United States: Can your lien be avoided if only the debtor benefits? Courts are divided
To print this article, simply register or connect to Mondaq.com.
The United States Bankruptcy Court for the District of New Mexico has added its voice to the judicial authority division on whether a lien or similar transfer can be avoided under Sections 544, 547, 548 and 549 of the Bankruptcy Code, where only the debtor himself can benefit from the avoidance. Judge Thuma in his recent decision in US Glove, Inc. v. Jacobs (In re US Glove, Inc.), AP n ° 21-1009, 2021 WL 2405399 (Bankr. DNM June 11, 2021), ruled that, despite the absence of a requirement of “inheritance benefit” in article 547 of the Bankruptcy Code, a Action for late annulment of a lien perfected during the preference period could only take place if the annulment of the lien benefited the estate (i.e. the creditors) and not just the debtor.
Sections 544, 547, 548 and 549 of the Bankruptcy Code empower the debtor or a trustee in a Chapter 11 or Chapter 7 bankruptcy, respectively, to sue creditors to avoid certain transfers. The most common type are payments received within 90 days of filing for bankruptcy (or 1 year for insiders), often referred to as a preference period, but the term transfer is broadly defined by the Bankruptcy Code and may include granting and the perfection of privileges.1 Where the transfer concerns money or property that is to be recovered for the estate, this action will include a request for recovery of the transferred property in accordance with Section 550 (a) of the Bankruptcy Code. Article 550 (a) contains a limit whereby property can only be recovered for the benefit of the estate.2 However, in an action for annulment or perfection of a lien, as was the case in the American glove decision, section 550 (a) cannot be invoked and its limitation on inheritance benefits may not apply.3Articles 544, 547, 548 and 549 of the Bankruptcy Code do not explicitly limit their avoidance power to situations that will benefit the succession.4 As Justice Thuma recognized, courts are divided on whether nullity actions that do not raise Section 550 require that there be an “inheritance benefit / creditors benefit”.
In US Glove, Inc., the debtor sued the defendant – who was also the debtor’s only authorized unsecured creditor – to avoid a lien that the defendant perfected more than 20 months after he was granted his security interest in the collateral securing his loan to the debtor. Identifier. to * 1-2. Defendant’s deferral occurred within the preference period and the debtor sued the defendant to avoid the lien under section 547 of the Bankruptcy Code. Identifier. The plaintiff filed a motion for summary judgment and the defendant opposed the motion on the sole issue of whether the action could proceed without benefit to the unsecured creditors (i.e. the defendant) .5
Identifier. at 4 o’clock. The defendant argued that the cancellation powers of section 547 were inapplicable unless the creditors benefited from them.
Justice Thuma discussed the history of the Bankruptcy Act and the division between the courts as to whether a “benefit to the estate” requirement is imposed where it is not explicitly provided for in the law. . Identifier. to * 6-9. Siding with courts demanding an advantage for the estate, Judge Thuma detailed six bases for his decision:
- Under the Bankruptcy Act, a trustee or debtor in possession had to demonstrate a benefit to the estate before they could use their annulment powers.
- The language and legislative history of the cancellation and collection sections of the Bankruptcy Code do not reflect a desire to eliminate the “benefit of the succession” rule developed under the Bankruptcy Act, and the Court Supreme has repeatedly ruled that a clear indication is required before concluding that Congress intended to move away from the past.
- It does not make sense to have a limitation on “inheritance benefit” for some avoidable transfers but not for others.
- It seems likely that Congress intended the Section 550 “inheritance benefit” limitation to apply to all avoided transactions, and that Congress simply ignored the situation in which Section 550 failed. need not be invoked, such as the claim for annulment of lien at issue.
- The granting of security is in effect a transfer of ownership, so section 550 should apply.
- Requiring a benefit for the estate is in line with the objectives of the Bankruptcy Code and the provisions relating to the annulment action which aimed to create an equal distribution between creditors in the same situation and not to be used to generate windfall profits for debtors.
Judge Thuma denied the summary judgment and, despite ruling in favor of the defendant on the legal issue, held that evidence and information on the legal standard was needed to determine whether rescinding the lien would benefit the estate. The Court held that “[w]whether a particular action provides a windfall for the debtor or a benefit for the estate “depends on a case-by-case, fact-specific analysis” ”and would require proof. Identifier. at * 9 (citation omitted). The Court noted that cases range from authorization to cancel so long as there is some benefit to requiring that all recovered proceeds be paid directly to creditors. Username. See also Rushton v. Hiawatha Coal Co. Inc. (In re CW Min. Co.), 477 BR 176, 189 (BAP 10th Cir. 2012) (“There is also a division of powers as to how to interpret” for the benefit of the estate “.”).
In cases where the benefits of annulment will not accrue to creditors, this decision and the others that precede it provide creditors with another basis for defending annulment claims in addition to traditional defenses.
1.11 USC §101 (54).
2.11 USC §550 (a).
3. Historically, under the Bankruptcy Act of 1898 (the “Bankruptcy Act”), the cancellation and collection provisions were contained in the same provision and the courts have uniformly held that the cancellation powers were intended to benefit unsecured creditors and could not be used when the only beneficiary was the debtor.
American glove, 2021 WL 2405399, at * 5, citing 11 USC §§ 67 et seq. (repealed) and In Whiteford Plastics Co. v. Chase Nat’l Bank of New York City, 179 F.2d 582 (2d Cir. 1950).
4. 11 USC §§544, 547, 548 and 549.
5. In general, under article 547, the trustee may avoid any transfer of an interest of the debtor in property to a creditor or for the benefit of a creditor, for or by reason of a previous debt due. by the debtor before the transfer was made, while the debtor was insolvent, within 90 days before the date of the bankruptcy request or between 90 days and one year before the request date if the creditor of this transfer was an insider, if that allows the creditor to get more than he would get in Chapter 7. Identifier.at 2 hours. The Court concluded that the defendant had more or less conceded the debtor’s prima facie case and focused on its argument that the debtor does not have standing to assert the claim because avoiding the defendant’s privilege would benefit not to creditors. Identifier. to 1.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
POPULAR POSTS ON: Insolvency / Bankruptcy / Restructuring from the United States