753 F.3d 124
4th Cir.2014Background
- Debtor Construction Supervision Services (CSS) filed Chapter 11 in January 2012 after purchasing materials and services on open account from multiple first- and second-tier subcontractors (the Subcontractors).
- Subcontractors delivered materials prepetition but had not served statutory notice of lien on funds (i.e., had not perfected liens) before the bankruptcy filing.
- After the petition, Subcontractors sought to serve notice and perfect liens on funds owed to CSS; BB&T (secured lender) objected, arguing no prepetition ‘‘interest in property’’ existed because perfection had not occurred prepetition.
- Bankruptcy court ruled for Subcontractors: under N.C. Gen. Stat. § 44A-18 and North Carolina law delivery created an entitlement (an interest) that perfection later secures; postpetition perfection falls under the Section 362(b)(3) exception.
- District court affirmed; Fourth Circuit reviewed de novo and affirmed, holding Subcontractors had an interest in property at the time of filing and thus could perfect postpetition under the Section 362(b)(3)/546(b) exception.
Issues
| Issue | Plaintiff's Argument (BB&T) | Defendant's Argument (Subcontractors) | Held |
|---|---|---|---|
| Whether subcontractors had an "interest in property" at the time of the bankruptcy filing when they had delivered materials but had not perfected liens by serving notice | No — because statutory lien was not perfected prepetition, any right was merely inchoate and insufficient to be an "interest in property" for § 362(b)(3) | Yes — North Carolina law vests an entitlement to a lien upon delivery (i.e., an existing interest) and perfection is a later step to secure/notify that interest | Held for Subcontractors: delivery created an existing interest in property; postpetition perfection falls within § 362(b)(3) exception |
| Whether § 362(b)(3) / § 546(b) permits postpetition actions to perfect interests that predated the petition | Argued the exception should not apply because no prepetition interest existed without perfection | Argued exception applies because state law treats the lien as securing a preexisting right that arose on delivery, so trustee’s avoidance powers are subject to perfection laws | Held: Exception applies because state law created an interest prepetition and trustee’s rights are subject to perfection rules under § 546(b) |
Key Cases Cited
- In re Maryland Glass Corp., 723 F.2d 1138 (4th Cir. 1983) ("interest in property" broader than perfected liens; trustee cannot undo state-law interests that predate petition)
- In re AR Accessories Grp., Inc., 345 F.3d 454 (7th Cir. 2003) (statutory lien’s effective date may relate back to when the underlying right arose; filing for lien gives notice but does not create the interest)
- In re Quigley, 673 F.3d 269 (4th Cir. 2012) (standard of de novo review for legal issues on appeal from bankruptcy court)
- Safety-Kleen, Inc. v. Wyche, 274 F.3d 846 (4th Cir. 2001) (purpose of the automatic stay is to prevent a chaotic scramble and allow equitable disposition of the estate)