In Re Binghi
DECISION ON AVOIDANCE BY A CHAPTER 13 DEBTOR OF A SECURED INTEREST UNDER
At issue here is whether a Chapter 13 debtor has standing to exercise the so-called “strong arm” power of avoidance under
Jurisdiction
The Court has jurisdiction pursuant to
Background
The Debtors Henry F. Binghi and Toni Binghi (the “Debtors”) own a one-half interest in real property located at 89 Gold-ens Bridge Road, Katonah, New York 10536 (“Premises”).
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On August 21, 2000, the Debtors entered into a Credit Line Mortgage (“Mortgage”) with Wachovia Bank, N.A. (“Wachovia”) secured by the Premises for up to $200,000 in equity advances. The Mortgage was properly recorded in the Westchester County Clerk’s
On September 13, 2001, the Debtors executed a Modification Agreement of the Mortgage (the “Modification”) with Wa-chovia, which increased the Debtors’ credit limit from $200,000 to $332,000. Although Wachovia forwarded it to the Clerk’s Office for recordation, the Clerk refused to record the Modification believing that certain signatures therein were copies. Subsequently, Wachovia recreated and forwarded the Modification to the Debtors for execution. However, the Debtors failed to execute the recreated Modification, which was never recorded with the Clerk’s Office. All of the foregoing facts are undisputed.
On April 25, 2003, the Debtors filed for Chapter 13 bankruptcy relief in this Court. Wachovia timely filed a proof of claim for the amount of $331,639.98. The Debtors filed an objection to Wachovia’s proof of claim, contending that Wachovia’s claim should be bifurcated into a secured claim for $200,000 and an unsecured claim for $131,639.98 since the Modification was not recorded. At a hearing before this Court on July 22, 2003, the Debtors sought to avoid the unperfected portion of the Modification, arguing that the Chapter 13 Trustee (the “trustee”) may do so as a hypothetical bona fide purchaser pursuant to
Discussion
The threshold issue governing the Debtors’ objection is whether Chapter 13 debtors have standing to exercise the avoidance powers
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set forth in Chapter 5 of the Code, specifically
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the ease, whether or not such a purchaser exists.
On its face,
Section 1303 of the Code, entitled “Rights and powers of debtor,” provides:
Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections363(b), 363(d), 363(e), 363(f), and 363(0, of this title.
The plain language of Section 1303 is quite explicit and does not include the avoidance powers under Chapter 5 of the Code. Nevertheless, a floor comment in the legislative history of Section 1303 suggests that this section “does not imply that the debt- or does not also possess other powers concurrently with the trustee.” 124 Cong. Rec. H. 11106 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); S17423 (daily ed. Oct 6, 1978) (remarks of Sen. DeConci-ni). Not surprisingly, courts are split on this issue.
The Second Circuit Court of Appeals has “deliberately expressed] no opinion regarding, whether a Chapter 13 debtor would be able to invoke those [avoidance] powers in an action to augment the bankruptcy estate.”
Olick v. Parker & Parsley Petroleum Co.,
This Court faced a similar issue in
In re Higgins. Higgins v. Erickson (In re Higgins),
The Court recognized that there are limited exceptions to the trustee’s exclusive avoidance powers under Section 522, which is intended to “give limited protection to a debtor’s exemptions.” Id. The Court examined specifically Section 522(h), which provides in pertinent part:
The debtor may avoid a transfer of property of the debtor ... to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee undersection 544 , 545, 547, 548, 549 or 724(a) of this title ...; and
(2) the trustee does not attempt to avoid such transfer.
It found Section 522 inapplicable since the transfers at issue were voluntary. Id.
A majority of courts (the “Majority”) employs essentially the same statutory analysis as that of
In re Higgins
and holds that because of no explicit statutory authority, Chapter 13 debtors do not have standing to utilize a trustee’s avoidance powers under Chapter 5.
See e.g., Stangel v. Powers (In re Stangel),
As
In re Higgins,
most of the majority recognizes the Chapter 13 debtors’ limited authority to assert trustee’s avoidance powers under Section 522.
In re Stangel,
The Majority declines to follow the above quoted floor comment in the legislative history of Section 1303, reasoning that the express statutory grant of avoidance powers to Chapter 11 and 12 debtors, but not to Chapter 13 debtors, is the most accurate indicia of Congress’ intent.
See In re Holcombe,
These courts view resort to a fragment of the legislative history in order to expand the scope of Section 1303 as beyond the proper role of a judge.
In re Hamilton,
As compelling, practical and intensely equitable as these arguments might be, they are at bottom well-meaning forays into judicial legislation. They exceed the scope of a bankruptcy judge’s role, which is to interpret and apply the statute, not to rewrite it... Legislative history, especially floor comments, may augment but may not amend the statute’s straightforward language. Section 1303 simply does not confer standing on the debtor to pursue avoidance actions ... If Congress intended to grant avoidance powers to a Chapter 13 debt- or, it could have explicitly done so.
A number of courts (the “Minority”) has allowed Chapter 13 debtors to exercise trustee’s avoidance powers.
See e.g., Russo v. Ciavarella (In re Ciavarella),
The Minority relies heavily on the quoted excerpt from the legislative history of Section 1303.
In re Ciavarella,
However, the Supreme Court’s decision in
Hartford Underwriters Insurance Co. v. Union Planters Bank,
The Minority argues that the plain language of Section 103(a) of the Code allows Chapter 13 debtors to exercise Chapter 5 avoidance powers,
In re Ciavarella,
The Minority suggests that the practical role of Chapter 13 trustees and the realities of filing a Chapter 13 case require that Chapter 5 avoidance powers be extended to Chapter 13 debtors.
In re Ciavarella,
The Supreme Court in
Hartford Underwriters
dealt with similar policy arguments, including the trustees’ lack of incentive to pursue certain matters.
Hartford Underwriters,
Conclusion
The plain and unambiguous statutory language of Sections 1303 and 544(a), the Supreme Court decision in Hartford Underwriters and overwhelming case law compel the conclusion that Chapter 13 debtors do not have standing to assert trustee’s avoidance powers.
Because they do not have standing to avoid Wachovia’s secured claim under
Counsel to Wachovia is directed to settle an order consistent with this decision.
Notes
. The owners of the other one-half interest in the premises are Vincenzo and Lucretia Gentile.
. Examples of the avoidance powers under the Code are: (1)
. For a full discussion of the various methods of statutory construction, including the "New Textualist" methodology, see Walker, Jr., John M., Judicial Tendencies in Statutory Construction: Differing Views on the Role of the Judge, 58 N.Y.U. Ann. Surv. Am L. 203 (2001).