BANKRUPTCY CORNER
BANKRUPTCY CORNER
Prepetition Secured Creditors and Avoidance Actions
JASON S . RIGOLI
Avoidance actions are a significant source of recovery in bankruptcy cases . Generally , avoidance actions can be split into two categories : ( i ) preference claims under 11 U . S . C . § 547 ( b ) or ( ii ) “ fraudulent transfer ” claims under 11 U . S . C . § 544 or 548 . When a trustee or debtor in possession successfully avoids the transfer of an interest in property under §§ 544 , 547 , or 548 , the property that was transferred and avoided is recoverable to the estate or a money judgment for the value of the property transferred .
Avoidance actions are all creatures of bankruptcy that arise as a result of the filing of the bankruptcy as a way to augment the estate . Outside of bankruptcy a debtor would not have standing to seek to avoid the transfer of its interest in property under any circumstance , it is generally the right of a creditor .
A question that arises is how a prepetition secured lender affects the trustee ’ s ability to avoid and recover such avoided transfers . To this author the answer is complicated and nuanced and implicates various applicable laws ; however , this article will address some overarching principles . Depending on which claim the trustee asserts , the secured creditor ’ s lien will impact the viability of the claim .
11 U . S . C . § 544 ( b )
Claims under § 544 ( b ) put the trustee in the shoes of the “ triggering creditor ” and allows the trustee to avoid a transfer or obligation that would be voidable by an unsecured creditor under applicable nonbankruptcy law . Typically , these claims are brought under the Uniform Fraudulent Transfer Act ( UFTA ), which Florida has adopted , Chapter 726 , Florida Statutes , or Uniform Voidable Transactions Act ( UVTA ), although depending on the creditors in a particular case , the Federal Debtor Collection Procedures Act , 28 U . S . C . §§ 3301-3308 , or IRS collection procedures , 26 U . S . C . § 6502 , may apply .
Under either the UFTA or UVTA , if prepetition the property transferred was subject to a valid lien , then there is no transfer to avoid . See Barbee v . Amerant Bank ( In re Luna Devs . Grp ., LLC ), 618 B . R . 595 ( Bankr . S . D . Fla . 2020 ) (“ Transfer ” means every mode … of disposing of or parting with an asset …” and “ Asset ” is defined to specifically exclude “ property encumbered by a valid lien .”) ( citing Fla . Stat . § 726.102 ( 2 )( a ) and ( 14 )). Accord , UVTA § 1 ( 2 ) ( i ) and ( 16 ). Accordingly , if the property at issue is subject to a lien there is no transfer under the UFTA or UVTA and the inquiry stops there .
11 U . S . C . § 547 and 548
Section 547 and 548 of the Bankruptcy Code do not contain the same exclusion of property subject to a lien . Sections 547 and 548 allow the Trustee to avoid the transfer of any interest of the debtor in property . See 11 U . S . C . § 547 ( b ) ( a “ trustee may …. avoid any transfer of an interest of the debtor in property ”) and § 548 ( a ) (“[ t ] he trustee may avoid any transfer … of an interest of the debtor in property …”).
11 U . S . C . § 550
The recovery of the avoided transfers , under 544 , 547 , or 548 is governed by § 550 of the Bankruptcy Code , which also does not exclude or limit the recovery by the amount of a lien .
Majority Opinion
There is a substantial body of case law holding that pre-petition secured creditors do not have liens on the avoidance actions or recoveries because the causes of action are post-petition claims , that constitute after-acquired property of the estate and not “ proceeds ” or collateral , and , therefore , the debtor could not encumber such postpetition claim and the prepetition creditor ’ s lien is cut-off under 11 U . S . C . § 552 .
This rationale does not comport with my understanding of why such avoidance
PBCBA BAR BULLETIN 8 actions exist or the application of the uniform commercial code . Generally , a secured creditor whose collateral is transferred without the secured creditor ’ s authorization or satisfaction of the lien , retains a lien in the property . See e . g ., Fla . Stat . § 679.3151 ( 1 ); Littman v . Commercial Bank & Trust Co ., 425 So . 2d 636 , ( Fla . 3d DCA 1983 ) ( secured creditor retains lien against transferred collateral under Fla . Stat . § 679.311 ( 1983 )). By bringing a claim under §§ 547 or 548 and 550 to avoid and recover the transfer of property subject to a perfected prepetition lien , the general priority scheme of creditors is upended , and general unsecured creditors receive a windfall they would not be entitled to outside of bankruptcy .
The question , for me , is not whether the prepetition secured lender has a lien on the avoidance action but whether avoidance action is seeking to avoid and recover property that was transferred prepetition and remained subject to the prepetition lien . If the transfer was not avoided and recovered under 547 or 548 and 550 , the secured lender , whose lien is not necessarily affected by the bankruptcy could conceivably bring its own direct claims against the transferee to recover its converted collateral under applicable nonbankruptcy laws .
Notwithstanding , currently the majority of courts hold that the avoidance actions are not subject to the liens of prepetition secured lenders .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com .
1
For ease of reference , “ trustee ” will be used to refer to a bankruptcy trustee under any chapter , a debtor in possession , creditors ’ committee , or liquidating trustee , or other fiduciary who may have authority to bring a claim or cause of action under 11 U . S . C . §§ 544 , 547 , or 548 .