Pssst, Can You Keep a Secret?: Unperfected "Secret" Liens as a Preference Defense

• Published in: American Bankruptcy Institute journal 2017-06, Vol.36 (6), p.32
• Main Authors: Lee, Bernice C, Hitchings, Jarret P, Helman, Andrew C
• Format: Article
• Language: English
• Subjects: Bankruptcy; Bankruptcy laws; Bankruptcy reorganization; Commercial law; Debtors; Federal court decisions; Federal courts; Liens; Petitions; Preferences; State court decisions; State laws; Subcontractors
• ISSN: 1931-7522

Facts and Procedural Background The dispute in E.D.C. Liquidating centered on whether a debtor's pre-petition payments to the holder of an unperfected statutory lien could be avoided as preferential transfers under § 547 of the Bankruptcy Code. The issue arose in the context of a post-confirmation adversary proceeding initiated by a plan liquidating trustee seeking to avoid and recover five pre-petition transfers totaling at least $231,000.2 Prior to its bankruptcy filing, the debtor provided tool-and-die manufacturing, storage and related services.3 In the course of this business, the debtor ordered two custom molds from Mo-Tech Corp. (the defendant/transferee).4 Due to financial difficulties, the debtor was unable to pay for the molds, so the parties negotiated new payment terms before Mo-Tech would deliver the molds. Mo-Tech argued that even in light of the unperfected nature of its lien, each of the transfers was on account of a fully secured claim because at the time of each transfer, it had a right to file a financing statement under Ohio's moldbuilder's lien laws. [...]the transfers were shielded from avoidance. [...]the pre-petition transfers allowed Mo-Tech to receive more than it would have had the transfers not been made and its claim been treated as an unsecured claim in a chapter 7 liquidation.9 The E.D.C. Liquidation Court's Decision The bankruptcy court agreed with Mo-Tech, concluding that the transfers made to it after delivering both molds could not be avoided as preferential transfers. [...]the court denied the trustee's motion and granted Mo-Tech's motion. The trustee argued that...