On July 2, 2019, the United States Bankruptcy Court for the Southern District of Mississippi sent a clear message to secured lenders that their security interests on a contractor's account receivables, even if perfected, will not be superior to the rights of a surety to recover retainage during a bankruptcy proceeding. The decision presents an important take away for secured lenders-- if a construction project is incomplete, securing their loan solely with a security interest in a contractor's accounts receivables is a risky decision.

In In re Kappa, Case No. 17-5115-KMS, a general contractor (the "Debtor") filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Petition"). Prior to filing the Petition, the Debtor executed a promissory note (the "Note") to its bank (the "Bank"). In connection with the Note, the Debtor executed a security agreement which provided the Bank a secured interest in a plethora of collateral including the Debtor's accounts receivables. The Bank properly perfected its security interest in or about September 2010. The Debtor ultimately defaulted under the Note...