Even if the trustee blows the two-year statute of limitations for bringing an avoidance action to invalidate an unperfected lien, the trustee is not time-barred from objecting to the secured status of the claim, according to Bankruptcy Judge Wendy L. Hagenau of Atlanta.
Ten years before filing in chapter 13, the debtor had purchased real property. The lender recorded the mortgage in the wrong county. The lender filed a secured proof of claim two months after the chapter 13 filing, probably not aware that the lien was not perfected.
The case was converted to chapter 7 about two years after the chapter 13 filing. More than two years after the chapter 13 filing, the chapter 7 trustee filed an adversary proceeding against the lender. The complaint sought to avoid the unperfected mortgage, disallow the secured claim, and allow the lender’s claim as an unsecured claim.
According to Judge Hagenau in her April 21 opinion, the lender agreed that the trustee had the status of a bona fide purchaser (BFP) and that the mortgage was invalid as to a BFP.
Section 544(a) provides that a trustee has “the rights and powers of, or may avoid any transfer of property . . . that is avoidable by . . . (3) a bona fide purchaser of real property . . . .” Section 546 requires that a suit to avoid a lien under Section 544 must be brought within two years of the “order for relief.” The trustee conceded that conversion did not restart the two-year clock on avoidance actions.
The trustee was therefore time-barred when it came to avoiding the unperfected lien. However, the trustee contended that she could nevertheless object to the allowance of the claim as secured.
The lender countered by arguing that the trustee could not object to the allowance of the secured claim because the trustee’s complaint fell more than two years after the original chapter 13 filing.
The resolution of the dispute came down to a question of statutory interpretation.
Judge Hagenau cited appellate authority for the notion that Section 544(a) grants “rights and powers” beyond the avoidance of transfers because the statute “uses the disjunctive word ‘or.’”
Next, Judge Hagenau cited the Supreme Court for holding that affirmative defenses, generally speaking, are not subject to statutes of limitations. She then deduced that an objection to a claim is the same as an affirmative defense raised in an answer to a complaint.
To close the circle, Judge Hagenau cited the Fifth Circuit for holding that a debtor can object to the allowance of a claim by raising the Truth in Lending Act, even though the objection was filed after the one-year statute of limitations under the TLA would have elapsed. Coxson v. Commonwealth Mortg. Co. of Am. L.P. (In re Coxson), 43 F.3d 189, 194 (5th Cir. 1995).
Judge Hagenau ruled that the “clear weight of authority permits parties to assert time-barred claims defensively.” In other words, Section 546(a) “does not limit a trustee’s ability to raise her BFP rights defensively in response to a proof of claim,” the judge said.
Because Section 546(a) “does not bar a trustee from asserting her BFP status as a defense to a claim outside the two-year time limit,” Judge Hagenau disallowed the secured claim and said the lender only had the status of an unsecured creditor when it comes to distributing proceeds of sale of the property subject to unrecorded mortgage.
Even if the trustee blows the two-year statute of limitations for bringing an avoidance action to invalidate an unperfected lien, the trustee is not time-barred from objecting to the secured status of the claim, according to Bankruptcy Judge Wendy L. Hagenau of Atlanta.
Ten years before filing in chapter 13, the debtor had purchased real property. The lender recorded the mortgage in the wrong county. The lender filed a secured proof of claim two months after the chapter 13 filing, probably not aware that the lien was not perfected.
The case was converted to chapter 7 about two years after the chapter 13 filing. More than two years after the chapter 13 filing, the chapter 7 trustee filed an adversary proceeding against the lender. The complaint sought to avoid the unperfected mortgage, disallow the secured claim, and allow the lender’s claim as an unsecured claim.
According to Judge Hagenau in her April 21 opinion, the lender agreed that the trustee had the status of a bona fide purchaser (BFP) and that the mortgage was invalid as to a BFP.
Section 544(a) provides that a trustee has “the rights and powers of, or may avoid any transfer of property . . . that is avoidable by . . . (3) a bona fide purchaser of real property . . . .” Section 546 requires that a suit to avoid a lien under Section 544 must be brought within two years of the “order for relief.” The trustee conceded that conversion did not restart the two-year clock on avoidance actions.