat. The court dismissed both Liberty’s and the individual defendants’ counterclaims for the reasons stated orally and recorded in open court at the final pretrial conference (Document No. 59). As made clear in the final order on pretrial conference, the claims and defenses that the court tried are those described in the pretrial stipulation (Document No. 43, 87A and 104). 105

Before discussing each of the claims, however, the court will initially address threshold or preliminary legal issues that affect the consideration of several claims. These issues involve the legal effect of the confirmation order in Toy King I as it relates to the claims made in this proceeding and the defendants’ assertion that the Liberty loan should be recharacterized as a loan made to the debtor rather than to TKA.

B. THRESHOLD LEGAL ISSUES.

1. What is the effect of the commitment letter as included in the order of confirmation in Toy King I?

Initially, the parties dispute the effect of the confirmation order in Toy King I as it relates to the obligations of Liberty and the borrowers and guarantors under the commitment letter. Liberty says that the commitment letter was nothing but a private contract under which it agreed to lend money. Once it lent the money, the terms of the loan documents themselves establish all rights and obligations of the parties, and the commitment letter itself loses any independent significance.

The plaintiff, on the other hand, says that the commitment letter became a specific order of the court that Liberty and the others were bound to follow. In that sense, Liberty was bound to perform and to require performance by the debtor and the other defendants under the terms of the commitment letter. To the extent the loan actually made differed from the terms of the commitment letter, the plaintiff contends the differing aspects were not authorized and can be avoided. To the extent the parties did not comply with the terms of the commitment letter and creditors were damaged thereby, the plaintiff contends the breaches are actionable.

The confirmation order in Toy King I confirmed the plan and authorized the debtor to execute and deliver to Liberty all necessary documents in connection with the debtor’s guaranty in accordance with the terms of the commitment letter attached to the order and incorporated in it by reference. Thus, the terms of the commitment letter became an integral part of the plan as confirmed, indistinguishable in any respect from any of the plan’s other terms. The loan terms described in the commitment letter were the only terms that were permitted or authorized by the court. Terms or provisions that were materially different from the loan described in the commitment letter would and will constitute a breach of the plan as confirmed by the court to the extent any such breach can be attributed to a person or entity bound by the confirmed plan.

The parties had ten days to take an appeal from the confirmation order pursuant to Part VII of the Federal Rules of Bankruptcy Procedure or to seek to alter or amend the confirmation order pursuant to F.R.B.P. 9023 and F.R.Civ.P. 59. No party took any such action. Accordingly, the confirmation order became final.

Section 1141(a) of the Bankruptcy Code provides that “the provisions of a confirmed plan bind the debtor, ... any entity acquiring property under the plan, and any creditor, [and] equity security holder.... ” *85 Obviously, therefore, all defendants were bound by the terms of the commitment letter as an order of the court and as part of the confirmed plan. TKA and King were equity security holders of the debtor. TKA, Morrow, Angle, Woodward, Hunsaker II, Hunsaker III, and Ranney all acquired property under the plan. M & D was a creditor of the debtor.

Liberty was to acquire property under the plan. It was to receive a security interest in the debtor’s inventory. It was also to receive the debtor’s guaranty of TKA’s obligation to repay the loan. It is true that Liberty was not to receive these interests in the debtor’s property until the loan closed. The loan as described in the commitment letter, however, was an integral part of the debtor’s confirmed plan, specifically approved and authorized by the court and without which the plan would not have been feasible and therefore not confirmed. Thus, it is clear that Liberty was an “entity acquiring property under the plan.”

Liberty was also bound to the terms of the confirmation order, as an order of the court and as an integral portion of the debtor’s confirmed plan, because Liberty voluntarily appeared and agreed to be so bound. Indeed, it was Liberty that requested that the commitment letter be made part of the confirmation order.

Section 1142 of the Bankruptcy Code provides that:

(a) Notwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition, the debtor and any entity organized or to be organized for the purpose of carrying out the plan shall carry out the plan and shall comply with any orders of the court.

(b) The court may direct the debtor and any other necessary party to execute and deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan.

In this case, Liberty came to the bankruptcy court and proposed making the loan described in the commitment letter as the means of permitting the confirmation of the debtor’s plan. Liberty is clearly an “other necessary party” within the meaning of Section 1142(b). Liberty was bound under the terms of the confirmed plan to make the loan described in the commitment letter — not a loan the terms of which varied in material respect from the loan described in the commitment letter.

In Paul v. Monts, 906 F.2d 1468, 1472 (10th Cir.1990), the court dealt with the effect of a confirmed plan on a third party who proposed to take specified action under the plan but who did not perform. The plan as confirmed contained alternative means to consummate the plan, one of which anticipated that the third party would provide new capital to the reorganized debtor. The third party was not a signatory on any documents and had not specifically consented to be bound. The court held that, under these circumstances, the Bankruptcy Code did not bind the nonperforming third party but that such a party could agree to be bound. Id. The court stated that “[a] fair reading of section 1141(a) provides that [the noncreditor] was not bound by the plan under section 1141(a) and would not be bound until it acquired property thereunder or unless it agreed to be bound.” Id. (Emphasis added). The court further suggested that, where the party to be charged enters into a preconfirmation written agreement with the debtor that is incorporated into the confirmed plan, the noncreditor party is bound (citing Kal-O-Mine Industries, Inc. v. Camp (In re Lumpkin Sand & Gravel, Inc.), 104 B.R. 529, 536 (Bankr.M.D.Ga.1989), aff' d, 111 B.R. 370 (M.D.Ga.1990)). Id. Finally, the court suggested that, although the noncreditor was not bound by the confirmed plan under the *86 Bankruptcy Code, ordinary contract principles nevertheless applied. Id.

In this case, Liberty was not merely an alternative party to the plan. Instead, it represented the only means by which the plan was to be consummated. To this end, Liberty was a signatory to the commitment letter that was incorporated into the order of confirmation. Indeed, the court incorporated the commitment letter into the confirmation order at the request of Liberty. Liberty made that request specifically to bind the debtor to the conditions and terms outlined in the commitment letter. But for Liberty’s action in requesting approval of the making of the loan described in the commitment letter, the court would not have been able to confirm the plan. These circumstances can be construed in only one way — that Liberty consented to be bound by the terms of the confirmed plan just as the other parties described in Section 1141(a) would be bound.

Having so consented, Liberty was also contractually bound. See In re Page, 118 B.R. 456, 460 (Bankr.N.D.Tex.1990) [“In essence, the plan becomes a binding contract between the debtor and the creditors and controls their rights and obligations.”]; United States v. Shepherd Oil, Inc. (In re Shepherd Oil, Inc.), 118 B.R. 741, 751 (Bankr.D.Ariz.1990) [“Certainly a plan of reorganization is a binding contract.”].

For these reasons, therefore, each and every defendant was bound by the terms of the commitment letter.

2. Is the debtor the obligor or a guarantor on the Liberty loan?

The way in which the court construes the Liberty transaction — whether with the debtor as guarantor or the debtor as principal obligor — is important because of its significant ramifications affecting other issues in this proceeding. These ramifications include:

• Whether TKA or Liberty is the initial transferee of recoverable preferences;

• Whether transfers made by the debtor were to insiders or non-insiders;

• Wdiether the transferee recovered more in payment of its loan than it would in a hypothetical Chapter 7 liquidation of the debtor;

• Whether the payments were made by the debtor in the ordinary course of the debtor’s and TKA’s business or the debt- or’s and Liberty’s business;

• Whether the debtor or its principals made the payments with the intent to hinder, delay, and defraud creditors;

• Whether the debtor received equivalent value for its payments;

• Which defendants are the immediate or mediate transferees and thus eligible to use the good faith defense to preference and fraudulent transfer claims;

• The scope of the principals’ fiduciary duties;

• Whether the debtor has available the defenses of a surety; and

• Whether the debtor has rights of contribution or subrogation against the other guarantors/defendants and Liberty.

The plaintiff takes the position that the written loan documents evidence the true and accurate position of the parties with respect to their rights and obligations under the Liberty loan. Under both the commitment letter and the loan documents, of course, Liberty made the loan to TKA as obligor. The debtor guarantied this obligation.

The plaintiff also asserts that TKA made or intended to make some or all of the proceeds of the Liberty loan available to the debtor as a capital contribution, consistent with the terms of the commitment letter. It points to the inclusion of preferred stock in the Touche Ross pro forma and the debtor’s listing of $1 million of these proceeds as shareholder’s equity on all of its balance sheets generated between May 28, 1989, through October 29, 1989.

*87 The defendants argue, however, that the court should construe the transaction differently. The defendants say the court should determine that the debtor was, in actual fact, the principal on the Liberty loan rather than the guarantor. This construction, the defendants assert, is consistent with the actual substance of the transaction as contemplated and transacted between the parties.

The defendants point out that all parties understood from the outset that the Liberty loan was for the ultimate benefit of the debtor. In addition, the parties understood that the ultimate payment of the loan would be effected through the sale of the debtor’s inventory in the ordinary course of its business.

The defendants assert that this understanding was consistent with the financial realities of the debtor and TKA. The debt- or was the operating entity and generated revenues through the sale of its inventory. TKA, in contrast, was nothing but a shell company, with its only asset being its stock in the debtor and receivables owed to it by the debtor. Accordingly, TKA, on its own, was financially incapable of servicing the loan without the debtor’s revenues. The defendants argue, therefore, that Toy King was intended to be the — “true”—obligor on the loan.

The defendants claim that Liberty wanted to denominate TKA as the borrower to avoid the appearance of making a loan to a company in bankruptcy. The defendants say denominating TKA as borrower was nothing more than a technical formality or a semantic exercise for appearances only.

The gist of the defendant’s argument seems to be as follows: the debtor was the one who needed the money, the debtor received the money, and the debtor was the one who repaid the money. Because the debtor was the only one with the resources to repay the loan, the transaction was never and could never have been more than a simple loan to the debtor, notwithstanding any writings to the contrary.

The most notable aspect of the transaction consistent with the defendants’ argument is the execution of notes and the monthly payment of interest by the debtor. The defendants argue that these loan characteristics of the Liberty loan are more reasonable than the capital contribution aspects. The defendants point to the clear benefit inuring to the debtor and the inability of the parent to service the underlying loan absent these periodic payments.

The difficulty with this argument is that the notes that the debtor executed were not notes to Liberty but were instead notes to TKA. The interest that the debtor paid was not interest paid to Liberty but was instead interest paid to TKA. These notes were entirely and legally independent of the Liberty loan promissory note. The debtor did not give any notes or pay any interest directly to Liberty.

Moreover, the record overwhelmingly supports the fact that TKA intended to use at least some of the Liberty loan to make a capital contribution rather than a loan to the debtor. The commitment letter, prepared by sophisticated and competent counsel, clearly states that the proceeds could be used solely for payment of Toy King I dividends and capital contributions to the debtor. Similarly, the accountant from Touche Ross testified that it was his understanding, gained from information provided by Morrow, that at least some of the Liberty loan proceeds would be applied as a capital contribution to the debt- or. This understanding is consistent with the written evidence. The pro forma referred to preferred stock — plainly a capital contribution — and the debtor’s own balance sheets for many months posted some of the monies received from the proceeds of the Liberty loan as preferred stock. 106

*88 In addition, the record contains no evidence that the debtor was unable to obtain financing on its own behalf, 107 other than the self-serving testimony of the individual defendants. To the contrary, the evidence supports the fact that Liberty was willing to denominate Toy King as borrower but did not do so at the request of the debtor’s principals. Although Liberty received a tangential benefit in acceding to this request, it was the debtor who received the most benefit. As Morrow testified, designating TKA as borrower, rather than the debtor, afforded the debtor substantial tax advantages.

The most important advantage, however, was the “capital contribution” characterization of some of the borrowing. This characterization enhanced the debtor’s stated net worth. Had the Liberty loan been posted on the debtor’s balance sheets as a liability, the debtor’s net worth would have been reduced by that amount.

Finally, as will be discussed at greater length in Section V.D.2.a.iii. and V.D.3. below, this characterization was a material factor in the toy manufacturers’ decisions to extend credit to the debtor after confirmation. Thus, the debtor was a direct recipient of the benefits of structuring the transaction with the debtor as guarantor and TKA as obligor.

Recognizing the debtor as guarantor rather than obligor is more than mere “form” or an exercise in semantics. The defendants’ argument invites circuity — if the parent company was “nominal” to the loan to the point that it should be excised from the transaction, why was it needed in the first place? If it was necessary to structure the transaction in that way, then TKA could not have been a nominal party.

A finding that the debtor is obligor on the Liberty loan would materially affect the disposition of this proceeding and the potential liability of each party, as noted earlier. It would be inequitable to permit the parties to reap the benefits of the transaction as they structured it, with TKA as obligor and the debtor as guarantor, and then avoid the consequences by having the court ignore their chosen structure and recharacterize the transaction well after the fact. Recharacterizing the transaction as the defendants urge would turn equity on its head, contrary to principles of reorganization. “It is the duty of the court, especially a court of equity, to adjust the rights of the parties so far as possible so that the ultimate loss shall accord with the equitable position of the parties.” Whitlock v. Max Goodman & Sons Realty, Inc. (In re Goodman Industries, Inc.), 21 B.R. 512, 520 (Bankr.D.Mass.1982) (quoting 10 Williston on Contracts § 1264 at 842 (3d ed.1967)). “That is especially true when the party now complaining that the court should consider the realities and not the form were instrumental in creating the very form of which they now complain.” Id.

It is true, as the defendants argue, that there is some evidence in the record supporting the proposition that all parties to this proceeding intended that the debtor was the “real” or “true” borrower. It is also true, however, that there is equally compelling evidence that supports the position that the parties intended TKA to be the borrower while the debtor served as guarantor. In the face of this conflicting evidence, the court is persuaded that the terms of the commitment letter and loan documents themselves establish the roles each of the parties were and are to play in accordance with the intent and desires of the parties.

More importantly, this was the role mandated by the terms of the confirmed plan as evidenced by the Toy King I confirmation order. Were those roles to be *89 reversed by the parties, the parties would be in material breach and in violation of the confirmed plan. That breach would be no less material or severe if ordered by the court in this proceeding at the urging of the defendants.

Accordingly, the court finds that TKA is the obligor for the Liberty loan and the debtor is an unlimited guarantor.

C. PREFERENCE CLAIMS.

1. Introduction.

The unsecured creditors committee seeks to set aside as preferences, pursuant to the provisions of Sections 547 and 550 of the Bankruptcy Code, payments that the debtor made to TKA. The payments that the committee attacks are payments of interest and principal on the Liberty loan, the C & S line of credit, and the Nintendo loan. Also included are guaranty fees paid by the debtor to TKA in connection with the C & S line of credit.

The debtor made these payments in two discreet time periods. First, the debtor made these kinds of payments in the 90-day period before the filing of the petition commencing the Toy King II case on February 12, 1990. Second, the debtor made these kinds of payments earlier, during the period commencing with the confirmation of the Toy King I case on May 23, 1989, and continuing through the date 91 days before the commencement of the Toy King II case.

In addition, the plaintiff attacks as preferences certain payments the debtor made to M & D. The plaintiff also seeks to set aside as preferences certain UCC-1 filings by Liberty purporting to perfect security interests and a security agreement allegedly made by the debtor in favor of Liberty after the loan purporting to be secured by the security agreement had closed.

Section 547(b) of the Bankruptcy Code permits the avoidance of:

... 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.

“The bedrock philosophy of the Bankruptcy Code is an equality of a division of assets for all creditors of the debt- or.” Jones v. J.E.G. Enterprises, Inc. (In re Greenbrook Carpet Co.), 22 B.R. 86, 89 (Bankr.N.D.Ga.1982). The plaintiff carries the burden of establishing by a preponderance of the evidence each of the elements constituting a preferential transfer. Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588, 595 n. 15 (11th Cir.1990); Ruff v. Vurchio (In re Vurchio), 107 B.R. 363, 365 (Bankr.M.D.Fla.1989).

2. Payments by the debtor to TKA made during the 90 days immediately before the filing of Toy King II.

a. Introduction.

During the 90-day reach back period, the debtor paid TKA $2,906.26 in interest *90 on the C & S line of credit, $40,492.62 in interest on the Liberty loan, and $12,157 in interest on the Nintendo loan. During the same period, the debtor also paid TKA $250,000 in principal on the C & S line of credit, $600,000 in principal on the Liberty loan, and $700,000 in principal on the Nintendo loan. The debtor also paid TKA a $5,000 guaranty fee in connection with the C & S line of credit during this period.

b. Do the payments to TKA constitute transfers?

A “transfer” is broadly defined in Section 101(54) of the Bankruptcy Code. Under this definition, a transfer encompasses every means of disposing of or parting with property or an interest in property of the debtor. “The concept of property of the estate under Bankruptcy Code section 541(a) is expansive.” United Agri Products v. Jonovich (In re Food & Fibre Protection, Ltd.), 168 B.R. 408, 417 (Bankr.D.Ariz.1994) (citing Begier v. Internal Revenue Service, 496 U.S. 53, 58-59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990)). In this case, the debtor wrote and delivered checks to TKA in payment of all its obligations. These checks were drawn on its regular operating account. The debtor’s operating account contained funds that were obtained through the sale of its inventory sold in the ordinary course. There can be no dispute, therefore, that the debtor’s payments to TKA were transfers within the meaning of Section 547(b).

c. Was each transfer to or for the benefit of a creditor?

Section 101(10) of the Bankruptcy Code defines “creditor” as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” Section 101(5) defines “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”

TKA made monies available to the debt- or both directly and indirectly. TKA directly loaned to the debtor $500,000 of the Liberty loan, the C & S line of credit, and the Nintendo loan. The debtor executed notes that formalized its obligations to TKA for most, but not all, of these monies.

TKA also indirectly loaned to the debtor $1 million of the Liberty loan. Although Liberty funded the $1 million letter of credit by making payments to the debtor’s creditors as required by the confirmed plan, TKA was the obligor on the Liberty loan. TKA and the debtor did not execute a note to memorialize the debtor’s obligation to TKA for this $1 million portion of the Liberty loan. The, debtor, however, made monthly payments of interest to TKA on account of the $1 million letter of credit.

TKA and the debtor operated on the premise that all of the monies TKA made available to the debtor from the Liberty loan, the C & S line of credit, and the Nintendo loan created debts of the debtor in TKA’s favor. Although the plaintiff now attacks the payments of those debts, the defendants do not dispute that TKA was a creditor of the debtor at all times between the confirmation of Toy King I and the filing of Toy King II.

It is clear, therefore, that the debtor made transfers directly to TKA; TKA was the recipient of the funds paid; the transfers reduced the debtor’s unsecured obligations to TKA; and TKA received the direct benefit of these payments. Accordingly, TKA is a creditor of the debtor with respect to all transfers at issue here as required by Section 547(b)(1).

d.Were the transfers for or on account of an antecedent debt?

Section 101(12) of the Bankruptcy Code defines a “debt” as a “liability on a claim.” Section 101(5) defines a “claim” as a “right to payment....” “Although ‘antecedent debt’ is not defined by the Code, essentially a debt is ‘antecedent’ if it is *91 incurred before the transfer.” Tidwell v. AmSouth Bank, N.A. (In re Cavalier Homes of Georgia, Inc.), 102 B.R. 878, 885 (Bankr.M.D.Ga.1989) (citing 4 Collier on Bankruptcy ¶ 547.05 (15th ed.1989)).

The debtor incurred the obligation to repay the principal debts at issue in this claim of preference at the time that it received the monies from TKA. This was true even when the debtor did not execute a note to evidence its obligation to TKA, as was the case with the $1 million letter of credit and a small portion of the $500,000 line of credit monies. Similarly, the debt- or incurred the obligation to pay the C & S guaranty fees at the time it received the proceeds from that line of credit. In every case, the obligation to repay principal or to pay guaranty fees was incurred before November 14, 1989 — the date 90 days before the filing of the Toy King II case. Accordingly, the payments of principal and guaranty fees on these obligations were payments “for or on account of’ antecedent debts.

The debtor also incurred the obligation to pay interest at the time it executed each note or otherwise incurred each obligation, notwithstanding the fact that the precise amount of the interest may then have been contingent until the due date of each interest payment. CHG International, Inc. v. Barclays Bank (In re CHG International, Inc.), 897 F.2d 1479, 1486 (9th Cir.1990). The payment of interest was on account of, tied, and related to each of the underlying obligations that were plainly antecedent debts. This conclusion is consistent with Florida state law. See Parker v. Brinson Construction Co., 78 So.2d 873, 874 (Fla.1955) [interest is “generally considered to be a part of the principal debt itself’ because it is compensation paid by a borrower to a lender for the use of money]. 108 Accordingly, all interest payments made during the 90 days before the filing of this bankruptcy case were payments made “for or on account of’ antecedent debts within the meaning of Section 547(b)(2).

e. Was the debtor insolvent at the time of the transfers?

i. Presumption of insolvency.

Under Section 547(f) of the Bankruptcy Code, the court presumes the debtor to be insolvent during the 90 days prior to the date of the filing of the bankruptcy petition. This presumption is not conclusive and may be rebutted by the defendants. Pembroke Development Corp. v. Window (In re Pembroke Development Corp.), 122 B.R. 610, 611-12 (Bankr.S.D.Fla.1991). The plaintiff retains the burden of persuasion on the issue of insolvency, however, and must demonstrate the debtor’s insolvency by a preponderance of the evidence if the creditor defendant successfully rebuts the presumption. Id.

In this case, the defendants presented evidentiary support of the debtor’s solvency in the form of the debtor’s financial balance sheets from the period of November 1989, through February 1990. These balance sheets reflected assets that exceeded liabilities for every month during that time. In addition, the defendants presented expert testimony in the person of Morrow, who is a certified public accountant in addition to being an officer and director of the debtor and a defendant personally. Morrow testified that, in his opinion, the debtor was solvent during the period between the confirmation of Toy King I and the filing of Toy King II irrespective of whether the debtor’s inventory was valued at cost or at market value. This evidence and testimony, while ultimately not credited by the court, is sufficient to rebut the presumption of insolven *92 cy and require the plaintiff to put on its proof.

ii. Liquidation valuation test.

Section 101(32)(A) of the Bankruptcy Code defines “insolvent” when referring to a corporation such as the debtor as “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation .In most circumstances, fair valuation is “an estimate of proceeds realizable within a reasonable time frame through either collection or sale at regular market value.” Pembroke Development, 122 B.R. at 611 (citing Hill v. Southeast Bank, N.A. (In re Continental Country Club, Inc.), 108 B.R. 327, 331 (Bankr.M.D.Fla.1989)).

In circumstances where the debtor is on its “financial deathbed” and has no hope of continuing to operate as a going concern, liquidation value may represent a fair valuation of the financial condition of the debtor. Schwinn Plan Committee v. AFS Cycle & Co. (In re Schwinn Bicycle Co.), 192 B.R. 477, 487 (Bankr.N.D.Ill.1996); Miller & Rhoads, Inc. Secured Creditors’ Trust v. Robert Abbey, Inc. (In re Miller & Rhoads, Inc.), 146 B.R. 950, 956-57 (Bankr.E.D.Va.1992). This standard is especially applicable in circumstances such as those presented here where the debtor is liquidated shortly after the filing of the petition because otherwise the company’s true financial condition is “fictionalized.” Miller & Rhoads, 146 B.R. at 956.

In Miller & Rhoads, the debtor, M & R, was acquired in the late 1980’s in a leveraged buyout. The debtor incurred substantial debt in connection with the acquisition. After the buyout, the parent company made unsuccessful changes in the direction and focus of the debtor. As a consequence of these changes, the debt- or was at a competitive disadvantage and performed below industry averages. Price Waterhouse issued a going concern qualification with its audit of the 1988 fiscal year end financial statements. The retail economy declined and the debtor posted operating losses for almost every month after the leveraged buyout. Ultimately, the debtor was unable to pay its debts as they matured and filed for protection under Chapter 11. A Chapter 11 liquidating plan was confirmed less than a year after the case was filed. The debtor was unable to pay all claims in full upon liquidation.

In determining insolvency, the court found that the debtor “was not financially viable ... and was not salvageable.” Id. at 954. It further found that “M & R’s chances of reorganizing were nonexistent unless it received a substantial infusion of new equity capital....” Id. In conclusion, the court stated that the “evidence of M & R’s extremely precarious financial position when it filed bankruptcy ... is overwhelming and in large part uncontroverted.” Id.

In the Toy King case, the facts are much the same. Despite repeated borrowings, the debtor could not continue as a going concern without additional equity infusions because it was unable to generate sufficient sales to allow it to pay its operating costs in addition to its debt. This was apparent to all defendants at least as early as the November 17, 1989, meeting between Morrow, Angle, and Horne. From that point in time or soon afterwards, the focus of the debtor was on liquidation.

VMI was the only suitor that exhibited serious interest in “merging” with the debtor after it was offered in the Wall Street Journal. VMI was known in the industry as an “undertaker” with no interest in operating its acquisitions. VMI was interested only in acquiring the debtor’s inventory and leasehold interests at a substantially discounted price. VMI ultimately purchased the assets of Toy King after the filing of Toy King II for a price of $1,050,000, an amount that was not sufficient to pay the debtor’s unsecured creditors. Indeed, the debtor was unable to make any payment to unsecured creditors.

*93 This case is unlike Brown v. Shell Canada, Ltd. (In re Tennessee Chemical Co.), 148 B.R. 468, 474 (Bankr.E.D.Tenn.1992). In that case, the court used “going concern” valuation even though the debtor had not made a profit in the last three years because, notwithstanding its protracted losses, it was sold as a going concern. Id. The court stated that the usual assumption is that “going concern value is greater than forced sale, liquidation or salvage value. Going concern value means that value is added to the property because it can be operated as a business.” Id. at 475.

In contrast, Toy King was not sold as a “going concern.” VMI had no interest in operating Toy King stores but instead wanted to use the leaseholds to sell the debtor’s inventory together with its own at “rock bottom” prices.

Using a liquidation valuation approach, the court finds that the debtor was insolvent during the entire 90 day preference period, dating from November 14, 1989, through the filing of the involuntary petition on February 12, 1990. The debtor was in a liquidation posture for much of that time and was put in that posture through the direct actions of its principals who were actively seeking to sell the debt- or.

iii. Going concern valuation test.

Even if the court were to use a “going concern” valuation as its measure for insolvency, the court would still find the debtor to be insolvent during this period. In determining going concern value, the court must “take into account all considerations that the parties might fairly bring forward and give substantial weight in their bargaining.” National Rural Utilities Cooperative Finance Corp. v. Wabash Valley Power Association, Inc. (In re Wabash Valley Power Association, Inc.), 111 B.R. 752, 768 (S.D.Ind.1990). The court should consider both a willing buyer and a willing seller, evaluating the “assumptions and methods used by both sides.” Id. at 769.

The balance sheet test is the simplest methodology to determine insolvency using a going concern valuation approach. This test compares “the fair value of the Debtor’s assets at the time of the transaction with the Debtor’s liabilities of the same date.” Food & Fibre Protection, 168 B.R. at 417 (citing McWilliams v. Gordon (In re Camp Rockhill, Inc.), 12 B.R. 829, 833-34 (Bankr.E.D.Pa.1981)).

In this case, the court has found that the balance sheets of the debtor were not credible evidence of the debtor’s true financial condition. The court determined that the assets were overstated, the liabilities were understated, and some liabilities of the debtor were mischaracterized as shareholder’s equity. In addition, the balance sheets reflected the forgiveness of debt as shareholder’s equity in contravention of what is now generally accepted accounting practice. The debtor’s liabilities did not include all of the borrowings of the debtor. The liabilities also did not include lease rejection damages incurred as a consequence of closing stores after confirmation, nor did they include the actual costs of opening the six stores after confirmation. The persistent and unequivocal losses of the debtor were similarly understated.

Although the record does not contain sufficient evidence to correct the balance sheets with precision, the record does permit the court to make gross adjustments as are required by the expert testimony the court has credited, as the court has done in notes 46, 82, 83, 84, and 98. See GHK Associates v. Mayer Group, Inc., 224 Cal.App.3d 856, 274 Cal.Rptr. 168, 178 (1990) [court has power to infer specific values for assets and/or damages, but inferences must be drawn from substantial evidence actually presented by the parties]. 109 Based on the adjusted balance *94 sheets, the court concludes that the debtor was insolvent from at least October 29, 1989, and at all times thereafter.

This conclusion is also supported by all the facts and circumstances of the debtor as established by the evidence. See DuVoisin v. Anderson (In re Southern Industrial Banking Corp.), 71 B.R. 351, 369 (Bankr.E.D.Tenn.1987). By late October 1989, the debtor was in a downward spiral. By this time, most of the inventory needed for Christmas had been received. That inventory was insufficient in amount, contained many stale or unpopular products, and was obtained at a cost that almost guarantied inadequate sales margins. Despite its repeated borrowings from TKA, the debtor did not have sufficient capital to purchase quality inventory at a competitive cost.

Consequently, Toy King’s sales during November and December were substantially below projections and insufficient to compensate for the persistent and systemic losses of the debtor that occurred after the confirmation of Toy King I. As the deferred deadline for payment on its inventory approached, the debtor was completely and unquestionably incapable of meeting its obligations as they came due. “The point of peril is reached when the firm’s ability to continue as a going concern — a concern that can cover its costs— is in doubt because its expected costs are greater than its expected revenues.” In re Taxman Clothing Co., 905 F.2d 166, 169 (7th Cir.1990). “In legal and accounting terms, this means when its liabilities exceed its assets.” Id.

The debtor’s schedules also support the court’s finding that the debtor was insolvent throughout the 90-day period before filing. Those schedules, executed under penalty of perjury by Morrow, reflect that liabilities of the debtor in the amount of $3,669,570 exceeded assets of $3,588,406. These schedules purport to represent the debtor’s financial condition at the time of the filing of the bankruptcy petition and reflect the debtor’s financial status following the months that traditionally are the most profitable in the industry.

The assets as stated in the schedules are in the exact amount of the assets as reflected in the debtor’s January 28, 1990, balance sheet. The liabilities, however, are greater, corroborating McCarthy’s opinion that the debtor understated its liabilities.

Moreover, the schedules overstate the actual value of the assets because the inventory value on the schedules is at “cost” at an amount that is twice the value of the inventory that the court has found as a matter of fact. These schedules, adjusted for the actual value of the inventory, paint a much more accurate picture of the debt- or’s true financial condition.

For all the reasons stated above, the court concludes that the debtor was insolvent during the 90-day period before the filing as required by Section 547(b)(3).

f. Did the transfers occur on or within 90 days of the filing of the petition?

In this case, the creditors filed the involuntary petition on February 12, 1990, *95 and the court entered its order for relief on April 10, 1990. When the petition date and the order for relief date are different, “[t]he preference period is measured from the date the involuntary petition is filed, not the date the order for relief is entered.” Cavalier Homes of Georgia, 102 B.R. at 883 n. 6. Counting back 90 days from the filing date of February 12, 1990, one can calculate that the 90-day preference period begins on November 14, 1989. Thus, all payments made on or after November 14, 1989, by the debtor to TKA on account of the loans in question satisfy the Section 547(b)(4)(A) element.

g. Did TKA receive more than it would have received in a Chapter 7 liquidation?

i. Secured claims or unsecured claims?

To satisfy the requirements of Section 547(b)(5), the plaintiff must establish that the recipient of the transfers at issue received more through the transfer than it would have received in a Chapter 7 liquidation. “As a general rule, the question is whether other creditors holding unsecured claims are prejudiced.” Grove Peacock Plaza, Ltd. v. Resolution Trust Corp. (In re Grove Peacock Plaza, Ltd.), 142 B.R. 506, 517 (Bankr.S.D.Fla.1992). “Unless the assets are sufficient to provide a 100 percent distribution to creditors in a liquidation, any creditor holding an unsecured claim who receives a payment during the preference period is in a position to receive more than it would have received in a Chapter 7 liquidation.” Hill v. Southeast Bank, N.A. (In re Continental Country Club, Inc.), 108 B.R. 327, 332 (Bankr.M.D.Fla.1989). A transferee who holds a secured claim, on the other hand, does not receive more through a prepetition transfer than it would in a Chapter 7 liquidation because such a creditor holds collateral for its claim. Levit v. Ingersoll Rand Financial Corp. (In re V.N. Deprizio Construction Co.), 874 F.2d 1186, 1200 (7th Cir.1989); Miller v. Rausch-Alan (In re Gam est, Inc.), 129 B.R. 179, 182 (Bankr.D.Minn.1991).

The defendants argue that the payments to TKA in question were payments on secured claims. If so, the payments would not meet the requirements of Section 547(b)(5). It is true that TKA’s obligations to Liberty were secured by collateral, some of which included the debtor’s assets. The Liberty notes executed by TKA contained specific dates for repayment of principal and charged interest at a rate of prime plus two percent. In contrast, the TKA notes executed by the debtor were unsecured demand notes that charged interest at a rate of prime plus three percent. Although the parties stipulated that each of the debtor’s obligations to TKA tracked an underlying obligation of TKA, there was no legal requirement that TKA cancel the debtor’s note upon the satisfaction of the underlying note. Indeed, TKA did not do so upon the repayment of the C & S line of credit following the confirmation of Toy King I.

In this case, therefore, each of the debt- or’s payments to TKA that the plaintiff attacks was a payment on an unsecured obligation. Although TKA used the monies it received from the debtor to make payments on its secured obligations to Liberty and C & S, those obligations were factually and legally separate.

On its facts, this case is analogous to Ray v. City Bank and Trust Co. (In re CL Cartage Co.), 899 F.2d 1490, 1493 (6th Cir.1990). In that case, the bank made a personal loan to the debtor’s president. The president’s mother, who also secured the loan by pledging a certificate of deposit, co-signed the loan. The president loaned the monies obtained from the bank to the debtor. This loan was unsecured. The debtor made payments on its loan to the president’s mother or directly to the bank. The court found the payments to be preferential, notwithstanding the bank’s secured position, because the transfers at issue were repayments on the unsecured *96 debt between the debtor and the president. Id.

Similarly, the debtor’s obligations to TKA were wholly unsecured, and it is the payment of those obligations that the plaintiff attacks. Thus, the fact that TKA’s obligations to Liberty were secured is irrelevant in determining what position TKA would hold in a hypothetical Chapter 7 case of the debtor. In a Chapter 7 case, TKA’s claims against the debtor would be unsecured claims independent of Liberty’s claims. It is from TKA’s position as an unsecured creditor, therefore, that the court must determine whether TKA received more by the payments in question than it would have received in a Chapter 7 case had the payments not been made,

ii. Liquidation scenario.

A plaintiff may rely on the debt- or’s schedules and filed claims to show that a 100 percent distribution would not be possible. Continental Country Club, 108 B.R. at 332 (citing Flatau v. Tribble’s Shoes, Inc. (In re Lawrence), 82 B.R. 157, 160-61 (Bankr.M.D.Ga.1988)). The schedules and claims in this case substantiate the conclusion that the assets of the debt- or, even if liquidated at the scheduled values, would not permit a full distribution to be paid to unsecured creditors who either filed claims or were listed by the debtor in its schedules.

Alternatively, a plaintiff may demonstrate that a 100 percent distribution is unlikely under the circumstances of the case. In Braniff, Inc. v. Sundstrand Data Control, Inc. (In re Braniff, Inc.), 154 B.R. 773, 777 (Bankr.M.D.Fla.1993), for example, the court concluded that Section 547(b)(5) was satisfied where the record showed that there was “no scenario under which unsecured creditors ... [would] receive 100 cents on the dollar.”

The same conclusion can be made in this case. The case was initially filed as an involuntary Chapter 7 case but was then converted to a case under Chapter 11. After the court entered an order for relief, the debtor liquidated by selling its assets to VMI with the court’s approval. The purchase price of $1,050,000 was insufficient to pay any dividend whatsoever to unsecured creditors.

In all likelihood, a Chapter 7 trustee would not have been able to liquidate the debtor as quickly or on as favorable terms as the debtor was able to obtain in the Chapter 11 case. Indeed, this is precisely why the debtor and the creditors agreed to convert the case to a case under Chapter 11 after the petitioning creditors initially filed the involuntary Chapter 7 case. Accordingly, there is no scenario under which the unsecured creditors would have received 100 cents on the dollar.

In these circumstances, therefore, it is apparent that TKA received more when it received the payments in question than it would have received in a Chapter 7 liquidation had the payments not been made. In a Chapter 7 liquidation, it would receive nothing. As it was, it received the full value of the payments at the time the debtor made them. Accordingly, the transfers satisfy the requirements of Section 547(b)(5).

h. Summary for transfers to TKA during the 90-day preference period.

As the foregoing describes, the plaintiff has proven by a preponderance of the evidence that the payments by the debtor to TKA of principal and interest on the C & S line of credit, the Liberty loan, and the Nintendo loan made during the 90-day period immediately before the filing of this case satisfy each and all of the preference elements set forth in Section 547(b) of the Bankruptcy Code.

The defendants, however, have raised affirmative defenses to these preference claims as provided by Section 547(c) of the Code. The plaintiff has other preference claims as to which the defendants have raised the same affirmative defenses. From an organizational standpoint, there *97 fore, it is desirable to consider first the plaintiffs other preference claims as to which the defendants have identical affirmative defenses. After the court has considered all of these preference claims, then the court can consider the affirmative defenses that relate to all.

3. Payments by the debtor to TKA made between 90 days before the commencement of Toy King II and the date of confirmation of Toy King I.

a. Introduction.

The unsecured creditors committee also seeks to set aside as preferences payments that the debtor made to TKA at an earlier period of time: between 90 days before the commencement of the Toy King II case on February 12, 1990, and the confirmation of the Toy King I case on May 23, 1989. As with the payments made by the debtor to TKA during the 90-day period immediately before the filing of this case, the payments the committee attacks are the payments of principal and interest on the C & S line of credit, the Liberty loan, and the Nintendo loan. Also at issue are the guaranty fees paid by the debtor on the C & S line of credit.

In analyzing this claim in relation to the elements of Section 547(b) of the Bankruptcy Code, the court reaches the same results on the elements described below for the same reasons as the court reached for the plaintiffs preference claim as to the payments made during the 90-day period immediately before the filing of this case:

• Section 547(b): the payments are transfers.

• Section 547(b)(1): the payments were made to or for the benefit of TKA, a creditor.

• Section 547(b)(2): the payments were made for or on account of an antecedent debt owed by the debtor before such transfer was made.

• Section 547(b)(5): the payments enabled TKA to receive more than it would receive in a Chapter 7 liquidation if the payments had not been made.

The plaintiffs preference claim for payments made during the earlier period before the 90 days immediately before the filing of this case, however, requires separate and different consideration of the Section 547(b)(3) and (4) elements.

b. Was TKA an insider of the debt- or?

Section 547(b)(4)(B) of the Bankruptcy Code permits transfers made up to a year before the filing of the bankruptcy case to be set aside if the transfer is to an insider. If the transfer is to an insider, therefore, the transfer need not be made only within the 90-day period immediately before the fifing. In this sense, transfers to insiders are subject to a much greater reach back period.

The plaintiff here seeks to reach back to the time of the confirmation of Toy King I. Because the date of that confirmation order was May 23, 1989 — less than a year before the fifing of Toy King II — the plaintiff seeks to reach back only to the points within the one-year insider reach back period provided by Section 547(b)(4)(B) and not all the way back to the beginning of that one-year period.

The transfers that the plaintiff attacks are the following:

During the period between May 23, 1989, and November 13, 1989, the debtor paid TKA $6,900 in interest on the C & S fine of credit, $44,678.27 in interest on the Liberty loan, and $7,162.50 in interest on the Nintendo loan. The debtor also paid $15,283.22 in guaranty fees to TKA on the C & S fine of credit.

The evidence clearly establishes that the debtor made these payments to TKA. Thus, the question on which the plaintiffs ability to use the one-year reach back period turns is whether TKA is an “insider” of the debtor. The insider rela *98 tionship is to be determined on the exact date of the transfer. Dent v. Martin (In re Trans Air, Inc.), 86 B.R. 290, 292 (S.D.Fla.1988).

In the case of a corporation such as the debtor here, Section 101(31) of the Bankruptcy Code defines “insider,” among other things, as a “person in control of the debtor.” Section 101(41) of the Code then defines “person,” among other things, as a “corporation.” Thus, TKA, a corporation, can be an insider of the debtor if TKA was in control of the debtor.

In Lee’s Place v. Hawbaker, 1992 WL 164443 (C.D.Ill.), the court found that, where the defendant controlled “both policy and day-to-day operations, in addition to other aspects of the business, including seeking financing for the business, development and implementation of long-term plans, and furnishing significant input for decision-making outside the normal course of business,” the defendant was an insider of the debtor because the defendant was in control of the debtor. Id. at *5.

Similarly, the facts proven at trial plainly establish that TKA was in control of the debtor. TKA was initially incorporated for the purpose of acquiring the stock of the debtor. TKA undertook to obtain all financing, other than trade credit, that was ultimately provided to the debtor. TKA determined the dates those monies were made available to the debtor and in what amount. TKA also determined the cost to the debtor of those borrowings and on what terms.

An affiliate is also included within the definition of insider. 11 U.S.C. § 101(31)(E). Section 101(2)(A) defines “affiliate” as an “entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debt- or.... ” TKA held more than 20 percent of the outstanding shares of the debtor. Thus, TKA is also an insider because it is an affiliate of the debtor.

For all of these reasons, it is plain that TKA was an insider of the debtor within the meaning of Section 547(b)(4)(B). The plaintiff has therefore established the Section 547(b)(4)(B) element of its preference claim as to the payments to TKA made outside the non-insider 90-day preference period and going back to the time of the confirmation of Toy King I.

c. Was the debtor insolvent at the time of the transfers? i. Introduction.

The plaintiff is required to demonstrate that the debtor was insolvent between the time of the confirmation of the first case, May 23,1989, and the beginning of the 90-day preference period, November 14, 1989, to satisfy this Section 547(b)(3) element. As previously stated, the plaintiff seeks to reach back only to May 23, 1989, and not all the way to the beginning of the one-year insider reach-back period.

In Section V.C.2.e. above, the court found that the debtor was insolvent during the 90-day period immediately before the filing of the second bankruptcy case using either a liquidation approach or a going concern approach. In determining whether the debtor was insolvent during the period beginning on May 23, 1989, and continuing to the start of the 90-day period on November 14, 1989, the court cannot rely on the same liquidation analysis as previously discussed by the court. The reason, of course, is that the time between the making of the payments now in issue and the ultimate liquidation of the debtor is too great.

ii. Going concern valuation test.

In Section V.C.2.e.iii. above, the court analyzed the debtor’s solvency during the 90 days immediately before the filing using the going concern valuation test. The court’s analysis there is fully applicable to the larger insider reach back period beginning on May 23, 1989. The court therefore adopts it for this purpose. The debtor’s balance sheets, as adjusted by the court for the reasons previously *99 described, establish that the debtor’s liabilities exceeded its assets at all times from the date of confirmation of Toy King I through the 91st day before the filing of this case.

The facts of the case are consistent with the picture painted by these adjusted balance sheets. The debtor was in a tenuous condition even before it reached confirmation of its first case. Before confirmation in Toy King I, the debtor had overdrawn its debtor-in-possession operating account and was forced to borrow money from TKA.

After confirmation, the debtor continued to operate at a loss while it shored up its rapidly sagging operations with more borrowings from TKA. TKA made available the monies it obtained from Liberty and C & S but at premium rates due to interest upcharges and guaranty fees.

Within 60 days of confirmation, the debtor essentially exhausted the monies received from TKA on the Liberty $500,000 line of credit. More than half of this amount was disbursed within three weeks of confirmation. Shortly thereafter, TKA was forced to borrow again on the C & S line of credit and make those monies available to the debtor. Following that borrowing, TKA was once again knocking at the door of Liberty for another loan on behalf of the debtor. Before the loan was even finalized, TKA attempted to overdraw the $500,000 line of credit.

TKA exhausted the entirety of the Liberty $700,000 Nintendo loan by disbursing the monies to the debtor within 30 days after Liberty approved the loan. Only $152,158.45 of the Nintendo loan was used for the stated purpose of purchasing Nintendo products; $547,841.55 was used for ordinary operations because of the debt- or’s precarious financial position and shortage of cash.

These borrowings demonstrate clearly that the debtor was thinly capitalized. The debtor’s only capital was the $10,000 capital infusion that occurred at confirmation. The debtor’s only significant asset was its inventory. Because of poor management, a bad mix of product, and insufficient advertising, coupled with a slow season, the debtor was unable to maintain a sales volume that enabled it to meet its operating costs without further borrowing.

Stated another way, the debtor’s average gross margin of 26 percent was insufficient to sustain its operating costs and to pay its debts as they became due. The debtor was able to operate throughout the summer and fall only through its repeated borrowings and the industry practice of shipping inventory on terms that allowed a substantial delay in payment for the goods. 110 The shipment of inventory on dating terms enabled the debtor to feed on itself and to maintain the illusion of health and vigor for a protracted period of time. Accordingly, the court finds that the debt- or was insolvent during this entire period of time within the meaning of Section 547(b)(3).

iii. Retrojection analysis.

Alternatively, the court can determine solvency or insolvency using retrojection analysis when the debtor’s financial-condition is unascertainable as of the relevant dates. Murphy v. Nunes (In re Terrific Seafoods, Inc.), 197 B.R. 724, 731 (Bankr.D.Mass.1996). The retrojection rule provides that when a debtor was insolvent “on the first known date and insolvent on the last relevant date, and the trustee demonstrates ‘the absence of any substantial or radical changes in the assets or liabilities of the bankruptcy between the retrojection dates,’ the debtor is deemed to have been insolvent at all intermediate times.” Id. (quoting Foley v. Briden (In re Arrowhead Gardens, Inc.), 32 B.R. 296, 300 (Bankr.D.Mass.1983)). This rule allows the court to conclude that a debtor is insolvent even when there is a deficiency *100 of evidence as to financial status during some of the time period at issue. The theory is that if a debtor is insolvent on one date and insolvent on a later date and there are no intervening circumstances that would suggest otherwise, the court can conclude that the debtor was insolvent during the entirety of the intervening period, even in the absence of specific financial information. Id.

The court has previously found that the debtor was insolvent at the time of the confirmation of Toy King I and immediately thereafter. Among other things, this is because the “fresh start” accounting convention would have more accurately presented the debtor’s true financial situation rather than the “quasi-reorganization” convention that the debtor then used. Similarly, the court has also found that the debtor was insolvent on October 29, 1989, a date that precedes the 90-day period before the filing of this case. The evidence presented at trial contains nothing that would suggest any material change for the better in the debtor’s financial condition between these two dates. Indeed, the evidence plainly shows a continuing deterioration in the debtor’s financial health from the first date to the second. This retrojection analysis, therefore, provides further support for the court’s conclusion that the debtor was insolvent during the entire time from May 23, 1989, through November 14, 1989, and satisfies the requirement of Section 547(b)(3).

d. Summary for transfers to TKA during insider preference period.

As the foregoing describes, the plaintiff has proven by a preponderance of the evidence that the payments by the debtor to TKA of principal and interest on the Liberty loan, C & S line of credit, and the Nintendo loan, as well as the C & S guaranty fees, made between 90 days before the commencement of the Toy King II case and the confirmation of the Toy King I case satisfy each and all of the preference elements set forth in Section 547(b) of the Bankruptcy Code.

Before determining this claim, however, the court will need to consider the defendants’ affirmative defenses as provided by Section 547(c) of the Code. The court will first consider the plaintiffs remaining preference claims.

4. Payment by the debtor to M & D made during the 90 days immediately before the filing of Toy King II.

a. Introduction.

The unsecured creditors committee also seeks to set aside as a preference a payment that the debtor made to M & D on December 29,1989, in the amount of $301,-006.17. This payment related to the claims in Toy King I that M & D purchased from First Union.

As is more fully described in Section IV.D.2. above, First Union originally held unsecured claims for $2,373,615 111 against the debtor in Toy King I. Under the confirmed plan in Toy King I, the debtor was to pay unsecured creditors 17.5 percent of their claims. Thus, First Union was to receive about $415,382 on account of these claims.

Principals of the debtor, Morrow and Angle, formed M & D to purchase the First Union claims. M & D was substituted for First Union as the holder of the First Union unsecured claims on January 12, 1989. M & D paid First Union $125,000 for the claims on April 11, 1989.

On July 6, 1989, the debtor paid M & D $138,500 on account of the First Union claims. Around the same time, the debtor gave M & D a promissory note for the remainder due on the claims, in the amount of $294,382. 112 On December 29, 1989, the debtor paid M & D the amount *101 then due on the note, $801,006.17. 113 It is this payment, the payment of a remaining unpaid dividend pursuant to a confirmed plan, that the plaintiff attacks as a preference. 114

Although once unheard of, it is becoming more common for a business that has reorganized in Chapter 11 to come a second time to the bankruptcy court for relief after the reorganized debtor fails again. That is what happened here. The ease law generated by successive Chapter 11 cases, however, is relatively sparse. The reported cases generally deal with the propriety of a subsequent case, as was the case in Fruehauf Corp. v. Jartran, Inc. (In re Jartran, Inc.), 886 F.2d 859, 868 (7th Cir.1989), or the treatment of claims arising from the first case that remain unpaid upon the filing of the second case. Id.

The question presented here is one of first impression. Is a payment *102 made pursuant to a confirmed Chapter 11 plan subject to attack as preferential in a subsequent case? The defendants say no, arguing that payments on a confirmed plan are not transfers of property of the debt- or’s estate in a subsequent case. For reasons that will be delineated below, the court concludes that a payment pursuant to a confirmed plan is no different from any other transfer and therefore is susceptible to attack as a preference.

As previously discussed, Section 547(b) of the Bankruptcy Code sets forth the elements of a preference that the plaintiff is required to establish by a preponderance of the evidence.

b. Does the payment constitute a transfer of the debtor’s property ?

i. Whose money was it?

To recover the payment as a preference, Section 547(b) requires that the plaintiff must first establish that the payment constitutes a “transfer of an interest of the debtor in property.” As the court has previously decided in Section V.C.2.b. above, payments, such as the ones the debtor made to TKA, plainly constitute transfers. The threshold issue presented by the payment to M & D, however, is whether that transfer was of the debtor’s property or property in which the debtor held an interest. Because the transfer was of money, the question is whether it was the debtor’s money that the debtor paid to M & D. If so, then the plaintiff will have satisfied this element.

The debtor made a payment of $301,006.17 to M & D on December 29, 1989. The debtor made this payment by check, executed by Morrow on behalf of the debtor, and drawn on the debtor’s operating account. All funds in the account as of the date of the transfer were monies earned by the reorganized debtor by operation of its business after the confirmation of Toy King I or monies borrowed from TKA. Clearly, the facts in this case would seem to demonstrate that this money was the debtor’s property so that there was a transfer of the debtor’s property.

Notwithstanding the debtor’s apparent ownership of the funds used to make the M & D payment, the defendants argue that these funds were somehow held in trust for the purpose of paying Toy King I claims arising from the confirmation of that case. All assets of the reorganized debtor, they suggest, are the beneficial property of the claimants of the confirmed bankruptcy case and should not therefore be considered the debtor’s property for purposes of Section 547(b) of the Bankruptcy Code. The defendants cite a number of cases in support of this argument. See, e.g., Still v. Rossville Bank (In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458, 464 (6th Cir.1991) [holding, on principles of res judicata, that the trustee could not avoid transfers made after confirmation but prior to conversion to Chapter 7 because creditors are entitled to rely on the plan as confirmed]; In re T.S.P. Industries, Inc., 117 B.R. 375, 379 (Bankr.N.D.Ill.1990) [holding that conversion of a confirmed Chapter 11 case to Chapter 7 was not justified absent prepetition preferences or fraudulent transfers because there is otherwise no longer estate property to be administered for the benefit of creditors]; In re Kaleidoscope of High Point, Inc., 56 B.R. 562, 566 (Bankr.M.D.N.C.1986) [holding that funds disbursed pursuant to a confirmed Chapter 11 plan could not be “reeled in,” absent unusual circumstances, after conversion of the case to one under Chapter 7].

Assuming for the moment the defendant’s argument is valid, even if Toy King I claimants had an equitable interest in the reorganized debtor’s assets, the reorganized debtor would still retain a legal interest in that property. See 11 U.S.C. § 541(a)(1) [property of the estate includes all of the debtor’s legal or equitable interests in property]. Thus, the debtor’s money used to pay M & D, even if equitably owned by the Toy King I creditors, would still be money in which the debtor main- *103 tabled a legal interest. By making the payment, the debtor would be transferring that legal interest. The Section 574(b) requirement of a “transfer of an interest of the debtor in property,” therefore, would be met. (Emphasis added).

In any event, the debtor dissipated the assets it held at the time of confirmation and extinguished any interest in those assets long before it made the payment to M & D. The debtor’s sales of its existing inventory between May 1989 and October 1989 were insufficient to meet its operating costs incurred for the same period. By mid-September, the debtor was so strapped for cash that Liberty improperly advanced funds on the $1 million portion of the Liberty loan to meet TKA’s request for additional monies for the debtor’s benefit. By October 3, 1989, the Liberty loan was completely disbursed and the debtor was using the proceeds of the Nintendo loan for its operating costs. 115

Clearly then, all assets the debtor held after October 3, 1989, were assets the debtor acquired after the confirmation of Toy King I. The debtor, therefore, could not have used assets or proceeds traceable to assets held by the debtor at confirmation to satisfy the M & D claim in December 1989. Instead, the debtor paid the M & D claim using monies it borrowed after confirmation or monies it generated from sales of its inventory acquired after confirmation.

ii. Conversion vs. a new filing.

More significantly, the line of cases relied upon by the defendants deals with a situation very different from the one this case presents. All of the cases cited by the defendants arise from the conversion of a pending Chapter 11 case to a case under Chapter 7 after the court has first confirmed the case under Chapter 11. Unless the plan or order of confirmation provides otherwise, all of the property of the debtor is revested in the reorganized debtor when a case is confirmed under Chapter 11. 11 U.S.C. § 1141(b). The bankruptcy estate therefore ceases to exist. Were the court to subsequently convert the same case to a case under Chapter 7, there is nothing left in the bankruptcy estate for the Chapter 7 trustee to administer. Accordingly, courts have held that the trustee in a converted case cannot “reach back” and avoid transfers that occurred pursuant to a confirmed plan of reorganization before the conversion. Simply put, there is nothing into which to reach back.

In contrast, a subsequent new case, filed after the reorganized debtor has confirmed a Chapter 11 plan in an earlier case, creates an entirely new estate. “The estate created in one bankruptcy case is distinct from that created upon the commencement of a subsequent case.” In re Jamesway Corp., 202 B.R. 697, 701 (Bankr.S.D.N.Y.1996).

It is clear, therefore, that the cases cited by the defendants have nothing whatsoever to do with the circumstances presented here where a second bankruptcy case and an entirely new bankruptcy estate are involved. In the second case, the trustee has all powers given the trustee by the Bankruptcy Code. The trustee is not denied some of those powers because there may have been an earlier bankruptcy case involving the same debtor. Although it is true that a Chapter 7 trustee in the same bankruptcy case in which a Chapter 11 plan was first confirmed may find no estate to administer — and as a practical matter may therefore be denied certain powers for that reason 116 — those cases dealing *104 with the conversion situation are not controlling or persuasive in the subsequent case situation.

The estate in a subsequent case contains all of the assets that the reorganized debt- or holds upon the filing of the petition in that second case. These assets are then administered for the purpose of paying claims of that estate in accordance with the priorities as set forth in Section 507. In the later case, “the entity’s unpaid liabilities under the first case plan become general unsecured claims.” Official Committee of Unsecured Creditors of White Farm Equipment Co. v. United States (In re White Farm Equipment Co.), 943 F.2d 752, 757 (7th Cir.1991) (quoting In re Jartran, 76 B.R. 123, 125 (Bkrtcy.N.D.Ill.1987)).

The clear import of this is that a claimant holding a claim that arises in the first case enjoys no special ownership interest in property of the estate of the subsequent case. All unsecured claims of the debtor, including unsecured claims arising from the prior confirmed case, are included within the same class in the subsequent case. 11 U.S.C. §§ 507, 1122. This is so even though “the rights and remedies of a creditor may be substantially altered or impacted upon in subsequently filed Chapter 11 proceedings.” Jamesway, 202 B.R. at 702 (quoting Shepherd Oil, 118 B.R. at 747).

Unpaid claims arising from a confirmed plan in a prior case are to be treated pro rata with others in their class in a second case, except in specific and unique circumstances not present here. 117 Those creditors holding an unpaid unsecured claim from a prior confirmed bankruptcy case have no special property interest in the debtor’s estate that supercedes other claimants in their class.

It follows by extension that, when the debtor makes a payment on a confirmed plan prior to the filing of a subsequent bankruptcy petition, the debtor does so using property of the debtor within the meaning of Section 547(b). The transfer is no different in its essentials than a transfer made pursuant to a contract or judgment. The paucity of case law on this issue itself corroborates this conclusion,

iii. National bankruptcy policy.

Most importantly, this conclusion advances the principles that form the very foundation of bankruptcy law.

The purpose of the preference section is two-fold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. ... Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debt- or....

Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355 (5th Cir.1986) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 177-78, reprinted in 1978 U.S.C.C.A.N. 5787, 6138).

These principles are no less important, and may be more so, in a subsequent bankruptcy case than they are in the first. Having been through the process once al *105 ready, the claimant holding a claim that arises from a confirmed plan has a better knowledge of the probable consequences that will flow from a second failure by the debtor. The claim arising from the first case is undoubtedly already reduced in amount, and the claimant has as much incentive to maximize its own return as does a creditor with a new post-confirmation claim. Such a claimant is more likely to “grab” the debtor’s assets in payment of its claim before the second filing to enhance its position. Section 547, of course, is specifically designed to remedy such “grabs” and to ensure that all creditors of the same classes are paid equally on a pro rata basis.

Although concerned with different issues of law, Shepherd Oil, 118 B.R. at 750-752, illustrates clearly the dynamic that occurs in a subsequent case. In that case, the court held that it could not impose a constructive or express trust on the property of a subsequent bankruptcy estate for the benefit of an unpaid creditor of the first bankruptcy estate, even in the face of apparent fraud.

In Shepherd Oil, the debtor confirmed a plan whereby the United States Department of Energy (“DOE”) was to receive a pro rata distribution from the net proceeds of the reorganized debtor along with other members of the class. Because the plan contemplated that DOE would not be paid immediately, DOE was also to receive a blanket lien on the debtor’s assets to secure payment.

After confirmation and pending the disposition of the debtor’s objection to the DOE claim, the debtor segregated in a certificate of deposit the monies to pay DOE but did not record the blanket lien. The debtor later used those monies to convert its facility to a corn/ethanol plant without DOE’s knowledge. Although the debtor made partial distributions to other creditors in DOE’s class, the debtor made no payments to DOE.

Several creditors then filed a new involuntary bankruptcy petition against the debtor based upon its defaults under the confirmed plan in the first case. The debt- or’s assets were ultimately liquidated, but the proceeds were insufficient to pay all claims in full, including DOE’s claim for its unpaid dividend from the first case.

In an attempt to assert priority over the claims arising in the second case, DOE sought a declaration that the order of confirmation in the first case created a constructive or express trust in DOE’s favor. The court disagreed, stating that, even if “the fraud perpetrated upon the D.O.E. created a constructive trust under some theory of law, this Court would be required to direct the turnover of any funds or assets for the benefit of all creditors in the [second case].” Id. at 748. The court went on to state that using the confirmed plan in the first case to create an express trust “would frustrate the fundamental purposes of the Bankruptcy Code of equality of distribution to creditors in the same class and the relative priorities of creditors.” Id. at 752.

The bankruptcy system is built upon notions of fundamental fairness and equality of distribution within a particular class. The avoidance provisions contained in the Code allow the court to reach back before the filing of the bankruptcy petition to ensure that no one creditor will be advantaged to the detriment of others in its same class of priority. A creditor who receives a payment pursuant to a confirmed plan within the applicable preference period will be and should be subject to attack if the elements of a preference can be established. This will “ensure that the delicate balance of the priority and discharge scheme established by the Code is not skewed by the unanticipated development of serial Chapter 11 filings.” White Farm Equipment, 943 F.2d at 757.

For all these reasons, the court is persuaded that payment of claims pursuant to a confirmed plan after confirmation and out of assets generated by the reorganized debtor are transfers of the debtor’s prop *106 erty within the meaning of Section 547(b). This conclusion does not leave a defendant who has received such a payment unprotected in the defendant’s reliance of the payment. The defendant is vulnerable only within a specific and circumscribed time period, depending on its relation to the debtor. In any event, the plaintiff is obligated to establish all of the requisite elements of Section 547(b). The defendant also has the ability to defend the payment pursuant to Section 547(c). 118

c.Was the transfer to or for the benefit of a creditor?

First Union originally held the claims in question. It transferred its claims to M & D in the manner then required by the Federal Rules of Bankruptcy Procedure. M & D then became the holder of those claims. Section 101(10) of the Bankruptcy Code defines “creditor,” among other things, as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” Section 101(5) defines “claim,” among other things, as a “right to payment.” M & D’s right to payment, acquired from First Union, arose before the order for relief in the second bankruptcy case. M & D is therefore a creditor of the debtor for purposes of this claim. The fact that M & D acquired the unsecured claims from First Union instead of having the debtor incur the indebtedness directly does not alter this conclusion.

In addition, the debtor made and delivered to M & D a promissory note in the amount of the unpaid portion of the claims that M & D acquired from First Union. M & D therefore had a right to payment directly from the debtor under that note.

In either case, it is plain that the payment in question was to and for the benefit of M & D, a creditor, within the meaning of Section 547(b)(1).

d. Was the transfer for or on account of an antecedent debt?

The debtor incurred the underlying indebtedness owed originally to First Union well before the filing of Toy King II. The debtor executed its note in favor of M & D for the unpaid portion of the First Union unsecured claims on September 11, 1989. Accordingly, the transfer made on December 29,1989, in full satisfaction of that note was for or on account of an antecedent debt within the meaning of Section 547(b)(2).

e. Was the debtor insolvent at the time of the transfer?

For the reasons stated in Section V.C.2.e. above, the court reaches the same conclusion with respect to this element as to payments made to TKA during the 90-day period immediately before the filing of this case. Accordingly, the debtor was insolvent at the time of the debtor’s payment to M & D within the meaning of Section 547(b)(3).

f. Did the transfer occur on or within 90 days of the filing of the petition?

The debtor made its payment to M & D on December 29, 1989. Because this date was after November 14, 1989, the first day of the 90-day preference period, the payment was made within the 90-day preference period as set forth in Section 547(b)(4)(A).

g. Did M & D receive more than it would have received in a Chapter 7 liquidation?

The First Union claims were unsecured claims in Toy King I. The debtor executed *107 an unsecured promissory note on behalf of M & D for the portion of the First Union claims that was not paid within 90 days of the confirmation of Toy King I. As stated in Section V.C.2.g.ii. above, unsecured creditors in Toy King II were not likely to receive a 100 percent distribution on their claims and did not in fact receive any distribution on their claims. Accordingly, M & D, when it was paid in full on its note, received more than it would have received in a Chapter 7 liquidation had the payment not been made, all as required by Section 547(b)(5).

h. Summary for transfer to M & D during the 90-day preference period.

Based upon the foregoing, the plaintiff has proven by a preponderance of the evidence that the payment by the debtor to M & D of principal and interest on the M & D note, in satisfaction of what initially began as the First Union unsecured claims, during the 90-day period immediately before the filing of this case satisfies each and all of the preference elements set forth in Section 547(b) of the Bankruptcy Code.

The defendants’ affirmative defense to this preference claim pursuant to Section 547(c) of the Bankruptcy Code will be considered later after the determination of all of the preference claims.

5. Recording of UCC-1 financing statements by Liberty during the 90 days immediately before the filing of Toy King II.

a. Introduction.

Liberty filed UCC-1 financing statements in Alabama, Florida, South Carolina, Virginia, and Wisconsin in June 1989. By these filings, Liberty perfected its security interest in the debtor’s inventory in those states effective on the dates of the filings. None of these UCC-1 financing statements, however, contained “proceeds” in the collateral description. Liberty re-filed its UCC-1 financing statements in the same states in January 1990. For the first time, these re-filed financing statements specifically included “proceeds” in the collateral description.

Liberty also filed UCC-1 financing statements in Maryland and Pennsylvania in January 1990. Liberty filed these UCC-1 financing statements more than 30 days after the debtor opened its new stores in Pennsylvania and Maryland.

The unsecured creditors committee seeks to set aside the perfection of the security interests accomplished as a consequence of these January 1990 filings.

The plaintiff, of course, has the burden to demonstrate that transfers, including the perfection of security interests, are preferences. Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir.1991). As previously discussed, Section 547(b) sets forth the elements of a preference that the plaintiff is required to establish by a preponderance of the evidence.

The parties agree that questions about Liberty’s perfection of its security interests are governed by Section 9-103 of the Uniform Commercial Code, as adopted by each state in which Toy King stores were located. Each of the states involved in this issue has adopted the Uniform Commercial Code, including the 1972 amendments to Article 9 of the Code.

b. Does the re-filing of UCC-1 financing statements that specify proceeds for the first time constitute transfers?

Liberty re-filed UCC-1 financing statements in Alabama, Florida, South Carolina, Virginia, and Wisconsin in January 1990. These UCC-1 financing statements specifically included “proceeds” in the description of collateral. “Proceeds” were not included in the UCC-1 statements that Liberty filed in these same states in June 1989. A transfer of the debtor’s property occurred if the re-filing *108 of the UCC-1 financing statements afforded Liberty greater rights with respect to the debtor’s property that secured TKA’s debt to Liberty than Liberty had before the re-filing occurred. Provident Hospital & Training Association v. GMAC Mortgage Co. of Pennsylvania (In re Provident Hospital & Training Association), 79 B.R. 374, 378-79 (Bkrtcy.N.D.Ill.1987) [“For preference purposes, a transfer is deemed to occur at the time of re-perfection of a security interest where perfection has previously lapsed.”].

Section 9-306 of the Uniform Commercial Code, as amended in 1972, provides that:

(1) “Proceeds” includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds....

(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.

(Emphasis added).

Pursuant to these provisions of the UCC, a secured party automatically has a security interest in the “proceeds” of its collateral unless the parties agree otherwise. Thus, a UCC-1 financing statement that describes the collateral also covers the “proceeds” of that collateral even if “proceeds” are not included in the description of the collateral. To exclude the “proceeds” of the collateral, the UCC-1 financing statement would have to so state affirmatively.

The rule that existed prior to the 1972 amendments seemed to mandate an opposite conclusion. It provided that, unless financing statements specifically described “proceeds,” secured creditors’ rights in “proceeds” became unperfected after ten days from receipt by the debtor. The “Official Reasons for the 1972 Change” explains the apparent shift in approach as follows:

This ambiguity has been clarified in favor of an automatic right to proceeds, on the theory that this is the intent of the parties, unless otherwise agreed. Further there has been eliminated the requirement of claiming proceeds in a financing statement, which has resulted in a checking of a box on each financing statement in order to claim proceeds. Instead, the filed claim to the original collateral is treated as constituting automatically the filing as to the proceeds ....

(Emphasis added).

Uniform Laws Annotated, Master Edition, Vol. 3, Section 9-306.

After the 1972 amendments, parties to a security agreement are therefore required to take affirmative action to exclude “proceeds” from the collateral that secures the underlying obligation. In the absence of such action, “proceeds” are automatically included within the pledged collateral.

The original UCC-1 financing statements filed by Liberty in June 1989, did not exclude “proceeds.” Accordingly, Liberty had a perfected security interest in “proceeds” generated from the sale of the debtor’s inventory at all times after these initial UCC-1 filings notwithstanding the failure of the original financing statements to include “proceeds” affirmatively in the description of the collateral. The January 1990, re-filings in Alabama, Florida, South Carolina, Virginia, and Wisconsin, therefore, gave Liberty no new or greater rights in the collateral than those that Liberty already had.

As a consequence, the plaintiff has failed to establish the element of transfer as required by Section 547(b) as to these re-filings. Because the plaintiff must establish all of the required elements of a preference, the failure to establish any one element defeats the plaintiffs claim. It is therefore unnecessary for the court to con *109 sider any of the other preference elements as to the January 1990 UCC-1 financing statement re-filings in Alabama, Florida, South Carolina, Virginia and Wisconsin.

c. Does the filing of UCC-1 financing statements more than SO days after inventory has been moved constitute transfers?

The debtor opened new stores in Pennsylvania and Maryland in mid-October 1989. The debtor transported inventory from its Florida warehouse to stock the new stores one week prior to the opening of each new location. 119 Liberty filed UCC-1 financing statements in Pennsylvania and Maryland in January 1990, to perfect its security interest in the debtor’s inventory and proceeds in those states. 120 Liberty filed these UCC-1 financing statements more than 30 days, but less than four months, after the date the debtor first shipped inventory to those states.

As the court described earlier in Section IV.E.5. above, Liberty perfected its security interest in the debtor’s inventory located in Florida, and its proceeds, by filing a UCC-1 financing statement in Florida in June 1989. The issue the plaintiff presents, therefore, is whether Liberty retained its security interest in the inventory shipped to Pennsylvania and Maryland upon its removal from Florida and, if so, for how long? If Liberty’s security interest in the inventory shipped to Pennsylvania and Maryland became unperfected at any point after it left Florida, Liberty would not be able to enforce its security interest in all of that inventory. In that event, the filing of a UCC-1 financing statement to re-perfect a security interest in inventory and proceeds would operate to expand Liberty’s rights and would constitute a transfer of an interest of the debt- or’s property. Provident Hospital & Training Association, 79 B.R. at 379.

Section 9 — 103(l)(d) of the Uniform Commercial Code states that:

When collateral is brought into and kept in this state while subject to a security interest perfected under the law of the jurisdiction from which the collateral was removed, the security interest remains perfected, but if action is required by Part 3 of this Article to perfect the security interest,

(i) if the action is not taken before the expiration of the period of perfection in the other jurisdiction or the end of four months after the collateral is brought into this state, whichever period first expires, the security interest becomes unper-fected at the end of that period and is thereafter deemed to have been unperfected as against a person who became a purchaser after removal;

(ii) if the action is taken before the expiration of the period specified in subparagraph (i), the security interest continues perfected thereafter;

Pursuant to this section, to continue its perfection in all of the debtor’s inventory, Liberty was required to file UCC-1 financing statements in Pennsylvania and Maryland no later than four months after the date the inventory was first shipped into each state. 121 In the case of Pennsylvania, *110 that deadline was February 8, 1990. In the case of Maryland, that deadline was February 11, 1990. Liberty in fact filed UCC-1 financing statements in those states in early January 1990, well before the expiration of the four months period. Liberty’s security interest in the debtor’s Pennsylvania and Maryland inventory and proceeds, therefore, was continuously perfected at all times.

The plaintiffs argument to the contrary based upon Section 9 — 103(l)(c) of the Uniform Commercial Code is unpersuasive because that provision is inapplicable to these facts. It deals only with the obligations of a creditor with a purchase money security interest. It provides that:

If the parties to a transaction creating a purchase money security interest in goods in one jurisdiction understand at the time that the security interest attaches that the goods will be kept in another jurisdiction, then the law of the other jurisdiction governs the perfection and the effect of perfection or non-perfection of the security interest from the time it attaches until thirty days after the debtor receives possession of the goods and thereafter if the goods are taken to the other jurisdiction before the end of the thirty-day period.

(Emphasis added).

Contrary to the plaintiffs arguments, Liberty did not have a purchase money security interest in the collateral at issue — • the debtor’s inventory — that secured the Liberty and the Nintendo loans. Section 9-107 of the Uniform Commercial Code defines a purchase money security interest as follows:

A security interest is a “purchase money interest” to the extent that it is

(a) taken or retained by the seller of the collateral to secure all or part of its price; or

(b) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used.

(Emphasis added).

Liberty did not sell inventory. It was merely a bank in the business of loaning money. Liberty loaned money to TKA. It therefore is TKA — and not Toy King— that is “the debtor” implicated in Section 9-107(b). Except for the $1 million letter of credit required to be used to pay Toy King I dividends, TKA had an unfettered right to use the money it received from the Liberty and Nintendo loans. TKA used the loan proceeds, except for the $1 million letter of credit, to make loans to Toy King for its general corporate purposes, including the purchase of Nintendo inventory. TKA, as “the debtor” on the Liberty obligations, did not use the loan proceeds to “acquire rights in or the use of collateral.” In any event, Liberty did not hold a purchase money security interest in Toy King’s inventory. Section 9-103(l)(c), therefore, is inapplicable to these facts.

Because Liberty retained a continuously perfected security interest in the debtor’s inventory located in Pennsylvania and Maryland, the plaintiff has failed to establish that a transfer of the debtor’s property occurred with respect to the filing of UCC-1 statements in Pennsylvania and Maryland in January 1990. The plaintiffs failure to establish this required element defeats its preference claim as to these filings.

d. Summary for recording of UCC-1 financing statements by Liberty during the 90-day preference period.

As the foregoing describes, the plaintiff has failed to prove by a preponderance of *111 the evidence that a transfer of the debtor’s property occurred as a result of the filing or re-filing of UCC-1 financing statements in January 1990. Because the plaintiff cannot establish one of the essential elements as set forth in Section 547(b), the court finds that no preference has occurred, and the court need not consider the other elements of that section.

6. Execution of amended security agreement by the debtor to Liberty between 90 days before the commencement of Toy King II and the date of confirmation of Toy King I.

a. Introduction.

To secure the Liberty loan, the debtor executed a security agreement on June 9, 1989, that granted Liberty a security interest in its inventory and proceeds. That security agreement also contained a future indebtedness or future advances clause, commonly referred to as a “dragnet clause,” that granted a security interest to secure “any and all obligations” of TKA to Liberty.

TKA entered into a subsequent agreement with Liberty to borrow $700,000, referred to as the Nintendo loan. Before Liberty approved the loan, TKA executed a note on September 12, 1989, that included a grant of a security interest in “[a]ll collateral cited in Promissory Note and revolving credit and security agreement dated June 9, 1989.” Liberty approved the loan on September 27, 1989. Liberty disbursed the proceeds to TKA between September 13, 1989, and October 17, 1989. On October 24, 1989, well after all of the loan proceeds had been disbursed by Liberty, the debtor executed an amended security agreement that specifically incorporated the Nintendo loan.

The unsecured creditors committee seeks to avoid the security interest created by the execution of the October 24, 1989, security agreement by the debtor.

b. Was Liberty an insider of the debtor?

The debtor executed the amended security agreement in connection with the Nintendo loan on October 24, 1989. This is the date the debtor allegedly transferred to Liberty an interest in its property, that is, a security interest in the collateral described in the security agreement. Because this date is not within the 90-day presumed preference period, the plaintiff must demonstrate that Liberty is an insider of the debtor in order to use the reach back period provided by Section 547(b)(4)(B).

In circumstances where the debtor is a corporation, Section 101(31)(B) of the Bankruptcy Code defines “insider” as including a:

(i) director of the debtor;

(ii) officer of the debtor;

(iii) person in control of the debtor;

(iv) partnership in which the debtor is a general partner;

(v) general partner of the debtor; or

(vi) relative of a general partner, director, officer, or person in control of the debtor;

Plainly, Liberty does not fit within any of these categories. The definition, however, uses the word “includes” and thus is not limiting in scope. See 11 U.S.C. § 102(3). Consequently, the six categories of corporate insider set forth at Section 101(31)(B) are not exhaustive.

To determine if Liberty is an insider of the debtor, the court must look to the relationship between the debtor and Liberty. As the legislative history tells us, “an insider is one who has a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arms length with the debtor.” Torcise v. Cunigan (In re Torcise), 146 B.R. 303, 305 (Bkrtcy.S.D.Fla.1992) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 312 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 25 (1978), re *112 printed in 1978 U.S.C.C.A.N. 1987, 5787). See, e.g., Browning Interests v. Allison (In re Holloway), 955 F.2d 1008, 1011 (5th Cir.1992); Committee of Unsecured Creditors for Pittsburgh Cut Flower Co. v. Hoopes (In re Pittsburgh Cut Flower Co.), 124 B.R. 451, 459-60 (Bankr.W.D.Pa.1991); Grant v. Podes (In re O’Connell), 119 B.R. 311, 316 (Bankr.M.D.Fla.1990).

In Germain v. RFE Investment Partners IV, L.P. (In re Wescorp, Inc.), 148 B.R. 161, 164 (Bankr.D.Conn.1992), the court found that a bank was not an insider even where the bank had approval rights over compensation of the principals and, in the event of default, the ability to exercise stock warrants of the debtor and to elect jointly a majority of the board of directors. The court concluded that the bank and the debtor negotiated the terms of the loan agreement at arms-length, including those of potential control of the debtor. Because the bank never sought to implement the control provisions, even in the face of default, the court found no insider relationship. Id. See also, Lynn v. Continental Bank, N.A. (In re Murchison), 154 B.R. 909, 913 (Bankr.N.D.Tex.1993) [bank was not an insider even though it was debtor’s primary lender and able to put substantial financial pressure on debtor where debtor made its own decisions without interference by the bank]; Huizar v. Bank of Robstown (In re Huizar), 71 B.R. 826, 831 (Bankr.W.D.Tex.1987)[“[A] bank’s financial power over the debtor does not by itself render the bank [an] ‘insider’ for purposes of § 547.”]; Schick Oil & Gas, Inc. v. Federal Deposit Insurance Corp. (In re Schick Oil & Gas, Inc.), 35 B.R. 282, 285-86 (Bankr.W.D.Okla.1983) [to show control, a plaintiff must demonstrate some means of restraint or authority greater than the financial power over the debtor that is a normal incident of the debtor-creditor relationship].

In this case, Liberty did not exercise any managerial control over the debtor, and it did not require that the debtor “obtain its advice or consent before exercising managerial decisions.” Cavalier Homes of Georgia, 102 B.R. at 883. The debtor “was not required to obtain prior approval [from Liberty] for decisions made in the ordinary course of business.” Id. The evidence adduced at trial demonstrates that at all times Liberty maintained nothing more than an “arms-length creditor debtor relationship” with Toy King.

On these facts, the court concludes that Liberty is not an “insider” of the debtor for purposes of the insider “reach back” period of Section 547(b)(4)(B) of the Bankruptcy Code. Because Liberty is not an insider and because the transfer occurred more than 90 days before the filing of the petition in this case, the plaintiff has failed to establish this element required by Section 547(b)(4).

c. Summary for the execution of the amended security agreement during the insider preference period.

As the foregoing describes, the plaintiff has failed to prove by a preponderance of the evidence that Liberty is an insider subject to the extended preference period. Because the plaintiff cannot establish one of the essential elements as set forth in Section 547(b), the plaintiff cannot prevail on this claim. The court need not, therefore, consider the other elements of that section.

7. Ordinary course of business affirmative defenses to preference claims.

a. Introduction.

As the court determined in Sections V.C.2. and V.C.3. above, the debtor made preferential payments to TKA on the Liberty loan, the Nintendo loan, and the C & S line of credit. These payments comprised both interest and principal. Similarly, the court determined that the debtor made preferential payments to TKA for guaranty fees on the C & S line of credit. *113 The court also determined in Section V.C.4. above that the debtor made a preferential payment to M & D.

Both TKA and M & D have asserted Section 547(c)(2) of the Bankruptcy Code as a defense to these preferential payments made by the debtor. This “ordinary course of business” exception protects preferential payments received by a creditor if three conditions exist. Those conditions are summarized as follows:

(A) The debt in controversy was incurred in the ordinary course of both the debtor’s and creditor’s business;

(B) The controverted payment was made in the ordinary course of business of both the debtor and the creditor; and

(C) The payment was made in accordance with ordinary business terms.

11 U.S.C. § 547(c)(2). See generally, 4 Collier on Bankruptcy ¶ 51.10 at 547-51 (15th ed.1990).

“The purpose of this exception is to leave undisturbed normal financial relations, because it does not detract from the general bankruptcy section to discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 373-74 (1977). The section was “designed to encourage creditors to continue to deal with troubled debtors on normal business terms by obviating any worry that a subsequent bankruptcy filing might require the creditor to disgorge as a preference an earlier received payment.” Barnhill v. Johnson, 503 U.S. 393, 402, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). Stated another way, “[t]he purpose of the ordinary course exception is to ensure that normal commercial transactions are not caught in the net of the trustee’s avoidance powers.” Courtney v. Octopi, Inc. (In re Colonial Discount Corp.), 807 F.2d 594, 600 (7th Cir.1986), cert. denied, 481 U.S. 1029, 107 S.Ct. 1954, 95 L.Ed.2d 526 (1987).

The ordinary course exception is “directed primarily to ordinary trade credit transactions.” Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1567 (11th Cir.1986). Courts and commentators agree that the exception protects “recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor’s transferee.” 4 Collier on Bankruptcy ¶ 547.10 at 547-52 (15th ed.1990). The ambit of a recurring, customary credit transaction is fairly broad. In Union Bank v. Wolas, 502 U.S. 151, 162, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991), for example, the Court held that the “ordinary course” exception is available for payments on both long and short-term financial obligations. See also, Rieser v. Randolph County Bank (In re Masters), 137 B.R. 254, 261 (Bankr.S.D.Ohio 1992); Warren v. Society Corp. (In re Perks), 134 B.R. 627, 631-32 (Bankr.S.D.Ohio 1991). The court in Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir.1990), held that even an isolated, single credit transaction can qualify as a debt incurred in the ordinary course for purposes of this exception.

“[A] creditor asserting that a transfer falls within § 547(c)(2) bears the burden of proving each of the three elements. 11 U.S.C. § 547(g).” Miller v. Florida Mining & Materials (In re A.W. & Associates, Inc.), 136 F.3d 1439, 1441 (11th Cir.1998). Each element must be established by a preponderance of the evidence. Logan v. Basic Distribution Corp. (In re Fred Hawes Organization, Inc.), 957 F.2d 239, 244 (6th Cir.1992); Perks, 134 B.R. at 630.

“Because of the important policies served by preference law, courts have repeatedly held that the exceptions contained in Code § 547(c), including the ordinary course exception, ‘should be narrowly construed.’ ” Hassett v. Goetzmann (In re CIS Corp.), 195 B.R. 251, 257 (Bankr.S.D.N.Y.1996) [citations omitted]. Ultimately, the “[d]etermination [of ordinary course of business] is peculiarly factual”. *114 Pittsburgh Cut Flower, 124 B.R. at 460. The court must therefore consider the transfers to TKA and M & D as they relate to each element of the ordinary course defense.

b. Were the debts incurred in the ordinary course of both the debt- or’s and the creditor’s businesses?

i. Debts to TKA.

(1) Introduction.

To satisfy this Section 547(c)(2)(A) element, the defendant must demonstrate that the “original transaction creating the debt” is within the ordinary course of dealing between the parties. Grove Peacock Plaza, 142 B.R. at 518. The focus is on the “nature of the original transaction creating the debt.” Id. “[C]ourts generally are interested in whether or not the debt was incurred in a typical, arms-length commercial transaction that occurred in the marketplace, or whether it was incurred as an insider arrangement with a closely-held entity.” Huffman v. New Jersey Steel Corp. (In re Valley Steel Corp.), 182 B.R. 728, 735 (Bankr.W.D.Va.1995) [citations omitted]. The purpose of the inquiry is to ensure that “neither the debtor nor the creditor do anything abnormal to gain an advantage over other creditors.” Id.

In this case, the relationship between the debtor and TKA was not an arms-length relationship because there was an identity of interests between the two entities. TKA was formed shortly before the filing of Toy King I specifically for the purpose of acquiring the stock of the debtor. Morrow and Angle were each 20 percent shareholders of TKA. Morrow and Angle were also officers and directors of the debtor. They made all of the financial decisions for both TKA and the debtor. Accordingly, the tension that commonly exists between debtor and creditor is absent in this case. None of the transactions between TKA and the debtor here at issue would therefore appear to fall readily into the category of a typical, arms-length commercial transaction. A closer examination of the relationship between TKA and the debtor and the transactions that occurred is therefore necessary.

TKA loaned money to the debtor throughout the pendency of the Toy King I bankruptcy. The terms and conditions of that lending and the parties’ course of dealing in payment of that lending are not in evidence. In any event, the relationship between TICA and the debtor while it was in the midst of reorganization was shaped by the requirements and limitations of the bankruptcy process. Accordingly, the court will look to the post-confirmation course of dealing between TKA and the debtor to determine the “ordinariness” of the transactions.

After Toy King I was confirmed, TICA loaned money to the debtor in a series of loans for its use in paying plan dividends and/or for its operations. TKA acquired the funds to make these loans through its borrowings from Liberty and C & S. To appreciate the lending dynamic that occurred between TKA and the debtor that resulted from the shared management and control of those two companies, it is necessary to also examine the underlying transactions as they occurred between TKA and the banks.

(2) The LibeHy loan.

The Liberty loan was negotiated between TKA and Liberty in furtherance of the confirmation of Toy King I. Liberty approved the loan with specific guaranties. Liberty and TKA then executed a commitment letter that detailed the terms and conditions of the loan and incorporated those terms and conditions into the confirmed plan. The commitment letter contemplated that $1 million of the loan would be made available directly to the debtor through a letter of credit for the sole purpose of paying plan dividends to unsecured creditors. The commitment letter further contemplated that $500,000 would be available to TKA under a line of credit *115 for the sole purpose of making a capital contribution in the debtor for its operating costs. The commitment letter also had a net worth covenant that required $2 million in equity to be in the debtor after its reorganization and before closing the Liberty loan. Touche Ross was to corroborate this equity in an opinion letter.

The court concluded in Section IY.E.5. above that Liberty closed the loan on terms and conditions that were not approved by the senior loan committee and/or were not in accordance with the confirmed plan. Liberty closed the loan with limited guaranties that were reduced in amount from the guaranties that had been previously approved. Liberty also closed the loan and began to advance the proceeds without obtaining corroboration from Touche Ross that the debtor had a net worth of $2 million.

Liberty made the proceeds of the loan available to TKA and the debtor in the manner contemplated by the commitment letter. Liberty made $1 million available directly to the debtor in the form of a letter of credit for the limited purpose of paying dividends pursuant to the confirmed plan in Toy King I. Liberty also made a $500,000 line of credit available to TKA but made an immediate debit in the amount of $301,822.93 on that line to pay the C & S indebtedness owed by TKA. Liberty also made an immediate debit in the amount of $18,707.22 to pay the bank’s loan fees and costs. These monies, totaling $320,530.15, were paid out by Liberty at closing and thus were never available to TKA for its use in making a capital contribution or loan to the debtor.

Although TKA did not disburse any of the $320,530.15 in payment of the debtor’s obligations, it nevertheless considered that the monies were used for the debtor’s benefit and booked the transaction as an obligation of the debtor. TKA did this by substituting the Liberty loan for the C & S loan as the underlying obligation on the notes the debtor gave TKA prior to and just after the Toy King I confirmation. These notes required interest to be paid monthly at a rate that exceeded the interest rate on the Liberty loan by one percent.

TKA drew down the remainder of the $500,000 line of credit during the months immediately following confirmation and made the monies available to the debtor. In most cases, the debtor executed a demand promissory note in favor of TKA for those draws. In every case, the demand notes required interest to be paid monthly at a rate that exceeded the interest rate on the Liberty loan by one percent.

The debtor ultimately executed notes in an aggregate amount of $421,885. 122 The debtor did not execute notes for the remaining $78,115. TKA, however, treated the entirety of the $500,000 line of credit as loans to the debtor, regardless of whether the parties executed promissory notes in support of those loans. On its balance sheets, the debtor booked some or all of the disbursements from the $500,000 line of credit as liabilities. 123

TKA did not make any of the $500,000 line of credit available to the debtor as a capital contribution as required by the commitment letter. Instead, TKA denominated the $1 million letter of credit as a capital contribution in the debtor. The debtor showed this on its internal balance sheets under assets as a stock subscription receivable and under shareholder’s equity as preferred stock. As the debtor drew down the letter of credit, the debtor made adjustments to its internal balance sheet by debiting the amount of the payment from the stock subscription receivable and from the prepetition liabilities. The court concluded in Section IV.F.2. above that the debtor’s booking on its balance sheets of *116 the $1 million as a capital contribution was inaccurate and contrary to general accounting principles.

The debtor exhausted the letter of credit by October 3, 1989. In November 1989, the debtor modified the way it recorded the $1 million on its balance sheet. In its November 28, 1989, balance sheet the debtor posted the $1 million as a liability rather than as preferred stock. 124

Notwithstanding the way in which the $1 million was initially recorded on the debt- or’s balance sheets, TKA at all times treated the transaction as a loan to the debtor. TKA billed the debtor monthly for interest charges that were calculated on the basis of the total amount paid out as of that date on the letter of credit. TKA charged interest at a rate that was at least one percent more than the interest that Liberty charged to TKA on the letter of credit. TKA and the debtor did not execute any documents to memorialize these loans.

Thus, TKA made the proceeds of the Liberty loan available to the debtor in a manner that was inconsistent with the requirements of the confirmed plan, the Touche Ross pro forma, and the way in which it was booked on the debtor’s balance sheets. The defendants offered no credible explanation for the divergent treatment of the Liberty loan by the debt- or and TKA. The divergence is especially notable given the identity of interests between the parties.

In addition, TKA loaned a substantial portion of the Liberty loan proceeds to the debtor without any supporting documentation of the loan. In Lee’s Place v. Haw-baker, 1992 WL 164443 (C.D.I11.1992), the court found that loans made by an insider to the debtor without any written documentation were not incurred in the ordinary course.

In those cases where documentation was executed, TKA loaned the money to the debtor through demand notes that allowed TKA to direct repayment at will. TKA also charged interest at a rate that exceeded the interest they were paying on the underlying transaction. In short, the loans represented by the Liberty loan proceeds were insider arrangements specifically designed to benefit TKA and its principals.

For all of the above reasons, the court is unable to conclude that the debts represented by the Liberty loan were incurred by the debtor in the ordinary course of its dealings with TKA.

(3) The C & S line of credit.

TKA negotiated a line of credit with C & S during the pendency of Toy King I. The line of credit was capped at $400,000 and was unconditionally guarantied by Morrow, Angle, and Woodward. TKA borrowed money on the line of credit in the amount of approximately $300,000 during the course of Toy King I and immediately thereafter. TKA repaid the principal in June 1989 as a condition of the Liberty loan. Although that payment went directly to C & S from the Liberty $500,000 line of credit, TKA and the debtor executed notes that memorialized the debtor’s obligation to repay those monies to TKA. Even where no notes were executed, TKA and the debtor treated the transaction as a loan to the debtor. 125

The debtor had insufficient cash reserves to sustain its operations after confirmation of Toy King I, largely as a consequence of TKA’s repayment of the C & S line of credit from the Liberty loan proceeds. After that repayment, TKA had less than $200,000 on the Liberty line of credit to make available to the debtor for its use in its operations. Accordingly, TKA sought additional credit for the bene *117 fit of the debtor within weeks of its first draw on the Liberty line of credit.

Initially, TKA approached Liberty, but Liberty declined to extend further credit at that time. Liberty waived its prohibition against additional borrowing, however, and consented to TKA’s further borrowing on the C & S line of credit. TKA thereupon drew upon the C & S line of credit and made the funds available to the debt- or. TKA and the debtor executed demand notes with specific interest and payment terms for all of the draws on the C & S line of credit. These notes contained terms that were consistent with all of the Liberty loan notes previously executed and also with each other.

At the time TKA incurred its obligation to C & S and the debtor in turn incurred its obligation to TKA on the C & S proceeds, the debtor was not operating normally. The debtor was unable to obtain the level of trade credit from toy manufacturers that had been projected. Consequently, the debtor was forced to purchase a significant percentage of its inventory from toy distributors, rather than from manufacturers, at higher prices. The debtor delayed new store openings. There were scant cash reserves in the debtor’s operating account for day-to-day expenses. In short, the inevitable slide into bankruptcy had begun.

For these reasons, the court concludes that the TKA obligation represented by the C & S line of credit was not part of a normal financial relation between TKA and the debtor. It was an “unusual action undertaken during the ‘slide into bank-ruptc/ ” and therefore not incurred in the ordinary course of dealing between the debtor and TKA. Grove Peacock Plaza, 142 B.R. at 518.

(4) The Nintendo loan.

By August, when TKA approached Liberty for additional funds, the debtor had reached a crisis point. As described in Section IV.G.5. above, the debtor had little likelihood of being able to sustain its operations up to and through the Christmas season without an influx of cash.

The situation was so acute that TKA attempted to overdraw its Liberty line of credit in an effort to make funds available to the debtor. Liberty recognized the urgency of the circumstances and made the funds available to TKA from the $1 million portion of the Liberty loan, even though those monies were dedicated to a specific purpose and were not to be used for general funds.

As described in some detail in Section IV.G.5. above, the transaction between Liberty and TKA was itself out of the ordinary. Liberty’s senior loan committee approved the Nintendo loan with additional terms and collateral intended to minimize Liberty’s risk. Liberty sought more expansive guaranties as well as additional collateral. In Production Steel Inc. v. Sumitomo Corp. of America (In re Production Steel, Inc.), 54 B.R. 417, 423 (Bankr.M.D.Tenn.1985), the court found a creditor’s new requirement of a substantial down payment and letter of credit from the debtor as a condition of shipment not in the ordinary course. Liberty did not actually receive any of the enhancements it negotiated with TKA because the loan proceeds were disbursed before the supporting documentation for the loan was executed. The court concluded in Section IV.G.5. above that Liberty was imprudent in the manner in which it made the Nintendo loan.

Of course, the transaction represented by the Nintendo loan that occurred between Liberty and TKA is not the transaction at issue here. At issue here is the series of loans that TKA made to the debtor using the proceeds of the Nintendo loan. Because the manner in which Liberty and TKA executed the Nintendo loan was fueled by the exigencies of the debtor, however, the facts of that loan transaction demonstrate the rapidly worsening circumstances of the debtor that were present when TKA loaned the Nintendo loan proceeds to the debtor.

*118 TKA made all of the proceeds of the Nintendo loan available to the debtor and executed demand notes to memorialize each loan. The demand notes provided for interest payments on the loans to be made monthly at a rate that exceeded the interest paid to Liberty by one percent. The terms and conditions of these notes were in accord with all of the other notes that had been executed between TKA and the debtor post-confirmation.

The court determined in Section IV.G.5. above, however, that less than one quarter of the money that TKA loaned to the debtor from the Nintendo loan was used to purchase Nintendo products. The remainder was used to support the debtor’s operations during the months preceding the Christmas season. TKA’s loans to the debtor represented by the Nintendo loan were clearly not financial transactions incurred in the normal course of the debtor’s financial relations with TKA but instead were unusual actions “undertaken during the ‘slide into bankruptcy.’ ” Grove Peacock Plaza, 142 B.R. at 518.

Accordingly, the court concludes that TKA has failed to establish that the loans represented by the Nintendo loan were incurred in the ordinary course of dealing between TKA and the debtor.

(5) The guaranty fees for the C & S line of credit.

TKA borrowed money from C & S on its line of credit. The debtor was neither obligor nor guarantor on that obligation. Although TKA made the monies available to the debtor that it obtained on the C & S line of credit, those transactions were separate and independent of TKA’s obligations to C & S. The debtor executed a demand note for each disbursement made by TKA of monies obtained from the C & S line of credit. TKA charged an interest rate that was higher than the interest rate it was paying for those monies.

At the same time, TKA charged the debtor guaranty fees. The defendants offered no explanation for why the debtor was charged these fees, despite having no legal obligation on the underlying note. TKA charged the debtor these guaranty fees in June and July even though the underlying C & S obligation was completely paid. As the debtor’s financial condition worsened, TKA increased the guaranty fees. TKA maintained no formal record of the debtor’s obligation to pay the guaranty fees or the subsequent increase in these fees. The fees themselves, at all times, were excessive and unreasonable in amount. The record is devoid of any justification for the debtor’s payment of guaranty fees, other than as a means to divert proceeds of the debtor into the pockets of Morrow, Angle, and Woodward. Accordingly, the court finds that the debtor’s incurring of the obligation to pay guaranty fees was not in the ordinary course.

(6) Summary for whether debts to TKA were incurred in the ordinary course of business.

For the foregoing reasons, the court finds that TKA has failed to establish by a preponderance of the evidence that the obligations represented by the Liberty loan, the C & S line of credit, the Nintendo loan, and the C & S guaranty fees were incurred in the ordinary course of dealing between TKA and the debtor as required by Section 547(c)(2)(A).

ii. Debt to M & D.

In deciding whether the debt owed to M & D was incurred in the ordinary course of both the debtor’s and M & D’s businesses, the court must start by examining the relationship between M & D and the debtor. As discussed in Section IV.D.2. above, Morrow and Angle — the debtor’s principals — formed M & D for the purpose of acquiring and holding the First Union claims against the debtor. Morrow and Angle were majority shareholders, officers, and directors of M & D. Accordingly, an insider relationship existed between Morrow and Angle and M & D.

Morrow and Angle were also affiliates and therefore insiders of the debtor. Each owned 20 percent of the shares in *119 TKA, the entity that held the majority of the debtor’s stock. 126 In addition, Morrow and Angle were officers and directors of the debtor and in control of its operations. Morrow and Angle were thus both affiliates of the debtor because each directly or indirectly owned, controlled, or held with the power to vote 20 percent or more of the outstanding voting securities of the debtor. 11 U.S.C. § 101(2)(A). Because an affiliate is included within the definition of insider, Morrow and Angle were each insiders of the debtor. 127 11 U.S.C. § 101(31)(E). See also Equibank v. Dan-Ver Enterprises, Inc. (In re Dan-Ver Enterprises, Inc.), 86 B.R. 443, 449 (Bankr.W.D.Pa.1988).

Because M & D was an insider of two affiliates of the debtor, Morrow and Angle, M & D was an insider of the debtor in its own right. Butler v. David Shaw, Inc., 72 F.3d 437, 441 (4th Cir.1996). See also 11 U.S.C. § 101(31)(E) [insider is defined as “affiliate or insider of an affiliate as if such affiliate were the debtor”].

As was the case with TKA and the debt- or, M & D and the debtor had an identity of ownership and management. The M & D note transaction would therefore not seem to fall within the ambit of arms-length commercial financial relations and a closer look at the transaction between M & D and the debtor is required.

No prior course of dealing exists between M & D and the reorganized debtor because M & D was formed specifically for the purpose of acquiring the First Union claims. Accordingly, the court will look to the transaction itself in the context of the facts and circumstances present at the time it was incurred to determine the “ordinariness” of the transaction.

As described in Section IV.D.2. above, the debtor negotiated a compromise with First Union in settlement of the bank’s claims against it during the pendency of the Toy King I case. Under the terms of the compromise, the debtor was to return real estate and make a payment to First Union on its unsecured claims. The debt- or’s payment on the unsecured claims was to be in an amount substantially less than that provided for in the plan. First Union purportedly was willing to accept a lower dividend because it wanted to be paid in advance of confirmation.

Rather than structure the debtor’s compromise with First Union in a way that would benefit the debtor and its creditors, the debtor’s principals structured the compromise in a manner that would give them the benefit personally. Morrow and Angle, therefore, reached a private agreement with First Union to acquire its claims. They formed a corporation, M & D, for that purpose. Although counsel for the debtor sent a letter to counsel for the unsecured creditors committee advising the committee of the principals’ plans to acquire the claims, the letter misstated or omitted material facts, including the timing of the transaction. The letter indicated that First Union required consummation of the transaction immediately and stated that the closing would occur on the following day. Counsel sent the letter during the Christmas holidays. It is clear that the letter was timed to preclude any action by the unsecured creditors committee.

The debtor did not file a motion seeking the court’s approval of the arrangement reached between the debtor and First Union, despite the fact that part of the arrangement provided for the surrender of collateral and the pre-confirmation payment of First Union’s secured claim. 128 *120 Instead, the debtor itself filed a motion to substitute M & D for First Union as claimant, with First Union’s written stipulation to the substitution attached. First Union was the only creditor who received service of that motion. The motion did not contain many of the details of the transaction, nor did it disclose the relationship between the substituted claimant and the debtor. The court granted the motion on an ex parte basis.

Notwithstanding the representations in the letter to counsel for the unsecured creditors committee that “time was of the essence,” M & D did not pay First Union for its unsecured claims until almost three months after the court entered the order granting the motion to substitute claimant and some four months after the time debt- or’s counsel said the transaction was to close. M & D did not make the payment to First Union until the court approved the debtor’s disclosure statement and the outcome of the Toy King case was in little doubt.

In marked contrast, the debtor made its initial payment on the First Union claims to M & D in the very first distribution to creditors after confirmation of Toy King I. That payment contained some amount of “interest” and “profit” in derogation of the terms of the confirmation order which provided for interest to be paid only on claims that were unpaid for more than 90 days from the date of confirmation. The debtor executed a note for the remainder of the dividend due on the First Union claims on terms that were inconsistent with the confirmed plan. 129

The M & D transaction was unusual and out of the ordinary. It was a special arrangement between the principals of the debtor, the debtor, and First Union, negotiated and consummated largely outside of the scrutiny of the unsecured creditors, the United States trustee, and the bankruptcy court. The debt itself was strue-tured in a way that was inconsistent with the terms of the confirmed plan.

For all of these reasons, the court concludes that the M & D obligation was not incurred in the ordinary course of dealing between M & D and the debtor within the meaning of Section 547(c)(2)(A).

c. Were the payments made in the ordinary course of the businesses of both the debtor and the creditors?

i. Introduction.

Whether the transfer at issue occurred in the ordinary course of business between the parties within the meaning of Section 547(c)(2)(B) is a subjective inquiry. McLaughlin v. Hoole Machine & Engraving Corp. (In re Parkline Corp.), 185 B.R. 164, 169 (Bankr.D.N.J.1994). The court must focus on the ordinary payment pattern between both the debtor and the creditor. Central Hardware Co. v. The Walker-Williams Lumber Co. (In re Spirit Holding Co.), 214 B.R. 891, 898 (E.D.Mo.1997), aff'd, 153 F.3d 902, 905 (8th Cir.1998) [“[I]t is necessary to look at not only the creditor’s actions during the preference period, but also the debtor’s actions.”]; Gro ve Peacock Plaza, 142 B.R. at 518. The transfers should demonstrate “some consistency with other business transactions between the debtor and the creditor.” Spirit Holding, 214 B.R. at 897.

ii. Payments to TEA.

(1) Introduction.

In this ease, TKA and the debtor did not have an established history or course of dealing prior to the preferential payments at issue here. Although the parties did have a creditor/debtor relationship during the pendency of Toy King I, that relationship was shaped by the limitations and restrictions imposed by the bankruptcy *121 process. In any event, the defendants presented no evidence of the parties’ course of dealing during Toy King I.

The absence of an historical pattern of course of dealing is not fatal, however, because the court can also consider the written contractual terms governing the relationship of the parties. Fred Hawes Organization, 957 F.2d at 245. Cf. Parkline, 185 B.R. at 169 [non-adherence to written terms of contract was within ordinary course where the parties had a stable history of course of dealing over a long period of time]. The court will therefore look to the written contracts to establish the initial course of dealing between TKA and the debtor. Although TKA and the debtor did not execute a promissory note for every transaction between them, it is undisputed that TKA billed the debtor for all its obligations consistent with the terms of the executed notes. Accordingly, the terms of the TKA notes represents a course of dealing with respect to all indebtedness that the debtor owed to TKA: the Liberty loan, the C & S line of credit, and the Nintendo loan.

(2)Payments of interest.

Each promissory note required the debtor to pay interest charges on the last day of every month in which the loan was outstanding. Every month, TKA sent the debtor a written statement that reflected the interest owed. Each statement also listed the due date as the last day of the month. The debtor paid the interest charges in full as they were billed. The evidence reflects that the debtor made these payments by check drawn on its operating account prior to the due date. The debtor made no late payments.

All of the debtor’s payments of interest on its obligations to TKA were made in a consistent and ordinary manner. There was little or no deviation in the manner and timing of these payments from the date of the confirmation of Toy King I through the filing of the involuntary petition initiating Toy King II. Accordingly, the defendant has established that all interest payments made by the debtor on the obligations represented by the Liberty loan, the C & S line of credit, and the Nintendo loan were made within the ordinary course of dealing between TKA and the debtor within the meaning of Section 547(c)(2)(B).

(3)Payments of guaranty fees.

The debtor paid to TKA guaranty fees on notes that were tied to TKA’s borrowing on the C & S line of credit. The debtor did not execute any documentation of its agreement to pay these fees to TKA. TKA, however, sent a monthly statement to the debtor that detailed the total interest and guaranty fees owed and the debtor promptly paid the amounts requested in a consistent and timely manner. As the court stated in the foregoing section, the debtor did not deviate in its method or in the timing of payment of these statements during the period between the confirmation of Toy King I and the filing of the involuntary petition in Toy King II. Accordingly, the defendant has established that all guaranty fee payments made by the debtor on its obligations represented by the C & S line of credit were made within the ordinary course of dealing between TKA and the debtor within the meaning of Section 547(c)(2)(B).

(4)Payments of principal.

It is a closer question with respect to the debtor’s principal payments to TKA on its obligations. Each of the promissory notes executed by the parties stated that the principal balance of each promissory note was due upon demand. The procedure that TKA used to make demand on the debtor for the repayment of the principal balance on its promissory notes was not made a matter of evidence in this case. 130 The defendant guarantors stipu *122 lated, however, that principal payments on the debtor’s obligations were timed to correspond to TKA’s payments on the underlying obligation. Accordingly, the court will look to the payment terms of the underlying obligations.

TKA executed a promissory note on each of its obligations. The promissory note on the Liberty loan provided for a due date for payment of principal of June 30, 1990. The C & S promissory note contained a due date for payment of principal on December 30, 1989. Similarly, the Nintendo loan promissory note provided for a due date for payment of principal of December 30,1989.

The debtor paid TKA the principal owing on the C & S line of credit on December 1, 1989. The debtor made two payments to TKA on the principal balance of the Nintendo loan, one on December 8, 1989, and one on December 18, 1989. Finally, the debtor made two principal payments to TKA on the Liberty loan on December 28, 1989, and on January 8, 1989. In every case, the debtor made the principal payments weeks before the due date of the underlying indebtedness. In the case of the Liberty loan, the payment of principal was in advance of the due date of the underlying indebtedness by a period of months.

On its face, there would appear to be nothing out of the ordinary in this payment history. Indeed, the paradigm example of a course of dealing that is out of the ordinary course is a variation in the timing or method of payments, most notably late payments. See Craig Oil, 785 F.2d at 1567. The variation in method or timing is indicia of credit relations that have moved out of the ordinary course and into the realm of preferential payments as the debtor or the creditor seek to improve their positions in the face of impending financial disaster.

In this case, there is no variation because the debtor and TKA had no established course of dealing with respect to principal payments. The debtor made all of the payments before the due dates of the underlying obligations by check drawn on the debtor’s operating account. There is nothing in the payment history itself, therefore, to indicate that the payments were made out of the ordinary course.

The court is required, however, to pay “particular regard to the circumstances surrounding” the payment at issue. J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp., 96 B.R. 474, 476 (D.N.J.1988), aff'd, 891 F.2d 66, 72 (3d Cir.1989). Most typically, the circumstances under consideration are the collection practices of the creditor. See Grant v. Cosec International, Inc. (In re L. Bee Furniture Co.), 206 B.R. 989, 992-93 (Bankr.M.D.Fla.1997). A variation in collection practices can be indicative of external pressure placed on the debtor for the purpose of preferring the creditor. Collection practices that are unusual and are designed to obtain a benefit for the creditor during financially troubled times have been held to be out of the ordinary course of dealing. See, e.g., Craig Oil, 785 F.2d at 1566-67 [late payments and payments made by cashier’s checks not in the ordinary course]; Spirit Holding, 214 B.R. at 899 [payment by wire transfer not in the ordinary course]; J.P. Fyfe, 96 B.R. at 478 [deal that imposed new terms and constraints as a direct result of creditor’s knowledge of debtor’s deteriorating financial condition not in the ordinary course]; Valley Steel, 182 B.R. at 737 [late payments out of the ordinary course]; Clark v. Balcor Real Estate Finance, Inc. (In re Meridith Millard Partners), 145 B.R. 682, 688 (D.Colo.1992), aff'd, 12 F.3d 1549, 1554 (10th Cir.1993), cert. denied, 512 U.S. 1206, 114 S.Ct. 2677, 129 L.Ed.2d 812 (1994) [escrow or lock box arrangement not in the ordinary course].

In this case, the historical course of dealing in the retail toy industry permitted the debtor to delay payment on most of its trade debt until after the Christmas season. This delay alleviated much of the *123 financial pressure that would have otherwise been placed on the debtor. In addition, the creditor, TKA, and the debtor have an identity of interest. It was unnecessary, therefore, for TKA to apply pressure on the debtor for the purpose of collecting its debt. TKA, through its principals, essentially made all decisions as to how much the debtor would pay on its obligations and when it would do so. An examination of the collection practices of the creditor in this case, therefore, is not especially illuminating on this point.

The court, however, is not limited to inspecting the creditor’s actions. It may also consider the circumstances surrounding the debtor’s actions. In DuVoisin v. Anderson (In re Southern Industrial Banking Corp.), 92 B.R. 297, 306 (Bankr.E.D.Tenn.1988), the court found that the debtor’s actions in “slow walking” payments — deliberately slowing down the payment process — during financial crisis were not in the ordinary course. Similarly, the court held in Ledford v. Sears, Roebuck & Co. (In re Williams), 5 B.R. 706, 707 (Bankr.S.D.Ohio 1980), that payments made by a debtor were outside the ordinary course where the debtor, on his own and without pressure, sharply increased his monthly payment on goods bought on credit in the face of an impending judgment. Recently, the court in Securities & Exchange Commission v. First Jersey Securities, Inc. (In re First Jersey Securities, Inc.), 180 F.3d 504, 514 (3d Cir.1999), held that the debtor’s payment of fees to its law firm was not in the ordinary course of the parties where the manner and timing of the payment was suspect. In that case, although the payments were timely, the law firm was aware of the debtor’s precarious financial situation and accepted restricted stock in payment of its fees. Id. at 513.

The internal circumstances surrounding TKA and the debtor’s decisions to make the payments of principal in advance of the due date on the underlying debt are more instructive in determining whether the preferential payments of principal were within the ordinary course of the parties. At the time the debtor made these payments, the demise of the debtor as an operating entity was in little doubt. On November 17, 1989, Morrow and Angle met with Liberty’s loan officer, Horne, to advise him that the debtor would post a substantial loss for the year and would be unable to make any principal payment on the Liberty loan. Shortly thereafter, the debtor paid the principal owing on the C & S line of credit obligations and an initial payment of principal on the Nintendo loan obligations. Both payments were in advance of TKA’s due dates on the underlying obligations.

On December 11, 1989, Morrow ran an advertisement in the Wall Street Journal putting the debtor up for sale or merger. One week later, Morrow wrote a letter to Horne advising him that the debtor was going to post a substantial loss for the year and of his efforts to sell or merge the debtor.

The debtor then made its final payment of principal to TKA on the Nintendo loan obligations. In contravention of the representations made at the November 17, 1989, meeting, the debtor also made two payments of principal to TKA on the Liberty loan obligations. All of these payments served to prefer the parent company and its shareholders, many of which had an identity of interest with the debtor, to the detriment of the other unsecured creditors, who did not.

Under these circumstances, the court concludes that the debtor’s payments of principal to TKA, made in advance of any due date on the underlying indebtedness and in the face of impending financial disaster, were not made in the ordinary course within the meaning of Section 547(c)(2)(B).

iii. Payment to M & D.

The M & D debt was structured in two parts, with the first payment being made in the debtor’s initial distribution of *124 dividends and the remainder paid pursuant to an executed promissory note. In addition, the M & D obligation was subject to a subordination agreement executed by the debtor. The agreement operated to subordinate the M & D note to all of TKA’s obligations to Liberty. The subordination agreement prohibited the payment of principal and interest on the M & D note, other than as provided for in the note itself, without Liberty’s written consent. The subordination agreement specifically stated that, “[i]n any event the Borrower shall not pay, and the creditor shall not receive, any prepayment of principal or interest payable with respect to the Subordinated Debt prior to the date on which such sums are due and payable in the ordinary course under the terms of such Subordinated Debt.” The promissory note provided for principal payments to be made monthly beginning in March 1990.

The debtor made a payment to M & D on December 29, 1989, paying the entirety of the balance owing on the subordinated note, inclusive of interest and principal. This payment was in advance of the due date, was done without the written consent or knowledge of Liberty, and was in direct derogation of the terms of the note itself, as well as the subordination agreement. The defendants explain the payment as necessary to obtaining a final decree in Toy King I and as a prerequisite to the anticipated merger with VMI. Even were this true, 131 the payment still would have been made out of the ordinary course of business of both the debtor and M & D.

In CIS, 195 B.R. at 260, the court held that the payment of a bonus to and by the principal, in the face of the debtor’s insolvency and on the eve of bankruptcy, was not in the ordinary course. The court stated that the principal “must be charged with the highest duty since he was the top ranking executive of CIS, with the highest level of responsibility and compensation from the company.” Id. at 259. The court found the payment to be extraordinary because the principal “was the top executive of CIS with the sole power to cause and control the direction, timing and nature of the Payment at a time when he knew that CIS was insolvent and would be filing for bankruptcy.” Id.

Similarly, in this ease, Morrow was the top ranking officer of the debtor and the sole officer making financial decisions at the time of the payment. He too knew that the debtor was insolvent at the time the payment was made and that the demise of the debtor was imminent. Morrow owed the debtor the same allegiance owed by the principal in CIS and through his actions demonstrated the same disregard for the best interests of the company as did the principal in GIS.

Morrow caused the debtor to pay the M & D note in full at a time when he knew that the debtor was unable to pay its debts as they came due. At the time the debtor paid the M & D note, the debtor owed nearly $2 million to its trade creditors. *125 The debtor’s financial demise was in the end stages. In acknowledgment of this, Morrow had placed an advertisement in the Wall Street Journal seeking to sell or merge the company. In causing the debt- or to pay the M & D note, Morrow sought to advantage himself to the detriment of the company and its creditors in the face of the impending liquidation of the debtor.

Accordingly, the court finds that the debtor’s payment to M & D of principal and interest on the M & D note on December 29, 1989, was out of the ordinary course of dealing between the parties within the meaning of Section 547(c)(2)(B).

d. Were the payments made in accordance with ordinary business terms?

i. Introduction.

This Section 547(c)(2)(C) element is an objective component requiring “proof that the payment is ordinary in relation to the standards prevailing in the relevant industry.” Roberts v. Service Transport, Inc. (In re Ideal Security Hardware Corp.), 186 B.R. 237, 239 (Bankr.E.D.Tenn.1995). This objective component serves two functions.

One is evidentiary. If the debtor and creditor dealt on terms that the creditor testifies were normal for them but that are wholly unknown in the industry, this casts some doubt on his (self-serving) testimony .... The second possible function of the subsection is to allay the concerns of creditors that one or more of their number may have worked out a special deal with the debtor, before the preference period, designed to put that creditor ahead of the others in the event of bankruptcy.

Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1048 (4th Cir.1994) (quoting In re Tolona Pizza Products. Corp., 3 F.3d 1029, 1032 (7th Cir.1993)).

In examining this element, the court must focus on the business “practices of the creditor’s competitors.” Spirit Holding, 214 B.R. at 899. The defendant is required to adduce evidence of “a prevailing practice among similarly situated members of the industry facing the same or similar problems.” Id. “In other words, the benchmark for ordinariness is the norm in the creditor’s industry.” Id.

Our court of appeals has recently made clear that the defendant must make a showing of ordinariness in relation to industry standards to prevail on the “ordinary course” defense of Section 547(c)(2)(C). A.W. & Associates, 136 F.3d at 1442. The court went on to say that “[industry standards do not serve as a litmus test by which the legitimacy of a transfer is adjudged, but function as a general backdrop against which the specific transaction at issue is evaluated.” Id. at 1443.

Accordingly, the defendant must:

... prove that the debtor made its pre-petition preferential transfers in harmony with the range of terms prevailing as some relevant industry’s norms. That is, subsection C allows the creditor considerable latitude in defining what the relevant industry is, and even departures from that relevant industry’s norms which are not so flagrant as to be “unusual” remain within subsection C’s protection. In addition, when the parties have had an enduring steady relationship, one whose terms have not significantly changed during the pre-pe-tition insolvency period, the creditor will be able to depart substantially from the range of terms established under the objective industry standard inquiry and still find a haven in subsection C.

Advo-System, 37 F.3d at 1050 (quoting Fiber Lite Corp. v. Molded Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 18 F.3d 217, 226 (3d Cir.1994)). These decisions are cited with approval in A.W. & Associates, 136 F.3d at 1442.

*126 ii. Payments to TKA.

In its proof, TKA failed to define the industry that is similarly situated to it, the creditor here. TKA did not present any evidence beyond the adumbrated testimony of Horne and Morrow, representing Liberty and TKA respectively, that would enable the court to compare the subjective course of dealing between TKA and the debtor with an objective, normative, creditor’s industry standard. The testimony of Horne and Morrow was limited to the specific practices of Liberty, TKA, and the debtor rather than general practices in the retail toy industry or other relevant industry, whatever that might be.

The court finds the testimony of Horne and Morrow, to the limited extent that it could be interpreted as describing an industry standard, to be both self-serving and insufficient to establish an objective industry standard. Testimony of the defendants, even in the event that it does include evidence of industry practice, is “inherently suspect because it is to be expected that the testimony of an officer of the defendant would be favorable to the defendant’s position.” Ideal Security Hardware, 186 B.R. at 239. Moreover, the evidence’s weight is so insubstantial as to fail to meet the preponderance of the evidence standard. See Anderson v. Ganis Credit Corp. (In re Weilert R.V., Inc.), 245 B.R. 377, 386 (Bankr.C.D.Cal.2000)[“[H]owever broad an interpretation is applied, some proof of industry standard is warranted.”].

In the absence of any evidence of an industry standard, the court is required to conclude that TKA failed to establish this element of the ordinary course defense. See, e.g., Spirit Holding, 214 B.R. at 901-02 [vague, generalized evidence of industry standard provided by an employee of defendant insufficient to establish industry norm]; Ideal Security Hardware, 186 B.R. at 239 [defendant did not establish element of proof of the ordinary business terms of the industry]; Hovis v. Powers Construction Co. (In re Hoffman Associates, Inc.), 194 B.R. 943, 955 (Bankr.D.S.C.1995) [defendant could not prevail on its affirmative defense because there was a lack of credible evidence of industry norm].

Accordingly, TKA has failed to establish that the preferential payments made by the debtor to it were in the ordinary course of dealing prevalent in the industry within the meaning of Section 547(c)(2)(C).

iii. Payment to M & D.

The record is devoid of any evidence of the relevant industry or the industry standard with respect to the debtor’s payment to M & D. For the reasons stated in Section V.C.7.d.ii. above the court finds that M & D has failed to establish that the preferential payment made by the debtor on December 29, 1989, to M & D was in the ordinary course of dealing prevalent in the industry within the meaning of Section 547(c)(2)(C).

e. Summary for the ordinary course of business affirmative defenses.

As the foregoing describes, TKA and M & D have failed to establish by a preponderance of the evidence one or more of the essential elements of the defense as set forth in Section 547(c)(2). Accordingly, the court finds that all of the preferential transfers occurred outside the ordinary course of business of TKA and the debtor and are recoverable by the plaintiff.

D. FRAUDULENT TRANSFER CLAIMS.

1. Transfers by the debtor to TKA and M & D made between the confirmation of Toy King I and the commencement of Toy King II.

The unsecured creditors committee seeks to set aside as fraudulent transfers payments that the debtor made to TKA, M & D, Liberty, and the individual defendants pursuant to the provisions of Sections 548 and 550 of the Bankruptcy Code. The committee also seeks the same relief pursuant to Sections 726.105 and 726.106, Florida Statutes. Because the applicable *127 federal and state law is substantially the same, the court will deal with the federal and state claims together.

The committee attacks the debtor’s payments of principal, interest upeharges, and guaranty fees to TKA on the C & S line of credit, as well as payments of principal, loan fees and costs, and interest upeharges on the Liberty and Nintendo loans. The committee also seeks to set aside the debt- or’s payment to M & D of interest and “profit” on the first distribution on the First Union claims to the extent that it exceeded interest paid on claims in the same class under the Toy King I confirmed plan. In addition, the committee seeks to set aside the debtor’s December 29, 1989, payment to M & D of both principal and interest in derogation of the subordination agreement. The debtor made all of the payments under attack within one year of the commencement of the Toy King II case.

The debtor paid TKA $2,231.26 in interest upeharges, $250,000 in principal, and $20,283.22 in guaranty fees on account of the C & S line of credit between May 10, 1989, and December 28, 1989. During the same period, the debtor paid TKA $8,632.12 in interest upeharges and $600,000 in principal 132 on the Liberty loan and $2,479.22 in interest upeharges and $700,000 in principal on the Nintendo loan. The debtor also paid M & D $439,506.17 in principal, interest, and “profit” between the period of July 6, 1989, and December 29, 1989, representing the dividend on the First Union claims that M & D acquired in Toy King I.

2. Actual fraud.

a. Badges of fraud.

i. Introduction.

Section 548 of the Bankruptcy Code, Fraudulent transfers and obligations, permits the avoidance of:

(a)(1) ... any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted;

* * * *

The underlying purpose of this fraudulent transfer statute is to “prevent valuable assets from being transferred away from debtors in exchange for less than fair value, leaving insufficient funds to compensate honest creditors.” 4 Collier on Bankruptcy, f 548.01 at 548-4-24 (15th ed.1993). “In fraudulent conveyance actions, it is the trustee’s burden to prove all issues.” Vurchio, 107 B.R. at 364; 4 Collier on Bankruptcy, ¶ 548.10 at 548-111-12 (15th ed.1993). The plaintiff must do so by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). See Western Wire Works, Inc. v. Lawler (In re Lawler), 141 B.R. 425, 429 (9th Cir. BAP 1992) [applying Grogan to all bankruptcy proceedings grounded in fraud].

Actual fraud is seldom proved by direct evidence. Because “[p]ersons whose intention is to shield their assets from creditor attack while continuing to derive the equitable benefit of those assets rarely announce their purpose, ... it must be gleamed [sic] from inferences drawn *128 from a course of conduct.” Freehling v. Nielson (In re F & C Services, Inc.), 44 B.R. 863, 872 (Bankr.S.D.Fla.1984). Thus, a “finding of the requisite intent may be predicated upon the concurrence of facts which, while not direct evidence of actual intent, lead to the irresistible conclusion that the transferor’s conduct was motivated by such intent.” Id. (quoting 4 Collier on Bankruptcy, ¶ 548.02[5] at 548.33-34 (15th ed.1984)).

To determine whether the circumstantial evidence supports such an inference of intent, the court looks to the existence of certain “badges of fraud.” In a recent Section 548 fraudulent transfer decision, our court of appeals adopted the badges of fraud contained in the Florida fraudulent transfer statute. Levine v. Weissing (In re Levine), 134 F.3d 1046, 1053 (11th Cir.1998). These “badges of fraud” include whether:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially all the debtor’s assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k)The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Id. (citing § 726.105(2), Fla. Stat.)

Although “[t]he presence of a single badge of fraud may spur mere suspicion, the confluence of several can constitute conclusive evidence of an actual intent to defraud.... ” Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1st Cir.1991). The evidence in this case clearly establishes that multiple badges of fraud are present in every transfer under attack as a fraudulent transfer.

ii. Transfers to insiders.

The first badge of fraud present in this case, transfer to an insider, is also one of the most important. See F & C Services, 44 B.R. at 868 [“Fraud will be presumed when the transfer occurs between corporations controlled by the same officers and directors.” (citing J.I. Kelley Co. v. Pollock & Bernheimer, 57 Fla. 459, 49 So. 934, 935 (1909)) ]. See also, White v. Coon (In re Purco, Inc.), 76 B.R. 523, 529 (Bankr.W.D.Pa.1987) [The actions of “insiders or those who exert considerable influence over the affairs of a corporate debtor should receive rigorous scrutiny.”]; Lipman v. Norman Packing Co., 146 Va. 461, 131 S.E. 797, 798 (1926) [“As a general rule the burden of proof rests on him who charges fraud, and not on him whose conduct is charged to be fraudulent. But, where the transaction assailed is between [insiders], only slight evidence is required to shift the burden of showing its bona fides.” (citing Mankin v. Davis, 82 W.Va. 757, 97 S.E. 296, 298 (1918)) ]. Indeed, our court of appeals recently held that the district court erred in not considering the close relationship between the parties, among other things, when it held that a transfer was not fraudulent. General Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1500 (11th Cir.1997) *129 [remanding the case for further consideration].

This “badge of fraud” is so significant that in some cases an insolvent debtor’s transfer to an insider has caused the court to make a finding of actual fraud in the absence of any other badges of fraud. See, e.g., Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 806 (9th Cir.1994); Terrific Seafoods, 197 B.R. at 732. Cf. Food & Fibre Protection, 168 B.R. at 418 [because the insider relationship “did not fit the traditional mold,” the court found no actual fraud where the only other badge of fraud was insolvency].

Indeed, under Florida law, any transfer made in payment of an antecedent debt to an insider who knew or should have known that the debtor was insolvent at the time of payment is constructively fraudulent. § 726.106(2), Fla. Stat.

As the court concluded earlier in Sections V.C.3.b. and V.C.7.b.ii. above, TKA and M & D were both insiders of the debtor. All payments to them, therefore, carry with them this badge of fraud,

iii. Concealment of transfers.

(1) Collective action.

The second badge of fraud implicated in this case is the debtor’s concealment of material aspects of its transfers to TKA and M & D. Morrow, Angle, and King, all principals of the debtor, either individually or collectively, misrepresented the financial condition of the debtor, including material aspects of the transfers at issue here. Because the alleged fraud at issue in this case arises out of the collective actions of the principals perpetrated through the debtor, the collective group product doctrine is applicable. Under that doctrine, individual liability attaches to each member of a group that has contributed collectively to a fraud. Atlantis Group, Inc. v. Rospatch Corp. (In re Rospatch Securities Litigation), 760 F.Supp. 1239, 1255 (W.D.Mich.1991). When alleging a collective fraud, therefore, “specific allegations about the role of each defendant are unnecessary.” Id. (quoting, In re Consumers Power Co. Securities Litigation, 105 F.R.D. 583, 593 (E.D.Mich.1985)).

The fraudulent transfers that the plaintiffs allege in this case revolve around the collective actions of the principals. It was these collective actions, represented through the corporate entity, which resulted in the transfers at issue here. Accordingly, the court will not seek to attach specific responsibility for the debtor’s actions to any individual defendant except where necessary for its decision in other parts of this opinion. It is sufficient to state that the debtor’s principals all contributed to the debtor’s concealment of the transfers at issue here. 133

Because each is an insider of the debtor and in a position to control the disposition of its property, the acts of concealment and the accompanying inference of fraudulent intent of each individual may be imputed to the transferor, the debtor. Roco, 701 F.2d at 984. See also, Armstrong v. Ketterling (In re Anchorage Marina, Inc.), 93 B.R. 686, 691 (Bankr.D.N.D.1988) [“In cases such as this one in which the Debtor is a corporation the intent of the controlling officers and directors is presumed to be the Debtor’s intent.”]. Morrow, Angle, and King were insiders because each was an officer and director of the debtor. See 11 U.S.C. § 101(31)(B)(i) and (ii). In addition, Morrow and Angle were responsible for the financial manage *130 ment 134 of the debtor and therefore were also insiders by virtue of being in control of the debtor. See 11 U.S.C. 101(31)(B)(iii).

(2) During Toy King I.

The principals took affirmative steps to conceal the nature and extent of the debt- or’s transfers to TKA and M & D and in so doing misrepresented the debtor’s financial condition to its trade creditors. The concealment began when the debtor filed a false financial statement, signed by King under penalty of perjury, during Toy King I that omitted the debtor’s borrowing from TKA. 135 The debtor also failed to seek court approval for that borrowing, even though Morrow knew that it was required. As a consequence of this concealment, the Toy King I unsecured creditors did not know that the debtor was suffering from inadequate cash to support its operations at the time that they cast their votes in favor of the debtor’s plan.

Morrow and Angle also concealed their acquisition of the First Union claims. The debtor filed the motion for substitution on M & D’s behalf. That motion did not contain any facts or information that linked Morrow and Angle with the substituted claimant, M & D, or disclose the insider relationship between M & D and the debtor.

Morrow and Angle similarly concealed from the debtor’s general unsecured creditors the profit that would accrue to them upon the debtor’s payment of the negotiated dividend on the First Union claims. The motion to substitute claimant did not contain any facts or information showing M & D’s cost to acquire the First Union claims or its anticipated profit.

(3) Touche Ross pro forma.

Morrow provided projections and assumptions to Touche Ross for its use in drafting the debtor’s pro forma. Morrow planned to use the pro forma to solicit monies to fund the Toy King I plan and to maintain the debtor’s operations post-confirmation. Morrow also planned to use the pro forma in making credit requests from toy manufacturers to acquire inventory to be sold by the debtor post-confirmation.

Morrow understood that the pro forma was intended to provide a projection of the debtor’s financial condition immediately following confirmation. The pro forma was based upon the debtor’s historical financial information at the end of the 1988 fiscal year that was then adjusted in accordance with Morrow’s assumptions and projections. Morrow used assumptions, however, that were inaccurate, contingent, and/or that would occur over a period of time substantially before or after confirmation. For example, he directed Touche Ross to show $1 million as an asset and in shareholder’s equity, even though he knew that the money would be disbursed incrementally over time and even though he was aware that TKA. was going to treat the transaction as a liability of the debtor.

Morrow understated the plan payment liabilities by decreasing the scheduled total to an amount that he estimated would be owed after the completion of objection to claims litigation or adversary proceedings against specific claimants. Morrow knew that those matters would be concluded long after confirmation and that the results were uncertain. Morrow took a wholly inconsistent position with respect to lease rejection damages. He chose not to include lease rejection damages as a liabili *131 ty on the pro forma balance sheet because those damages were speculative. 136

At the same time, Morrow substantially understated current liabilities by denominating January 29,1989, as the “snapshot” date of the pro forma. By using that date, Morrow was able to incorporate the positive effects of the reorganization that would accrue at a much later point or points in time and set those positive effects against liabilities at a much earlier point of time. Essentially, by selecting the January 29, 1989, date Morrow was able to ignore the debtor’s substantial losses incurred between January 29, 1989, and the actual Toy King I confirmation date.

The court concluded in Section IV.D.3. above that Morrow crafted the assumptions used in formulating the pro forma in a way designed to inflate artificially and inaccurately the stated net worth of the debtor. Accordingly, the court concludes that Morrow intended to conceal the debt- or’s true financial position from its creditors when he directed Touche Ross to incorporate these assumptions into the debtor’s pro forma.

(4) Financial statements.

This pattern of concealment continued after the confirmation of Toy King I and was evidenced most strongly in the debt- or’s balance sheets. Each of the debtor’s balance sheets prepared between the date of the confirmation of Toy King I and the filing of Toy King II contained omissions and misrepresentations of the debtor’s transfers to TKA and M & D. The most egregious of these was the posting of $1 million of the Liberty loan as equity in the debtor rather than the liability it actually was.

The debtor also concealed the totality of its obligations to TKA by understating its liability for the monies it received from TKA from the $500,000 Liberty line of credit, including the obligation to pay loan fees and costs to TKA. The debtor failed to post accrued interest charges on its pre-petition obligations (plan payments to Toy King I creditors) that remained unpaid for more than 90 days.

The principals used these balance sheets to conceal from the trade creditors the actual extent of the debtor’s obligations to the parent. In addition, the principals misrepresented the debtor’s actual financial condition in their communications by letter and telephone with trade creditors. The principals indicated in these communications that the debtor was performing well and was at or close to its projected levels. At the time that the principals were making these communications, they were unable to buy from Nintendo on credit and were in active negotiations with Liberty for additional monies because the debtor did not have sufficient capital to maintain operations up to and through the Christmas season.

In Sugarman, 926 F.2d at 1250, a principal of the debtor prepared financial statements that misrepresented the debtor’s loan obligations and understated the amount of interest being paid. Another principal used these financial statements to solicit purchasers of debentures issued by the debtor. The debtor used the proceeds from the sale of these debentures to fund its operations. The court found that the principals “acted in concert to depict [the debtor’s] business operations in a false light in order to lure further financing through debenture sales.” Id. at 1250-51.

Similarly, in this case, the principals’ concealment of the nature and extent of the debtor’s liabilities and actual net worth was intended to present the debtor in a false light to solicit additional trade credit. The trade creditors relied to their detriment on the Touche Ross pro forma, the *132 debtor’s financial statements, and on the written and oral communications of the debtor and its principals. The trade creditors made favorable credit decisions on the basis of the debtor’s overstated net worth. See, e.g., Jezarian v. Raichle (In re Stirling Homex Corp.), 579 F.2d 206, 214-15 (2d Cir.1978) [“When persons or institutions lend money to a corporation, or otherwise become its creditors, they do so in reliance upon the protection and security provided by the money invested by the corporation’s stockholders the so-called equity cushion.” The court went on to say that “[t]his (reliance) is not only theoretically true, but common experience teaches that it is practically true also.” (quoting Scott v. Abbott, 160 F. 573, 582 (8th Cir.1908)) ]. Had the trade creditors known the debtor’s actual net worth, they would have lowered the debtor’s credit lines or refused to extend credit altogether.

The debtor also manipulated the timing of its financial statements to conceal its transfers to TKA and M & D. For example, the debtor always prepared and disseminated its balance sheets and income statements each month after the date on which it made its payments to TKA. Because the debtor had already made the payments, they were not reflected on the financial statements. In this way, the debtor was able to conceal its payments of the one percent interest upcharge and guaranty fees to TKA. The debtor did not even prepare or disseminate a balance sheet for the month of December 1989.

(5) First Union claims.

The principals likewise concealed the fact that the debtor’s payment of $138,500 to M & D on July 6,1989, included “profit” and interest not contemplated or allowed in the confirmed plan. The debtor’s schedule of dividend payments that referenced the payment to M & D listed the claimant as First Union, showed the debt as disputed, and indicated that the $138,500 payment was a final payment on the First Union claims.

In actual fact, the claims were held by M & D and had been since January, 1989. The debtor, represented by Morrow and Angle, had no “dispute” with the First Union claims that Morrow and Angle held through M & D. Finally, the July 6, 1989, payment was never intended to be a full and final disposition of the First Union claims.

Only $121,000.62 of the July 6, 1989, payment to M & D represented principal on the First Union claims dividend. The remaining $17,499.38 represented “profit” and interest. Under the confirmed plan, M & D was not entitled to interest on its initial dividend because the debtor made the payment within the first 90 days from the effective date of the confirmed plan. The plan provided for the payment of interest only to those unsecured creditors who were paid more than 90 days from the effective date of confirmation. At the Toy King I confirmation hearing, Morrow himself testified without equivocation that no creditor was to receive treatment other than as described in the debtor’s proposed plan. In its very first distribution, the debtor accorded more favorable treatment to M & D than other unsecured creditors in its class received. 137

(6) December transfers.

Morrow also caused the debtor to make principal payments on its obligations to TKA and M & D in December 1989 at a time when he knew that the debtor would not be able to pay all of its obligations as they came due. Morrow caused the debt- or to pay TKA $250,000 on account of the C & S line of credit, $600,000 on account of the Liberty loan, and $700,000 on account *133 of the Nintendo loan. As noted above, the principals were able to conceal these transfers by not preparing and disseminating a balance sheet for December 1989.

Morrow also caused the debtor to pay $301,006.17 to M & D on account of the M & D note. The debtor did not seek Liberty’s consent to the premature payment of the subordinated note, and thus Liberty did not know that the M & D note was being paid in derogation of the Toy King I confirmed plan. The principals were similarly able to conceal this transfer by not preparing and disseminating a balance sheet for December 1989.

The debtor’s concealment of these transfers is particularly noteworthy because the principals caused the debtor to make the payments before they were due and at a time when the principals knew the debtor’s days as an independent operation were numbered.

(7) Conclusion.

Accordingly, the court finds that this badge of fraud is present with respect to the debtor’s transfers to TKA associated with the Liberty loan and the C & S guaranty fees as well as its transfers to M & D. This badge of fraud is also present to a significant but, in fairness, a lesser degree with respect to the debtor’s transfers to TKA associated with the C & S line of credit and the Nintendo loan,

iv. Transfers for less than reasonably equivalent value.

(1) Alternative approaches.

The third badge of fraud present in this case is the lack of equivalent value for some or all of the transfers at issue. This badge is also one of the elements required to prove constructive fraud pursuant to Section 548(a)(1)(B) of the Bankruptcy Code and Section 726.106(1), Florida Statutes.

The Bankruptcy Code does not define “reasonably equivalent value.” The courts, therefore, have had to fashion a meaningful test to determine this issue. Courts have used three different approaches in their attempts to determine whether a debtor has received a “reasonably equivalent value” for a transfer that is under attack as a fraudulent conveyance.

The first approach is an objective one that relies upon a mathematical formula to determine equivalence. Using this approach, a court will find a per se lack of equivalent value when the transfer is for less than 70 percent of the market value of the debtor’s property. See, e.g., Durrett v. Washington National Insurance Co., 621 F.2d 201, 203-04 (5th Cir.1980). 138 “However, most courts have rejected this rigid test as being overly mechanical.” Official Unsecured Creditors Committee of Long Development, Inc. v. Oak Park Village Limited Partnership (In re Long Development, Inc.), 211 B.R. 874, 881 (Bankr.W.D.Mich.1995), aff' d, 117 F.3d 1420, 1997 WL 377055 (1997) (citing Bundles v. Baker (In re Bundles), 856 F.2d 815, 823-24 (7th Cir.1988)). 139

The second approach is a “subjective test which focuses on the fairness aspect. Under this approach, the consideration is presumed ‘fair’ so long as it is not ‘so far short of the real value of the property as to startle a correct mind or shock the moral sense.’ ” Id. (quoting Mancuso v. Champion (In re Dondi Financial Corp.), 119 B.R. 106, 109 (Bankr.N.D.Tex.1990)). One could characterize this approach as a “smell test.”

The third approach is the “totality of the circumstances” test. Id. at 881-82. This test combines both objective and subjective elements. Using this approach, courts have “looked to the ‘totality of the circumstances’ surrounding the transaction to de *134 termine whether ‘fair consideration’ or ‘reasonably equivalent value’ is given in exchange for a transfer of property.” Id. In applying this test, the court considers the transfer in the context of the surrounding circumstances and from the perspective of the creditor. Mancuso v. T. Ishida USA, Inc. (In re Sullivan), 161 B.R. 776, 781 (Bankr.N.D.Tex.1993).

Our court of appeals adopted this third approach in Grissom v. Johnson (In re Grissom), 955 F.2d 1440, 1445 (11th Cir.1992). 140 The court stated that the “only proper way to determine reasonable equivalency under Section 548 is to conduct a thorough inquiry of all relevant facts and circumstances.” Id. at 1449.

In this case, the transfers that the plaintiff attacks fall into four different categories. The first category is the debtor’s payments to TKA and M & D of principal. The second category is the debtor’s payment to TKA of loan fees and expenses. The third category is the debtor’s payments to TKA and M & D of interest. The fourth category is the debtor’s payments to TKA of guaranty fees on.the underlying C & S line of credit.

(2) Payments to TKA and M & D of principal.

The debtor made five payments of principal to TKA and two to M & D during the time between the confirmation of Toy King I and the filing of Toy King II. The debtor repaid principal to TKA in an amount that was exactly equivalent to the amount of principal it received; the debtor received at least a dollar for dollar value for its payment of principal to TKA. There can be no question, therefore, that all payments of principal made by the debtor to TKA were reasonably equivalent in value. Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 12 (Bankr.D.D.C.1993) [payments made up to amount of antecedent debt were reasonably equivalent because they were dollar for dollar exchanges].

The court can make a similar determination about the debtor’s principal payments to M & D of $121,000.62 on July 6, 1989, and $294,382 on December 29, 1989, on the First Union claims. 141 The First Union claims were for monies loaned to the debt- or. The debtor received all of the monies that gave rise the claims. After protracted arms-length discussions during the pen-dency of Toy King I, the debtor negotiated a dividend of 17.5 percent of the total claims.

The debtor discharged the original First Union claims when the court confirmed the plan in Toy King I. 11 U.S.C. § 1141(d)(1)(A). In Conston, 181 B.R. at 772-73, the court explained the effect that discharge has on a prepetition debt as follows:

[Discharge impairs a creditor’s post-confirmation ability to enforce its pre-confirmation claim.... [T]he creditor can enforce only those pre-confirmation claims found in the confirmed plan and ... the creditor can enforce those claims only in the manner and amount specified in the confirmed plan. From a commercial vantage point, the old debt is ‘extinguished,’ and a new debt is put in its place.

*135 See also, In re Townsend, 187 B.R. 230, 235 (Bankr.W.D.Tenn.1995) [“Under Chapter 11 proceedings, discharge occurs when the reorganization plan is confirmed and substantially consummated.” The pre-bankruptcy contracts are then “no longer valid and the Debtor is responsible for payments to creditors as described in the plan.”].

In this case, the debtor’s prepetition debts were discharged on May 23, 1989, when the debtor confirmed its plan. Each prepetition creditor then held a contract claim under the confirmed plan for its pro rata dividend. When the debtor paid the principal on the dividend owed to M & D for the First Union claims, it satisfied an antecedent debt that was a dollar-for-dollar equivalent of the amount it paid. Indeed, this amount was in an amount substantially less than the debtor originally received when the claims were created. The debtor, therefore, received a reasonably equivalent value for its payment to M & D of the principal balance on the First Union claims. International Loan Network, 160 B.R. at 12.

(3) Payment to TKA of loan fees and expenses.

The debtor also obligated itself to pay loan fees and costs to TKA in the same amount as those incurred by TKA in connection with the Liberty loan. 142 It is undisputed that the debtor ultimately received all of the proceeds of the Liberty loan through its independent borrowing from TKA. It therefore received the same benefit from its transaction with TKA as TKA received from its transaction with Liberty. The plaintiff did not present any evidence or testimony that the fees and costs incurred by TKA, and in turn by the debtor, were unreasonable or out of the ordinary in type or amount. Liberty’s loan officer, Horne, testified that it was typical within the banking industry to assess loan fees and costs against the obli-gor. The court, therefore, determines that the debtor received a reasonably equivalent value for its payment to TKA of loan fees and costs.

(4) Payments to TKA and M & D of interest.

The debtor made periodic interest payments on its obligations to TKA. The debtor also made two payments of interest on its dividend obligation to M & D; one on July 6, 1989, that included “profit,” and one on December 29, 1989. The plaintiff does not dispute that the payment of interest is a necessary cost of borrowing money, but objects to the amount of interest paid by the debtor in relation to the value it received. The plaintiff argues that TKA’s charge of an additional one percent interest to the debtor was nothing more than a disguised means of skimming the debtor’s assets for the benefit of TKA. The court agrees.

In general terms, Liberty determined the rate of interest to be charged on its loans consistent with the market and the degree of risk inherent in the loan. 143 Horne testified that Liberty evaluated the Liberty loan as more risky than most of the loans it made at or around the same time. 144 When Liberty determined the inherent risk of the Liberty loan, it did so on the basis of the amount and strength of the collateral that secured the loan and with the knowledge that TKA would repay the loan using revenues derived from the debtor’s operations. Liberty ultimately *136 charged TKA interest at a rate of two percent over prime. 145 The court concludes that Liberty charged interest on the Liberty loan at an appropriate rate given the degree of risk and the amount and type of collateral that it held. The court reaches the same conclusion with respect to the Nintendo loan. 146

TKA, however, charged a higher interest rate to the debtor on all its obligations funded by monies obtained by TKA from Liberty. The interest rate charged by TKA exceeded by one percent TKA’s cost of borrowing. In different circumstances, this additional interest might be explained by the fact that all of the debtor’s obligations to TKA were unsecured. An unsecured loan by definition is more risky than a secured loan because the creditor lacks the ability to attach directly the debtor’s collateral upon default of the loan. For this reason, unsecured loans typically carry higher interest charges than secured loans. A debtor might be willing to pay the higher interest rate if it lacked collateral, had already pledged its collateral, or was otherwise unable to obtain a secured loan. A debtor could receive an equivalent value for its payment of the additional interest by not having to pledge its assets to secure the loan. 147 The amount of additional interest and the surrounding circumstances of the transaction would determine whether the equivalent value was reasonable.

In this case, however, there are several factual distinctions that remove the TKA/ Toy King relationship from the ambit of the prototypical lender/borrower relationship. The most important distinction is that TKA was superfluous to the Liberty loan transaction because Liberty was willing to lend directly to the debtor. The debtor was not therefore in a situation where it had to pay a higher cost of borrowing because it was unable to obtain other financing or because its assets were already encumbered. Indeed, the debtor pledged its most significant asset, its inventory, to Liberty as part of its guaranty of TKA’s borrowing from Liberty.

The other important distinction between TKA’s relationship with the debtor and a prototypical lender/borrower relationship was the insider relationship that existed between TKA and the debtor. See Carmel v. River Bank America (In re FBN Food Services, Inc.), 175 B.R. 671, 688 (Bkrtcy.N.D.Ill.1994), aff 'd and remanded, 82 F.3d 1387, 1396 (7th Cir.1996) [“The bargaining position of the parties and their relationship should be examined to determine that the value transferred is disproportionately small compared to the value actually received by the Debtor.”]. Indeed, TKA owned virtually all of the stock of the debtor and controlled and dominated it. The debtor did whatever TKA directed. In addition, as the evidence in this case clearly demonstrates, TKA’s exposure on its borrowings was equivalent to the debt- or’s. The monies it would use to repay the Liberty loan were derived from the debt- or’s operations. If the debtor’s revenues were insufficient to pay its obligations to TKA, TKA had no alternate source of income to make its payments to Liberty. 148 TKA also did not have any collateral to satisfy its obligations to Liberty other than its stock in the debtor and receivables *137 from the debtor. Although it might appear that TKA was in a riskier position vis a vis the debtor than Liberty was (because, in the event of the debtor’s failure, it stood equally with other unsecured creditors in its claim to the debtor’s unencumbered assets), TKA was actually in a position to ensure that the debtor could prefer its obligations to TKA and therefore control the risk of default. In fact, this is exactly what occurred.

This dynamic is even more markedly illustrated by the C & S line of credit transaction. TKA’s obligation to C & S on its line of credit was unsecured. TKA charged the debtor an additional one percent interest rate on the monies it borrowed on the C & S line of credit and loaned to the debtor. Again it could be argued that TKA was at greater risk than C & S because it lacked the additional guaranties of payment that C & S enjoyed, but, as explained in the preceding paragraph, TKA was in actuality at no greater risk than C & S. Clearly, the debtor received the same benefit from its borrowing as TKA did for less consideration. In addition, the record is devoid of any credible evidence that would suggest that the debtor was unable to borrow directly from C & S after obtaining court approval.

This case is not like Harman v. First American Bank of Maryland (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 485 (4th Cir.1992). In that case, the court found that the debtor’s payments to the bank in satisfaction of a line of credit in the name of the parent and guarantied by the principals were for reasonably equivalent value. The court noted that the debtor received all draws on the line of credit and made all payments directly to the bank. Id. at 481. Although the parent maintained a note showing the indebtedness of the debtor, the note was on exactly the same terms as the parent’s obligation to the bank and was credited equivalent to each payment made by the debtor. Id. Accordingly, the court found that the creditors were no worse off and the debtor therefore received an equivalent value for its payments to the bank. Id. at 485.

In this case, TKA did not loan money to the debtor on the same terms and conditions as those contained in its borrowings from Liberty and C & S. Instead, TKA charged the debtor a higher rate of interest than the banks charged TKA. In addition, TKA’s loans from the banks had a fixed maturity, while TKA’s loans to the debtor were payable on demand. Unlike the case in Jeffrey Bigelow Design Group, the debtor did not receive equivalent value and the debtor’s creditors were plainly worse off because of this arrangement.

After considering the totality of the circumstances, the court determines that the debtor received no benefit from its payment of additional interest to TKA and that TKA had no legitimate basis to charge the debtor a greater rate of interest than it was itself obligated to pay. Looking at the payment from the perspective of the creditors, it is clear that the debtor’s value was proportionately diminished by these payments. The court concludes, therefore, that the interest up-charge of one percent was for less than a reasonably equivalent value to the debtor. In so concluding, the court notes that the determination of whether a debtor has received less than a reasonably equivalent value is fact intensive and that the court’s conclusion here is necessarily limited by the facts before it. There may very well be circumstances, different than those that took place here, that would justify a parent company’s charge to its subsidiary of an additional interest component when it makes available to its subsidiary the proceeds of its borrowings from a third party.

The situation is slightly different with respect to the debtor’s interest and “profit” payments to M & D. The interest rate to be paid on that obligation was determined in the confirmed plan. That plan evolved from protracted negotiations and was supported by the creditors and approved by the court. The confirmed *138 plan provided that all unsecured claims that were paid more than 90 days after the date of confirmation would be paid interest at the rate of nine percent. The debtor paid M & D $138,500 on July 6, 1989, including $17,499.38 in interest and “profit,” even though the payment was made within 90 days of the date of confirmation. The defendants offered no explanation for the debtor’s payment of interest and “profit” in derogation of the confirmed plan. The court concludes that this payment of interest and “profit” was part of the principals’ general scheme to skim monies from the debtor for the benefit of the individual defendants. Accordingly, the court determines that the debtor received no benefit for its July 6, 1989, payment to M & D of interest and “profit.”

The debtor made a second payment to M & D on December 29, 1989, in the amount of $301,006.17. That payment included $6,624.17 in interest. As the court stated in Section IV.H.2. above, the debtor included in this payment less interest than it was required to pay under either the confirmed plan or the M & D note. 149 Accordingly, the debtor did not receive less than a reasonably equivalent value for its December 29, 1989, payment of interest on the M & D note.

(5) Payments to TKA of guaranty fees on the C & S line of credit.

Finally, the debtor paid guaranty fees to TKA on its notes denominated as supporting TKA’s obligation to C & S. TKA distributed the fees to the guarantors on the C & S line of credit: Morrow, Angle, and Woodward. The debtor itself had no liability to C & S for TKA’s obligation, either as obligor or as guarantor. There was no legitimate reason, therefore, for the debtor to pay these fees. The debtor derived no benefit from the payments. In addition, the plaintiffs accounting expert, McCarthy, testified that the fees were excessive and unreasonable in amount. Although TKA was unable to offer any explanation for these fees, it is clear that TKA was simply used as a means to conceal the debtor’s payment of guaranty fees to the individual guarantors. By washing these payments through the parent company, the principals were less likely to excite the attention of Liberty and the debtor’s trade creditors that would have resulted from disclosing specific and individual payments to the principals in the debtor’s financial statements.

Looking at the debtor’s payments of interest upcharges and guaranty fees to TKA from the creditors’ perspective, it is clear that these payments diminished the assets of the debtor. It is equally clear that the debtor did not receive an equivalent benefit to compensate it for the diminution of its assets. These payments did not enhance or promote the debtor’s business operations. To the contrary, each payment incrementally and proportionately drained the lifeblood of the debtor by diverting monies that were urgently needed for the operation of the debtor. At the same time that TKA was charging the debtor premium interest rates and guaranty fees, the debtor was operating at a loss and was severely undercapitalized. The debtor was required to borrow repeatedly to support its operations. Its future was in considerable doubt and the only hope the debtor had was that the 1989 Christmas season sales would exceed by a substantial margin past sales records. It is clear that TKA charged these additional interest upcharges and guaranty fees to the debtor as a means to ensure that the shareholders of TKA obtained a return on *139 their investment, regardless of the ultimate success or failure of the debtor.

(6) Summary.

In summary, the court determines that the debtor received a reasonably equivalent value for all payments to TKA and M & D of principal, for its payment to M & D of interest on December 29, 1989, and for its payment to TKA of loan fees and costs. The court determines that the debtor did not receive a reasonably equivalent value for its payments to TKA of the interest or guaranty fees and for its payment to M & D of interest and “profit” on July 9, 1989.

v. Insolvency at the time of the transfers.

The final “badge of fraud” implicated in this case is the debtor’s insolvency, either at the time of or as a result of the transfer. This badge of fraud is another element required to prove constructive fraud pursuant to Section 548(a)(1)(B) of the Bankruptcy Code and Section 726.106, Florida Statutes. Perhaps because of the devastating effect of insolvency when transfers are considered, courts have found it to be “one of the most important factors” in the determination of actual fraud. Liebersohn v. Zisholtz (In re Martin’s Aquarium, Inc.), 225 B.R. 868, 876 (Bankr.E.D.Pa.1998) [“The issues of adequacy of consideration and insolvency of the transferor ... are ‘the most significant’ of the badges,” (quoting In re Main, Inc., 213 B.R. 67, 79 (Bankr.E.D.Pa.1997), aff'd in part and rev’d & remanded in part on other grounds, 226 B.R. 140 (E.D.Pa.1998)) ].

The court previously determined in Sections V.C.2.e. and V.C.3.C. above that the debtor was insolvent at all times after the confirmation of Toy King I and through the filing of Toy King II. Accordingly, this important badge is present as to all transfers at issue here.

vi. Summary.

Applying the “badges of fraud” enumerated in Levine to the facts of this case, each transfer implicates at least three badges. The debtor’s payments of principal and loan fees to TKA and of principal to M & D were insider transfers that the debtor and its principals concealed. The debtor made these transfers while the debtor was insolvent. The debtor’s payments of interest upcharges, guaranty fees, and “profit” to TKA and M & D were transfers to insiders that the debtor and its principals either concealed or made for less than reasonably equivalent value. The debtor also made these transfers while the debtor was insolvent.

b. Subjective evaluation of the debt- or’s motive.

“Although the Court may make inferences from the objective facts surrounding the transfer^], such as the traditional ‘badges of fraud,’ the Court cannot find intent without also making a ‘subjective evaluation of the debtor’s motive.’ ” Sullivan, 161 B.R. at 780 (quoting Jeffrey Bigelow Design Group, 956 F.2d at 484). The court can “examine both the intent of the bankrupt and the intent of the transferee. A fraudulent intent on either party enables the [plaintiff] to avoid the transfer.” Ward v. Southern Land Title Corp. (In re Southern Land Title Corp.), 474 F.2d 1033, 1038 (5th Cir.1973) (citing 4 Collier on Bankruptcy, ¶ 67.37 (15th ed.1967)). “Fraudulent intent does not require an intent to run the company aground; it requires merely an intent to hinder or defraud creditors.” Roco, 701 F.2d at 984.

For example, in Roco, the court held that a buy out transaction that left the debtor insolvent was fraudulent. Id. In that case, the father transferred his share of the company to his son in exchange for periodic payments. The court found that the father intended to secure a steady retirement income at his prior salary level at the expense of the company’s creditors. Id.

Similarly, in Hoffman Associates, 194 B.R. at 960-61, the court found that the actions of the principal were intended to *140 defraud creditors to the benefit of the debtor’s parent company and the principal personally. In that case, upon the death of a partner of the debtor, the parent company took over the business to wind it up. The remaining principal of the debtor was also a principal of the parent company. The principal “executed a plan that would allow him to receive payment on his debt the moment the Debtor had any excess cash.” Id. at 960. As a consequence of this plan, “[o]ther creditors, with the notable exception of those who would have had claims against [the principal] personally based on his guarantees of the Debtor’s obligations, were left with no recourse.” Id. at 960-61. The court found that the principal was operating the debtor’s business “for the purpose of ‘orchestrating the corporations so that his debt, both personally and as [the parent corporation], was satisfied first.’ ” Id. at 955.

The court reaches a similar conclusion in this case after considering all of the evidence and testimony and the totality of the circumstances. The facts of this case overwhelmingly support the conclusion that the principals of the debtor, Morrow, Angle, and King, orchestrated and conducted a scheme that favored their individual and personal interests and prejudiced the trade creditors.

Morrow and Angle were sophisticated businessmen and both were trained and had previously worked as certified public accountants. In addition, Morrow had been in the business of evaluating and acquiring distressed companies for almost ten years. Although not an accountant, King had many years of experience in the retail toy industry and was knowledgeable about the ups and downs involved in operating a retail toy business. Consequently, Morrow, Angle, and King were all fully able to appreciate both the potential and the risks involved in operating Toy King. Each was privy to information about the condition and status of Toy King, including its true worth, its true liabilities, and its actual operations.

The principals, individually or together, concealed the actual financial condition of the debtor from the trade creditors and represented the debtor as having a substantially greater net worth than was the case for the purpose of obtaining maximum trade credit. At the same time, Morrow and Angle, through TKA and M & D, charged the debtor bogus fees dressed up as interest, guaranty fees, and “profit” that were intended to ensure that, whatever the ultimate future of the debtor, TKA, M & D, and their shareholders would receive a return on their investment.

When it became clear that the debtor would not survive as an independent entity, Morrow and Angle caused the debtor to make principal payments on all obligations to TKA that were tied to notes that they had personally guarantied. In addition, Morrow caused the debtor to pay the outstanding M & D note in derogation of the subordination agreement. As a consequence of these payments, each one of which was made prior to its actual due date, there was insufficient money remaining in the debtor to pay trade creditors as those obligations became due. Through these actions, the principals imposed on the trade creditors the risk of loss traditionally reserved for the shareholders.

The defendants directly implicated in this fraudulent scheme, Morrow, Angle, and King, have justified their actions, to the extent that they have defended them at all, as simple business judgments made in response to the exigent circumstances of the debtor. These defendants have offered no evidence that would support such an innocuous explanation for their actions, and the court does not credit it.

Although the court conceivably could reach a different result if each transfer were considered individually and in a vacuum, the evidence clearly supports a conclusion that the principals’ actions in effectuating all of the transfers at issue in this proceeding were part of a “general fraudulent plan which must be viewed in its *141 entirety.” Pepper v. Litton, 308 U.S. 295, 312, 60 S.Ct. 238, 84 L.Ed. 281 (1939). See also, MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F.Supp. 913, 934 (S.D.N.Y.1995)[“[A]n allegedly fraudulent conveyance must be evaluated in context; where a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications.” (quoting Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993)) ].

The evidence in this case clearly shows a consistent and sustained course of dealing between TKA or M & D and the debtor, perpetrated and condoned by the debtor’s principals, which was intended to hinder, delay and defraud creditors and inure to the benefit of insiders. The facts of this case epitomize what fraudulent transfer law is designed to prohibit: “placing the assets of a financially ailing corporation where insiders can reach them, but creditors cannot.” Pirrone v. Toborojf (Vaniman International, Inc.), 22 B.R. 166, 181 (Bankr.E.D.N.Y.1982). In the words of the Sugarman court, the debtor was a “moribund [toy retailer] whose inevitable financial demise was lucratively delayed ... by insiders who financed its life support system at the expense of unsuspecting [trade creditors] who were left holding the bag when the plug was pulled by the onset of these involuntary bankruptcy proceedings.” Sugarman, 926 F.2d at 1249.

c. Conclusion.

Accordingly, the court determines that the plaintiff has established by a preponderance of the evidence that each transfer at issue here satisfies the elements of Section 548(a)(1)(A) of the Bankruptcy Code and Section 726.105, Florida Statutes, and was a fraudulent transfer actually intended to hinder, delay, or defraud creditors.

3. Constructive fraud.

a. Introduction.

The purpose of Section 548(a)(1)(B) is to provide a test of constructive, as opposed to actual fraud. Section 548 of the Bankruptcy Code, Fraudulent transfers and obligations, permits the avoidance of:

(a)(1) ... any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debt- or was an unreasonably small capital; or

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debt- or’s ability to pay as such debts matured.

“If the required elements of this provision are established, a conclusive presumption of fraud arises.” Pittsburgh Cut Flower, 124 B.R. at 456 (citing 4 Collier on Bankruptcy ¶ 548.03 at 548-550 (15th ed.1990)).

Section 726.106, Florida Statutes, is the state law equivalent to Section 548(a)(1)(B) of the Bankruptcy Code. 150 It *142 is substantially the same as the federal law except that it may be used only to benefit a “creditor whose claim arose before the transfer was made.” Id. Clearly, the debt- or incurred trade debt as part of its ordinary operations throughout the pendency of Toy King I and immediately thereafter. This trade debt was posted as a liability on each of the debtor’s balance sheets. There can be no question, therefore, that the plaintiffs claims arose before the transfers at issue in this case. Accordingly, the court will consider the federal and the state claims together.

In analyzing the claims of fraudulent transfer in relation to the elements of Section 548(a)(1)(B) of the Bankruptcy Code and Section 726.106, Florida Statutes, as to each transfer the court reaches the same conclusions on the elements described below for the same reasons as the court described in Section V.D.2.a.iv. and Section V.D.2.a.v. above:

• Section 548(a)(l)(B)(i): the debtor received a reasonably equivalent value for its payments to TKA of principal, its payment to TKA of loan fees and costs, and its payment to M & D of principal and its December 29, 1989, interest payment on the First Union dividend claims.

The debtor, however, received less than a reasonably equivalent value for its payment to TKA of interest at a rate that exceeded the rate paid by TKA, for its payment of guaranty fees, and for its payment to M & D on July 6,1989, of interest and “profit” on the First Union claims.

• Section 548(a)(l)(B)(ii)(I): the debtor was insolvent when each transfer was made.

b. Unreasonably small capital.

In addition, the court determines that the plaintiff has also satisfied the requirements of Section 548(a)(l)(B)(ii)(II) as to each transfer because the debtor had an unreasonably small capital for its operations from the date of the confirmation of Toy King I and through the filing of Toy King II. “It must be remembered that ‘[unreasonably’ small capitalization need not be so extreme a condition of financial debility as to constitute equitable insolvency” Murphy v. Meritor Savings Bank (In re O’Day Corp.), 126 B.R. 370, 407 (Bankr.D.Mass.1991) (quoting Metro Communications, 95 B.R. 921, 934 (Bankr.W.D.Pa.1989) rev’d on other grounds, 945 F.2d 635, 650 (3d Cir.1991)). “‘[Unreasonably small capitalization encompasses financial difficulties which are short of equitable insolvency or bankruptcy insolvency but are likely to lead to some type of insolvency eventually.’ ” Id.

As stated in Section IV.F.2. above, the court credited McCarthy’s opinion that the debtor had an unreasonably small capital when Toy King I was confirmed and at all times thereafter. At the time Toy King I was confirmed, the debtor had no more than $10,000 in capital. All other capital listed on the debtor’s balance sheets was either phantom equity or disguised liabilities. In either case, this other equity was unavailable to the debtor to subsidize its operations during the loss months. The debtor needed an equity base to carry it through the prolonged period that the debtor expected to operate at a loss. Because the debtor had inadequate capital, it was forced to borrow repeatedly to augment its revenues during the loss months.

For all these reasons, the court concludes that the debtor had an unreasonably small capitalization for its anticipated *143 operations for each of the transfers in issue.

c. Summary.

To prevail, the plaintiff is required to satisfy only one of the three elements of Section 548(a)(l)(B)(ii). As just shown, the plaintiff has satisfied the first two. There is no need, therefore, for the court to consider Section 548(a)(l)(B)(ii)(III). 151

In the circumstances, the plaintiff has established by a preponderance of the evidence that all of the transfers at issue, with the exception of those noted below, were constructively fraudulent pursuant to Section 548(a)(1)(B) of the Bankruptcy Code and Section 726.106, Florida Statutes. The transfers that are not constructively fraudulent are the payments to TKA of principal and loan fees and costs and the payments to M & D of principal and the payment to M & D on December 29, 1989, for interest on the First Union claim. These payments are not constructively fraudulent because these payments were for reasonably equivalent value within the meaning of Section 548(a)(l)(B)(i). Thus, the plaintiff has failed to establish this necessary element of constructive fraud for those transfers.

4. Summary.

As the foregoing describes, the plaintiff has proven by a preponderance of the evidence that each transfer at issue in this proceeding satisfies all of the elements of Section 548(a)(1)(A) of the Bankruptcy Code and Section 726.105, Florida Statutes, and is a fraudulent transfer. Although the plaintiff has failed to establish that some of the transfers are constructively fraudulent under Section 548(a)(1)(B) of the Bankruptcy Code and Section 726.106, Florida Statutes, the plaintiff did establish that these transfers were actually fraudulent.

Accordingly, the court determines that the debtor made fraudulent transfers when it made payments to TKA of principal, interest upeharges and guaranty fees and when it made the July 6, 1989, payment of “profit” and the December 29, 1989, payment of principal and interest to M & D.

E. LIABILITY OF TRANSFEREES OF AVOIDED TRANSFERS.

1. Introduction.

The court determined in Sections V.C. and V.D. above that many of the transfers at issue in this proceeding are avoidable under Sections 547 or 548 of the Bankruptcy Code. The court must now determine which defendants are liable for these avoided transfers. Section 550 of the Bankruptcy Code governs the question of liability for transfers avoided under Sections 547 and 548 of the Bankruptcy Code.

Section 550(a) provides, in pertinent part, that:

[T]he trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—

(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial transferee.

“[Sjeetion 550 prescribes the liability of a transferee of an avoided transfer, and enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee.” Huffman v. Commerce Security Corp. (In re Harbour), 845 F.2d 1254, 1255-56 (4th Cir.1988) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 375 (1977), reprinted in 1978 U.S.C.C.A.N. 5787-5876, 6331).

“The structure of the statute separates initial transferees and beneficiaries, on the one hand, from ‘immediate or mediate transferee[s]’, on the other.” Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 895 (7th Cir.1988).

*144 Under Section 550, liability of the initial transferee and beneficiaries is strict; the statute provides no “good faith” defense to these recipients. The initial transferee and beneficiaries, therefore, may not defend from liability by claiming “good faith.” Id. Immediate or mediate transferees, however, are afforded a “good faith” defense. Id.

2. Who are the initial transferees?

a. The conduit theory.

The debtor made all payments at issue in this case to TKA or M & D. There is no dispute that M & D is the initial transferee of the debtor’s payments on the First Union dividend and the M & D subordinated note. With regard to the debtor’s payments to TKA, however, all defendants argue that TKA is not an initial transferee but merely a conduit to Liberty and C & S. As such, TKA seeks to insulate itself from liability for all preferential and fraudulent transfers made to it. In addition, if TKA were a conduit, Liberty would be strictly liable as an initial transferee and would be unable to defend from liability using the “good faith” defense. 152

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