In re Straight
| Decision Date | 20 June 1996 |
| Docket Number | Bankruptcy No. 95-10007. Adv. No. 95-1005. |
| Citation | 200 BR 923 |
| Parties | In re Beverly A. STRAIGHT and Milton L. Straight, Debtors. Beverly A. STRAIGHT and Milton L. Straight, Plaintiffs, v. FIRST INTERSTATE BANK OF COMMERCE, and Internal Revenue Service, Defendants. |
| Court | U.S. Bankruptcy Court — District of Wyoming |
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Stephen R. Winship, Winship & Winship, P.C., Casper, WY, for Beverly A. Straight and Milton L. Straight.
Stuart S. Healy, Sheridan, WY, for First Interstate.
Donald R. Wrobetz, Assistant U.S. Attorney, District of Wyoming, Cheyenne, WY, for IRS.
DECISION ON MOTIONS FOR SUMMARY JUDGMENT
This case came before the court on the amended complaint of the plaintiffs/debtors, Milton L. and Beverly Ann Straight, and the motions for summary judgment filed by the Straights and both defendants, the Internal Revenue Service (IRS) and the First Interstate Bank of Commerce (FIB). On February 13, 1996, the court held a hearing on the motions. After a review of the record and pleadings on file, and upon consideration of the arguments of the parties, the court finds and rules as set forth herein.
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F) and (K). The motions are brought pursuant to Fed.R.Civ.P. 56(a) and (b), made applicable in adversary proceedings by Fed.R.Bankr.P. 7056.
The debtors' amended complaint states claims for a declaratory judgment under 28 U.S.C. § 2201 and to avoid liens. The IRS argues that this court is without jurisdiction under the Declaratory Judgment Act to determine those issues on which the debtors seek a declaratory judgment. The court disagrees. Even if the remedy of a declaratory judgment were necessary to resolve this case, an actual controversy exists and the matters which the debtors seek to have resolved fall within the provisions of 11 U.S.C. § 505. As such, they are excluded from the restrictions of § 2201(a). See In re Border, 116 B.R. 588, 590 (Bankr.S.D.Ohio 1990).
The Straights are residents of Sheridan County, Wyoming. For the purposes of this case, the property of the Straights has at all times been located in Sheridan County, Wyoming.
Mrs. Straight is engaged in the road construction flagging business under the dba Centerline Traffic Control and Flagging. She borrowed funds from the First Interstate Bank of Commerce in Sheridan, Wyoming, to operate the business. On May 7, 1993, she gave FIB a promissory note for $35,000. The note was secured by collateral identified in a Commercial Security Agreement signed the same date. The Security Agreement was filed by FIB, in lieu of a financing statement, on May 12, 1993 in the Office of the Sheridan County Clerk.
The Security Agreement granted FIB a security interest in items of collateral identified as equipment and inventory, which were listed in the attached Schedules A through D. The lists were of various tools, traffic signs and traffic control devices, and a mobile office. The equipment is valued in the debtors' schedules at $84,239.36 (office equipment and machinery).
In her business operations, Mrs. Straight entered into at least two subcontracts with general highway construction contractors. One of these was a March 23, 1993 contract with Nicholls & Lewis, Inc. On May 27, 1993, Mrs. Straight entered into a Standard Sub-contract Agreement with another highway contractor, Lobo, Inc. and Carr Construction, Inc., A Joint Venture (Lobo/Carr). The parties do not dispute that Mrs. Straight assigned the subcontract payments to FIB, although the assignments were not provided to the court as FIB indicated.
Performance under both contracts was completed. Payments due under the Lobo/Carr contract are valued in the debtors' chapter 13 plan at $144,500. According to Mrs. Straight's affidavit however, Lobo/Carr owes Mrs. Straight $115,536.
FIB extended credit to Mrs. Straight under a number of promissory notes dated from June 8, 1993 to October 25, 1994. The amount of the FIB claim as of the date the Straights filed their chapter 13 voluntary petition, January 13, 1995, is $150,351.21.
On September 13, 1994, the IRS filed a Notice of Federal Tax Lien in the Office of the Sheridan County Clerk for unpaid employment taxes totaling $79,134.23. The IRS claim as of the date of the bankruptcy filing is $119,990.62.
The IRS did not file its Notice of Federal Tax Lien in the office of the Secretary of State of Wyoming. FIB did not file an assignment of either subcontract in any location. FIB did not file its May 6, 1993 security agreement or a financing statement with the Secretary of State of Wyoming.
Straights own property other than the rights to contract payments and equipment, which is subject to the federal tax lien, including their home. There is a first lien on the residence of $15,113, but some equity exists.
On December 30, 1994, FIB was paid $16,605.04 from the Lobo/Carr contract payments. The payment was made upon stipulation of the parties from funds held by the District Court for the Fourth Judicial District of Wyoming. On January 13, 1995, the Straights filed their voluntary petition for relief under chapter 13. The payment was within 90 days of the filing of the bankruptcy petition.
The standards for entry of summary judgment are frequently stated. Summary judgment is appropriate when there are no issues of material fact in dispute and the moving party is entitled to judgment as a matter of law. In re Baum, 22 F.3d 1014, 1016-1017 (10th Cir.1994). A fact is material if it could affect the outcome of the claim. An issue is genuine if it presents sufficient disagreement to be submitted to the trier of fact, and the trier of fact could return a verdict for the nonmoving party. Farthing v. City of Shawnee, Kan., 39 F.3d 1131, 1135 (10th Cir.1994). The court must review the record and make all reasonable inferences in favor of the party opposing the motion. Id.
The threshold issue is whether a chapter 13 debtor has standing and/or the requisite statutory authority to assert the avoiding powers of a trustee found in various provisions of the bankruptcy code. In their original complaint, the Straights sought a determination of the relative priorities of the FIB consensual lien and the IRS tax lien. The action was necessary for the debtors to value the secured claims in a chapter 13 plan. In this court's view, a chapter 13 debtor has standing to pursue claim valuation and to bring an action for a determination of the relative priorities of competing liens for plan payment purposes.
Subsequently, the debtors amended their complaint to include claims for lien avoidance under §§ 544 & 545 and the recovery of an alleged preferential transfer under § 547. Section 103(a) makes the avoiding powers of chapter 5 applicable in cases under chapter 13. Nonetheless, who will exercise these powers in chapter 13 is anything but clear. The power to avoid a lien or transfer under §§ 544, 545, or 547 is granted to the "trustee." In chapter 13, the trustee's specific duties do not include using the lien avoiding powers of chapter 5. Nor does the enumerated list of the debtor's powers which is set forth in § 1303.
The reported decisions, relying on statutory construction, reach different conclusions. Early decisions were split into at least two camps. Some courts held that only a chapter 13 trustee could use the avoiding powers. In re Walls, 17 B.R. 701 (Bankr.S.D.W.Va.1982). Others held that the debtor could exercise these powers. In re Ware, 99 B.R. 103 (Bankr.M.D.Fla.1989); In re Ottaviano, 68 B.R. 238 (Bankr.D.Conn.1986); In re Hall, 26 B.R. 10 (Bankr.M.D.Fla.1982) ().
The present majority rule holds that debtors may use the avoiding powers for their own benefit only within the narrow limits of § 522(h), i.e., if the property would have been exempt but for the transfer and the trustee does not act. Otherwise, the majority holds that the strong arm powers belong exclusively to the chapter 13 trustee. In re Hill, 152 B.R. 204, 206 (Bankr.S.D.Ohio 1993); In re Davis, 148 B.R. 165 (Bankr.E.D.N.Y.1992), aff'd, 169 B.R. 285 (E.D.N.Y.1994).
In addition to statutory construction, most of the decisions are also supported by policy considerations. For example, given the trustee's reluctance in most cases to pursue transfers, the debtor should be able to redress any alleged wrongs.
On the other hand, the strong arm powers are obviously intended to enhance the estate, not to increase the personal assets of the debtor. This policy supports a rule that only a trustee can use the avoiding powers outside of § 522(h). Some courts have stated that if a debtor is authorized to exercise avoiding powers, the debtor must do so for the benefit of the estate. In re Jernigan, 130 B.R. 879 (Bankr.N.D.Okla.1991).
A number of factors are important in this case. In some respects, the case is more similar to a chapter 11 case. The debtor has made no plan payments since the beginning of the case and, as the IRS points out, that alone could make these issues moot.
Also, the chapter 13 trustee has refused to pursue this litigation, having no apparent motivation to recover preferential transfers or to avoid liens. Obviously, if the court rules against the debtors on this question, they can convert their bankruptcy case to a chapter 11 or chapter 7 case. The adversary proceeding will likely go forward. And finally, the court believes it is inequitable for a creditor with an unperfected lien or as the recipient of a preferential transfer to retain an advantage over the other creditors.
Therefore, the court holds that the Straights may prosecute these claims so long as any recovery is...
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