In a 28 page decision signed April 29, 2011, Judge Gross of the Delaware Bankruptcy Court determined that in order for a transfer to be considered “substantially contemporaneous” as used by Bankruptcy Code §547(c), it does not necessarily need to comply with the timing requirements of §547(e). Judge Gross’s opinion is available here (the “Opinion”).


In 2004, J. Silver Clothing, Inc. (the “Debtor”) entered an agreement with the Connecticut Community Bank, N.A. (the “Bank”) by which the Debtor would receive a $1 million revolving credit loan in exchange for a first lien on all its assets, except real estate leases, and a guarantee from the Debtor’s chairman of the board, James Fuld (“Fuld”). The loan closed on December 1, 2004. Opinion at *4.

As part of perfecting its lien, the bank was required to file a UCC-1 Financing Statement (“UCC-1”). After submitting its first UCC-1 by mail on December 3, 2004 and having the Division of Corporations reject it for failure to properly list the Debtor’s address, the Bank submitted a second UCC-1 by mail on December 20, 2004. The Debtor, having heard that the UCC-1 was not yet on file, submitted its own UCC-1 by mail on December 30, 2004. The Division of Corporations stamped the Bank’s second UCC-1 as filed on January 4, 2005. Opinion at *5.

In an attempt to stave off bankruptcy, the Debtor repaid the Bank’s loan and sold several of its assets (repaying the loan and lifting the Bank’s lien was a requirement of the sale). The Debtor then filed for bankruptcy on February 25, 2005 and the case was converted to a chapter 7 bankruptcy on April 12, 2005.

The chapter 7 Trustee, brought a preference action against the Bank, claiming that because the lien was not perfected within the time limit set by Bankruptcy Code §547(e), the exchange of value (the lien for the loan) was not contemporaneous, as required to protect the transfer under 547(c).

Judge Gross’s Opinion

Judge Gross granted summary judgment in favor of the Bank. While the 1st and 6th Circuits treat 547(e) as a bright line rule that if a transfer extends beyond the time limit provided by § 547(e), then the exchange is not substantially contemporaneous, the majority of Circuit Courts do not treat 547(e) as a bright line rule. Opinion at *17.

Relying on a previous decision by Judge Walrath, Hayes Lemmerz, 329 B.R. 136, 140-41 (Bankr. D. Del. 2005), Judge Gross rejected the bright line rule in favor of a “totality of the circumstances” rule. To quote Judge Gross, “the Court concludes that Section 547(e) does not command the Court to apply the 10-day limitation inflexibly. Instead, the Court will examine all of the circumstances determining the parties’ intent.” Opinion at *19. And according to Judge Gross’s analysis, the exchange was contemporaneous as required by 547(c), disallowing the Trustee’s attempt to avoid the transfer.

While it is possible that you can take more than the time provided by 547(e) to perfect a lien, the last thing anyone wants is to lose a case by overlooking one section of the bankruptcy code. The order contains far more particulars than this one blog post could contain, and I encourage you to take the time to read it for yourself.