The Seventh Circuit handed down a decision on Jan. 11 that could be misunderstood to mean that a lien granted by the bankruptcy court to secure DIP financing will evaporate when the debtor loses ownership of the collateral.

Properly interpreted, the opinion means nothing of the sort and should not be cited in the future about the continuing validity of liens securing chapter 11 financing.

The case involved a gas-collection system that the debtor built on a landfill owned by the City of Peoria, Ill. The system included underground pipes to collect gas and three miles of power lines connecting the electric generating plant to the local utility.

The lease from the city to the debtor provided that the system “shall become Peoria’s property at no cost to Peoria” on the termination of the lease.

Four years after building the system, the debtor found itself in chapter 11. The bankruptcy court soon thereafter approved debtor in possession financing secured by a so-called priming lien on essentially all of the debtor’s property. The lender’s claim was given superpriority status under Section 364(c)(1) in the financing order of 2000.

In 2004, the lender called a default and obtained a modification of the automatic stay. Evidently, the lender never proceeded to foreclose its lien on the system. While the debtor was continuing to operate the system, the city extended the lease in 2006.

Around the time that the bankruptcy court denied a motion to assume and assign the lease, the debtor halted operations of the system in 2008. That year, the city sent the debtor a notice terminating the lease for failure to cure breaches. In the notice, the city elected to retain the system.

In 2013, the lender filed suit for unjust enrichment against Peoria, contending it had a “better claim” to the system than the city. On cross motions for summary judgment, the district court ruled in favor of the city.

The lender appealed but lost again in a Jan. 11 opinion for the Seventh Circuit authored by Circuit Judge David Hamilton. Upholding the district court, he held that the city had a better claim to the system.

Construing the lease, Judge Hamilton said it gave the debtor “no post-termination interest in the disputed property at all, only obligations.” On the other hand, he said the lease gave the city “the right to retain the [system] at no cost no matter how the lease terminated.”

Judge Hamilton held that the lender “does not have a ‘better claim’ than Peoria to the disputed property because the bank could have no greater rights to the property than originally held by” the debtor.

In a discussion that could be troublesome with regard to the continuing effect of liens securing DIP financing, Judge Hamilton said that the bank’s security interest “could not reach the [system] at Peoria’s landfill.” The statement, however, is probably dicta and included neither analysis nor citation to authority.

Just exactly what does the opinion mean? Does it mean that the bank’s security interest granted by the bankruptcy court terminated when the debtor lost ownership of the system?

Other than the one brief statement quoted above, the opinion does not analyze the continuing validity of a security interest when a debtor voluntarily or involuntary transfers ownership of collateral.

The pleadings explain the lack of analysis regarding the continuing enforceability of the bank’s lien. The lender’s brief barely mentioned and did not develop issues regarding the continuing attachment of the lien following a transfer of ownership. Instead, the lender attempted to make a claim for unjust enrichment, with an appeal to the court’s sense of equity, by laying out how much money the debtor had expended in building the system and how the bank had financed continuing operations.

The opinion probably means nothing about the continuing validity of liens securing DIP financing. Here’s why:

The bank’s terse complaint only made a claim for unjust enrichment. The complaint did not include a claim seeking a declaration that the bank had a security interest in the system after ownership went to the city.

In his opinion, Judge Hamilton dealt with Illinois law on unjust enrichment to conclude that the city had a better claim. Given the pleadings, he had no reason to analyze the continuing attachment of the bank’s lien because the security interest, if there was one, had been waived in the district court.

Consequently, the opinion should not be read as undercutting the continuing validity of DIP liens and loans.