Court Opinion

ID: 9693876
Source: CourtListenerOpinion
Date Created: 2023-08-25 17:06:02.383137+00
Date Added: 2024-06-11T12:08:21.237376
License: Public Domain

McFEELEY, Chief Judge,
dissenting:
I respectfully dissent. At issue is whether a Debtor’s post petition payments on an avoided lien constitute proceeds of that lien. The majority does not reach this issue as it maintains that a Trustee never has a right to collect the debt amount as represented by the lien because the avoidance of the lien only serves to preserve the position of the estate with respect to the other creditors. As I explain below, I disagree with them on this point. An examination of the way the bankruptcy code operates in a lien avoidance demonstrates the flaw in the majority’s argument.
Once a bankruptcy case has begun, the trustee is given certain “avoidance” rights and powers. See, e.g., 11 U.S.C. §§ 544, 547, 548. Under § 544(a) of the bankruptcy code, commonly known as the “strong arm clause,” a trustee has the authority to avoid unperfected hens to the same extent as certain hypothetical ideal creditors.1 Any transfer avoided by the trustee under § 544(a) “is preserved for the benefit of the estate but only with respect to property of the estate.” 11 U.S.C. § 551.2
The initiation of a bankruptcy case creates an estate that includes all legal and equitable interests of the debtor in property as of the date of the filing of the petition. 11 U.S.C. § 541(a). Included in property of the estate is “any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.” 11 U.S.C. § 541(a)(4). Through the conjunction of §§ 541(a) and 551, a lien avoided under § 544(a) becomes property of the estate.
Here, the Trustee avoided the lien on the Ranger. The avoidance of the lien related back to the filing date of the bankruptcy petition. It is the value of the lien on that date that entered the chapter 7 estate and became an asset of the estate.
The bankruptcy code defines a lien as “a charge against or interest in property to secure payment of a debt or performance of an obligation.” 11 U.S.C. § 101(37). Pursuant to the bankruptcy code, the estate has a claim against the property by virtue of the lien. The Bankruptcy Code defines *330“claim” as the “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed contingent, matured, unmatured, disputed, undisputed, legal equitable, secured or unsecured.” Id. § 101(5)(A).
Since the avoided lien gives the estate a claim against the property, how is the amount of that claim to be determined? The amount of the claim can only be measured by the debt represented by the lien. While it is the lien that enters the estate as an asset, the trustee can only determine the value of the lien to the estate through a valuation of the secured property. If no valuation of the security is done, the lien is fully secured, and the value of the lien may only be determined through scrutinizing the debtor’s underlying obligation. The value of a fully secured hen and the value of the underlying obligation are the same. Therefore, the Trustee must look to the debtor’s underlying obligation to determine the value of the hen to the estate.
Here, as of the Debtor’s filing date, the value of the underlying obligation was approximately $10,440.00. Consequently, this sum was the value of the hen brought into the estate pursuant to § 544(a).
The majority acknowledges that the avoidance and preservation of the hen gives the estate a claim in the Ranger up to the amount of VCCU’s debt on the petition date. However, the majority never explains how the estate realizes that claim. They argue that they do not address the question of whether the estate may collect Postpetition Payments by virtue of the estate’s claim because that issue is not before them. This is clearly incorrect as this is precisely the issue before this court: Are postpetition payments on a lien the proceeds of that lien? As expressly provided in the Bankruptcy Code, a trustee has the right to claim any proceeds of property of the estate.
Section 541(a)(6) expands the reach of “property of the estate” to include “proceeds ... of or from property of the estate.” 11 U.S.C. § 541(a)(6). The bankruptcy code never explicitly defines “proceeds.” Because property interests are created and defined through state law, Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), courts must look to Kansas state law to obtain a definition of “proceeds.” Kansas has adopted the Uniform Commercial Code (“UCC”). Pursuant to the UCC, “proceeds” include “whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.” Kan. Stat. Ann. § 84-9-306(1). As explained by the Tenth Circuit, the term “collection” in the context of a debt or claim may be defined as “payment or liquidation of it.” In re Hastie, 2 F.3d 1042, 1045 (10th Cir.1993).
After filing his Chapter 7 petition, the Debtor reduced his obligation to VCCU by making post petition payments totaling $1,136.00. Here, because the lien is fully secured, and thus, the lien and the obligation are inextricably entwined, the Debt- or’s post petition payments reduced the secured obligation and concurrently the lien. Because the post petition payments reduced the value of the lien by liquidating a portion of the underlying obligation, these payments are proceeds of the lien.3
In an argument that the majority never addresses, VCCU contends that the pay-*331merits were not a collection on the lien, merely a post petition payment of the unsecured debt.4 VCCU’s argument hinges on the premise that there was a secured and an unsecured portion of debt owed it. If there were secured and unsecured portions of the Debtor’s obligation, the Debtor could voluntarily choose to make payments on the unsecured portion. See Gerwer v. Salzman (In re Gerwer), 253 B.R. 66, 70 (9th Cir. BAP 2000) (explaining that a Debtor has a right to direct the allocation of voluntary payments). However, because no valuation was ever done on the Ranger nor does the record indicate that either party asked for a valuation, I must presume that the value of the Ranger was the value of the obligation. Since the Ranger was fully secured, the Debtor could not have chosen to make payments to reduce any unsecured obligation; any payments made on the Debtor’s obligation could have been applied only to the fully secured lien.5
Alternatively, VCCU contends that the post petition payments cannot be “proceeds of the lien” because proceeds cannot come from a debtor’s post petition earnings. VCCU grounds this argument on language in § 541(a)(6) which provides that proceeds are property of the estate “except such as are earnings from services performed by an individual debtor after the commencement of the case.” 11 U.S.C. § 541(a)(6). VCCU misreads this limiting phrase. Clearly, post petition earnings per se are not property of the estate. However, as VCCU itself points out, the Debtor has the right to determine what he wants to do with his post petition earnings. In fact, following the lien avoidance, the Debtor merely redirected the payments he had been depositing with VCCU to the Trustee. Presumably these payments are property of the estate. Illogieally, VCCU and the majority suggest that it is the identity of the payor of those payments that determines whether the payments are proceeds of an avoided lien. This argument is flawed. When making a determination as to whether such payments may come into the estate as proceeds of an avoided lien, the bankruptcy court must look at the context in which such payments are made. Equity demands this result. The prevailing policy behind the bankruptcy code is to provide every debtor with a fresh start while compensating creditors equitably. To permit VCCU to retain the payments would be to allow it to receive a windfall at the expense of either the Debtor or the Creditors. Potentially, the Debtor could be harmed because a lien avoidance relates back and is valued as of the date of the petition. Lien avoidance usually happens months after the original petition date. The Debtor conceivably could be forced to pay twice; once to VCCU and again to the Trustee.6 Alternatively, if the Trustee reduces the Debtor’s obligation to the sum owed following the post petition payments, the other creditors would be harmed because there will be less in the estate to satisfy their claims.
For these reasons, I would reverse the bankruptcy court.

. See 11 U.S.C. § 544(a) (giving the trustee the same avoidance powers as the following: 1) a judicial lien creditor; 2) a creditor holding an unsatisfied returned execution; 3) a hypothetical or real bona fide purchaser of real property).

. The legislative purpose behind bringing the preserved lien into the estate is to maintain the priority position of creditors vis-a-vis each other-that is, the legislature wanted to prevent the junior lienholders from moving up in priority. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 376 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 91 (1978); see also C & C Co. v. Seattle First Nat'l Bank (In re Coal-X Ltd. "76”), 60 B.R. 907, 910-12 (Bankr.D.Utah 1986) (providing a comprehensive discussion on the language and the legislative history of § 551). *331Here, the diminution in the total value of the lien is a loss to the estate.

. Two cases addressing this specific issue were found. The most clearly articulated explanation for denying a trustee recovery on post petition payments is given in In re Clos-son, 100 B.R. 345, 347 (Bankr.S.D.Ohio 1989). In Closson, the bankruptcy judge found that a trustee could not recover post petition payments on an avoided lien on the grounds that § 550 limits the extent of a trustee's recovery to the value of the property transferred. Id. Because in this case the value of the property is equivalent to the value of the lien, Closson does not resolve the question of whether the post petition payments are proceeds of the lien.
The other case that addressed this issue is Kelley v. Chevy Chase Bank (In re Smith), 236 B.R. 91, 101 (Bankr.M.D.Ga.1999). However, In re Smith also offers no guidance; it asserts without further explanation that post petition payments are not recoverable because they are made with post petition earnings, and therefore, there is no loss to the estate. Id.

.In response to the Trustee's arguments, VCCU also argues the following points: 1) the voluntary or involuntary nature of the payment is improperly raised as it was not raised at trial, and furthermore, the trustee lacks standing to make it; 2) if the issue is properly raised, the intent of the Debtor is irrelevant to the issue of whether the post petition payments are recoverable by the Trustee; 3) even if intent is relevant, the payments were voluntary as it was the Debtor who designated how the payments were to be made. Since there was no secured and unsecured portion of debt, these points are irrelevant here.

. Additionally, the Debtor testified that his intention was to pay down the in rem debt-the lien-on the Ranger.

. I note that more substantial sums than the one at issue here could be in dispute. For example, the lien could potentially not be avoided until two years after the petition date.