In re Driver

• Decision Date: 26 June 1991
• Docket Number: Bankruptcy No. IP91-1450-RWV-13.
• Citation: 133 BR 476
• Parties: In re Gregory Alan DRIVER, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

133 B.R. 476 (1991)

In re Gregory Alan DRIVER, Debtor.

Bankruptcy No. IP91-1450-RWV-13.

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

June 26, 1991.

Katherine A. Cornelius, Bleecker, Brodey & Andrews, Indianapolis, Ind., for ITT.

William L. Price, Indianapolis, Ind., for debtor.

ORDER DENYING MOTION FOR AVOIDANCE OF LIEN OF ITT FINANCIAL SERVICES

RICHARD W. VANDIVIER, Bankruptcy Judge.

This matter comes before the Court on the Debtor's Motion for Avoidance of Lien ("the Motion"), filed February 19, 1991, by which the Debtor seeks to avoid a lien of ITT Financial Services ("ITT"). A hearing was held April 10, 1991. The Court now denies the Motion for the reasons below.

In the Motion, the Debtor asserted that ITT held a nonpossessory, nonpurchase-money security interest in certain property that would be exempt under Indiana law, and the security interest is avoidable under 11 U.S.C. section 522(f)(2)(A). In its Motion in Opposition to Lien Avoidance, filed March 4, 1991, ITT objected, contended that the lien does not impair any exemption to which the Debtor would be entitled. ITT has since dropped any objection it had to avoidance of its lien on certain of the Debtor's household goods and furnishings, and now objects only to the Debtor's attempt to avoid the lien on his 1972 Cadillac Sedan DeVille ("the Car").

The underlying facts are not in dispute. In June, 1990, the Debtor obtained a loan from ITT, giving ITT a nonpossessory nonpurchase-money security interest in certain household goods and furnishings and the Car. The lien on the Car was not noted on the Car's certificate of title, and thus was not perfected under Indiana law. On February 13, 1991, the Debtor filed for relief under Chapter 13 of the Bankruptcy Code. The Debtor does not now contend that the lien is avoidable under 522(f)(2)(A), since it has been consistently held that motor vehicles are not among the enumerated items subject to lien avoidance under this provision. See e.g. In re Colbert, 57 B.R. 600, 601 (Bankr.D.D.C.1986). The Debtor instead contends that the lien is avoidable under 11 U.S.C. section 544(a)(1).

Under 11 U.S.C. section 544, a trustee is given "strong arm powers" to avoid certain otherwise valid transfers, including liens, accomplished by granting the trustee the rights and powers of certain hypothetical creditors, such as a judicial lien holder. See 11 U.S.C. section 544(a)(1). Since a judicial lien would take precedence over an unperfected security interest, such as ITT's, see Ind.Code 26-1-9-301, a trustee would have the power under section 544 to avoid ITT's lien on the Car.

Section 544 applies by its terms only to trustees, not to debtors. However, under section 522(g) and (h), if the trustee does not attempt to avoid a transfer that is avoidable under section 544 and the property subject to the transfer would be subject to exemption, the debtor is empowered to avoid the transfer, but only if the transfer was not voluntary. See 11 U.S.C. section 522(g)(1)(A). The Debtor has claimed the Car as exempt, however, since the Debtor voluntarily gave the security interest in the Car to ITT, the Debtor may not avoid the lien under section 522(g) and (h).

In Chapter 11 reorganizations, there is usually no trustee, and the debtor, as a "debtor-in-possession", assumes most of the duties and powers of a trustee, including the strong arm avoidance powers. See 11 U.S.C. section 1107. Since this section does not apply to Chapter 13 cases, see 11 U.S.C. section 103(f), it provides no basis for the Debtor to avoid ITT's lien.

In Chapter 13, in contrast to Chapter 11, there is always a trustee. See 11 U.S.C. section 1302. The debtor is given certain powers to use, sell or lease property, "exclusive of the trustee," see 11 U.S.C. section 1303, and a debtor engaged in business is given additional powers and duties, see 11 U.S.C. section 1304, but a Chapter 13 debtor is not explicitly bestowed with the trustee's strong arm transfer avoidance powers. The Debtor, however, argues that such powers should be implied.

There is case law in the Debtor's support. The seminal case appears to be In re Hall, 26 B.R. 10 (Bankr.M.D.Fla.1982), a brief opinion holding that a Chapter 13 trustee, whose practical role and function is different from a Chapter 7 trustee, is not exclusively empowered to invoke the strong arm powers, citing in support the legislative history of section 1303, which includes the statement:

Section 1303 of the House Amendment specifies rights and powers that the debtor has exclusive of the trustees. The section does not imply that the debtor does not also possess other powers concurrently with the trustee. For example, although section 1323 sic—323 is not specified in section 1303, certainly it is intended that the debtor has the power to sue and be sued.

Id. at 11, quoting 124 Cong.Rec. H11106 (daily ed. Sept. 28, 1978); S17423 (daily ed. Oct. 6, 1978) (emphasis supplied by court). The Chapter 13 debtors were thus permitted to avoid an unperfected security interest in certain inventory and equipment.

The Debtor relies principally on In re Freeman, 72 B.R. 850 (Bankr.E.D.Va. 1987), in which the court allowed Chapter 13 debtors to avoid an unperfected purchase-money lien on a car. The court reasoned that since a Chapter 13 trustee does not have the same motivation as a Chapter 7 trustee to avoid liens, the debtors, as the "true representatives" of the estate, should enjoy the trustee's lien avoidance powers. See id. at 854-55. The court reasoned that the debtors had acted on behalf of the estate when the trustee had failed to take action, and that the creditor who had received an avoidable transfer should not "reap a windfall at the expense of the unsecured creditors of the estate. . . ." See id. at 855.

The court in In re Einoder, 55 B.R. 319 (Bankr.N.D.Ill.1985), also found that Chapter 13 debtors could exercise a trustee's avoidance powers (in this case, preference avoidance), offering in support a detailed comparison between Chapter 7 and Chapter 13 trustees. Other cases have agreed, without detailed analysis. See e.g. In re Ottaviano, 68 B.R. 238 (Bankr.D.Conn. 1986) (power to avoid fraudulent transfer); In re Boyette, 33 B.R. 10 (Bankr.N.D.Tex. 1983) (lien avoidance power). The court in In re Chapman, 51 B.R. 663 (Bankr. D.D.C.1985), while first deciding that a trustee's strong arm powers are available to a Chapter 13 debtor, id. at 665, nevertheless declined to allow the debtor to avoid an unperfected security interest in his home, finding that avoidance would provide de minimis, if any, benefit to any unsecured creditors, id. at 666.

Other courts that have addressed the issue have concluded that a Chapter 13 debtor does not share the trustee's avoidance powers. The earliest case, In re Carter, 2 B.R. 321 (Bankr.D.Col.1980), observed that although the legislative history suggests some powers might be concurrently held by the debtor and the trustee, such as to sue and be sued,

the recognition of that power does no violence to the role of the Chapter 13 trustee. Were lien avoidance power concurrently held, the trustee would effectively lose control over lien avoidance litigation. That result should be avoided, particularly if it is reachable only by implication. When Congress intended debtors to exercise the powers of a trustee in Chapter 11, it explicitly so stated in section 1107(a). Presumably, a section analogous to section 1107(a) would be present in Chapter 13 if that were the congressional intent.

Id. at 322. Accord In re Driscoll, 57 B.R. 322, 325 (Bankr.W.D.Wis.1986); In re Colandrea, 17 B.R. 568, 583 (Bankr.D.Md. 1982).

The court in In re Jardine, 120 B.R. 559, 562 (Bankr.D.Idaho 1990), concluded that practicality dictates that the trustee control the right to assault transfers of property, since the trustee's broader perspective as to the estate acts as a buffer against potential abuse. If the trustee refuses to act, in appropriate circumstances, the court may authorize another interested party to pursue an action on behalf of the estate. See id. In what appears to be the most recent case on the issue, In re Tillery, 124 B.R. 127, 129 (Bankr.M.D.Fla.1991), the court noted that it was intended that a Chapter 13 plan be funded through future income, not by pursuing voidable transactions, concluded that there was no apparent justification to permit a Chapter 13 debtor to avoid a transaction to which the debtor was a participating party when the avoidance would play no meaningful role in the debtor's ability to propose and consummate a plan, and therefore held that the debtor may not utilize the avoidance powers of section 544.

The debate on this issue has focused in large part on the differences between the functions of a Chapter 7 and a Chapter 13 trustee. In Chapter 7, the debtor's price for a discharge is surrender of all his or her nonexempt property. An estate consisting of all the debtor's nonexempt, unencumbered property (with minor exceptions) is created, see 11 U.S.C. section 541(a), and is administered by the trustee, the representative of the estate, see 11 U.S.C. section 323(a), primarily for the benefit of unsecured creditors, see 11 U.S.C. section 726(a). The trustee may enhance the estate by avoiding certain prepetition transfers, such as unperfected security interests, preferences and fraudulent conveyances. See 11 U.S.C. sections 544, 547 and 548. Since the trustee is compensated on the basis of the amount of money the trustee distributes, see 11 U.S.C. section 326(a), the trustee has an incentive to avoid liens and other transfers if it will bring property into the estate for distribution to creditors. Since the trustee has no incentive to avoid transfers if the debtor will claim the property thus freed as exempt, see 11 U.S.C. section 522(g), the debtor is given limited power to avoid such transfers, one limitation being that the transfer must have been...