Opinion ID: 781182
Heading Depth: 3
Heading Rank: 2

Heading: Avoidance and Recovery

Text: 27 The Trustee properly avoided the mortgage for being improperly witnessed. Ohio Revised Code § 5301.234, which prior to its repeal provided recorded mortgages an irrebuttable presumption of validity, does not govern this case, which involves a bankruptcy petition filed before the short-lived § 5301.234 became effective. 2 As we held in Zaptocky v. Chase Manhattan Bank ( In re Zaptocky ), 250 F.3d 1020, 1027-28 (6th Cir.2001), another case that involved a bankruptcy petition filed before § 5301.234 went into effect, 11 U.S.C. § 544(a) gives the trustee the power to avoid a mortgage that was improperly witnessed under Ohio law. 28 Accordingly, we must determine whether IMC is entitled to a lien interest in the property pursuant to § 550(e). Courts in this circuit have split on the issue. Compare Eisen v. Allied Bancshares Mortgage Corp. ( In re Priest ), 268 B.R. 135 (Bankr.N.D.Ohio 2000) (holding that mortgage interest is preserved for the estate immediately upon avoidance without recourse to § 550 recovery), with Helbling v. Krueger ( In re Krueger ), No. 98-18686, 2000 WL 895601 (Bankr.N.D.Ohio June 30, 2000) (holding that § 550 lien is available to transferee after mortgage was avoided even if there was no actual recovery). We agree with the court in In re Priest and hold that because the Trustee neither sought nor needed to seek recovery here, § 550 did not apply, and the § 550(e) lien that IMC sought was unavailable. 29 First, avoidance and recovery are distinct concepts and processes. This is clear from both the statute itself and from its legislative history. Avoidance and recovery are addressed in two separate sections of the code, 11 U.S.C. § 544 and § 550, respectively, and have two separate statutes of limitations, 11 U.S.C. § 546(a) and § 550(f), respectively. According to the House Report for the Bankruptcy Reform Act of 1978, § 550 enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee. H.R.Rep. No. 95-595, at 375 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6331. The fact that avoidance and recovery are distinct does not mean that avoidance cannot trigger recovery, but it does suggest that avoidance need not always trigger recovery. 30 Second, the fact that avoidance is a necessary precondition to § 550 recovery 3 does not imply that avoidance is a sufficient condition for § 550 recovery or that avoidance automatically triggers § 550 recovery. The trustee's remedy of recovery is necessary only when the remedy of avoidance is inadequate. That is, when the avoidance of a transfer does not fully satisfy the estate, then the trustee may seek to recover the property transferred, but when the avoidance alone is a sufficient remedy, there is no need for the trustee to seek recovery. Unlike the court in In re Krueger, which determined that the statute made recovery automatic upon avoidance, 2000 WL 895601, at , we conclude that the language of § 550, stating that the trustee may recover property following avoidance, 11 U.S.C. § 550 (emphasis added), is permissive rather than mandatory (the trustee must recover) or descriptive (the trustee thereby recovers). See also 2 David G. Epstein et al., Bankruptcy, § 6-79 at 201 (West 1992) (Recovery goes beyond avoidance. Recovery is a bankruptcy remedy for avoidance which makes transferees of the affected property, and also people for whose benefit the transfer was made, personally accountable to the estate for the return of the property or for its value.). 31 Even assuming that the defective mortgage created a property interest under Ohio law, an assumption we implicitly made in Zaptocky, see In re Zaptocky, 250 F.3d at 1024, avoidance of that interest was an adequate remedy. The statutory scheme provided that, immediately upon avoidance of the transfer, IMC's interest in the Debtors' property returned to the estate without need for resort to the recovery process. First, the transfer was avoided under § 544(a). Second, § 551 provides that, when a transfer is avoided under § 544, the transfer is preserved for the benefit of the estate. 11 U.S.C. § 551. Section 541 then makes explicit that any interest that is preserved for the benefit of ... the estate under section ... 551 is part of the bankruptcy estate. 11 U.S.C. § 541(a)(4). Thus, immediately upon avoidance of the transfer, IMC's mortgage interest was preserved and became part of the estate. 32 As a textual and conceptual matter, there are strong reasons to affirm the BAP's conclusion that § 550 did not apply, because the Trustee never sought recovery. As a textual matter, the statute clearly indicates that avoidance and recovery are distinct, and the permissive language of § 550 suggests that recovery is an optional remedy that, in cases such as this one, need not be pursued. As a conceptual matter, the BAP's interpretation offers a coherent explanation of avoidance, recovery, and IMC's interest: upon avoidance, IMC's interest was preserved by § 551 and returned to the estate under § 541. Recovery was not necessary, because the code itself provided for the interest's return to the estate. 33 We recognize that under our interpretation, many cases will turn on whether a particular creditor's interest in the debtor's property, prior to that interest being avoided, was possessory or nonpossessory. In the case of creditors who have possessory interests in the debtor's property, the trustee will generally have to pursue recovery, because mere avoidance would not bring the property back into the estate's possession. In contrast, in cases involving creditors such as IMC who have nonpossessory interests in the debtor's property, trustees will generally not have to seek recovery, and the creditors will not be entitled to any of the § 550(e) protections. 34 Although critics argue that this distinction between the holders of possessory and nonpossessory interests does not itself appear in the code, see Black & White Cattle Co. v. Granada Cattle Servs., Inc. ( In re Black & White Cattle Co. ), 783 F.2d 1454, 1462 (9th Cir.1986) ([T]here is nothing in the statute or case law to suggest that Congress meant [to protect] only transferees in possession.), and leaves a gaping hole ... in the theory of defense to avoidance powers, David Gray Carlson, Bankruptcy's Organizing Principle, 26 Fla. St. U.L.Rev. 549, 609 (1999), the distinction that results from our interpretation is not as baseless as its proponents contend. First, although the In re Black & White Cattle Co. court is correct that the code itself does not explicitly refer to a possessory-nonpossessory distinction, the statute does carry implicit suggestions that Congress foresaw this consequence. As one court in our circuit has suggested, the very notion of recovery suggests such a possessory-nonpossessory distinction. That is, the presence of recovery under § 550 and preservation under § 551 35 is dependent on whether the interest the trustee avoided was possessory or nonpossessory. In particular, preservation under § 551 is, by its very nature, only applicable to nonpossessory interests, namely liens.... On the other hand, the very concept of `recovery' imparts the notion that a possessory interest in property exists; that is, the property to be recovered must be tangible property. The reason for this is self-evident: when a nonpossessory interest in property is avoided, there is nothing left to recover. 36 Morgan v. Liberty Mortgage ( In re Morgan ), 276 B.R. 785, 792 (Bankr.N.D.Ohio 2001) (citation omitted). Second, the distinction does further one of bankruptcy's important goals. Although our interpretation favors possessory transferees over nonpossessory transferees, it also favors the general creditors over the nonpossessory transferee by not permitting the nonpossessory transferee a § 550(e) lien. 37 Regardless of whether the possessory-nonpossessory distinction is one that Congress intended, it is one that Congress made, and this is not one of those `rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.' United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)). The Supreme Court has made clear that in bankruptcy cases, we are to adhere closely to the text of the statute, see Toibb v. Radloff, 501 U.S. 157, 162, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991), and the Bankruptcy Code's text and structure support our conclusions that recovery does not automatically follow from avoidance, and that where there is no recovery under § 550(a), there are no protections under § 550(e). Accordingly, because the Trustee neither sought nor needed to seek recovery, § 550 is not at issue in this case. IMC is thus unable to obtain the § 550(e) lien, and we affirm the decision in Case No. 01-4264. 38