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American Bankruptcy Law Journal (1984) 58: 269-282.


Copyright 1984, National Conference of Referees in Bankruptcy. Used by permission.


The Bankruptcy Reform Act's treatment of belatedly perfected security interests in personal property is enigmatic, because it attempts to employ preference law to avoid a class of transfers, so-called "secret liens," that are not true preferences. When a security interest is granted in exchange for contemporaneous value, preference policy in bankruptcy is not offended, because the transaction does not cause a depletion of the debtor's estate for the benefit of a particular creditor. However, the effect of the timing rules of section 547(e) of the Bankruptcy Reform Act is to treat most security interests perfected during the preference period and more than ten days after attachment as section 547(b) preferential transfers.

Recently, in the Vance case, the Ninth Circuit had an opportunity to apply section 547(c)(1), the substantially contemporaneous exchange exception, to the delayed perfection problem. Following a line of cases that apply the exception narrowly and mechanically, the court adopted an inflexible construction of section 547(c)(1) and refused to apply it to security interests that are not perfected within the ten-day grace period established by section 547(e). This decision should not be followed by courts in other jurisdictions,because its reasoning is flawed and neglects to take into account the purposes and goals of bankruptcy preference law and the broad language and historical development of the substantially contemporaneous exchange exception.

The better-reasoned cases apply section 547(c)(1) broadly and protect security interests that are (1) created in exchange for contemporaneous new value, and (2) perfected within a commercially reasonable time thereafter. This flexible approach to the delayed perfection problem ought to be followed, because it recognizes and protects the legitimate contractual expectations of secured creditors who act to perfect their security interests within a reasonable period of time, without sacrificing the interests of unsecured creditors who might have been misled by unreasonable delays in perfection.

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