Matter of Einoder
| Decision Date | 27 November 1985 |
| Docket Number | Bankruptcy No. 84 B 2069.,Adv. No. 84 A 506 |
| Citation | 55 BR 319 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In the Matter of John T. EINODER and Janice Einoder, Debtors. John T. EINODER and Janice Einoder, Plaintiffs. v. MOUNT GREENWOOD BANK, Defendant. |
Joel A. Schechter, Grossman, Mitzenmacher & Schechter, Chicago, Ill., for plaintiffs.
Fred Drucker, Susan Berkowitz, Schwartz & Freeman, Chicago, Ill., for defendant.
The debtors have filed a motion for summary judgment to avoid a preferential transfer and judgment lien in favor of the defendant, Mount Greenwood Bank ("the Bank"). The Bank has filed a cross motion for summary judgment. There is no issue of material fact and this case is ripe for decision as a matter of law. See Fed.R. Civ.P. 56; Bankruptcy Rule 7056.
The debtors own their home as owners of the beneficial interest in a land trust.1 Chicago Title and Trust Company (hereinafter "the land trustee") is the land trustee under the land trust. On or about December 30, 1981, the Bank loaned the debtors $35,000.00. The debtors in turn executed a promissory note which among other things gave the Bank a security interest in the beneficial interest in the land trust.2 Subsequently, the debtors defaulted on the loan. Thereafter, using a cognovit clause in the note, the Bank obtained a judgment by confession against the debtors for the amount of the loan plus interest and costs. The confessed judgment was later confirmed by the Bank and totalled $39,914.99.3
On November 16, 1983, the Clerk of the Circuit Court of Cook County issued a citation to discover assets on Chicago Title and Trust Company as land trustee for the debtors' land trust. Chicago Title and Trust Company was served with the citation on November 22, 1983. On February 17, 1984, the debtors filed a petition under Chapter 13 of the Bankruptcy Code.
1. Whether a Chapter 13 debtor has standing to enforce the trustee's avoiding powers.
2. Whether the Bank's citation lien arose within 90 days preceding the debtors' petition.
3. Whether the Bank's lien may be avoided in whole or in part by the debtors under 11 U.S.C. § 522(f)(1) or is otherwise subject to the debtors' exemption rights.
4. Whether the Bank has an equitable lien which is valid against a Chapter 13 trustee and/or debtor.
For purposes of this opinion, the Court assumes that the Bank's citation gave it a lien by means of legal proceedings4 in the debtors' beneficial interest in the land trust.5 The debtors' best line of attack to avoid that lien is to try to use the power given to the bankruptcy trustee to avoid preferential transfers under § 547 of the Bankruptcy Code. In their pleadings, however, the debtors do not seek to avoid the transfer directly under § 547. Instead, the debtors seek to recover the preference using § 522(h). That section permits a debtor to avoid various types of transfers of the debtor's property, including preferences under § 547, to the extent of the debtor's exemption rights. Section 522 of the Bankruptcy Code gives a debtor broad powers to avoid prepetition rights of secured creditors and other transferees in property claimed by the debtor as exempt.
The debtors have asserted a joint homestead exemption of $15,000.006 Therefore, even if the debtors prove that the creation of the Bank's citation lien is a preference, they would be able to avoid the lien only to the extent that the lien impairs their exemption rights, i.e. only to the amount of $15,000.00. The remaining $24,914.99 of the Bank's lien would survive. On the other hand, if the debtors could step directly into the trustee's shoes under § 547 they could avoid the entire lien, not just the extent of the debtors' exemption as under § 522(h). Therefore, the debtors potentially could avoid the entire citation lien of $39,914.99 under § 547.
Although the debtors assert their cause of action lies under § 522(h), the Court should construe their complaint also to assert the trustee's full avoiding powers under the more favorable § 547 to do substantial justice. See Fed.R.Civ.P. 8(f); Bankruptcy Rule 7008.7 Such an approach requires the Court to determine first whether the debtors have standing to pursue a cause of action under § 547. Only a handful of courts have considered the question of whether a Chapter 13 debtor may pursue the trustee's avoiding powers outside of § 522. The virtually unanimous opinion is that the Chapter 13 debtor possesses such avoiding rights and may proceed directly against the entire transfer under § 547, In re Ciavarella, 28 B.R. 823, 828 (Bankr.S.D.N.Y.1983), § 544, In re Boyette, 33 B.R. 10, 11 (Bankr.N.D.Tex. 1983); Matter of Hall, 26 B.R. 10, 11 (Bankr.M.D.Fla.1982); but see In re Carter, 2 B.R. 321, 323 (Bankr.D.Colo.1980), and § 548, In re Carr, 34 B.R. 653, 655 (Bankr.D.Conn.1983).
I agree with those courts that have extended the trustee's full avoiding powers to Chapter 13 debtors. The Bankruptcy Code in § 103(a) provides with few exceptions that the provisions of Chapters 1, 3 and 5 apply in cases filed under Chapters 7, 11 or 13. Clearly the Chapter 13 trustee has standing to pursue a preference action. See Ledford v. Society Bank, 51 B.R. 482 (Bankr.S.D.Ohio 1985). In addition, the Chapter 13 debtor is not specifically barred from proceeding directly under § 547. More importantly, the Court should not be blind to the realities of bankruptcy practice. It is clear that the Chapter 13 debtor is the most appropriate party to seek such a recovery. While the trustee, as representative of the estate, usually is the only party to have standing to pursue the avoiding powers granted under the Bankruptcy Code, see 11 U.S.C. §§ 323, 544-553, it is also clear that in Chapter 13 cases the trustee rarely, if ever, pursues such actions because the trustee reaps little benefit for the amount of time and effort involved. The trustee would have to hire an attorney and litigate the action. Should the trustee succeed, any recovery becomes property of the estate and goes to the debtor.8
In addition, the logic of the required economic distribution to creditors in a Chapter 13 plan also strongly suggests that the Chapter 13 debtor should have access to the trustee's avoiding powers. In order to get a plan confirmed, a Chapter 13 debtor must propose a distribution to unsecured creditors that satisfies the "best interests" test, i.e. that offers unsecured creditors payments with a present value at least equal to the distribution they would receive in a hypothetical Chapter 7 case involving the debtor. 11 U.S.C. § 1325(a)(4). In estimating what these debtors' creditors could expect in a Chapter 7 case, the Court would have to assume that the Chapter 7 trustee would seek to avoid the Bank's lien as preferential and would increase the distribution to creditors by virtue of the increase in non-exempt equity less costs of litigation and sale. Assuming for the sake of analysis of the standing of the Chapter 13 debtors to maintain this action that the hypothetical trustee would succeed in this regard, the amount the debtors must pay their unsecured creditors in this Chapter 13 case is increased accordingly. Therefore, it is logical to assume that because they must offer creditors payments based on the assumption that the full preference would be avoided in Chapter 7, they must similarly be able to avoid the preference in Chapter 13. Any other conclusion would be obviously unfair to the debtors.9
To say the trustee is the representative of the Chapter 13 estate is to raise legal formalism over reality.10 The essential role of a Chapter 13 trustee is to review plans, advise the Court with respect to plans and act as a disbursing agent under confirmed plans.11 The Chapter 13 trustee is not in a position to litigate actions under the avoiding powers. As previously pointed out, the Chapter 13 trustee has no economic interest in pursuing such litigation. It is hard to conclude from any reasonable reading of § 151302(b) that Congress intended the Chapter 13 trustee to pursue such actions. At present there are pending in this division of this district some 18,000 Chapter 13 cases to be handled by two Chapter 13 trustees and their staffs. The Chapter 13 trustees would become seriously overburdened and inefficient if they chose to set aside preferences, fraudulent conveyances, and the like on a routine basis. Therefore, it is only reasonable that the bankruptcy court allow the debtor to exercise the avoiding powers for his or her own benefit and for the creditors' indirect benefit as the trustees are unlikely ever to pursue those matters on their own. The trustees' inactivity in this regard should not result in windfalls to those creditors who have received avoidable transfers from Chapter 13 debtors.
This is true despite the fact that Chapter 13 contains no equivalent provision to § 1107, which explicitly gives the Chapter 11 debtor-in-possession the powers of the trustee. The absence of a Chapter 13 equivalent to § 1107 makes sense. The debtor in Chapter 13 is not the same as a Chapter 11 debtor-in-possession. There is always a trustee in a Chapter 13 case12 as contrasted with the normal Chapter 11 case where there is no trustee.13 Thus, a Chapter 13 debtor, although remaining in possession of his or her assets14 does not have all of the powers of a trustee. The Chapter 13 trustee, for example, retains the exclusive power to investigate the debtor's financial affairs,15 presumably to be able to comment intelligently on the debtor's proposed plan. The most logical analysis is that the Chapter 13 trustee has some of the trustee's powers, i.e. those necessary to carry out the trustee's assigned functions under § 151302, while the remaining trustee's powers vest in the Chapter 13 debtor. The Chapter 13 trustee has no need to pursue any avoiding powers to carry out...
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