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From the Bankruptcy Courts: the Rt Ustee's Avoiding Powers and Conditional Attachment Liens-Can Two People Wear the Same Shoes? Benjamin Weintraub

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From the Bankruptcy Courts: the Rt Ustee's Avoiding Powers and Conditional Attachment Liens-Can Two People Wear the Same Shoes? Benjamin Weintraub Maurice A. Deane School of Law at Hofstra University Scholarly Commons at Hofstra Law Hofstra Law Faculty Scholarship 1989 From the Bankruptcy Courts: The rT ustee's Avoiding Powers and Conditional Attachment Liens-Can Two People Wear the Same Shoes? Benjamin Weintraub Alan N. Resnick Maurice A. Deane School of Law at Hofstra University Follow this and additional works at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship Recommended Citation Benjamin Weintraub and Alan N. Resnick, From the Bankruptcy Courts: The Trustee's Avoiding Powers and Conditional Attachment Liens- Can Two People Wear the Same Shoes?, 22 UCC L.J. 88 (1989) Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/835 This Article is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Faculty Scholarship by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. From the Bankruptcy Courts Benjamin Weintr{lub* and Alan N. Resnick** THE TRUSTEE'S AVOIDING Nazario caused a preliminary writ POWERS AND CONDITIOf\IAL of attachment to be levied against ATTACHMENT LIENS-CAN TWO certain equipment and proceeds PEOPLE WEAR THE $AME because the debtor was not served SHOES? personally with the summons and A recent case in the Southern complaint. District of New York, In re De­ On May 11, 1984, another Lancey ,.1 raises interesting ques­ creditor, United. States Fidelity & ~ions about a lien obtained by writ Guaranty Company (USF&G), of attachment when a bankruptcy filed fimincing statements under petition is filed before the lienor Article 9 of the Uniform Commer­ obtains a money judgment against cial Code to perfect a security the debtor. interest in the assets of Mr. and DeLancey, the individual debtor, Mrs. DeLancey. The financing was the principal of a corporation statements, as well as ajudgment involved in the. roofing business in note, were filed as a result of Allentown, Pennsylvania. In April USF&G's issuance of payment 1984, Nazario, a creditor of both and performance bonds on behalf the corporation and DeLancey, of the debtor and the corporation. commenced an action against Mr. When various creditors sued and Mrs. DeLancey and the cor­ both the debtor and the corpora­ poration in federal district court to tion in October 1984, the state · collect unpaid debts for materials court ordered that certai~ equip­ furnished. On the same day, ment be sold and the proceeds held in escrow by a bank pending a determination of the relative * Counsel to the law firm of Levin & rights in the assets. On March 13, Weintraub & Crarnes, New York City; 1985, the Pennsylvania court held member of the National Bankruptcy. Con­ ference. that DeLancey, not the corpora­ ** Benjamin Weintraub Distinguished tion, was the owner of the equip­ Professor of Bankruptcy Law, Hofstra ment that was sold. The proceeds University School of Law, Hempstead, New York; Counsel to Berkman, Henoch, of the .sale held in escrow were Peterson, Kadin, Peddy & Scarcella, Gar­ only $44,217, which was less than den City, New York; Member of the Na­ the amount owed to Nazario and tional Bankruptcy Conference. 1 Case No. 85-B-20100 (S.D.N.Y. only a small fraction of the sum Dec. 20, 1988) (slip op.). owed to USF&G. 88 FROM THE BANKRUPTCY COURTS DeLancey filed a bankruptcy clause, because the lien·was "no­ petition commencing a chapter 7 perfected" in that it ~as condi­ liquidatiop. case on March 5, 1985. tional on obtaining a money'judg­ At that time, Nazario's attach­ ment that cannot be .obtained ment lien had priority, under because of the bankruptcy. Thus, Pennsylvania law, over the sub­ the attachment lien ~ssolved and, sequently perfected lien of according to the trustee's argu­ USF&G. If bankruptcy had not ment, the trustee niay preserve ensued and Nazario had eventu­ the attachment lien fot the benefit ally obtained a money judgment in of the estate under Section 551.of its action, Nazario's priority over the Code.4 The result of this rea­ USF&G would have enabled soning, according to the trustee, is Nazario to collect the entire es­ that the trustee stands in the prior­ crow fund. However, state law ity position of Nazario and defeats provides that a lien obtained by the junior security interesf of order of attachment is inchoate USF&G. and condit'ional on obtaining a Summary judgment was denied money judgment. If a judgment in part bec~use of factual issues cannot be obtained, the condi­ that had ·to be resolved, but the tional lien is dissolved. 2 Under bankruptcy court granted partiat these facts, what are the relative summary judgment to the extent rights of the parties as to the pro­ that the bank was directed to tum ceeds of the equipment held in the over the escrow funds to the escrow fund? trustee.5 Although the co~rt did gard to any knowledge of the trustee, or Relative Rights of the Parties of -any creditor, the ri&hts and powers of, or may avoid any transfer of prop­ This question was first raised in erty of the debtor or any obligation in­ curred by the debtor that is voidable by the context of a motion for sum­ (1) a creditor that e)(tends credit to the mary judgment by the trustee in debtor at the time of the commencement connection with his turnover ac­ of the case, and that obtains, at such time and with respect to such credit, a tion against the bank to recover judicial lien on all property on which a the escrow funds. The trustee ar­ creditor on a simple contract could have gued that Nazario's attachment obtained such a judicial lien, whether or not such a creditor exi~ts .... lien was voidable under Section 4 544(a)(l) of the Bankruptcy 11 U.S.C. 551 provides: 3 Any transfer avoided under section 522, Code, the· so-called strong-arm 544, 545, 547; 548, 549, or 724(a) of this title, or any lien void 'under section 2 See In re Savidge, 57 Bankr. 389, 391 506(d) of this title, is pres~rved for the· (D. Del. 1986). benefit of the estate but only with re­ 3 11 U.S.C. § 544(a) provides: spect to property of the estate. The trustee shall have, as of the com­ sIn re DeLancey, 77 Bankr. 424 mencement of the case, and without re- (S.D.N.Y. 1987). 89 UNIFORM COMMERCIAL CODE ~AW JOURNAL [VOL. 22 : 88 1989] not resolve the priority dispute promoting the priority of un­ between the trustee and USF&G, avoidable junior secured interests it did confirm that Nazario's lien who would otherwise improve was inchoate or unconditional be­ tpeir positions at the expense of cause it did not obtain a money the estate. " 6 judgment. The court pointed out, how­ In a subsequent· motion to re­ ever, that the trustee's rights re­ classify the claim ofUSF&G as an sulting from preservation of the unsecured claim, the trustee again­ avoided lien are not without lim­ took the position that Sections itation. 5M(a)(l) and 551 allow the trustee [T]he trustee who avoids and then to avoid the "unperfected" in­ preserves a senior secured claim choate attachment lien while pre­ cannot acquire greater rights in the serving it for benefit of the estate, property in question than those to thereby giving the trustee priority which the ~rustee succeeded .... over USF&G's lien. Thus, when under state law, the In response, USF&G argued avoided lien which is sought to be that the inchoate or conditional at.: preserved is inferior to subsequent tachment lien of Nazario is dis­ valid liens, the inferior lien cannot solved and therefore unavailable be enhanced by its preservation for preservation under Section under 11 U.S.C. § 551. If the avoided lien will sink below other 551. USF&G contended that the liens ~gainst the estate, the trustee trustee is .subrogated under Sec­ who stands in the shoes of the in­ tion 551 to the unsecured status of ferior avoided Jien will likewise Nazario's inch~ate or conditional sink whjle in those shoes, because lien which was "unperfected" 11 U.S.C. § 551 does not create a and dissolved because no money floating lien for trustees. 7 judgment was entered in favor of Nazario prior to bankruptcy. Focusing on the status of Since the trustee may not pre­ Nazario's attachment lien on the serve Nazario's lien for the ben­ date on which tl;te debtor filed the efit of the estate, according to bankruptcy petition, which is USF&G' s argument, its perfected when the trustee's strong-arm security interest became the powers arise under Section senior lien that is effective against 544(a), the bankruptcy court con­ the trustee. cluded that Nazario held a "valid The bankruptcy court noted unperfected attachment lien that the rationale behind the au­ which was superior to USF&G's tomatic preservation of avoided liens pursuant to Section 55i is that "the estate should benefit 6 In re DeLancey, slip op. at 6. from eacli avoidance rather than 7 Id. 90 FROM THE BANKRUPTCY COURTS subsequent in time lien which was· taining a money judgment after perfected by filed UCC Financing bankruptcy, the attachment lienor Statements.'' 8 will "perfect" the lien and the at­ The conclusion, that Nazario's tachment lienor's priority will lien had priority over USF&G's date back to the prebankrqptcy security interest under Pennsyl­ time when the attachment lien vania law led to the next question: was first obtained.
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