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Secret Liens: Can They Really Have Super-Priority Status?

By Anne Marrs Huber
March 02, 2004

In the restructuring world certain constants exist: The Bankruptcy Code (Code) has not dramatically changed since 1978, a Chapter 7 corporate debtor cannot receive a discharge, and exemptions are defined to the penny. But be wary '  there are unknown pitfalls out there. State governments, to appear responsive to local issues caused by distressed businesses, have increasingly enacted laws that spring “secret liens” or other penalties on debtors. Although bankruptcy practitioners may instinctively deride such laws as subordinate to the federal Code, recent federal opinions disagree.

Super-Priority Secret Liens: The Secrets Revealed

Commentators on Article 9 of the Uniform Commercial Code (Article 9) recognized the problems associated with statutory liens. See, e.g., Meredith S. Jackson & Jennifer L. Kercher, Report of the ABA Business Law Section Uniform Commercial Code Committee, Subcommittee on Relation to Other Law, Re: Inclusion of Nonpossessory Statutory Liens in Article 9, 51 Consumer Fin. L.Q. Rep. 108 (Spring 1997). Statutory liens often benefit individuals who have little or no education regarding commercial transactions. These liens exist in many forms, including health care liens, tax liens, mechanics' liens, warehousemens' liens, wage liens, landlords' liens, and artisans' liens. Consequently, these liens are governed by little-publicized, non-uniform state laws. See Id. While the Article 9 drafters ultimately elected to apply Revised Article 9 to certain types of agricultural liens, the commission explicitly excluded other statutory liens from Article 9. See U.C.C. ' 9-109 (2002).

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