516 F.3d 1207 (10th Cir. 2008), 06-3324, In re Haberman

Docket Nº:06-3324.
Citation:516 F.3d 1207
Party Name:In re Christopher Lee HABERMAN, also known as Chris L. Haberman; Catherine May Haberman, also known as Cathie M. Haberman, also known as Cathie M. Tucker, Debtors. J. Michael Morris, Trustee, Plaintiff-Appellant, v. St. John National Bank, Defendant-Appellee, Christopher Lee Haberman and Catherine May Haberman, Defendants.
Case Date:February 22, 2008
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit

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516 F.3d 1207 (10th Cir. 2008)

In re Christopher Lee HABERMAN, also known as Chris L. Haberman; Catherine May Haberman, also known as Cathie M. Haberman, also known as Cathie M. Tucker, Debtors.

J. Michael Morris, Trustee, Plaintiff-Appellant,


St. John National Bank, Defendant-Appellee,

Christopher Lee Haberman and Catherine May Haberman, Defendants.

No. 06-3324.

United States Court of Appeals, Tenth Circuit

Feb. 22, 2008

Appeal from the United States Bankruptcy Appellate Panel for the Tenth Circuit (B.A.P. No. KS-06-008)

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J. Michael Morris of Klenda, Mitchell, Austerman & Zuercher, L.L.C., Wichita, Kansas, for Plaintiff-Appellant.[*]

Before O'BRIEN, Circuit Judge, BRORBY, Senior Circuit Judge, and GORSUCH, Circuit Judge.

GORSUCH, Circuit Judge.

At one level, this is a dispute over loan payments secured by a nearly 30 year old Pontiac Trans Am. At another level, this case tests the limits of a bankruptcy trustee's statutory power to displace existing lienholders. Agreeing with the Bankruptcy Appellate Panel of the Tenth Circuit ("BAP"), we hold that a bankruptcy trustee who successfully avoids a lien pursuant to 11 U.S.C. §§ 544 and 551 preserves for the bankruptcy estate the value of the avoided lien, but does not automatically assume other rights the original lienholder may have against the debtor.


In 2001, Christopher and Catherine Haberman (the "Debtors" or "Habermans") borrowed $3,050 from St. John National Bank ("Bank") in order to purchase a new computer. To secure their loan, the Habermans granted the Bank a security interest in their 1980 Pontiac Trans Am. A year later, the Habermans filed for Chapter 7 bankruptcy and claimed the Trans Am as exempt from the bankruptcy estate. On the date they filed bankruptcy, they owed the Bank $3,237.50 on the loan, inclusive of interest, and the fair market value of their Trans Am was $2,000. Morris v. St. John Nat'l Bank (In re Haberman), 347 B.R. 411, 413 (B.A.P. 10th Cir.BAP 2006).

The bankruptcy trustee, Michael Morris (the "Trustee"), soon discovered that, through inadvertence, the Bank failed to perfect its security interest in the Trans Am. Seeking to protect the estate's interests, the Trustee filed an adversary action against the Bank and the Debtors to avoid the security interest pursuant to 11 U.S.C. § 544(a) and preserve the avoided lien for the benefit of the estate pursuant to 11 U.S.C. § 551. In re Haberman, 347 B.R. at 413.

While the Trustee litigated his adversary action, the bankruptcy court issued interim orders permitting the Habermans to retain possession of the Trans Am and continue making their loan payments to

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the Bank, with the understanding that, should the Trustee prevail, he could collect an appropriate sum from the Bank. And, indeed, the Habermans continued making payments on their loan, eventually paying off the full balance.

At the conclusion of the Trustee's adversary proceeding, the bankruptcy court determined that the Trustee was indeed entitled to avoid the Bank's lien. But the question then arose: Should the Trustee recoup from the Bank the value of the lien itself as of the date of the Habermans' bankruptcy filing - -that is, the $2,000 value of the Trans Am? Or was the Trustee entitled to recover the full amount of the loan as of the same date - -that is, $3,237.50?1

The bankruptcy court ruled that a trustee who voids a lien pursuant to 11 U.S.C. §§ 544 and 551 takes for the bankruptcy estate only the value of the lien itself and ordered the Bank to disburse to the Trustee $2,000.2 The BAP affirmed, holding that "[o]nce the Trustee avoided the Bank's lien, he inherited the Bank's position prior to avoidance and could not expand that position by enforcing the lien over and above the value of the collateral. His rights in the collateral were to be valued at the amount of the Bank's debt on the petition date, limited by the value of the collateral on that date." In re Haberman, 347 B.R. at 416-17. The Trustee then filed this appeal, which we entertain pursuant to 28 U.S.C. § 158(d).


The Trustee argues before us that the bankruptcy laws permit him to recoup the full value of the loan rather than just the value of the Bank's secured interest. To be sure the amount at stake isn't huge - -$1,237.50 representing the difference in these two sums. But the Trustee submits that the issue recurs frequently, and is one that merits clarification because it goes to the core of his statutory rights and duties. Indeed, "he has pursued several different theories in other bankruptcy cases in support of his mission to recover all postpetition payments in lien avoidance and preference actions." In re Haberman, 347 B.R. at 415 n.14. As the BAP has put it, and we agree, "though unsuccessful to date," the Trustee's efforts on behalf of the estates he represents are "certainly admirable." Id.

Because the alleged error the Trustee identifies is, in all events, one entirely of law, we review the BAP's decision de novo. In doing so, we begin at the beginning, by acknowledging that liens generally pass through bankruptcy unaffected, as they did before the enactment of the Bankruptcy Code. See Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). Various provisions of the Bankruptcy Code, of course, create certain exceptions to this rule. Relevant for our purposes, these exceptions include the trustee's strong arm powers to avoid liens

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and transfers and preserve them for the bankruptcy estate under 11 U.S.C. §§ 544 and 551.

In Section 544(a)(1), Congress afforded trustees the power to avoid any transfer or obligation that a hypothetical creditor with an unsatisfied judicial lien on the debtor's property could avoid under relevant state nonbankruptcy law. See 11 U.S.C. § 544(a)(1);3 see also 5 Collier on Bankruptcy ¶ 544.02 (15th ed.). That is, just as any other creditor could've avoided the lien on the Trans Am because of the Bank's failure to perfect its security interest under state law, Congress allowed the Trustee to do the same in bankruptcy.

Having avoided the lien, what happens next? In Section 551, Congress directed that "[a]ny transfer avoided . . . or any lien void[ed] . . . is preserved for the benefit of the estate." 11 U.S.C. § 551. So, the trustee, on behalf of the entire bankruptcy estate, in some sense steps into the shoes of the former lienholder, with the same rights in the collateralized property that the...

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