Chip’s Family Restaurant Seeks to Strip Liens Not Supported By Equity in Property, Sues American Express National Bank, US Small Business Administration, and Others

March 15, 2021, District of Nevada – Chip’s Southington, LLC, d/b/a Chip’s Family Restaurant (the “Debtor and Debtor-in-possession”) initiated an adversary proceeding under Fed. R. Bankr. P. 7001(2) and (9) to determine the validity, priority, and extent of liens filed by Defendants, American Express National Bank, US Small Business Administration (SBA), and Celtic Bank Corporation against the Debtor. 

The Debtor is one of the five locations of “Chip’s Family Restaurant,” a local family-friendly breakfast and brunch restaurant. According to the complaint, the Debtor’s assets are fully encumbered by the liens of its primary secured lender, M&T Bank, and Business Backer. Thus, the Debtor contends that all other lien creditors listed on Schedule D of the Debtor’s bankruptcy schedules should have their liens vacated by operation of Bankruptcy Code § 506(d). 

According to the Debtor, after subtracting the amount of prior encumbrances, the claims (be they allowed or disputed claims) of creditors subordinate to M&T Bank and Business Backer are unsecured to the extent of their balance. 

The complaint reasons that a lien on the property of the estate is treated as a secured claim only to the extent that there is equity available in the collateral to support the claim. Thus, the Debtor asserts that to the extent that a lien on estate property is not supported by the equity in the collateral, the lien is void, with certain exceptions. Accordingly, the Debtor requests the court to treat the claims of the creditors subordinate to M&T Bank and Business Backer as unsecured and vacate and void the liens.

(152)