Debtor, trustee can bring avoidance actions

Where a debtor and Chapter 13 trustee brought an adversary proceeding to avoid transfers of real property the debtor made within the two years before filing his bankruptcy petition, the defendant’s argument that the plaintiffs lacked standing was rejected.

Background

Debtor Jesse Albert Moore and the Chapter 13 trustee initiated this adversary proceeding by filing a complaint to avoid transfers of real property made from the debtor to Kimberly L. Berry within the two years before the debtor’s filing of his bankruptcy petition. The defendant has filed a motion to dismiss.

Standing

The defendant’s argument that both plaintiffs in this case lack standing to bring this avoidance action is tantamount to arguing that Chapter 5 avoidance actions are not available in Chapter 13 cases. The court rejects this contention.

There is nothing in the bankruptcy code prohibiting avoidance actions in Chapter 13 cases, nor should there be. Bankruptcy estates are comprised of various assets, including causes of action, the intent being to maximize the bankruptcy estate for the benefit of creditors and to ensure equal treatment of creditors according to their priority in the scheme of distribution. Allowing some creditors to retain fraudulent transfers or preferential payments, often at the expense of similarly situated creditors, is contrary to that intent.

An objection to a Chapter 13 plan based solely on the trustee’s assertion that it lacks the resources to pursue avoidance actions on behalf of an estate is problematic, especially if it leads to denying Chapter 13 relief to a qualified debtor who is unable to otherwise fund a Chapter 13 plan or permitting the recipient of an avoidable transfer to retain the funds or assets obtained at other creditors’ expense. These practical concerns are alleviated by recognizing a Chapter 13 debtor’s standing to pursue such actions on behalf of the bankruptcy estate.

The Fourth Circuit, while not having directly addressed the specific issue before the court, has recognized the necessity and efficacy of permitting a debtor to exercise trustee powers in Chapter 13 cases. Expanding the scope of the debtor’s powers to include the recovery of avoidable transfers on behalf of the bankruptcy estate is consistent with this policy. Accordingly, the court rejects the defendant’s contention that the plaintiffs lack standing to bring the complaint.

Merits

Count One is brought pursuant to § 548(a). Four elements must be met in order for a transfer to be avoided under this section: (1) the debtor must have transferred property in which he had an interest; (2) the transfer of the property must have occurred on or within two years before filing the petition; (3) the debtor must have received less than a reasonably equivalent value for the transfer and (4) the debtor must have been insolvent at the time of the transfer or became insolvent as a result of the transfer. The court finds that the complaint plausibly alleges all four elements.

Like a claim under § 548, there are four requirements for a transaction to be avoided under § 544(b): (1) there must have been a transfer; (2) the transfer was made absent adequate consideration; (3) the transferor was insolvent at the time of the transfer or was made insolvent by the transfer; and (4) the debt addressed by the avoidance action existed before the transfer was made. Each of the foregoing elements have been asserted in the complaint.

The final count is brought pursuant to § 544(a), which gives the trustee broad powers to avoid any transfer of real property by the debtor that would be voidable by a bona fide purchaser. The plaintiffs allege that the deeds transferring certain parcels of the properties were not properly recorded in the land records. Unrecorded transfers of real property lack the requisite perfection and are void as to bona fide purchasers without notice. Accordingly, Count Three sets forth sufficient facts to comprise a viable cause of action under § 544(a).

Affirmative defenses

The defendant alleges that the debtor should be precluded from proceeding with the adversary proceeding due to his own wrongdoing in effectuating the transfers. However the complaint does not contain the requisite elements for the defendant’s asserted defense of in pari delicto, nor are the plaintiffs foreclosed by language in the complaint from asserting a rejoinder to the defendant’s in pari delicto defense. As such, consideration of this defense is, at best, premature.

The defendant also argues that the plaintiffs should be precluded from pursuing avoidance recoveries because the Chapter 13 plan currently provides sufficient funds to pay claims in full through the debtor’s future income, rendering the fraudulent transfer recoveries unnecessary. Notwithstanding the lack of a sufficient record to support its contention, the defendant has cited no persuasive authority for this proposition. And even if it was true, it has no merit.

Defendant’s motion to dismiss denied.

Moore v. Berry, No. 21-03041, March 21, 2022. EDVA Bankr. at Richmond (Phillips). VLW No. 022-4-002. 15 pp.

Editor’s note: A version of this digest that appeared in the April 11, 2022, print issue misidentified the case as VLW No. 022-4-015.