Inchoate Lien and New Value Arguments Caused Dismissal for No Payment of Preference Case

Before it went out of business, the Debtor operated one of the biggest dairies in New Mexico. On the other hand, the Defendant, our client, provided animal feed ingredients, primarily cottonseed products, to the Debtor.

The Plaintiff brought an avoidance action against our client where he sought to avoid and recover $318,781.89 as alleged preferential, or in the alternative, as fraudulent transfers.

We presented a combination of defenses to strengthen our client’s position. As an initial matter, we argued that Plaintiff’s claims are barred by the statute of limitations under the Bankruptcy Code. Plaintiff brought the avoidance action well after the main bankruptcy case was terminated, which goes entirely against the time bar provisions of the Bankruptcy Code.

Secondly, we proved that the Defendant was a secured creditor eligible to assert a statutory animal feed lien under the state laws. By accepting the transfers in question, Defendant became an inchoate lienholder. Several courts have held that inchoate lienholders are no different from secured creditors and are immune from a trustee’s clawback attempts. We also showed with leading precedents that release of liens is recognized as a contemporaneous exchange for new value, an affirmative defense in preference clawback actions.

Based on the strength of our arguments, Plaintiff agreed to dismiss the case for no payment.

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