Tag Archives: unperfected interest

An Equitable Argument by an Unperfected Secured Creditor

An Equitable Argument by an Unperfected Secured CreditorAn Equitable Argument by an Unperfected Secured Creditor.  Has the court ever heard an equitable argument made by an unperfected secured creditor? The answer is yes. Here’s the story.

In a case of very unfortunate timing, a creditor loaned a business $500,000.00 to keep its doors open, took a security interest in the Debtor’s assets to secure the loan, and filed a UCC financing statement five days later to perfect the lien. However, on the day after the loan, and four days prior to perfection of the lien, an involuntary petition was filed against the Debtor. In re Millivision, 474 F.3d 4 (lst Cir. 2007). In this case the creditor argued that the “strong-arm” pro visions of §544 “offended the underlying equitable principles of the Bankruptcy Code by conferring a “windfall” cash infusion…” Further, it was argued that the “relation-back” provision of §5 47(e) (which allows transferees a grace period to perfect a transfer) constitutes “any generally applicable law” under §546(b), which limits the rights of a Trustee to recover under §544. Affirming the lower Courts, the First Circuit rejected the § 547(e) argument, finding that a subsection applicable to prefer entail transfers is not “generally applicable law” for purposes of the strong-arm powers under § 544 (b). The Court then noted that the creditor could have perfected its lien prior to making the loan, and “under long-established principles. Therefore the court found that petitioner’s lack of diligence precludes equity’s operation”. So yes a court has heard an equitable argument by an unperfected secured creditor and lost the argument. If you have a question about your perfected interest, please see a bankruptcy attorney.

For more information about Bankruptcy and Disability Income  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.

Unperfected Secured Creditor

Unperfected Secured CreditorUnperfected Secured Creditor – Notice of unperfected secured creditor? Is the disclosure of an unperfected secured creditor inquiry notice?

Here’s an example, pre-petition, the Debtor refinanced the mortgage on her residence. However, the deed of trust securing the refinanced obligation was not recorded when the Debtor filed her Chapter 7 petition. In her Schedule A, the Debtor listed a “secured claim” of $134,740.00 against the property. In Schedule D, she listed a claim held by the refinancing creditor with a balance of $134,165.00. It further stated: “Incurred: 2002, Lien: deed of trust…” She also attached a copy of her 2003 mortgage interest statement.

When the Trustee sought to avoid the unrecorded mortgage, the creditor argued that the Trustee’s hypothetical bona fide purchaser status under § 544(a)(3)was defeated by constructive or inquiry notice to the Trustee of the unrecorded deed. This notice allegedly came from the information included in the Debtor’s bankruptcy schedules. The Bankruptcy Court agreed with the creditor, citing Professional Investment Properties of America, 955 F.2d 623 (9th Cir. 1992), and the Trustee appealed to the Ninth Circuit BAP, 361 B.R. 509 (9th Cir. BAP2006).

The Appellate Panel considered the specific statutory language, and found that a Trustee’s strong-arm power arises “as of the commencement of the case… before there could be any constructive notice from debtor’s bankruptcy schedules.” The Court then distinguished Professional Investment as an involuntary case in which the petitioning creditors stated, in the petition itself, that the claims were “supposedly secured by assignments of deeds of trust….” There the inquiry notice came from the petition, at the commencement of the case. Here, the case was commenced with the filing of the petition, such that the schedules and statements were filed after commencement of the case.

If no case were commenced by a petition, there would be no case in which to file statements and schedules, which must therefore be deemed filed after the petition, even if presented to the Clerk contemporaneously with the petition. Thus. any inquiry or constructive notice was ineffective against the Trustee, whose strong-arm powers arose prior to receipt of such notice.

See, however, In re Lauver, 372 B.R.757(Bkrtcy. W.D.Pa. 2007). which held contra on essentially identical facts. There. Judge Markovitz held the Trustee did not qualify as a bona fide purchaser of the property under Pennsylvania law. The Court found that a review of the Debtor’s bankruptcy papers, where the petition and statements and schedules were filed contemporaneously, would put a hypothetical purchaser using ordinary diligence upon notice as to whether the mortgage was still in effect. leading to further inquiry. Disclosure of unperfected secured creditor not inquiry notice. If you have a questions about a secured creditor’s lien, you should contact an attorney to help.

Unperfected Secured Creditor – For more information about Bankruptcy and secured creditor’s lien  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.