On consecutive days, Bankruptcy Judge Elizabeth D. Katz of Springfield, Mass., issued opinions precluding chapter 13 debtors from exercising a trustee’s chapter 5 avoiding powers under Section 544(a) and the power to sell co-owned property under Section 363(h).
The more consequential opinion dealt with Section 544(a) and a chapter 13 debtor’s adversary proceeding attempting to avoid a mortgage lien that allegedly was not perfected. The lender filed a motion to dismiss and won, in Judge Katz’s July 11 opinion, holding that the debtor lacked standing.
The statute was the debtor’s primary hurdle, according to Judge Katz. Section 1303 gives the debtor certain powers “exclusive of the trustee,” but Section 544 is not among them.
Notably, the Ninth Circuit Bankruptcy Appellate Panel is among the minority of courts that extend avoiding powers to a chapter 13 debtor. The Fifth Circuit is among the majority that deprive chapter 13 trustees of those powers, Judge Katz said.
The debtor argued that the statute impliedly gave her avoiding powers, because Section 541 includes recoveries of avoided transfers in her estate. If her estate includes them, why can’t she pursue them, the debtor asked?
To confirm a plan, the debtor must show under Section 1325 that the plan will afford not less than creditors would recover in chapter 7, where their expected distribution would include the fruits of avoidance actions. How is it fair, the debtor contended, that she be forced to pay creditors the value of avoidance actions when she can’t prosecute them?
Judge Katz cited another Massachusetts decision for saying that a “growing number of courts” bar a debtor from exercising chapter 5 avoiding powers, except under Section 522(h), where debtors are given the power explicitly to avoid involuntary transfers of exempt property.
Judge Katz adopted the conclusion of the majority by relying on the plain language of the statute as depriving a chapter 13 debtor of avoiding powers.
One wonders whether a chapter 13 debtor would fare better by making an analogy to chapter 11 cases, where a creditors’ committee gains standing to bring a claim on behalf of the estate when the debtor, after demand, unjustifiably refuses to sue. See, e.g, Commodore International Ltd. v. Gould (In re Commodore International Ltd.), 262 F.3d 96 (2d Cir. 2001).
The principle evolved in chapter 11 because a debtor’s interests sometimes are not aligned with the creditors’ — for instance, when a corporate debtor would not be inclined to sue its own officers and directors. In chapter 13 similarly, the economic interests of a trustee might not be aligned with those of the debtor.
In chapter 11, there is no explicit statutory grant of power to a committee, just as a chapter 13 debtor is not empowered by the language of the Bankruptcy Code. Section 1103(b)(5) allows a committee to “perform such other services as are in the interest of those represented.”
The case decided the next day by Judge Katz entailed a chapter 13 debtor who sought to invoke Section 363(h) by selling property where she was a co-owner along with two nondebtors. In her July 12 opinion, Judge Katz dismissed the adversary proceeding sua sponte for lack of standing.
Judge Katz found five published decisions allowing a debtor to proceed under Section 363(h). The best rationale she found for those decisions rested on the incorporation of Section 363(b) into 363(h). However, she said that the majority of courts reject the theory, based on the plain language of the statute.
Citing her decision from the day before on Section 544, Judge Katz said that prohibiting debtors from using Section 363(h) is “consistent with the vast majority of case law regarding limitations on a chapter 13 debtor’s right to exercise trustee powers under the Bankruptcy Code.”
The opinion on Section 544 is Kalesnik v. HSBC Bank USA NA (In re Kalesnik), 16-3027 (Bankr. D. Mass. July 11, 2017), and the opinion on Section 363(h) is Andrade v. Essenfeld (In re Andrade), 17-3009 (Bankr. D. Mass. July 12, 2017).