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In re Hannah

316 B.R. 57 (D. N.J. 2004)

BANKRUPTCY; CHAPTER 13—A Chapter 13 debtor in bankruptcy does not have the avoidance power that a Chapter 13 trustee would have under section 544(a) of the Bankruptcy Code.

A debtor filed a voluntary Chapter 7 petition. At the Sec. 341 meeting of creditors, an issue arose regarding whether a bank recorded its mortgage on the debtor’s property. If timely recorded, it would have been a first mortgage on the property. The debtor then converted his Chapter 7 petition to a Chapter 13 proceeding and proposed to treat the mortgage as a general unsecured claim. The case was ultimately dismissed. The debtor then commenced a separate Chapter 13 case. When the bank received no payments after the petition filing date, it moved to vacate the automatic stay pursuant to 11 U.S.C. Sec. 362(d). The debtor cross-moved to reclassify the bank’s claim as an unsecured claim based on the bank’s failure to record the mortgage. The debtor claimed that he had the standing to use the avoidance powers specifically conferred on a Chapter 13 trustee under Sec. 544(a). The Court disagreed.

Congress specifically conferred the avoidance powers on debtors in Chapter 11 and Chapter 12 cases. By contrast, the rights and powers of a Chapter 13 debtor in Sec. 1303 provide only that the debtor shall have the rights and powers of a trustee under sections 363(b), (d)-(f), and (l). Thus, Sec. 1303 does not include the power of avoidance granted by Sec. 544. According to the Court, if Congress intended to give the Chapter 13 debtor trustee avoidance powers, it could have easily have adopted language similar to that in Chapters 11 and 12. The Court noted that Sec. 522(h) was also relevant to this determination. It allows debtors to avoid a transfer of property under the trustee’s avoidance powers if the trustee makes no attempt to do so, but only to the extent of the debtor’s exemption under Sec. 522(g)(1). Such limited authority also supported the Court’s conclusion that Congress did not intend to confer full avoidance powers on the Chapter 13 debtor.

The Court held that Sec. 544 was enacted to enable a trustee to enhance the estate’s assets and to assure that the unsecured creditors’ recovery is maximized. Section 544 was never intended to permit debtors to avoid liens on properties they retain. Chapter 13 is designed as a relief for the adjustment of debts of an individual with regular income. While a Chapter 13 debtor may sell, use or lease property, it was never intended that a Chapter 13 plan would be funded by the sale of properties nor by pursuing transactions which might be voidable under Secs. 544, 545, 547, 548 or 550. A Chapter 13 debtor does not occupy the same legal status as a debtor-in-possession in a Chapter 11 proceeding. A debtor-in-possession is legally an entity separate from the debtor. Therefore, the Court concluded that there was no justification to allow a Chapter 13 debtor to avoid a transaction to which the debtor himself was a participating party and when such an avoidance plays no meaningful role in the debtor’s ability to propose a Chapter 13 plan. Since the Court found that there was no statutory authority for a Chapter 13 debtor to exercise the avoidance powers pursuant to Sec. 544(a), the court denied the debtor’s cross-motion to reclassify the bank’s claim. The Court also concluded that the bank’s mortgage was to be treated as a secured claim. While the bank may not affect or foreclose the rights of subsequent lienors because the mortgage was not recorded, the mortgage was valid as between the debtor and the bank. N.J.S.A. 45:22-1 provides that an unrecorded mortgage lien is not unperfected as between the debtor and parties in privity to the transaction, in this case, the bank. For that reason, the Court adjourned the bank’s motion to vacate the stay to the time of the hearing on confirmation of the debtor’s plan.

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