Liens on business vehicles could be avoided in Chapter 11 bankruptcy

Written by Harold Jarnicki on . Posted in Uncategorized

When a business or individual files for bankruptcy, the federal bankruptcy law generally recognizes two types of claims: secured and unsecured. The distinction between a secured creditor, who holds a lien against estate assets, and an unsecured creditor, has a number of implications.

A debtor may find that, in certain circumstances, the debt of an unsecured creditor can be avoided, as seen in the Chapter 11 United States Bankruptcy Court case of In re Medcorp, Incorporated.

Ambulance business on life support

The debtors were an ambulance service business that provided transportation for individuals needing medical care. A bank had extended credit to the debtors for the purchase of vehicles under a credit and security agreement. As part of the extension of credit, the debtors granted the bank a security interest in all of its vehicles.

Later, due to financial difficulties, the debtors’ business assets and operations were about to be sold when the debtors filed for Chapter 11 bankruptcy. A bankruptcy trustee was appointed and eventually the court approved the sale of the debtors’ assets, including the vehicles, according to terms that were substantially identical to those originally proposed.

Prior to the sale, the bankruptcy trustee filed a motion to avoid any security interests or liens claimed by the bank on the vehicles the debtors had formerly used to operate their business. The trustee alleged that any interest the bank had was not properly perfected in the title system under Ohio law—that is, that the interest in the vehicles was not filed fully and correctly.

Was the obligation on the vehicles avoidable?

A creditor who holds an unperfected, or improperly perfected lien against a debtor when a bankruptcy case is filed could possibly have the lien avoided by the bankruptcy trustee. The rationale behind this law is to ensure that the estate assets available to a debtor’s unsecured creditors is maximized by preventing the creation and enforcement of secret or undisclosed liens; liens that due to lack of being perfected were not known to others.

The certificates of title for these vehicles did not show the existence of the bank’s liens and there was no evidence that the liens had been entered into the automated processing system used in Ohio for recording liens on vehicles. Thus, under the so-called “strong arm clause” of the bankruptcy law, the liens held by the bank on the vehicles were subject to avoidance based on the fact that the liens were not properly perfected.

Accordingly, the security interests held by the bank in the vehicles could be avoided in the bankruptcy proceeding and declared void.

Business bankruptcy can be complex

A business facing bankruptcy faces much more complex issues than an individual. Such issues as whether or not you wish to keep your business open should be factored in to your approach to bankruptcy. Before taking any action, seek the assistance of an experienced bankruptcy attorney who can provide advice on the best approach for your specific circumstances.