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M&M Management Company Seeks to Avoid Judgment Lien as Alleged “Preference Transfer”


January 25, 2021, Northern District of Indiana – Last week, Debtor M&M Management Company, LLC brought a lawsuit against Defendant Modern Hard Chrome of Indiana, Inc. to avoid liens under §544 and 547 of the Bankruptcy Code.

Defendant allegedly contracted to sell a commercial property to the Debtor and supposedly “executed a promissory note” of $730,000.00 in consideration for the sale of the property. “No money exchanged hands, no consideration was provided, and no deed was executed or recorded on the property, contemporaneously with the execution of the agreement or note.” 

Subsequently, the Debtor executed and recorded a mortgage agreement securing the sale of the property. The Defendant filed a complaint in a state court against the Debtor for judgment on the promissory note and foreclosure of mortgage. The Court held in favor of the Defendant. The judgment presumably affixed a judgment lien against the Debtor’s property.

The Debtor alleges that the Defendant “failed to properly perfect its security interest/mortgage” in the property under Indiana law as the description of the indebtedness in the agreement was “insufficient to sustain its validity” against a bona fide purchaser in light of the requirements of Indiana Code §32-29-1-5. Further, by operation of 11 U.S.C. §547(e)(2)(C), because the mortgage was not perfected at the commencing of the case, the perfection or transfer is deemed made “immediately before the date of the filing of the petition.”  

Further, the Debtor alleges that the “affixing of the judgment lien to the property was a transfer of property” of the Debtor within the meaning of Sec. 547(b) because the property was transferred to the Defendant within ninety days of the date of filing of the bankruptcy. Also, the creation of the judgment lien converted the Defendant’s claim from “unsecured to secured” and allowed it to receive a greater percentage of its claim than other creditors of the same class.

Accordingly, the Debtor contends that the mortgage and judgment lien held by the Defendant should be avoided under Sec. 547 and the property constituting Defendant’s collateral should be brought into the estate free from Defendant’s security interest.