Daily Development for
Thursday, January 15, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKRUPTCTY; PREFERENCES; "RELATION BACK" PERFECTION: Contractual liens recorded after time of creation will be deemed created as of time of recording for purposes of inclusion in preference period if recorded more than 20 days after initial creation, notwithstanding state law that provides for a longer "relation back" period.

Fidelity Financial Services, Inc. v. Fink, Trustee, No. 96-1370 -- U.S.S.Ct. Argued November 3, 1997 -- Decided January 13, 1998, affirming 102 F.3d 334

Debtor purchased a new car and gave a purchase money note to Lender and signed a security agreement on the car. Twenty-one days later, Lender mailed the application necessary to perfect its security interest under Missouri law. Debtor later filed for bankruptcy, and the trustee of her bankruptcy estate moved to set aside Lender's security interest on the ground that the lien was a voidable preference under 11 U.S.C. Sect. 547(b).

Section 547(c)(3)(B) prohibits the avoidance of a security interest for a loan used to acquire property if, among other things, the security interest is "perfected on or before 20 days after the debtor receives possession of such property." Trustee argued that this "enabling loan" exception was inapposite because Lender had not perfected its interest within the 20-day period. Lender responded that Missouri law treats a motor vehicle lien as having been "perfected" on the date of its creation (in this case, within the 20-day period), if the creditor files the necessary documents within 30 days after the debtor takes possession.

The Bankruptcy Court set aside the lien as a voidable preference, holding that Missouri's relation back provision could not extend Sect. 547(c)(3)(B)'s 20-day perfection period. The District Court affirmed on substantially the same grounds, as did the Eighth Circuit, holding a transfer to be perfected when the transferee takes the last step required by state law to perfect its security interest.

On appeal: Held: Affirmed. A transfer of a security interest is "perfected" under Sect. 547(c)(3)(B) on the date that the secured party has completed the steps necessary to perfect its interest, so that a creditor may invoke the enabling loan exception only by satisfying state law perfection requirements within the 20-day period provided by the federal statute. Section 547(e)(1)(B) provides that "a transfer of . . . property . . . is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee." (Much of the preceding text was gleaned from an email listserve report forwarded by a DIRT reader.)

This definition implies that a transfer is "perfected" only when the secured party has done all the acts required to perfect its interest, not at the moment as of which state law may retroactively deem that perfection effective. The statutory history of the preference provisions persuasively suggests that Congress intended Sect. 547(c)(3)(B) to establish a uniform federal perfection period immune to alteration by state laws permitting relation back. Thus, the statutory text, structure, and history lead to the understanding that a creditor may invoke the enabling loan exception only by acting to perfect its security interest within 20 days after the debtor takes possession of its property.

Comment: Here at UMKC, we're bragging because the principle author of the winning brief was the Editor's colleague, Ray Warner. Ray has provided advice and counsel concerning bankruptcy items reported in this service in the past. This time, the question immediately on the editor's mind was whether this case had any implications for after acquired liens in the real property context.

We identified three situations: mechanic's liens, fixture filings, and after acquired property clauses.

The mechanic's lien issue is the cleanest. First, although Section 546b, that provides that retroactively effective liens are valid in bankruptcy generally, and seems tailor made for mechanic's liens, does not apply to preferences. The Court made that plain here. Nevertheless, Ray points out that the preference law that the Court applied in Fidelity, 547(c)(3)(B), does not, in turn, apply to mechanic's liens. It applies only to contractual liens, and not statutory liens. The difference is not whether statutes address the issue of priority - clearly the Missouri statutes did address the priority of the automobile liens in Fidelity. The difference, rather, is whether the lien itself arises by operation of law (statutory lien) , as opposed to being triggered by a contractual security agreement (contractual lien).

Missouri law, for instance, provides (inter alia) for lien priority relating back to the "first shovel," even if that shovel was turned years prior to the filing of the lien. Although the mechanic must file a lien in order to be covered, the important distinguishing characteristic is that the debtor and creditor did not contract at the outset for that lien. They knew it was there by operation of law, but the law did not require that the parties provide for the lien by contract.

Compare, for instance, personal property security interests in fixtures, where the UCC may provide some "relation back" priority, but does not create the lien itself. The parties must contract to provide a lien or there isn't one. But most UCC provisions will not permit a fixture lien to "relate back" longer than the 20 day period permitted by the Bankrupcty Code. So the conflict doesn't arise. The problem in Fidelity came about when car dealers in Missouri convinced the legislature to extend the time for filing their security interests for thirty days.

Finally, there are after acquired property clauses. The lien in those cases would be viewed as a contractual lien, but it is not, classically, a "relation back" right. The lien doesn't arise until the debtor acquires the property, and that is the relevant time for fixing the lien for purposes of preferences analysis. Thus Fidelity doesn't have much to do with these liens. Note that future advance clauses create a "relation back" interest in terms of priority in the security, but the security interest itself for the particular debt isn't created until the advance is made. Thus, again, Fidelity doesn't say much about these situations. It was and is clear that a future advance security interest is "perfected" for purposes of preference analysis only at the moment that the future advance is in fact made.

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