Wednesday, April 21, 2010

FYI: 6th Cir BAP Says Borrower Has Derivative Standing to Pursue Lien Avoidance Adversary Action

The Bankruptcy Appellate Panel of the United States District Court for the Sixth Circuit recently held that: 1) a debtor had standing to bring an adversary proceeding to avoid a lien on her manufactured home and 2) the lien on the debtor's home was properly avoided when the lien was perfected during the 90 day preference period provided for in 11 U.S.C. § 547.  A copy of the opinion is attached.

A debtor obtained a loan from a lender, which was secured by a mortgage on certain real property.  The debtor used the proceeds of the loan to purchase a manufactured home which she placed on the mortgaged property.  The lender initiated foreclosure proceedings when the debtor subsequently defaulted on the mortgage, asserting a security interest in both the real property and the manufactured home, despite not having noted its lien on the certificate of title of the home.  The state court ordered that the manufactured home be deemed converted to real property for purposes of sale of the property.

When the debtor subsequently filed for Chapter 13 relief, the trustee and the debtor opposed the lender's motion for relief from stay seeking to sell the mortgaged property.  The trustee did not file an adversary proceeding, but the debtor filed an adversary complaint, pursuant to a court order allowing her to do so if the trustee did not pursue an adversary proceeding.  The parties filed cross motions for summary judgment, and the bankruptcy court granted the debtor's motion for summary judgment, holding that the debtor had standing to bring the adversary proceeding and that the lien was properly avoided.  This appeal followed.

The court upheld the bankruptcy court's ruling in favor of the debtor on both the standing and avoidance counts.  As to the issue of the debtor's standing to seek to avoid the lender's lien, the court held that the bankruptcy court properly granted the debtor derivative standing to pursue lien avoidance under 11 U.S.C. §§ 544 and 547. The court noted that this decision was based on, among other things, the fact that a Chapter 13 trustee often lacks the resources to pursue meritorious avoidance claims. 

The court also found that the debtor could properly avoid the lien under 11 U.S.C. § 547.  In holding that all of the required elements of a preference existed in this case, the court reasoned that the lien was perfected on the date of the state court judgment (not the date of the mortgage or the date of the filing of a lis pendens, as argued by the lender), which was within the 90 day preference period pursuant to Section 547, thus making the lien avoidable. 

Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874


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