Trade creditors often find themselves categorized as “general unsecured creditors” when a customer files for bankruptcy. However, some creditors benefit from liens that have been contractually negotiated or statutorily granted, potentially elevating the priority of their claims. To secure this priority, the lien must be properly granted and perfected under applicable law before the customer files for bankruptcy, and in a manner that does not expose the lien to avoidance as a “preferential transfer.”

Common trade creditor liens include consensual liens on specified assets, purchase money security interests (PMSI), consignment arrangements, mechanics’ liens, and shippers’ liens. For a lien to be treated as a secured claim in bankruptcy, it must be valid, properly perfected, and unavoidable. The validity and perfection of the secured claim are determined under state law, and these steps must be taken and maintained before the customer files for bankruptcy.

Under the Uniform Commercial Code (UCC), liens on most types of personal property are perfected by filing a properly completed financing statement with the appropriate recording office or by possession of the collateral. Common mistakes include improperly completed financing statements, filing in the wrong place, and failing to update or renew financing statements. Additionally, perfection may require other steps, such as recording a mortgage for real property liens or obtaining a deposit control agreement for bank accounts.

Creditors must carefully examine and confirm the documentation and perfection status of their secured claims. This should be done at the outset of a credit relationship and revisited if the customer shows signs of financial distress. Experienced counsel can assist in understanding and optimizing your secured position to avoid costly disappointments down the road. Read the full article here.

Photo of David Fournier David Fournier

David represents various interests in complex bankruptcy proceedings in the District of Delaware and other jurisdictions. His clients include corporate debtors, secured and unsecured creditors, official creditors’ committees, foreign representatives, and others. David also has extensive experience as a mediator in bankruptcy litigation.

Photo of Evelyn Meltzer Evelyn Meltzer

Evelyn focuses her practice on corporate bankruptcy, insolvency, distressed M&A, and creditors’ rights. With more than 20 years of experience, Evelyn understands all facets of a problem or opportunity, strategically devising insightful, innovative, and practical solutions that protect and advance her clients’ interests.

Photo of Kenneth Listwak Kenneth Listwak

Ken has broad experience in bankruptcy and reorganization matters, including adversary proceedings and contested matters in complex bankruptcy cases, and advising and guiding clients through complex issues involving bankruptcy law and Delaware legal practice.

Photo of Tori Lynn Remington Tori Lynn Remington

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also…

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also has experience in the Court of Chancery representing assignees in Delaware ABCs.