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Statutory Liens vs. Consensual Liens: Why it Matters and When it may Not

While secured creditors are entitled to special rights in bankruptcy, those rights may differ depending on whether creditors have a statutory or consensual lien on their collateral.  This is primarily because section 552(a) of the Bankruptcy Code provides, in part, that “property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement . . . .”  In other words, consistent with the concept that a debtor receive a ‘fresh start’ following a bankruptcy discharge, section 552(a)* strips certain secured creditors of liens in the post-petition property received by a debtor.  However, section 552(a) does not apply if a creditor is secured by a statutory lien; a statutory lien ‘flops over’ the petition date and attaches to post-petition receipts of a debtor.

In general, the Code contemplates three types of liens: (1) consensual liens (i.e. a lien created by a security agreement), (2) judicial liens and (3) statutory liens.  The primary distinction is that consensual liens are created by a security agreement between a debtor and a creditor, while judicial and statutory liens are created by operation of law and/or an order of a judge and do not require a debtor’s agreement.  As the name suggests, a statutory lien arises automatically by statute.

Most statutory liens are obvious; you ‘know ‘em when you see them’.  Perhaps that is why caselaw on the subject is so limited.  The most substantial analysis of the issue appears in two decisions from the Orange County, California chapter 9 bankruptcy case where noteholders sought continued post-petition payment of pledged taxes and other revenues of the debtor.  The Bankruptcy Court concluded that the noteholders held a consensual lien which was cut-off by the bankruptcy filing.  The District Court disagreed, finding that the noteholders were secured by a statutory lien.  Despite the reversal, we think the Bankruptcy Court got it right.

The Bankruptcy Court enumerated the key characteristics of a statutory lien: “the lien is automatic, and there is no need for any consent by the borrower or designation of revenues.”  For example, a statutory lien is created if a statute provides that debt issued pursuant to that statute shall be secured by a lien on property specified by that statute.  The lien is automatic, there is no need for any consent of the borrower.  If instead a statute provides that a borrower may borrow money and may pledge property to secure such borrowing, any lien granted by the borrower pursuant to the statute would be consensual.

One area where the consensual/statutory lien distinction may not be as significant is in a chapter 9 bankruptcy case when a creditor has a lien on ‘special revenues’ (as defined in section 902(2) of the Code).  This is because, pursuant to section 928, a creditor’s consensual lien on special revenues ‘flops over’ the petition date and attaches to post-petition receipts—much like a statutory lien does in all instances.  However, it may still be preferable to have a statutory lien on special revenues because, in addition to the ‘flop-over’ effect, section 928 also subordinates a creditor’s lien to “necessary operating expenses” of the project or system.  Since by its terms it appears that only consensual liens are addressed in section 928 (referencing “any lien resulting from any security agreement. . .”), section 928(b)’s subordination mechanism may not affect statutory liens on special revenues.

* All section references are to the Bankruptcy Code.

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About this Author

William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm
Member

Bill’s practice focuses primarily on commercial law, workouts, and corporate reorganization. He has represented various institutional lenders, indenture trustees, bondholders, and other creditors, debtors, and trustees in all manner of insolvency proceedings in courts throughout the United States.

His industry experience encompasses municipalities, airlines, hospitals and other health care facilities, retail, telecom, energy and clean tech, waste disposal, military housing, hotels, and educational institutions.

He has substantial experience in all phases of bankruptcy...

617-348-1665
Eric Blythe, Bankruptcy, Restructuring, Commercial Law Group, Mintz Levin
Associate

Prior to joining the firm, Eric served as legal counsel at the Massachusetts State House. While there, he worked for the state representative for Marshfield and Scituate, and he researched and reported on issues such as affordable housing, end-of-life health care, court-appointed attorney regulations, the tax-expenditure budget and pension reform. He also drafted legislation regarding issues ranging from freedom of speech rights to nuclear power plant regulation. He was a Summer Associate at Mintz Levin in 2009.

(617) 348-4913