Presenting a live 90-minute webinar with interactive Q&A Lien Stripping in Chapter 11 Bankruptcy Cases: Lessons for Secured Creditors Guidance for Secured Creditors on Lien Ride-Throughs After In re N. New Eng. Tel. Operations WEDNESDAY, JANUARY 27, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Marc E. Hirschfield, Partner, BakerHostetler , New York Marc Skapof, Counsel, BakerHostetler , New York George Klidonas, BakerHostetler , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Lien Stripping in Bankruptcy Cases Lessons for Secured Creditors By: Marc E. Hirschfield Marc Skapof George Klidonas
Four Overarching Topics: • What are Liens and Security Interests? • How are They Dealt with Under the Bankruptcy Code? • How the Second Circuit’s Decision in N. New Eng. Tel. Operations Affects the Validity of Liens Once a Chapter 11 Plan Goes Effective • The Post N. New England Tel. Operations Impact on Secured Creditors if they Fail to Participate in Bankruptcy Cases • Lien-Stripping in General & Pass-Through 6
What is a Lien? • A “lien” is defined as: “A legal right or interest that a creditor has in another's property, lasting usually until a debt or duty that it secures is satisfied .” LIEN , B LACK ' S L AW D ICTIONARY (10th ed. 2014). • Typically, the creditor does not take possession of the property on which the lien has been obtained. • There are many types of liens that are dealt with in bankruptcy. Some examples include: • Voluntary • Statutory • Judgment • The Fifth Amendment protects a secured creditor’s rights, but generally only to the extent of the value of the property. In re Timbers of Inwood Forest Associates, Ltd. , 793 F.2d 1380, 1391 (5th Cir. 1986) (citing Wright v. Union Central Life Ins. Co. , 311 U.S. 273, 278 (1940)). 7
Voluntary Liens • A voluntary lien is a lien created with the debtor’s consent. There are two broad classes of voluntary liens: • Purchase- Money Security Liens (“PMSI”) : security interest that is created when a purchaser uses the proceeds of a loan to purchase property immediately and gives the lender security by using the purchased property as collateral. UCC § 9-103 • Example : buyer purchases a home/boat/car by applying for a loan and uses the proceeds of the loan to effectuate the purchase • Non-Purchase- Money Security Liens (“Non - PMSI”) : lien where collateral supports an underlying obligation but not limited to purchase of specified personal property • Example : owner refinances a mortgage on property, or a loan is used to pay for expenses collateralized by accounts receivable • PMSI and Non-PMSI: borrower retains possession of property 8
Voluntary Liens (cont’d) • A mortgage lien is very common in a bankruptcy case and is typically defined as a lien on the mortgagor's real property securing the mortgage. • There can be a first lien, a second lien, and/or a priming lien: • First lien: A lien that arises and attaches before or after another validly recorded lien in such a way that the lien has equal or superior rights in the same collateral. • Second lien: A lien secured by the same collateral as the first lien but subordinate in priority of payment to the existing first lien. • Priming lien: A lien on collateral superior to all other liens that arises after perfection of the pre-existing liens, e.g. , Debtor-in-Possession Financing • Many of the cases and concepts herein will discuss first and second liens. 9
Statutory Lien • A statutory lien is defined as a lien arising solely by force of statute, not by agreement of the parties. LIEN, B LACK ' S L AW D ICTIONARY (10th ed. 2014). • Two examples are a federal tax lien and a mechanic’s lien. • Tax lien: a lien on property imposed by a government (local, state, or federal) for unpaid taxes. The lien can arise from many instances including real estate, utilities, estate tax, etc. • Mechanic’s Lien : A statutory lien that secures payment for labor or materials supplied in improving, repairing, or maintaining real or personal property, such as a building, an automobile, or the like. Also termed lien of the mechanic; artisan's lien; chattel lien (for personal property); construction lien (for labor); garageman's lien (for repaired vehicles); laborer's lien (for labor); materialman's lien (for materials). Id. 10
Judicial Lien • A judicial lien is imposed by a court and created when a creditor has an interest in a debtor’s property after a judgment has been entered. • Mechanically, if a debtor owes money to a creditor and the judgment has not been satisfied, the creditor may request that the court impose a lien on specific property owned and possessed by the debtor. • After the court imposes the lien, typically it issues a writ directing the sheriff to seize the property, sell it, and turn over the proceeds to the creditor. • Judgment creditors can look to wages, bank accounts, or real or personal property. • Theoretically, a judgment creditor can foreclose on the property if it is not paid by the judgment debtor. 11
Important Rule about Liens • Liens, whether voluntary, judicial, or statutory in nature, are specific to the state in which they arose, with the exception of some federal liens such as those encumbering intellectual property. • Thus, look to state law to determine how they arise and their effects. • In some situations, liens arise automatically, while in others, a creditor must take some action to “perfect” its liens. • State law typically determines perfection. • Without perfection, a creditor with an otherwise valid lien may be subject to having it “stripped,” e.g. , strong-arm provisions of the Bankruptcy Code. 12
Perfection is Key • Real Estate : file and record the mortgage in the land records in the county where the property is located. • Tangible and Intangible Property : file a financing statement in the appropriate UCC filing offices. Article 9 of the UCC requires: • The debtor’s and creditor’s names • The debtor’s and creditor’s mailing addresses • Whether the debtor is an organization or individual • Type of organization and jurisdiction • Description of the collateral • Perfection by Possession , e.g. , money, instruments, letters of credit, certificated statements, and chattel paper may require perfection under Art. 8 of the UCC. • Perfection by Control , e.g. , deposit accounts and investment property. Liens may attach to the proceeds of collateral but not comingled cash • Tax Lien : perfect in the manner above depending on asset • Judicial Lien : record the Abstract of Judgment with the county recorder or Secretary of State in the county or state where debtor owns property 13
General Rule for Treatment of Liens in Bankruptcy • Liens Survive Bankruptcy • Generally, liens survive a bankruptcy, meaning that a filing alone will not extinguish a creditor’s lien. • Thus, a lien will typically remain on the property while the unsecured portion will be discharged in bankruptcy. • Secured Creditor’s Rights • A creditor has the right to foreclose on the collateral (subject to relief from the automatic stay), or a right to the proceeds of a sale of the collateral, or the right to credit bid. • A secured creditor is also entitled to “adequate protection” if the debtor uses its cash collateral and, in some cases, post-petition interest. 14
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