Wright v. Trystone Capital Assets, LLCWright v. Trystone Capital Assets, LLC
The parties have asked this court to decide what the debtor/plaintiff can recover from the avoidance of the defendant‘s fraudulent transfer. The court finds that, as a chapter 13 debtor only has standing to avoid fraudulent transfers through section 522,1 recovery is limited to the amount of the debtоr‘s exemption.
JURISDICTION AND VENUE
This matter before the court is a core proceeding pursuant to
BACKGROUND
The debtor, Leneto Runee Wright, filed an adversary proceeding against Trystone Capital Assets, LLC, alleging preferential and fraudulent transfer counts in connection with the tax sale certificate foreclosure of Mr. Wright‘s residence. Doc. No. 1. The chapter 13 trustee filed a letter stating that she declined to pursue in an action to avoid the transfer, but should the cоurt decide that she would have that ability, then the debtor would have standing to pursue such an action in her place under
DISCUSSION
As just related, the parties agreed that the transfer of Mr. Wright‘s real property to Trystone was avoidable under section 548(a)(1)(B). But as the court stated in its earlier opinion, and the trustee warned in a filing, Mr. Wright‘s standing to do so came from section 522(h). In re Wright, 2022 WL 10192004, at *2, *8; Doc. No. 45. As will be explained, section 522(h) limits the extent of a chapter 13 debtor‘s avoidance action, which then logically limits what a chapter 13 debtor can recover.
In dеtermining a statute‘s meaning, a court starts “with the language of the statute itself.” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). Where the language is plain, “the sole function of the courts is to enforce it according to its terms.” Id. (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S. Ct. 192, 194, 61 L. Ed. 442 (1917)). The Supreme Court has also ruled that “‘[w]here a statute ... names the parties granted [the] right to invoke its provisions, ... such parties only may act.‘” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6–7 (2000) (quoting 2A N. Singer, Sutherland on Statutory Construction § 47.23, p. 217 (5th ed. 1992)).
With those preceрts in mind, the court observes that section 548 provides that “[t]he trustee may avoid any transfer . . . of an interest of the debtor in property . . . .”
This plain languagе creates some confusion by seemingly limiting the avoidance power to “the trustee.” But Congress has specifically provided for chapter 11 and 12 debtors-in-possession (with few exceptions and limitations) to have all the powers of a trustee – including avoiding powers under section 548.
Nevertheless, section 522(h) provides:
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 under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
Other courts in this district agree that a chapter 13 debtor only has standing to avoid a transfer through section 522(h). See In re Nealy, 623 B.R. 278, 283 (Bankr. D.N.J. 2021) (chapter 13 debtor can only avoid a transfer if subsections (g)(1) and (h) of section 522 are satisfied; they have no independent right of action); In re Steck, 298 B.R. 244, 248 (Bankr. D.N.J. 2003) (holding that chapter 13 debtor does not have standing to exercise trustee‘s avoiding powers); In re Hayles, 200 B.R. 26, 27-28 (Bankr. D.N.J. 1996) (stating that the debtor‘s standing to avoid a lien would be limited to the circumstances set forth in section 522(h)) (citing In re Tash, 80 B.R. 304, 305–06 (Bankr. D.N.J. 1987)).
Here, the trustee declared on the record that she did not intend to avoid the transfer, the debtor claimed an exemption in the property, the transfer was not voluntary, and the debtor did not conceal the property. Therefore Mr. Wright can proceed through section 522(h).
But what exactly could he avoid? A close—and plain—reading of the first sentence of section 522(h) shows that avoidance is limited ”to the extent that the debtor could have exempted such property under subsection (g)(1) of this section. . . .”
I note, however, that the Complaint is fashioned as an аction under § 547 seeking to avoid the full amount of the judgment lien as a preference as opposed to an action under § 522(h) to avoid that portion of the judgment lien that impairs her exemption. While it is clear that the former remedy is available to the Chapter 13 trustee if the elements of § 547(b) are established, Defendant contends, and I agree, that the Plaintiff/Debtor‘s ability to utilize thе trustee‘s avoiding powers is limited to the extent of the exemption that is being impaired.
Id., at * 3 (emphasis added).
Courts that instead have ruled that chapter 13 debtors can exercise the avoiding powers directly, not just through section 522(h), focus on factors such as the role of the chapter 13 trustee, legislative history, and equitable concerns. In re Kalesnik, 571 B.R. 491, 497 (Bankr. D. Mass. 2017) (explaining justifications). “However, such rationales ‘ignore thе plain language of the statute.‘” Id. See In re Funches, 381 B.R. 471, 496 (Bankr. E.D. Pa. 2008) (“I find the Code to be clear and unambiguous on the subject of a debtor‘s authority to exercise the trustee‘s avoidance powers and conclude that implying additional rights to chapter 13 debtors does violence to the balance of rights among debtors, trustees and creditors that has been carefully constructed in the statute.“); In re Ryker, 315 B.R. B.R. 664, 674 (Bankr. D.N.J. 2004) (finding unpersuasive the reasoning given to allow chapter 13 debtors to avoid transfers other than through section 522(h), adding that “a reading of the statute in which only the Chapter 13 trustee has standing to prosecute avoidance actions is not inconsistent with the other rights and responsibilities of a Chapter 13 debtor, and is no real impediment to proposing or performing a Chapter 13 plan.“); In re Steck, 298 B.R. at 248 (in declining to rеad section 1303 “in a manner . . . inconsistent with its plain language,” stating “‘the bankruptcy court cannot waive or modify Bankruptcy Code requirements that are plain and unambiguous because it agrees with the policy underlying the debtor‘s arguments.‘“) (quoting In re Columbia Gas Systems, Inc., 33 F.3d 294, 302 (3d Cir. 1994)); Matter of Mast, 79 B.R. 981, 982 (Bankr. W.D. Mich. 1987) (rejecting the reasoning of courts using the “‘realities of bankruptcy practice’ to justify a strained interpretation of the Bankruptcy Code“). This cоurt also rejects those holdings as ignoring the plain language of the statute.
This distinction—that chapter 13 debtors can only avoid transfers through section 522(h)—informs what a chapter 13 debtor can recover. “An avoidance nullifies the transfer. As a result, the transferred property becomes a part of the estate automatically. A recovery, on the other hand, forces thе transferee to return the property or become personally liable for its value.” Cong. Credit Corp. v. AJC Int‘l, 186 B.R. 555, 558 (D.P.R. 1995).
The key words in section 550(a), again, are “to the extent that a transfer is avoided.” That means only to the extent of the debtor‘s exemption. It is axiomatic that one can only recover what one has avoided. Thus, Mr. Wright can only recover the amount of his exemption. See In re Compton, 1998 WL 372659, at *3 (“Stated another way, the Plаintiff may not recover more than the amount of her exemption less any part of the exemption otherwise utilized.“). Section 522(i)(2) supports this conclusion in preserving avoided transfers for the benefit of the debtor only “to the extent that the debtor may exempt such property under subsection (g) of this section or paragraph (1) of this subsection.”
Because Mr. Wright only avoided $25,150 of thе transfer, he only can recover $25,150 of the property or its value. As for whether the court orders return of the property or its value, because the property is worth well more than $25,150, it would be inequitable to Trystone to have to return the real property. The court shall order that Trystone pay Mr. Wright the value of his exemption: $25,150.
In so deciding, this court breaks with those that hold that a сhapter 13 debtor‘s ability to recover pursuant to section 550(a) means that they can also recover “for the benefit of the estate.” That is what a trustee (or chapter 11 or 12 debtor-in-possession) is charged with under section 550(a), while a chapter 13 debtor comes to section 550(a) only through section 522(i)(1), which only allows a debtor to recover “in the manner prescribеd by, and subject to the limitations of, section 550 of this title.” “Manner” means “the mode or method in which something is done or happens : a mode of procedure or way of acting.” “Manner.” Merriam-webster.com. 2023. https://www.merriam-webster.com (March 28, 2023). Accordingly, this court reads “in the manner prescribed by” to mean that, like a trustee, the debtor can recover from the initial transferee or аny immediate or mediate transferee of such initial transferee.
Thus, Mr. Wright‘s discussion about section 550(a)‘s recovery being for the “benefit to the estate” is not applicable here, since chapter 13 debtors can only recover their exemption—i.e., recovery only benefits them. In re Funches, 381 B.R. 471, 492 (Bankr. E.D. Pa. 2008) (“Where all of the statutory prerequisites under § 522(g)(1) and (h) have been satisfied, a debtor may use the trustee‘s avoiding powers for his or her own benefit.“) (emphasis added, footnote omitted). “Benefit of the estate” is only properly raised when а trustee or a chapter 11 or 12 debtor-in-possession avoids a transfer. See In re Cybergenics Corp., 226 F.3d 237, 244–47 (3d Cir. 2000) (noting that courts have limited a debtor‘s exercise of avoidance powers to circumstances in which such actions would in fact benefit the creditors, not the debtors themselves); In re Messina, 687 F.3d 74, 83 (3d Cir. 2012) (clarifying that a debtor may benefit from an avoidance if they filed an exemption). Indeed, when the Third Circuit Court of Apрeals stated that “Section 550 permits the debtor-in-possession or trustee to ‘recover, for the benefit of the estate’ property whose transfer has been avoided . . . ,” In re Majestic Star Casino, LLC, 716 F.3d at 750, it was referring to a chapter 11 debtor-in-possession, not a chapter 13 debtor. Because these debtors-in-possession are operating “essentially as a trustee,” they “act on behalf of the bankruptcy estate, that is, for the benefit of the creditors.” Cybergenics, 243.
Mr. Wright also cited Hirsch v. Gersten (In re Centennial Textiles, Inc.), 220 B.R. 165, 176 (Bankr. S.D.N.Y. 1998), as stating “Section 550(a) is intended to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.” Doc. No. 61, p. 4. This assertion traces back to In re Baker, 17 B.R. 392, 395 (Bankr. W.D.N.Y. 1982) (“The purpose and thrust of this section is to restore the debtor‘s financial condition to the state it would have been had the transfer not occurred.“). But while many courts have repeated this “truism,” even within the Third Circuit, see In re GGI Properties, LLC, 568 B.R. 231, 258 (Bankr. D.N.J. 2017); In re David Cutler Indus., Ltd., 502 B.R. 58, 78 (Bankr. E.D. Pa. 2013); In re EBC I, Inc., 380 B.R. 348, 362 (Bankr. D. Del. 2008), Baker cites no authority, such as legislative history, for the proposition.
In sum, to recover either the entire value of the real property or the real property itself in this case, the chapter 13 trustee had to avoid the transfer. In re Young, 390 B.R. at 489 (stating that the chapter 13 trustee‘s failure to avoid a lien for thе benefit of the estate, “allows the debtors to avoid Camelot‘s lien to the extent of their allowed exemptions under § 522(h). . . .“). Had the chapter 13 trustee done so here, then her recovery would be for the benefit of creditors, with the debtor still only entitled to his exemption.
While the result here may feel unfair, it is a greater outcome for the debtor than would occur outside of bankruptcy. New Jersey state law bars a property owner from avoiding a tax sale foreclosure.
Finally, Trystone complains that the debtor requests that it pay the debtor‘s attorney‘s fees relating to the adversary proceeding. The debtor did not so request in his complaint, thus the court assumes that Trystone means that the debtor effectively has Trystone paying the debtor‘s attorney fees by including those fees as a deduction from the section 550 recovery.2 Since the debtor of course is limited to recovering his exemption, not his exemption plus enough to pay all claims and administrative expenses, Mr. Wright‘s attorney‘s fees will not be paid by Trystone.
CONCLUSION
The сourt will grant Mr. Wright‘s Motion for Summary Judgment, and deny Trystone‘s Motino for Summary Judgment, on Count I of Mr. Wright‘s complaint, avoiding the tax sale certificate foreclosure as a fraudulent transfer. Trystone will be ordered to pay the debtor $25,150.
An appropriate judgment has been entered consistent with this decision.
/s/ Andrew B. Altenburg, Jr.
United States Bankruptcy Judge
Dated: March 29, 2023