In this prior post, we discussed common defenses that can be asserted in defending preference actions under the Bankruptcy Code. Another defense that may be utilized is the “statutory lien defense” pursuant to Section 547(c)(6) of the Bankruptcy Code.
A statutory lien is a lien that arises by operation of a statute. Examples of statutory liens are tax, mechanic’s, and materialmen liens because they are established by statute.
Section 101(53) of the Bankruptcy Code defines a statutory lien as “a lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.” 11 U.S.C. § 101(53).
Statutory liens are the focus of § 547(c)(6): “The trustee may not avoid under this section a transfer — . . . that is the fixing of a statutory lien that is not avoidable under section 545 of this title.” Thus, if the statutory lien is not avoidable under § 545, it is not avoidable as a preferential transfer.
Section 545 provides:
The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien—
(1) first becomes effective against the debtor—
(A) when a case under this title concerning the debtor is commenced;
(B) when an insolvency proceeding other than under this title concerning the debtor is commenced;
(C) when a custodian is appointed or authorized to take or takes possession;
(D) when the debtor becomes insolvent;
(E) when the debtor’s financial condition fails to meet a specified standard; or
(F) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien;
(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists, except in any case in which a purchaser is a purchaser described in section 6323 of the Internal Revenue Code of 1986, or in any other similar provision of State or local law;
(3) is for rent; or
(4) is a lien of distress for rent.
Accordingly, if a Trustee cannot avoid a statutory lien under Section 545, then the perfection of the lien itself is unavoidable. A common example of when the Section 547(c)(6) defense applies occurs when a mechanic’s or materialmen lien creditor perfects its lien within 90 days prior to the debtor filing bankruptcy. The perfection of such lien during the 90-day period will not be deemed a preference because it is considered a statutory lien, which is not avoidable.
For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, below are several articles on this topic:
Preference Payments: Brief Analysis of Preference Actions and Common Defenses
Minimizing Preference Exposure: Require Prepayment for Goods or Services
Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges
Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.