June 1, 2020

May 30, 2020

Subscribe to Latest Legal News and Analysis

May 29, 2020

Subscribe to Latest Legal News and Analysis

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.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

TRENDING LEGAL ANALYSIS


About this Author

William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm, Bankruptcy & Restructuring Insolvency & Creditor Rights Litigation Directors & Officers Litigation Chapter 9 & Municipal Insolvency Litigation
Member

Bill is a nationally recognized bankruptcy attorney with extensive experience in corporate and municipal reorganizations and debt restructurings both in and out of court. He represents creditors and debtors across a wide range of industries throughout the country in all phases of distressed debt negotiations, bankruptcy litigation, and distressed asset acquisitions. Bill is also recognized as one of the leading attorneys in the nation for his work representing bond trustees and bondholders in Chapter 9 bankruptcies and other governmental and municipal insolvencies.

Bill is the chair...

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

Eric’s practice focuses primarily on commercial litigation and lending, debt restructuring and workouts, distressed debt advising and corporate and municipal reorganization. Past representations include a diverse mix of lenders, secured and unsecured creditors, corporate borrowers, bondholders, bond trustees and institutional investors.

Eric’s experience also extends to other disciplines, often in the distressed context, including director and officer representation, intellectual property licensing and sales, consignment, insurance and landlord/tenant issues.

Eric is an active member of the American Bankruptcy Institute and the Boston Bar Association—specifically the Bankruptcy Law Section where he chairs the Public Policy Committee. He is also the editor of Mintz's bankruptcy blog Distressing Matters which provides timely discussion and analysis on a variety of bankruptcy and commercial law issues.

(617) 348-4913