Try as we might, whether representing debtors or secured creditors, we are unable to discern with certainty all of the liens giving rise to secured claims effective as of the petition date. The applicable recording systems with respect to real property interests, personal property interests under Article 9 of the Uniform Commercial Code and other interests perfected by compliance with separately applicable federal statutory schemes,¹ are less than perfect and do not account for and categorize various types of liens that may exist under applicable federal and state law. The debtor and its known secured creditors must be ever cognizant of the existence and potential impact of possible "hidden liens."²

There are numerous ways a secured creditor can become unperfected or lose priority under Article 9 based on actions taken by the debtor or other circumstances. However, in most instances, the vigilant creditor can take precautionary action to preserve and safeguard its lien position. More troubling, however, are the risks presented by various statutory liens arising under federal and state law that can prime an existing lienholder's interest. Some of these "hidden" non-Article 9 statutory liens are described below.

Foremost among hidden liens are federal tax liens arising under the Internal Revenue Code against "all property and rights to property, whether real or personal" that belong to the taxpayer. 26 U.S.C. §6321. Typically, a tax lien search will be part of any debtor's or secured creditor's due diligence in reviewing the secured claims asserted against the debtor, so such parties may become aware of any existing federal tax liens. The same is generally true with respect to judgment liens.

Mechanic's or materialman's liens arising under state law are perhaps the most frequently encountered type of hidden liens in bankruptcy. Similarly, "possessory liens"³ are often asserted by unpaid processors, equipment rebuilders and the like against equipment or products of the debtor that are in the possession of such possessory lienholders as of the petition date. While not necessarily afforded lien priority, reclamation claims are asserted in a great number of bankruptcy cases and are often satisfied to the detriment of secured creditors.

With respect to agricultural and livestock production, hidden liens may arise pursuant to the Perishable Agricultural Commodities Act, 7 U.S.C. §§499 et seq. (PACA) and the Packers and Stockyards Act, 7 U.S.C. §§181 et seq. (PSA), pursuant to which a trust is created to ensure payment to unpaid perishable agricultural commodities suppliers or to livestock and poultry producers and processors, respectively. Similar or additional protections may be afforded under state law pursuant to agricultural producer's lien or farm products lien statutes.

For debtors owning real estate and involved in manufacturing operations, environmental liens for cleanup costs may constitute hidden liens arising pursuant to applicable federal or state law. Federal liability generally arises pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§9601 et seq. (CERCLA).

Further liens may arise with respect to unpaid wages under applicable state law or pursuant to the "hot goods" section of the federal Fair Labor Standards Act, 29 U.S.C. §215(a)(1), which prohibits any person from introducing goods into interstate commerce that were produced in violation of the overtime and minimum wage provisions of the Fair Labor Standards Act. Certain maritime liens may arise pursuant to the Commercial Instruments and Maritime Liens Act, 46 U.S.C. §§31301 et seq., and may be effective without any prior filing to evidence the obligation.

In addition, a hidden lien may be encountered if a debtor is found to have liability under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§1961 et seq. (RICO), for numerous "racketeering activities" including financial institution fraud, mail fraud, robbery, bribery and extortion, among others. Property subject to forfeiture in favor of the United States pursuant to RICO involves any interest in real or personal property acquired or maintained in violation of RICO and any proceeds derived therefrom. The liens that arise upon conviction of a debtor for a RICO offense relate back to the date of the commission of the illegal acts.⁴

In addition to the foregoing, numerous other lien rights exist under applicable state common law or statutory provisions in various jurisdictions, including landlord's liens, artisan's liens, various bailee liens, unemployment compensation and workers' compensation liens, and molder's liens, just to identify several of the more commonly occurring types of hidden lien rights.

Moreover, trade creditors may transform general unsecured claims into secured claims to the extent of any valid setoff or recoupment rights, thereby further diminishing the debtor's estate and the available collateral base of any secured creditors with an interest in the debtor's accounts receivable.

Given the risks associated with hidden liens, a debtor or secured creditor is well advised to understand the types of hidden liens that are particular to a debtor's industry or business and that may otherwise arise pursuant to applicable federal or state law.

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Footnotes

¹ Liens on ships, aircraft, railroad rolling stock, patents, copyrights and trademarks are governed by compliance with the applicable federal statutory provisions, outside the context of Article 9 of the Uniform Commercial Code. See UCC §9-109(c)(1). Return to article

² For a detailed discussion of matters pertaining to the assertion of various types of hidden liens, see Borges, Wanda, "Hidden Liens: Who Is Entitled to What?," 103 Com. L.J. 284 (Fall 1998). Return to article

³ A possessory lien is a common-law or statutory right to retain possession of all or some personal property belonging to another until some debt due on or secured by such property is paid or satisfied. See, e.g., N.Y. Jur. 2d Liens §11 (1989). Return to article

⁴ Similarly, forfeiture issues may apply with respect to aircraft, vehicles or vessels used or intended for use in the transport of illicit substances, pursuant to the Comprehensive Drug Abuse Prevention and Control Act. See 21 U.S.C. §881. Return to article