Summary:
American Residential Services, L.L.C (“American”) received $186,419.35 from the Debtor in the 90-days preceding its bankruptcy and the Trustee sought to avoid such payments as a preference under 11 U.S.C. § 547. The parties agreed that the Trustee had met his burden regarding the first four requirements of § 547(b), but that he had failed to show that American had received more than it would have under Chapter 7, as American “could and would have filed appropriate claims of lien ... and been paid in full in the hypothetical Chapter 7.”
First the Bankruptcy Court held that the amount of assets of the estate would result in a dividend to unsecured creditors of significantly less than 100%.
American’s responded that it could have been a secured creditor by filing claims of lien under an “inchoate lien” theory. This approach "recognizes that since a holder of inchoate lien rights cannot perfect a lien after accepting payment in satisfaction of the underlying claim, a refusal to protect such transfers from avoidance exposes holders of such inchoate rights to ‘an unreasonable Hobson’s choice between accepting payment (with the attendant risk that it could be avoided if the payor enters bankruptcy) or taking the commercially unreasonable step of declining payment in order to perfect an inchoate statutory lien.’” ACP Ameri-Tech Acquisition, LLC, 2012 WL 481582 at *3 (Bankr. E.D. Tex. 2012) (quoting 360Networks (USA), Inc.,327 B.R. 187 at 192 (Bankr. S.D.N.Y.2005)).
The Bankruptcy Court, however, found that this would establish “a new layer of ‘hypothetical’ guesswork by requiring the trustee to prove ... that the actual presence defendant would not have done something (filed a lien) that a hypothetical and reasonable preference defendant presumably woud have done.” Relying on the evaluation made by the Fourth Circuit of inchoate lien rights in regards to the new value defense of § 547(c) in United Rentals, Inc. v. Angell, 592 F.3d 525, 531 (4th Cir. 2010), the bankruptcy court held that the same statutory rights were at issue and that N.C.G.S. § 44A only gives the right to file a mechanics’ lien. As United Rentals held, when a preference defendant has failed to exercise its right to recorded a mechanic’s lien, there was neither an interest transferred nor an interest to release.
For a copy of the opinion, please see:
Sparkman v. American Residential Services, L.L.C.- Inchoate and Hypothetical Mechanic’s Lien does not Equate with a Security Interest for 11 U.S.C. § 547(b)(5).pdf
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