Thursday, June 17, 2010

Attachment Lien: How an Unsecured Creditor can be Protected Against a Debtor's Bankruptcy

It is axiomatic that a cash transaction exposes the seller to little risk of loss. And it is easy to require cash payment for small purchases. However, when it comes to large transactions such as real estate purchases or wholesale purchase of goods, there are few purchasers who can afford to pay cash. So, sellers often consider extending credit in order to enable more purchase tranactions to take place. The added volume of transactions comes with its downsides. Sellers need to properly balance out the additional sales volume against the risk of purchaser defaults. Sophisticated sellers factor in the borrower's creditworthiness against the transaction profits, and seek guaranties and security for payment. In a secured transaction, seller seller may take back the collateral if debtor defaults on the payments, or goes bankrupt.

But what about sellers who extend credit without taking back a security? What protection do they have when the debtor defaults or is at risk of filing for banktuptcy? In such situations, the creditor may have rush to the court and seek an "attachment lien." Attachment is a prejudgment remedy that allows the creditor, who has followed the statutory requirements and who has established a prima facie claim, to have a lien recorded against real property and/or the debtor's assets seized and held until final adjudication at trial. See, Lorber Industries v. Turbulence, Inc., 175 Cal. App. 3d 532, 535 (1985).

If an unsecured creditor succeeds in obtaining an attachment lien, the creditor is placed in very similar situation to a creditor who obtained security at the inception of the transaction. Federal Bankruptcy law recognizes attachment liens issued by state courts under state law. A “prejudgment attachment constitutes a valid and perfected lien which is superior to the rights of the Trustee, notwithstanding that judgment has not been entered.” In re Giordano, 169 B.R. 12, 13 (Bankr. D.R.I. 1994). An unperfected prejudgment attachment lien could be pursued after bankruptcy, and upon judgment, the prejudgment attachment lien would ripen into a vested lien, relating back to the date of attachment. In the Matter of DeLancey, 94 B.R. 311, 314 (Bankr. S.D.N.Y. 1988). See, In re Southern California Plastics, Inc. (Diamant v. Kasparian), 165 F. 3d 1243 (9th Cir. 1999).

Obtaining an attachment lien requires proper facts, proper timing, and proper legal skills. If a debtor is going out of business or about to file for bankruptcy, there is often little time to file lawsuit and go through the lengthy motion process to obtain an attachment lien. In emergency situations, a creditor must act promptly and bring an ex parte application for a Right to Attach Order, and promptly perfect the lien by recording the resulting Writ of Attachment. It behooves the creditors to retain experienced business litigaiton attorneys to assist them with these processes.

Robin Mashal is a Los Angeles business attorney, and a partner at the law firm of Hong & Mashal LLP. Mr. Mashal has been admitted to the State Bar of California and the Bar of the United States Supreme Court. He can be reached by phone at (310) 286-2000.