Goods and service providers in certain industries have enforceable state law lien rights if they satisfy the requirements for obtaining and perfecting those liens. For example, many states grant lien rights for suppliers that provide goods or services in connection with the construction or improvement of real property. These lien rights grant the creditor collateral to foreclose on in the event of a financially distressed customer’s nonpayment.

Creditors may also “lien on” their lien rights as a defense to preference liability in the event a customer files for bankruptcy protection. In addition to the various other defenses available in a creditor’s preferencedefense-toolkit (such as the subsequent new value, ordinary course of business and contemporaneousexchange defenses), creditors with valid and perfectible lien rights and fully secured claims might also have a full defense to preference liability. These creditors may successfully rebut the greater-than-liquidation element of a preference claim, which requires proof that the alleged preference payment enabled the creditor to recover more than they would have recovered in a hypothetical Chapter 7 case.

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