Sidestepping the 544 Standing Issue

Posted by NCBRC - January 24, 2012

Two weeks ago the Fourth Circuit Court of Appeals side-stepped the issue of whether a chapter 13 debtor has standing under section 544 to avoid a pre-petition transfer.  In re Lee, 2012 WL 29185, No. 10-1772 (Jan. 6, 2012) (per curiam). The bankruptcy court had previously ruled against the debtor on the standing issue and the district court affirmed. In the case, involving a family dispute over real property, the Fourth Circuit held that the debtor was collaterally estopped from asserting the existence of an avoidable transfer or interest in the property on the date of filing.

Whether a debtor has standing to exercise section 544 avoidance powers has long been a contentious issue that has divided bankruptcy courts and bankruptcy appellate panels.  Most recently, in U.S. Bank Nat’l Ass’n v. Barbee, No. 10-8074 (B.A.P. 6th Cir., Dec. 12, 2011), the Bankruptcy Appellate Panel for the Sixth Circuit concluded that a debtor had derivative standing to seek avoidance of an unperfected lien on his manufactured home under section 544. The court identified certain economic realities that supported its finding: the trustee’s lack of resources to pursue every legitimate avoidance claim, the requirement that the plan conform to section 1325(a)(4), and the possibility of the debtor’s being accused of bad faith if he proposes a plan that does include avoidance of a clearly avoidable lien. (U.S. Bank filed a notice of appeal to the Sixth Circuit Court of Appeals on Jan. 10, 2012.)

Similarly, the court in Houston v. Eiler (In re Cohen), 305 B.R. 886 (B.A.P. 9th Cir. 2004), noting the practical considerations, held that debtors have standing to seek lien avoidance under section 544. There the court adopted a “holistic” approach noting that section 1306(b), providing that debtors retain possession of estate property, and section 1303, permitting debtors to exercise powers over estate property, indicate congressional intent that chapter 13 debtors retain more rights with respect to estate property than chapter 7 debtors. See also Countrywide Home Loans v. Dickson, 427 B.R. 399 (B.A.P. 6th Cir.), aff’d on other grounds, 655 F.3d 585 (6th Cir. 2011) (sixth circuit found direct standing under section 522(h) and declined to decide issue of derivative standing under 544); Thacker v. United Companies Lending Corp. 245 B.R 724 (W.D. Ky. 2000); In re Anderson, 324 B.R. 609 (Bankr. W.D. Ky. 2000); In re Fitzgerald, 237 B.R. 252 (Bankr. D. Conn. 1999); Hernandez v. Cantu, 150 B.R. 29 (Bankr. S.D. Tex. 1993) (section 548(a)(2)); In re Ottaviano, 68 B.R. 238 (Bankr. D. Conn. 1986); In re Einoder, 55 B.R. 319 (Bankr. N.D. Ill. 1985) (547) (all finding standing).

The Bankruptcy Appellate Panel for the Tenth Circuit reached the opposite result in In re Hansen, 332 B.R. 8 (B.A.P. 10th Cir. 2005).  Because section 544 confers avoidance power specifically on the trustee and section 1303 does not include avoidance power within the enumerated powers retained by debtors, the Hansen court, and others like it, reasoned that Congress did not intend to extend that power to chapter 13 debtors. The Hansen court further reasoned that Congress knew how to give debtors avoidance power as evidenced by section 522(h) but did not do so with respect to section 544. See also In re Knapper, 407 F.3d 573 (3d Cir. 2005) (decided on Rooker-Feldman grounds); In re Stangel, 219 F.3d 498 (5th Cir. 2000) (standing issue secondary to decision that debtor cannot avoid tax lien under the substantive provision of section 545(2)); In re Osting, 337 B.R. 297 (Bankr. N.D. Ohio 2005); In re Binghi, 299 B.R. 300 (Bankr. S.D.N.Y. 2003); In re Mitrano, 2011 Bankr. LEXIS 3653 (Bankr. E.D. Va., Sept. 23, 2011); In re Gilliam, 2004 Bankr. LEXIS 1653 (Bankr. D. Kan., Oct. 28, 2004) (all finding no standing).

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