Chapter 13 Debtor May Exercise Trustee’s Avoidance Power

Posted by NCBRC - February 10, 2014

A chapter 13 debtor may exercise the trustee’s avoidance powers under section 544 if doing so will benefit the bankruptcy estate. In re Aiwohi, 13-90038 (Bankr. Haw. Jan. 31, 2014). In that case, the debtor sought to avoid an unrecorded mortgage lien and the bank objected on the basis that the debtor could not stand in the shoes of a bona fide purchaser as required by section 544(a)(3). The court found that even though the debtor had actual knowledge of the lien, the hypothetical bona fide purchaser would not have had such knowledge. Therefore, the lien was avoidable. See also Soule v. Gragg (In re Harrison), No. 11-13580, A.P. No. 13-1010 (Bankr. N.D. Okla. Jan. 23, 2014) (trustee’s lack of constructive notice as hypothetical bona fide purchaser that Quitclaim deed to debtor was intended as resulting trust permitted sale of property for benefit of estate even though trustee had actual knowledge of the parties’ intention with respect to the property).


Though the court’s brief opinion deals primarily with the issue of whether the debtor could be deemed a bona fide purchaser as required by section 544(a)(3), the more controversial question is whether the avoidance power of section 544(a)(3) is exclusively in the hands of the trustee. Many courts have held that because section 544 refers only to the trustee’s avoidance powers, the debtor may not exercise those powers in lieu of the trustee except to protect an exemption as permitted by section 522(h). See Knapper v. Bankers Trust Co. (In re Knapper) , 407 F.3d 573, 583 (3d Cir.2005); Estate Constr. Co. v. Miller & Smith Holding Co., 14 F.3d 213, 220 (4th Cir.1994); Stangel v. United States (In re Stangel), 219 F.3d 498, 501 (5th Cir.2000); Hansen v. Green Tree Servicing, LLC (In re Hansen) , 332 B.R. 8 (10th Cir. BAP 2005); In re Huskey, 479 B.R. 829 (Bankr. E.D. Ark. 2012) (debtor may not exercise trustee’s power under section 544(a)(3)); Mouton v. Toyota Motor Credit Corp., 479 B.R. 55 (Bankr. E.D. Ark. 2012) (because debtor failed to satisfy requirements of section 522(g)(1) and (h) that the property be exemptible by the debtor and were not involuntary liens, debtor had no standing to exercise trustee’s avoidance power).


The Aiwohi court followed the contrary decision reached in Houston v. Eiler (In re Cohen), 305 B.R. 886 (B.A.P. 9th Cir. 2004), in which the BAP explored the philosophies between the two camps as they existed at that time. Courts finding that debtor lack standing generally base their positions on the statutory language specifying that the trustee may stand in the shoes of a bona fide purchaser to avoid a lien and the assumption that had Congress intended to confer standing on the debtor it would have done so explicitly. On the other hand, courts finding that the debtor has standing focus on “economic realities” and the “anomalies” that would result by limiting standing to avoid liens to the chapter 13 trustee. Those courts rely on the conclusion that powers conferred exclusively on debtors through section 1303 are not all-inclusive and that debtors may have additional powers concurrent with those of the trustee, such as the power to sue and be sued. The courts holding that debtors have standing to exercise the trustee’s avoidance power tend to focus on a “holistic” approach that best advances the underlying purposes of chapter 13 and that harmonize with the overall picture of a chapter 13 debtor maintaining control, albeit under court supervision, over estate property. The Cohen court also noted the difficulty of requiring a debtor to propose a plan that would pay to unsecured creditors as much as they would receive under chapter 7 while not permitting the debtor to take the avoidance action that would make it possible for him or her to comply with that requirement.

The Sixth Circuit BAP has likewise found that ambiguity in statutory language and chapter 13 practicalities favor a finding that debtors have derivative standing to exercise the trustee’s strong arm power beyond what is conferred under section 522(h). U.S. Bank Nat’l Ass’n v. Barbee, No. 10-8074 (B.A.P. 6th Cir., Dec. 12, 2011) (following Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (B.A.P. 6th Cir. 2010), aff’d on other grounds, 655 F.3d 585 (6th Cir. 2011)).

Aiwohi opinion

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