Perfecting Your Attachment Lien Post Bankruptcy

The benefits to a creditor in obtaining a writ of attachment against a debtor are numerous. Aside from providing the creditor with a speedy remedy that encourages settlement, a writ of attachment creates a lien, all be it unperfected, over a debtor’s assets upon levying on the debtor’s property. The recent case of Aquarius Disk Services, Inc., 254 B.R. 253 (9^th Cir. 2000), provides a creditor with additional incentives to proceed with this provisional remedy.

In Aquarius, the bankruptcy court found that an attachment lienholder may obtain relief from the automatic stay, if cause exists, to perfect the lien by proceeding in state court and obtaining a judgment against the debtor. The case involved the failure of Aquarius Disk Services (“Aquarius”) to make lease payments on commercial real property to the Don and Lenne Carr. The Carrs sought damages in the amount of $1,500,000 against Aquarius for breach of contract and fraud. The Carrs filed an ex parte application for writ of attachment against Aquarius and obtained an attachment lien on all of Aquarius’ equipment, inventory, and accounts receivable. The sheriff’s department levied on deposited funds totaling $55,092.30. Aquarius filed for Chapter 7 bankruptcy, and the Carrs were precluded by the automatic stay from proceeding with the state court action. The Sheriff turned the proceeds from the Carrs’ attachment over to the Chapter 7 Trustee. As a result, the Carrs were left with a potential unsecured claim and were required to perfect their attachment lien to have an enforceable secured claim in the bankruptcy case. Accordingly, the Carrs moved the bankruptcy court for relief from the automatic stay to enable them to proceed in state court to perfect their attachment lien.

Once a party obtains a writ of attachment and levy’s on property of a debtor, an attachment lien is created from the time of the levy until three years from the date the writ was issued. Following levy, an attachment lien has priority over any subsequent liens. The attachment lien acts as a marker in time holding the creditors place in the priority line. See 6 Witkin, California Procedure, Provisional Remedies § 152 (3d ed. 1985). However, perfection of the attachment lien occurs when the creditor obtains a judgment in the underlying action. See Waffer Internat’l Corp. v. Khorsandi, 69 Cal. App. 4^th 1261 (1999).

In its analysis of the Carrs’ motion for relief, the bankruptcy court considered several issues. First, the bankruptcy court considered California law to determine the effect of an attachment lien and subsequent judgment. The bankruptcy court concluded that the attachment lien was not perfected since the lien was not reduced to judgment.

Second, to determine if relief from the automatic stay applies, the bankruptcy court had to balance the policies of the Bankruptcy Code against the policies of state law allowing the perfection of interests. The bankruptcy court favored state law policy of creditor diligence and deference that is given to state law in the bankruptcy context against the Bankruptcy Code’s efforts to maintain the status quo among creditors.

Third, to determine whether relief from the automatic stay should be granted, the bankruptcy court applied the “cause” standard and applied public policy and factorial analysis to grant relief from the automatic stay. The bankruptcy court reasoned that: (1) public policy favors allowing an attachment lien creditor to proceed to judgment; (2) judicial economy to continue litigation in the state court; and (3) the claim must be liquidated in state court because of the differences in the claims allowance procedures.

The court’s decision in Aquarius should add to the already lengthy list of benefits to creditors of pursuing and obtaining an attachment lien.