Unknown Secured Claims Hidden Liens

Try as we might, whether representing debtors or secured creditors, we are unable to discern with certainty all of the
liens giving rise to secured claims effective as of the petition date. The applicable recording systems with respect to
real property interests, personal property interests under Article 9 of the Uniform Commercial Code and other
interests perfected by compliance with separately applicable federal statutory schemes,<small>^{<a href="#1" name="1a">1</a>}</small> are less than perfect and do
not account for and categorize various types of liens that may exist under applicable federal and state law. The
debtor and its known secured creditors must be ever cognizant of the existence and potential impact of possible
"hidden liens."<small>^{<a href="#2" name="2a">2</a>}</small>

</p><p>There are numerous ways a secured creditor can become unperfected or lose priority under Article 9 based on actions
taken by the debtor or other circumstances. However, in most instances, the vigilant creditor can take precautionary
action to preserve and safeguard its lien position. More troubling, however, are the risks presented by various
statutory liens arising under federal and state law that can prime an existing lienholder's interest. Some of these
"hidden" non-Article 9 statutory liens are described below.

</p><p>Foremost among hidden liens are federal tax liens arising under the Internal Revenue Code against "all property and
rights to property, whether real or personal" that belong to the taxpayer. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… U.S.C. §6321</a>. Typically, a tax lien
search will be part of any debtor's or secured creditor's due diligence in reviewing the secured claims asserted
against the debtor, so such parties may become aware of any existing federal tax liens. The same is generally true
with respect to judgment liens.

</p><p>Mechanic's or materialman's liens arising under state law are perhaps the most frequently encountered type of
hidden liens in bankruptcy. Similarly, "possessory liens"<small>^{<a href="#3" name="3a">3</a>}</small> are often asserted by unpaid processors, equipment
rebuilders and the like against equipment or products of the debtor that are in the possession of such possessory
lienholders as of the petition date. While not necessarily afforded lien priority, reclamation claims are asserted in a
great number of bankruptcy cases and are often satisfied to the detriment of secured creditors.

</p><p>With respect to agricultural and livestock production, hidden liens may arise pursuant to the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=7… Agricultural
Commodities Act, 7 U.S.C. §§499</a> <i>et seq.</i> (<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=7…) and the Packers and Stockyards Act, 7 U.S.C. §§181</a> <i>et seq.</i>

(PSA), pursuant to which a trust is created to ensure payment to unpaid perishable agricultural commodities
suppliers or to livestock and poultry producers and processors, respectively. Similar or additional protections may
be afforded under state law pursuant to agricultural producer's lien or farm products lien statutes.

</p><p>For debtors owning real estate and involved in manufacturing operations, environmental liens for cleanup costs may
constitute hidden liens arising pursuant to applicable federal or state law. Federal liability generally arises pursuant
to the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=4… Environmental Response, Compensation and Liability Act, 42 U.S.C. §§9601</a> <i>et seq.</i>
(CERCLA).

</p><p>Further liens may arise with respect to unpaid wages under applicable state law or pursuant to the "hot goods"
section of the federal <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… Labor Standards Act, 29 U.S.C. §215(a)(1)</a>, which prohibits any person from introducing
goods into interstate commerce that were produced in violation of the overtime and minimum wage provisions of
the Fair Labor Standards Act. Certain maritime liens may arise pursuant to the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=4… Instruments and
Maritime Liens Act, 46 U.S.C. §§31301</a> <i>et seq.,</i> and may be effective without any prior filing to evidence the
obligation.

</p><p>In addition, a hidden lien may be encountered if a debtor is found to have liability under the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=1… Influenced
and Corrupt Organizations Act, 18 U.S.C. §§1961</a> <i>et seq.</i> (RICO), for numerous "racketeering activities" including
financial institution fraud, mail fraud, robbery, bribery and extortion, among others. Property subject to forfeiture in
favor of the United States pursuant to RICO involves any interest in real or personal property acquired or
maintained in violation of RICO and any proceeds derived therefrom. The liens that arise upon conviction of a
debtor for a RICO offense relate back to the date of the commission of the illegal acts.<small>^{<a href="#4" name="4a">4</a>}</small>

</p><p>In addition to the foregoing, numerous other lien rights exist under applicable state common law or statutory
provisions in various jurisdictions, including landlord's liens, artisan's liens, various bailee liens, unemployment
compensation and workers' compensation liens, and molder's liens, just to identify several of the more commonly
occurring types of hidden lien rights.

</p><p>Moreover, trade creditors may transform general unsecured claims into secured claims to the extent of any valid
setoff or recoupment rights, thereby further diminishing the debtor's estate and the available collateral base of any
secured creditors with an interest in the debtor's accounts receivable.

</p><p>Given the risks associated with hidden liens, a debtor or secured creditor is well advised to understand the types of
hidden liens that are particular to a debtor's industry or business and that may otherwise arise pursuant to applicable
federal or state law.

</p><hr>
<h3>Footnotes</h3>

<p><small>^{<a name="1">1</a>}</small> Liens on ships, aircraft, railroad rolling stock, patents, copyrights and trademarks are governed by
compliance with the applicable federal statutory provisions, outside the context of Article 9 of the Uniform
Commercial Code. <i>See</i> UCC §9-109(c)(1). <a href="#1a">Return to article</a>

</p><p><small>^{<a name="2">2</a>}</small> For a detailed discussion of matters pertaining to the assertion of various types of hidden liens, <i>see</i> Borges,
Wanda, "Hidden Liens: Who Is Entitled to What?," 103 Com. L.J. 284 (Fall 1998). <a href="#2a">Return to article</a>

</p><p><small>^{<a name="3">3</a>}</small> A possessory lien is a common-law or statutory right to retain possession of all or some personal property
belonging to another until some debt due on or secured by such property is paid or satisfied. <i>See, e.g.,</i> N.Y. Jur. 2d
<i>Liens</i> §11 (1989). <a href="#3a">Return to article</a>

</p><p><small>^{<a name="4">4</a>}</small> Similarly, forfeiture issues may apply with respect to aircraft, vehicles or vessels used or intended for use
in the transport of illicit substances, pursuant to the Comprehensive Drug Abuse Prevention and Control Act. <i>See</i>
21 U.S.C. §881. <a href="#4a">Return to article</a>