Southern California Bankruptcy Law Blog

Preferential Transfers IV: Defenses To Preference Avoidance Actions (Part VI)

Posted in Chapter 11, Chapter 13, Chapter 7

Man reading legal docsHere is the sixth defense against preference avoidance actions, the so-called statutory lien defense.

Defenses To Preference Avoidance Actions, Part VI:

The Statutory Lien Defense

Some liens are voluntary, the result of the debtor voluntarily granting a lien to a creditor.  Examples include home mortgages and car loans.

Other liens are involuntary and are recorded against the debtor’s wishes.  For example, if a creditor obtains a judgment against the debtor, the creditor can record a judgment lien against an asset — such as the debtor’s home.

Another type of involuntary lien is a statutory lien, which is a lien that arises by operation of some statute.  For example, if a homeowner is behind on homeowners association dues, the HOA can record a lien pursuant to a statute.  See, e.g., Cal. Civ. Code § 1367.1.  Statutory liens are the focus of § 547(c)(6):  “The trustee may not avoid under this section a transfer — . . . that is the fixing of a statutory lien that is not avoidable under section 545 of this title.”  Thus, if the statutory lien is not avoidable under § 545, it is not avoidable.  (One of the challenges in understanding statutes is having to follow chains of references from one part of the statute to another.  This is one of those challenges.)

Section 545 provides:

 The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien—

(1) first becomes effective against the debtor —

(A) when a case under this title concerning the debtor is commenced;

(B) when an insolvency proceeding other than under this title concerning the debtor is commenced;

(C) when a custodian is appointed or authorized to take or takes possession;

(D) when the debtor becomes insolvent;

(E) when the debtor’s financial condition fails to meet a specified standard; or

(F) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien;

(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists, except in any case in which a purchaser is a purchaser described in section 6323 of the Internal Revenue Code of 1986, or in any other similar provision of State or local law;

(3) is for rent; or

(4) is a lien of distress for rent.

Part (1) grants the Trustee the authority to avoid a statutory lien that takes effect when the debtor files for bankruptcy protection, is insolvent, or in financial distress.  When the triggering event occurs, it transforms an unsecured debt into a secured debt, and interferes with the priorities in the bankruptcy.  For that reason, the Trustee has an avoidance power.

Part (2) grants the Trustee the power to avoid a statutory lien that is not perfected against a hypothetical bona fide purchaser of the asset.

Part (3) grants the Trustee the power to avoid a statutory lien for rent, i.e., a landlord’s lien for rent.

Part (4) grants the Trustee the power to avoid a statutory lien of distress for rent.  Distress of rent allows a landlord to seize the assets of the debtor and sell them as a way of recovering the unpaid rent.

Thus, if a Trustee cannot avoid a statutory lien under one of the theories found in § 545, the lien is unavoidable.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the statutory lien defense to your case, contact a California Board Certified Bankruptcy Law Specialist to help you.

 

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