T H E P U B L I C AT I O N F O R C R E D I T & F I N A N C E P RO F E S S I O N A L S
MARCH 2008
NATIONAL ASSOCIATION OF CREDIT MANAGEMENT
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credit column
Bruce Nathan, Esq.
State Law Artisans’ Lien Rights
Defeat Preference Exposure
The Saga Continues
I
f this writer is a bit repetitive in pointing out recent
court decisions that uphold a trade creditor’s fully
secured state law possessory artisans’ lien rights as a full
defense to preference exposure, well let’s just call this an
advertisement for a legal session entitled “Meandering
the Minefields of ‘Hidden’ Liens and Trust Claims” that
will be presented at the upcoming May 2008 Credit
Congress in Louisville.
However, all kidding aside, the United States Court of
Appeals for the Sixth Circuit, in In re Southern Air
Transport Inc., recently ruled that a trade creditor asserting a fully secured North Carolina possessory artisans’
lien in the debtor’s property had a full defense to a
In the Southern Air case, the debtor’s
Chapter 7 Trustee could not satisfy
Bankruptcy Code Section 547(b)(5)’s “greater
than liquidation recovery” requirement
because the trade creditor had a fully secured
possessory artisans’ lien in the debtor’s
property at the time of payment.
$100,000 preference claim. The debtor’s bankruptcy
trustee could not satisfy Bankruptcy Code Section
547(b)(5)’s requirement that the creditor had received
more from the alleged preference than from the debtor’s
Chapter 7 liquidation.
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BUSINESS CREDIT MARCH 2008
Bruce will present the
following sessions:
16025. Drugs/Cosmetics/
Pharmaceuticals Industry
Group Session
16041. Bankruptcy Issues Facing
Trade Creditors From the Perspective
of the Bench and the Bar
16053. Meandering the Minefields
of “Hidden” Liens and Trust Claims
16065. Creditors’ Rights Forum
16076. Protecting Trade Creditors
From Customer Bankruptcy Risk:
No Need to Cry the Blues!
The Preference Statute
Section 547(b) of the Bankruptcy Code permits a trustee
or debtor-in-possession to recover a preference by satisfying all of the following requirements:
(a) The debtor transferred its property to or for the
benefit of a creditor (Section 547(b)(1));
(b) The transfer was made on account of antecedent
or existing indebtedness that the debtor owed the
creditor (Section 547(b)(2));
(c) The transfer was made when the debtor was
insolvent. A debtor’s insolvency is defined on a
balance sheet basis (the debtor’s liabilities exceed its
assets). The debtor is also presumed to be insolvent
during the 90-day preference period (Section 547(b)(3));
(d) The transfer occurred within 90 days of the debtor’s
bankruptcy filing for transfers to non-insider creditors,
and within one year of the bankruptcy filing for
transfers to insiders of the debtor, such as the debtor’s
officers, directors, controlling shareholders and
affiliated companies (Section 547(b)(4)); and
(e) The creditor received more from the transfer
than from a Chapter 7 liquidation of the debtor
(Section 547(b)(5)). This preference requirement is
designed to prevent a debtor’s transfer of its property to
one creditor that would diminish the property available
for distribution to the debtor’s other creditors. The
requirement is always satisfied when the recipient of the
alleged preference is fully secured by the debtor’s assets.
ments in May and June, 1998. Also, at Triad’s request, the
Lessor guaranteed payment for work Triad had performed
to date and the amount Southern Air owed to Triad for the
“C” check and “D” check.
Preference relief is denied if the trustee or debtor cannot
prove any of these elements of a preference claim. In Southern
Air, the debtor’s Chapter 7 Trustee could not satisfy Bankruptcy Code Section 547(b)(5)’s “greater than liquidation
recovery” requirement because the trade creditor had a fully
secured possessory artisans’ lien in the debtor’s property at
the time of payment.
The court concluded that Triad
had a fully secured perfected state
law (North Carolina) artisans’ lien
in the Aircraft in Triad’s possession
when Triad had received the
$100,000 Payment.
Factual Background
Southern Air was engaged in the air transportation of cargo.
Southern Air leased airplanes, including the airplane at issue in
this case, a McDonnell Douglas DC8-73 aircraft (the “Aircraft”)
leased from Aerolease Financial Group, Inc. (the “Lessor”). A
trade creditor, Triad International Maintenance Corp.
(“Triad”), serviced, repaired, maintained and stored the Aircraft in North Carolina.
Triad and Southern Air had entered into a maintenance agreement that provided for maintenance, overhaul and repair services, known as a “C” check, on the Aircraft. Southern Air was
obligated to pay (a) $250,000 to Triad upon Triad’s receipt of
the Aircraft and (b) not less than 100% of the total estimated
invoice amount due upon completion of work prior to Triad’s
return of the Aircraft to Southern Air.
Triad and Southern Air exchanged correspondence and
communicated about additional work, the “D” check, that
Triad would perform on the Aircraft. Triad demanded payment of all past due amounts that Southern Air owed for
Triad’s “C” check work performed prior to Triad starting any
“D” check. As a result, on April 13, 1998, Southern Air made
a $3,000,000 partial payment to Triad for the “C” check. Following the payment, Triad and Southern Air continued to
negotiate over Southern Air’s payment of outstanding
invoices owing on the “C” check and Triad’s performance of
services and payments for the “D” check work. By letter
dated May 15, 1998, Triad requested Southern Air’s payment
to Triad of $50,000 per week for five weeks, beginning the
week of May 18, to reduce the amount that Southern Air
owed to Triad. Southern Air made four of these $50,000 pay-
Triad then did some of the “D” work. By letter dated July 30,
1998, Triad provided a progress invoice no. 9807139 in the
amount of $603,329.65 (the “Invoice”) to Southern Air for
work done and for which payment was required prior to the
test flight of the Aircraft. On August 11, 1998, Southern Air
wired the sum of $100,000 to Triad as a partial payment of
the Invoice (the “$100,000 Payment”). Between August 12,
1998 and September 10, 1998, Triad satisfactorily completed
all work on the Aircraft and the Aircraft was flight ready. On
or before September 10, 1998, the Lessor paid Triad for all
unpaid balances owing by Southern Air.
On October 1, 1998, Southern Air filed its Chapter 11 case in
the United States Bankruptcy Court for the Southern District
of Ohio. The $100,000 Payment was made within 90 days of
Southern Air’s Chapter 11 filing. Thereafter, Southern Air’s
bankruptcy trustee sued Triad, seeking to avoid and recover
the $100,000 Payment as a preference.
The Lower Court Holdings
The issue in the Southern Air case was whether Triad had
received more from the $100,000 Payment than Triad would
have received in Southern Air’s Chapter 7 liquidation. This is
one of the requirements that the Southern Air Trustee had to
prove in order to successfully avoid and recover the $100,000
Payment as a preference.
Triad argued that it was a fully secured creditor when it had
received the $100,000 Payment as a result of Triad’s North Carolina possessory artisans’ lien against the Aircraft. Triad also
argued that its possession of the Aircraft was sufficient to perfect its artisans’ lien. Triad had performed its work and retained
possession of the Aircraft in North Carolina, which did not
require a written filing to perfect an artisans’ lien. As a result,
Triad did not have to file notice of its lien interest in the Aircraft
with the Federal Aviation Administration (“FAA”), which
maintains a national registry in Oklahoma City for recording
documents evidencing title and security interests in aircraft.
Southern Air disputed Triad’s artisans’ lien because, as lessee
of the Aircraft, Southern Air had lacked a property interest in
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the Aircraft. Southern Air also argued that Triad did not have
a perfected artisans’ lien in the Aircraft that was valid against
third parties because Triad had failed to file notice of its lien
with the FAA.
Both the bankruptcy and district courts ruled that the Trustee
had satisfied Bankruptcy Code Section 547(b)(5)’s “greater
than liquidation recovery” requirement. The courts concluded
that Triad had an unperfected artisans’ lien in the Aircraft as a
result of Triad’s failure to file notice of its lien with the FAA,
despite Triad’s possession of the Aircraft when Triad had
received the $100,0000 Payment. As a result, Triad was an
unsecured creditor of Southern Air and received more from
the $100,000 Payment than it would have received in a Chapter 7 liquidation of Southern Air. Triad then appealed to the
Sixth Circuit Court of Appeals.
The Sixth Circuit’s Decision
The Sixth Circuit reversed the lower courts’ rulings, and held
that Triad had no preference exposure because the Trustee
could not satisfy Section 547(b)(5)’s “greater than liquidation
recovery” requirement. The court concluded that Triad had a
fully secured perfected state law (North Carolina) artisans’
lien in the Aircraft in Triad’s possession when Triad had
received the $100,000 Payment.
The Sixth Circuit noted that Congress had enacted the Federal Aviation Act of 1958 to establish a single national filing
system, the FAA’s national registry in Oklahoma City, for
recording documents evidencing title and security interests
in civil aircraft. Congress determined that the mobility of aircraft had made it necessary to design a recording system for,
among other matters, encumbrances against Aircraft, that
was more convenient than the state-by-state Uniform Commercial Code (UCC) filing system for perfecting a security
interst in most categories of personal property. Congress did
not intend the FAA aircraft registry to supersede state laws
that otherwise govern priorities among the holders of various interests in aircraft. The court noted that North Carolina’s artisans’ lien law grants a creditor a lien in the debtor’s
goods in the creditor’s possession to secure payment of the
creditor’s claim for material, labor and/or services that
enhanced, restored or otherwise converted the goods into a
finished more valuable condition. Since North Carolina’s
artisans’ lien law did not require, or even provide for, the filing of an instrument to perfect the lien, Triad did not have to
file written notice of its lien with the FAA registry to perfect
its lien rights in the Aircraft.
The court also relied on Article 9 of the UCC, which governs
consensual security interests and recognizes the priority of
state law possessory liens over properly perfected security
interests. According to UCC Section 9-333, a possessory lien
in goods that secures payment of an obligation for services or
materials furnished with respect to such goods has priority
over a security interest in the goods, unless the statute giving
rise such lien provides otherwise. North Carolina’s artisans’
lien law does not so provide. The FAA’s system of perfecting
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security interests in aircraft should be no different in recognizing the priority of state law possessory artisans’ liens.
The Sixth Circuit then had to deal with whether Triad was
fully secured by the Aircraft that was leased by Southern Air.
The court ruled that Triad was a fully secured creditor by virtue of its possessory North Carolina artisans’ lien and, therefore, was not subject to preference exposure. Bankruptcy Code
Section 506(a)(1) defines a secured claim as “[a]n allowed
claim of a creditor secured by a lien on property in which the
estate has an interest … to the extent of the value of such creditor’s interest in the estate’s interest in such property.” Bankruptcy Code Section 101(37) defines the term “lien” as a
“charge against or interest in property to secure payment of a
debt or performance of an obligation.” Bankruptcy Code Sec-
Since Triad held a valid fully
secured perfected possessory
artisans’ lien in the Aircraft,
Southern Air’s Trustee could not
prove that Triad had received
more, as a result of the $100,000
Payment, than Triad would
have received in a Chapter 7
liquidation of Southern Air.
tion 541(a)(1) defines “property of the estate” to include “all
legal or equitable interests of the debtor in property as of the
commencement of the case.” The court concluded that the
Bankruptcy Code’s definition of property is sufficiently broad
to include a debtor’s right to possession of property. Therefore, Southern Air’s right to possession of the Aircraft, as lessee under its lease of the Aircraft, was property of Southern
Air’s bankruptcy estate under Bankruptcy Code Section
541(a)(1). As such, Triad’s artisans’ lien on the Aircraft was
perfected by Triad’s possessory interest in the Aircraft.
Triad’s possessory artisans’ lien also had priority over the Lessor’s interest, as titleholder and lessor, in the Aircraft. UCC
Article 2A (Section 2A-306) grants a creditor’s artisans’ lien,
that secures payment of the creditor’s claim for services and/
or materials with respect to leased goods, priority over the
lessor’s and lessee’s interest in the goods.
Since Triad held a valid fully secured perfected possessory
artisans’ lien in the Aircraft, Southern Air’s Trustee could not
prove that Triad had received more, as a result of the $100,000
Payment, than Triad would have received in a Chapter 7 liquidation of Southern Air. As such, the Trustee could not satisfy
Bankruptcy Code Section 547(b)(5) and the $100,000 Payment was not a preference. Case closed!
Conclusion
A trade creditor that provides goods and/or services to
improve a third party’s property in the creditor’s possession
might benefit from a state law artisans’ or other possessory
lien that secures payment of the creditor’s claim. The extent
of, and prerequisites for exercising, these lien rights vary from
state to state. As the Sixth Circuit Court of Appeals in Southern Air made clear, under the right circumstances, a trade
creditor that benefits from such possessory lien rights enjoys
both an enhanced ability to collect its claim and an additional
defense to preference risk. ●
Bruce Nathan, Esq. is a partner in the New York City office of the law
firm of Lowenstein Sandler PC. He is a member of NACM and is on the
Board of Directors of the American Bankruptcy Institute and is a former
co-chair of ABI’s Unsecured Trade Creditors Committee. He can be
reached via email at [email protected].
This is reprinted from Business Credit magazine, a publication of the
National Association of Credit Management. This article may not be
forwarded electronically or reproduced in any way without written
permission from the Editor of Business Credit magazine.
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