Court Opinion

ID: 9703030
Source: CourtListenerOpinion
Date Created: 2023-08-25 23:37:33.1341+00
Date Added: 2024-06-11T18:21:44.953045
License: Public Domain

MICHAEL, Bankruptcy Judge,
Dissenting.
I respectfully dissent. The majority opinion appears to be based upon the following conclusions: (1) application of the ruling of the United States Court of Appeals for the Tenth Circuit in In re Duncan to the facts at bar is inappropriate; (2) the fact that Toyota voluntarily released its lien defeats the automatic lien preservation provisions of § 551; and (3) in order to preserve any claim she might have had to the vehicle, the trustee was required to file an objection to the Debtors’ claim of exemption within 30 days of the first meeting of creditors or forever hold her peace. In my view, the bankruptcy court correctly applied both § 522(g) and the principles set forth in Duncan to the facts at bar.
Section 522(g)(1) provides:
Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if—
(1) (A) such transfer was not a voluntary transfer of such property by the debtor; and
(B) the debtor did not conceal such property .... 1
The test under § 522(g)(1) has two prongs: in order for a debtor to be allowed to claim property recovered by a bankruptcy trustee as exempt, the debtor must not have voluntarily conveyed the property, and the debtor must not have concealed the property. If the debtor fails to satisfy either of these requirements, he or she may not claim the property as exempt.
In the eyes of the majority, central to the ruling in Duncan is the finding that the debtor in that case acted with fraudulent intent.2 I disagree. As noted in Duncan, “[t]he plain language of section 522(g)(1) provides that a debtor cannot assert any exemption in property a trustee recovers after the debtor’s voluntary *535transfer of the property.”3 The court in Duncan went on to state that “ ‘the purpose of section 522(g) is to prevent a debt- or from claiming an exemption in recovered property which was transferred in a manner giving rise to the trustee’s avoiding powers, where the transfer was voluntary or where the transfer or property interest was concealed.’ ”4 There simply is no requirement, under either § 522(g) or Duncan, that a debtor engage in fraudulent or otherwise improper conduct in order for a trustee to avail herself of the powers bestowed under § 522(g). There need only be a voluntary transfer of an interest in property subject to the trustee’s avoiding powers.
Several bankruptcy courts have held that the granting of a security interest in a motor vehicle constitutes a transfer for purposes of § 522(g)(1).5 The parties have cited and our research has uncovered no contrary authority. Therefore, this judge concludes that, as a matter of law, the granting of the lien in the vehicle to Toyota constitutes a voluntary transfer of an interest in the vehicle for purposes of § 522(g)(1).
There is also no dispute that the transfer of the security interest in the vehicle is an avoidable transfer under § 544.
[T]he Bankruptcy Code grants [a] Trustee greater rights than the Bank had against Debtor’s vehicle outside bankruptcy. Trustee’s strong-arm powers under § 544 allow him to preserve the value of an unperfected lien for the benefit of the bankruptcy estate. Debtor’s pre-petition rights remain the same post-petition as she had voluntarily granted the lien, even though the Bank had failed to perfect it. The Bank’s rights are also preserved as its lien was not perfected and therefore not effective against subsequently perfected liens. Trustee has the rights of a creditor with a later-perfected lien. The Code allows the Trustee to avoid the unperfected lien and distribute the proceeds equally to all unsecured creditors of the bankruptcy estate.6
Thus we have the elements of a prima facie case for granting the trustee’s objection to exemption and preserving the value of the vehicle for the benefit of all creditors of the bankruptcy estate. The majority defeats the prima facie case on the grounds that the lien in the vehicle was released instead of avoided and that the trustee failed to timely object to the claimed exemption.
Section 522(g) requires that a bankruptcy trustee “recover” property in order for the provisions of that section to be triggered. The term “recover” is not defined in the Bankruptcy Code. Debtors take the position that a trustee must file an adversary proceeding in order to invoke the powers granted to her under § 544, relying upon In re Canney, a decision of the United States Court of Appeals for the Second Circuit.7 Debtors’ reliance upon Canney is misplaced. In Canney, the central issue was not lien avoidance, but whether the time frame during which a *536debtor could avail himself of his equity of redemption rights under Vermont law was subject to the automatic stay provisions of § 362(a) or the automatic tolling provisions of § 108(b). In a fallback argument, the debtor contended that he, as a debtor-in-possession, was entitled to assert “strong-arm” powers under § 544(a)(1), and that such rights gave the debtor a superior position over duly recorded mortgage interests.8 The Canney court expressly found that § 544(a)(1) was not applicable to the facts of the case, and noted in dicta that an adversary proceeding must be filed in order to exercise such “strong-arm” powers.9 The issue of whether an adversary proceeding or contested matter must be filed when the opposing party concedes the avoidability of the transfer is conspicuously absent in Canney.
Debtors ignore those cases which hold that a trustee can recover property for purposes of § 522(g)(1) without the necessity of litigation.10 I find those cases well-reasoned and based in practicality and reality. Consider the analysis of the Ninth Circuit Bankruptcy Appellate Panel in Glass:
In the bankruptcy context, a trustee may “recover” fraudulently transferred property in several ways: by initiating a formal adversary proceeding, by obtaining a judgment in his or her favor in that adversary action, or merely by using the threat of the avoidance powers to convince a debtor or third party transferee to return the property to the estate. Thus, it would appear that the word
“recovers” does not necessarily require that the trustee regain possession of the property through a formal legal action.11
The panel went on to
hold that where a debtor voluntarily transfers property in a manner that triggers the trustee’s avoidance powers or the debtor knowingly conceals a prepetition transfer or an interest in property, and such property is returned to the estate as a result of the trustee’s actions directed toward either the debtor or the transferee, the debtor is not entitled to claim an exemption under § 522(g)(1). It is not necessary for the trustee to commence a formal adversary proceeding or obtain a final judgment to prevail on an objection to a debtor’s claim of exemption pursuant to § 522(g)(1).
A trustee, however, must present sufficient facts upon which a bankruptcy court could reasonably conclude that a debtor transferred property in such a manner as to invoke the trustee’s avoidance powers under §§ 510(c)(2), 542, 543, 550, 551 or 553, the transfer was voluntary or the debtor knowingly concealed the transfer or an interest in the property, and the property was returned to the estate as the result of the trustee’s efforts, not limited to actions directed toward the transferee.12
The analysis of the Bankruptcy Appellate Panel was expressly approved by the United States Court of Appeals for the Ninth Circuit.13 In Hicks, the creditor did not contest that it had failed to properly perfect its lien, and no adversary proceeding *537or contested matter was ever filed against said creditor. In holding that the trustee had “recovered” the property for purposes of § 522(g)(1), the bankruptcy court stated that
‘The Code allows the Trustee to avoid the unperfeeted lien and distribute the proceeds equally to all unsecured creditors of the bankruptcy estate.’
Sometimes, the trustee is required to take affirmative and formal action to force the unperfected lienholder to recognize this reality, but in some cases, where the lien is patently unperfected, the creditor will yield to the trustee without much effort on the part of the trustee. I agree with those courts that have held that such property comes into the estate pursuant to the trustee’s powers, even if the trustee seems relatively passive in causing that to happen. In effect, so long as the trustee asserts the estate’s interest in the property when faced with an unperfected or otherwise avoidable lien, the property has been recovered by the trustee, and the debtor may not claim such property as exempt.14
In In re Ulrich, the creditor sought relief from the automatic stay to enforce its security interest in an automobile.15 Debtor opposed the motion on the basis that the creditor’s lien upon the vehicle was unper-fected. The bankruptcy court agreed, and denied the motion. Some time thereafter, the trustee obtained the title to the vehicle from the creditor, albeit without the eom-mencement of litigation. The court found that the trustee’s efforts in “following up” on the issue of non-perfection and obtaining the vehicle constituted “recovery” for purposes of § 522(g)(1).16
In the present case, “[t]he trustee retained Melville Dunn to represent the estate to pursue a preferential transfer which resulted in Toyota conceding and releasing the lien.”17 Counsel was successful in convincing Toyota to surrender its lien position without a fight. Given that Toyota’s lien was clearly unperfected, any litigation would have been pointless. Surely there is no reason to punish the trustee for securing the services of a persuasive advocate. The fact that Toyota conceded defeat does not mean that the trustee did not recover the vehicle. A ruling to the contrary would create needless litigation and crowd the dockets of the bankruptcy courts with contested matters and adversary proceedings when no real dispute existed.
The majority supports reversal by relying upon the fact that Toyota released its lien, rather than assigning it to the trustee or consenting to an order of avoidance. I am not persuaded. The legal effect of the lien release by Toyota was the same as if an order avoiding the lien had been entered; namely, the cloud upon title to the vehicle which existed as a result of Toyota’s lien was lifted.18 Toyota provided the trustee with the same result as if the trustee had litigated and won.19 Under § 551, preservation of an avoided lien for *538the benefit of the estate is automatic; the trustee need take no steps to preserve her position.20 To suggest that the trustee (and, in reality, the creditors of the bankruptcy estate) should lose because a particular method of lien elimination was chosen is to elevate form over substance. Moreover, it does not appear that this issue was raised before the bankruptcy court. It is well settled that an appellate court will not entertain an issue that was not first presented to the trial court.21 For each of these reasons, I am uncomfortable with the majority’s reliance upon the fact that Toyota released its lien to support reversal of the bankruptcy court.
Finally, I do not agree with the majority’s position that the trustee was required to file an objection to the claimed exemption in the vehicle within 30 days of the first meeting of creditors. This argument was squarely rejected by the court in Duncan:
We believe the better view is that of the Levine court. The debtors in that case voluntarily and fraudulently transferred non-exempt assets to various insurance companies to purchase annuities that were exempt from creditors’ claims under state law, and the court permitted the trustee to set aside the transfer notwithstanding the trustee’s failure to object under Rule 4003(b). The Levine court found that the trustee’s actions were subject to the two-year statute of limitations governing adversary proceedings under the trustee’s avoidance powers, 11 U.S.C. § 546(a)(1)(A). The Levine court reasoned that the trustee’s actions were not subject to the 30-day limitations period governing objections to claimed exemptions because the trustee was not contesting the exemptions per se; pursuant to 11 U.S.C. § 544(a), he was seeking instead to avoid the transfer of property by the debtor.
We find the Levine court’s rationale persuasive. Were we to hold otherwise, the two-year limitations period of section 546(a)(1)(A) would effectively become a 30-day limitations period, thereby rendering the provision meaningless.22
The Duncan court went on to expressly “hold that [a] Debtor is not entitled to claim a homestead exemption in property voluntarily transferred and recovered by the Trustee in an adversary proceeding, notwithstanding the Trustee’s failure to object within the 30-day period of [Rule] 4003(b).”23
The differences between this case and Duncan are that the debtor in Duncan acted fraudulently, and that litigation was required to set aside the fraud. These differences do not in my opinion render Duncan inapplicable to the case at bar. In both cases there were voluntary transfers of property, and in both cases the trustee recovered the property using his or her statutory powers. I believe the bankruptcy court reached the correct result and would therefore affirm the decision.

. § 522(g)(1).

. See Opinion, supra, at 533 ("We think Duncan means that when a trustee recovers fraudulently conveyed property that would otherwise be exempt by using the avoiding powers enumerated in § 522(g), a debtor cannot then benefit from his own misdeeds by claiming an exemption in it. It [Duncan ] has no application here.” (emphasis added)).

. 329 F.3d 1195, 1199 (10th Cir.2003).

. Id. at 1201 (quoting In re Glass, 164 B.R. 759, 764 (9th Cir. BAP 1994), aff'd, 60 F.3d 565 (9th Cir.1995)).

. See, e.g., In re Carter, 343 B.R. 270, 272 (Bankr.W.D.Okla.2006) ("Courts have held that when a debtor grants a security interest in a vehicle to a bank, with the ensuing notation of the bank's lien on the title to the vehicle, that constitutes a voluntary transfer.”); In re Hicks, 342 B.R. 596, 599 (Bankr.W.D.Mo.2006) (same).

. In re Buelow, 287 B.R. 446, 449 (Bankr.N.D.Iowa 2002).

. In re Canney, 284 F.3d 362 (2d Cir.2002).

. Id. at 374.

. See, e.g., In re Glass, 164 B.R. 759, 764-65 (9th Cir. BAP 1994), aff'd, 60 F.3d 565 (9th Cir.1995); In re Hicks, 342 B.R. 596, 600 (Bankr.W.D.Mo.2006); In re Ulrich, 203 B.R. 691, 693 (Bankr.C.D.Ill.1997).

. Glass, 164 B.R. at 763 (emphasis added).

. Id. at 764-65.

. 60 F.3d 565, 568-69 (1995).

. Hicks, 342 B.R. at 600 (quoting In re Buelow, 287 B.R. 446, 449 (Bankr.N.D.Iowa 2002)).

. 203 B.R. 691 (Bankr.C.D.Ill.1997).

. Id. at 693.

. Order, in Appellants' Appendix at 020.

. The record establishes that Toyota had recorded its lien upon the certificate of title to the vehicle but had failed to do so in a timely fashion. See Appellants' Appendix at 7-A.

. In its decision, the bankruptcy court characterized the actions of Toyota as "conceding” that its lien on the vehicle was subject to avoidance. See Order, in Appellants’ Appendix at 020.

. See § 551; see also Morris v. Vulcan Chem. Credit Union (In re Rubia), 257 B.R. 324, 327 (10th Cir. BAP 2001), aff'd, 23 Fed.Appx. 968 (10th Cir.2001); Morris v. Citifinancial (In re Trible), 290 B.R. 838, 844 (Bankr.D.Kan.2003).

. See Employers Reinsurance Corp. v. Mid-Continent Cas. Co., 358 F.3d 757, 769 (10th Cir.2004) (quoting Hynes v. Energy W., Inc., 211 F.3d 1193, 1201-02 (10th Cir.2000)).

. In re Duncan, 329 F.3d 1195, 1203 (10th Cir.2003) (footnote omitted).

. Id. at 1204 (emphasis added).