In re Haberman

Decision Date22 February 2008
Docket NumberNo. 06-3324.,06-3324.
Citation516 F.3d 1207
PartiesIn 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.
CourtU.S. Court of Appeals — Tenth Circuit

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.

I

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 Ant 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 (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 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 lip 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, $3,237.501

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).

II

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 Deivsnlip 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 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 11544.02 (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 original lienholder enjoyed. Likewise, the trustee, on behalf of the entire estate, assumes the original lienholder's position in the line of secured creditors; in this way, Congress sought to assure that the avoidance of a lien doesn't simply benefit junior lienholders who would otherwise gain an improved security position and might, when the estate is limited, prove the only beneficiaries of the trustee's actions. See S.Rep. No. 95-989, at 91 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5877 (noting that the preservation of avoided liens principally serves to prevent "junior lienors from improving their position at the expense of the estate when a senior lien is avoided"); H.R.Rep. No. 95-595, at 376 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6332 (same).

But, while Section 551 places the estate in the shoes of the displaced lienholder in certain respects, in others it does not. Section 551 says that only "liens" in particular, and "transfers" more generally, may be taken `by the trustee for the benefit of the estate. Section 101(54) defines the broader term "transfer" to embrace liens but also certain other dispositions of property interests, including "the creation of a lien; the retention of title as a security interest; the foreclosure of a debtor's equity of redemption; or each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property." 11 U.S.C. § 101(54).4

Though encompassing a wide array of modes of disposition of property interests, this definition does not, by its terms, cover contractual promises to future payments. In this respect at least, the statute appears to conform to the generally recognized (if sometimes hazardous to define) line between property and contract relations, affording the trustee the right to take for the benefit of the estate property but not purely contractual interests.5 As Corbin notes, "a fully effective exchange [or, we might say here, transfer], without including any enforceable promise [of future performance] by either party, creates numerous legal relations [that] are customarily described as property relations and not as contractual relations. This is because they are relations not merely between the two parties themselves, but between ... all ... persons" who as a society recognize the transfer of a property interest. 1 Corbin on Contracts § 1.3 (rev.ed.1993). The person-to-person contractual right embodied in a promise to pay some sum in the future is thus distinct and independent from the present property right created and recognized by society when one is given an interest in property such as a lien. Id.

So, for example, in Robinson v. Howard Bank (In re Kors, Inc.), 819 F.2d 19, 23-24 (2d Cir.1987), our sister circuit held that, while the benefit of an avoided security interest belonged to the estate under Section 551, the bank whose lien was avoided nonetheless retained its interest in a contract with the debtor — even though that contract, in the form of a subordination agreement, was part of the same transaction and ancillary to the avoided security interest. "[T]he subordination agreement is not a part of the Bank's unperfected security interest and is not itself a security interest," the court explained, "and therefore the trustee's powers under § 544(a)(1) and § 551 do not extend to the Bank's rights under the subordination agreement." Id. at 23. Collier's makes much the same point, explaining that "Section 551 preserves only `transfers' and `liens.' Related or ancillary rights held by ...

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