Following a chapter 11 case, lenders face significant risks associated with debtor-in-possession (DIP) loans or cash-collateral orders that provide for automatically perfected liens encumbering a debtor’s assets. Section 364(d)(1) authorizes a debtor to obtain financing secured by a lien on estate property, and bankruptcy courts regularly grant creditors automatically perfected liens on a debtor’s assets without the need to perfect such liens through the applicable state law system.

Automatically perfected judicial liens create a potentially serious problem for subsequent secured lenders who fail to discover the liens. Most lenders are not in the practice of searching busy chapter 11 case dockets for orders that could affect proposed collateral; lenders typically limit their searches to the existing state system for lien perfection. Failure to discover an automatically perfected judicial lien could result in a post-bankruptcy lender providing credit against assets already securing an existing obligation. Of course, this would result in a greater risk of a limited recovery for the post-bankruptcy lender in the event of a default or subsequent bankruptcy filing. 

Suppliers of goods to ocean-going vessels can face considerable counterparty risk, as the vessels that they supply may never return to the same port. As protection, the common law gave suppliers a maritime lien against any vessel to which they provided “necessaries.” In the U.S., this common-law lien has been codified in the Commercial Instruments and Maritime Lien Act (CIMLA), which states in relevant part that “a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner has a maritime lien on the vessel” and “may bring a civil action in rem to enforce the lien.”

The U.S. District Courts for the Southern District of New York and the Northern District of Florida recently decided disputes between a seller of fuel to certain ocean-going vessels and that seller’s subcontractors over which of them held maritime liens against the vessels to secure unpaid fuel charges. On nearly identical facts, the New York District Court decided in the seller’s favor and the Florida District Court in favor of the seller’s subcontractor, demonstrating a significant split between the two courts on the interpretation of the CIMLA.

• Wendy D. Brewer - JensenBrewer, LLC; Fishers, IN
• Bernadette M. Barron - Barron Business Consulting; Chicago
• Mark A. Bogdanowicz - Howard & Howard; Peoria, Ill.
• Chad J. Schandler - CohnReznick LLP; New York