UNITED STATES BANKRUPTCY JUDGE

____________________________________________________________

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT, AND GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

This proceeding is before the Court on opposing motions for summary judgment.

The plaintiff-debtor appears by counsel Jonathan C. Becker. Defendant Bank of America

Mortgage, L.L.C. (BA), appears by counsel Robert D. Kroeker, Steven M. Leigh, and

Beverly M. Patterson. Intervenor Kansas State Bank appears by counsel Patricia A.

Reeder. The Court has reviewed the relevant materials and is now ready to rule.

Debtor Gilliam brought this proceeding under § 544(a)(3) of the Bankruptcy Code

to try to avoid BA's mortgage on real property she owned and lived in when she filed her

Chapter 13 bankruptcy petition. BA mistakenly released its mortgage sometime before

Gilliam's bankruptcy filing. In the course of the proceeding, Gilliam has added the

assertion that § 522(h) authorizes her to avoid BA's mortgage under § 544(a). Among

other things, BA contends the power to avoid liens under § 544(a)(3) belongs to the

Chapter 13 trustee, and Gilliam has no standing to use it. As explained below, the Court

concludes that Gilliam cannot avoid BA's mortgage under § 522(h) because she

voluntarily gave the mortgage to BA, and that she has no standing to bring an avoidance

action directly under §544.

FACTS

The Court's resolution of this proceeding is based on the following facts. The

parties base other arguments on factual matters that may be in dispute, but the Court's

decision makes considering those arguments and resolving those disputes unnecessary.

2

In 1998, Debtor Gilliam and her then-husband borrowed almost $90,000 from

BA's predecessor, granting a mortgage on their home as security. BA's predecessor

properly recorded the mortgage with the register of deeds of the county where the home is

located. In 2000, the Gilliams gave a second mortgage on the home to Kansas State Bank

(KSB).

In November 2001, the Gilliams tried to pay off their debt to BA with the proceeds

of a third-party's personal check. A bank wired BA the amount required to pay off the

debt. The Gilliams claim they discovered very shortly that the check was no good, and

tried to get BA to send back the wire transfer. Despite any such efforts, BA recorded a

release of the mortgage approximately two weeks after the wire transfer. BA must also

have returned the funds at some time, because the parties agree that the debt to BA has

not been paid, and that the mortgage release was an error. The Gilliams allege they made

attempts to make partial monthly payments to BA after the mistaken release, but BA

rejected their offers. About twenty-two months after releasing the mortgage, BA

apparently tried to record a revocation of the release, but did not because the register of

deeds insisted mortgage registration fees would have to be paid, a requirement BA

disputed.

In March 2002, Gilliam's husband filed for divorce. On October 24, 2002, the

divorce court entered a judgment that awarded the home involved in the BA transaction to

Gilliam, free and clear of her husband's claims to it.

3

On November 29, 2002, Gilliam filed a Chapter 13 bankruptcy petition. She did

not claim the property mortgaged to BA as her homestead on her schedule of exemptions,

and has never amended that schedule. In a pretrial order, the parties stipulated that this

property was Gilliam's homestead; nevertheless, BA argues in its brief that the property is

not her homestead. For purposes of this decision, the Court will assume that the property

does constitute Gilliam's homestead. In her bankruptcy schedules, Gilliam listed KSB as

her only secured creditor, and listed BA among her general unsecured creditors. Other

than the amount she owed BA, her general unsecured debts totaled about $6,900. She

also owed a priority debt of about $2,000 for taxes on her home.

Along with the petition, Gilliam filed a Chapter 13 plan in which she proposed, in

paragraph 13, to file a Motion[] to Avoid Lien on Homestead against BA. She also

proposed to place two general unsecured debts (about $1,800 total) in a special class as

co-signed or nondischargeable debts, and to pay them in full. BA filed a proof of claim,

asserting that it was secured, and Gilliam objected, asserting that the mortgage release

had rendered the claim unsecured. BA also filed a motion for stay relief to which Gilliam

objected.

On February 18, 2003, Gilliam filed an amended Chapter 13 plan. In this plan,

paragraph 13 did not mention BA, but instead said Gilliam would sell her homestead, pay

off valid liens, taxes, and so forth, and then deliver $10,000 from the sale proceeds to the

Chapter 13 trustee to pay claims. The priority tax debt and the special class of nonpriority

4

debts remained in the plan. Only one of the holders of the special class debts filed a proof

of claim, for $1,468.42, and only $3,266.25 in other general unsecured claims were filed.

A buyer for the home was found, and in August 2003, the Court approved a sale

free and clear of liens, with the proceeds remaining after paying closing costs to be held

in escrow pending resolution of the conflicting claims to them. The sale price was

$165,000. The Court has not seen a full accounting of the closing costs, but they included

a real estate commission of $11,550, and presumably the priority tax debt of about

$2,000, leaving net proceeds of no more than about $151,450. BA's proof of claim

showed Gilliam owed it about $94,800, and KSB filed one showing she owed it about

$67,000. Consequently, if both claims are enforceable in those amounts against the sale

proceeds, nothing will remain for Gilliam to pay into her Chapter 13 plan. If Gilliam

succeeds in avoiding BA's mortgage, though, and getting her amended plan confirmed,

she will receive about $74,000 from the sale proceeds, and BA will receive most of the

money paid to unsecured creditors through her plan.

The same day that she filed her amended plan, Gilliam filed the complaint that

commenced this proceeding. Relying on the mistaken mortgage release and the avoiding

powers created by § 544(a) of the Bankruptcy Code, she seeks to avoid BA's claimed

mortgage on her homestead. In response, BA raised a number of defenses. The parties

have now filed opposing motions for summary judgment, along with various replies and

responses. Intervenor KSB has also submitted a brief in support of Gilliam's opposition

5

to BA's motion. Confirmation of Gilliam's plan has been stayed pending resolution of

this proceeding.

In her motion for summary judgment, Gilliam argues that BA's mortgage is

avoidable under § 544(a)(3) because under Kansas law, a bona fide purchaser could

obtain a superior interest in the property as a result of BA's release of the mortgage. In a

subsequent pleading, she added an argument that she is authorized by § 522(h) to avoid

the lien because the Chapter 13 trustee has not attempted to do so. In its motion, BA

argues, among other things, that Gilliam has no standing to avoid its mortgage under

§ 544(a)(3) because only the trustee is authorized to use that power. As explained below,

the Court concludes that Gilliam cannot avoid BA's mortgage under § 522(h) and has no

standing to try to avoid it under § 544(a)(3). These conclusions are sufficient to resolve

this proceeding, so the Court will not address the other issues that BA has raised.

DISCUSSION

1. Debtor Gilliam cannot avoid BA's mortgage under § 522(h).

   Various provisions of Chapter 5 of the Bankruptcy Code expressly confer certain

avoiding powers on the trustee.1 Chapter 5 applies to cases under Chapter 13 of the

Code.2 Because Chapter 13 debtors clearly do have standing under § 522(h) to use some

of those trustee avoiding powers in certain circumstances, the Court will first analyze

1See 11 U.S.C.A. §§ 544, 545, 547, 548 & 549.

211 U.S.C.A. § 103(a).

6

Gilliam's claim that she can avoid BA's mortgage through § 522(h). That section

provides:

The debtor may avoid a transfer of property of the debtor . . . to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided the transfer, if —

(1) such transfer is avoidable by the trustee under section

544 . . . ; and

(2) the trustee does not attempt to avoid such transfer.3

While this provision expressly authorizes a debtor to use the § 544 powers Gilliam wants

to use here, subsection (g)(1) imposes a significant limitation on that use, one that

prevents her from using it in this case. Under § 522(g)(1), a debtor may exempt property

that a trustee recovers through the exercise of the § 544 powers if — (A) such transfer

was not a voluntary transfer of such property by the debtor. Gilliam recognizes that case

law has pointed out this limit on § 522(h),4 and then, with a reference to BA's state court

foreclosure petition, declares, The attempted transfer was involuntary.5 But the only

transfer that might have resulted from BA's foreclosure petition was the re-perfection of

its mortgage. The transfer Gilliam is actually trying to avoid here (and would have to

avoid to enhance her homestead exemption) is her original granting of the mortgage to

BA, a transfer that was certainly voluntary. Consequently, even if the trustee might be

311 U.S.C.A. § 522(h).

4See, e.g., Realty Portfolio, Inc., v. Hamilton (In re Hamilton), 125 F.3d 292, 297 (5th Cir. 1997).

5Plaintiff's Memorandum in Opposition to Defendant's Motion for Summary Judgment, filed

Dec. 22, 2003, at 9th unnumbered page.

7

able to avoid BA's mortgage under § 544(a)(3), Gilliam cannot avoid it under § 522(g)(1)

and (h).

2. Debtor Gilliam has no standing to avoid BA's mortgage under § 544(a)(3).

   Before adding her effort to rely on § 522(h), Gilliam contended that she could

avoid BA's mortgage under § 544(a)(3), one of the provisions in Chapter 5 of the

Bankruptcy Code that establishes avoiding powers. The Chapter 13 trustee has not joined

her attack on the mortgage, and she has no agreement allowing her to use any of his

avoiding powers. Like the other Chapter 5 avoiding powers, § 544(a)(3) expressly gives

the power to avoid certain transfers and obligations to the trustee. It reads:

The trustee shall have, as of the commencement of the case, and without

regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

. . .

(3) a bona fide purchaser of real property, other than

fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists.6

BA argues that a Chapter 13 debtor is not authorized to exercise this trustee power. The

only provisions in Chapter 13 that confer any trustee powers on the debtor are §§ 1303

and 1304, and they concern only rights and powers under §§ 363 and 364, not § 544. By

contrast, in Chapter 11 and 12 cases, a debtor acting as the debtor in possession is

expressly given, with a few exceptions, all the rights, powers, and duties of a trustee

611 U.S.C.A. § 544(a)(3).

8

serving in a Chapter 11 case; the exceptions do not include any of the trustee avoiding

powers.7

As BA points out, most courts considering the question whether Chapter 13

debtors can exercise one of the Chapter 5 trustee avoiding powers have concluded that

they cannot, except to the limited extent authorized by § 522(h).8 This view often relies

on the Supreme Court's decision in Hartford Underwriters Insurance Company v. Union

Planters Bank.9 There, an insurance company that had provided postpetition coverage to

a Chapter 11 debtor sought to surcharge the insurance premiums against a secured

creditor's collateral (which included essentially all the debtor's assets) under § 506(c), but

the Supreme Court ruled it could not because the provision says nothing about others

surcharging collateral, only that the trustee may do so.10 In a passage particularly

relevant to the question of Chapter 13 debtor standing to use any of the trustee avoiding

powers, the Court said the context of § 506(c) supported the conclusion that Congress

intended to give the power to surcharge collateral exclusively to the trustee: First, a

7See 11 U.S.C.A. § 1107(a) & 1203.

8See, e.g., Realty Portfolio, Inc., v. Hamilton (In re Hamilton), 125 F.3d 292, 295-98 (5th Cir.

1997) (No standing to exercise § 544(a)(3) avoiding power, except to the limited extent authorized by § 522(h)); Stangel v. United States (In re Stangel), 219 F.3d 498, 500-01 (5th Cir. 2000), cert. denied 532 U.S. 910 (2001) (§ 545 avoiding power); see also In re Binghi, 299 B.R. 300, 302-03 (Bankr. S.D.N.Y. 2003) (§ 544(a)(3) avoiding power; citing numerous cases ruling against debtor standing to exercise various Chapter 5 avoiding powers); Carrasco v. Richardson (In re Richardson), 311 B.R. 302, 304-06 (Bankr. S.D. Fla. 2004) (§ 544(b) avoiding power).

9530 U.S. 1 (2000).

10Id. at 6-14.

9

situation in which a statute authorizes specific action and designates a particular party

empowered to take it is surely among the least appropriate in which to presume

nonexclusivity. . . . Second, the fact the sole party named — the trustee — has a unique

role in bankruptcy proceedings makes it entirely plausible that Congress would provide a

power to him and not to others.11 In addition, the Court rejected the insurance

company's policy argument that others should be able to use § 506(c) because the trustee

may sometimes lack incentive to surcharge collateral and a secured creditor might enjoy

the benefit of services without paying for them.12 The Court said limiting the use of

§ 506(c) to trustees followed the natural reading of the text, and that achieving a better

policy outcome was a job for Congress, not the courts.13 This Court notes that it has not

seen any decision since Hartford Underwriters was issued that cited the case but still

decided a Chapter 13 debtor could directly exercise the avoiding powers Congress gave to

the trustee in Chapter 5 of the Bankruptcy Code.

The strength of the Supreme Court's devotion to the plain meaning of the text of

the Bankruptcy Code was further illustrated this year in Lamie v. United States Trustee.14

In that case, the Court refused to allow debtors' attorneys (unless hired by the case

trustee) to qualify for compensation under § 330(a) of the Code, even though: (1)

11Id. at 6-7.

12Id. at 11-14.

13Id. at 13-14.

14540 U.S. ___, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004).

10

debtors' attorneys had qualified for such compensation before the provision was rewritten

in 1994; (2) as rewritten, the provision contained obvious grammatical problems that

might well have been the result of a scrivener's error; and (3) the legislative history did

not express a clear intent to delete debtors' attorneys from the revised provision.15 The

substance of §§ 1303 and 1304 has not changed since the Bankruptcy Reform Act of

1978,16 and so far as this Court is aware, there was no history under the predecessor to

Chapter 13 of debtors using trustee avoiding powers. Thus, faced with what seems to be

a stronger argument for reading another party into a provision than Gilliam can make

here, the Supreme Court refused to do so.

Most of the cases concluding that Chapter 13 debtors can use the Chapter 5 trustee

avoiding powers justified that conclusion in similar ways and were decided well before

Hartford Underwriters and Lamie.17 As explained in Freeman v. Eli Lilly Federal Credit

Union (In re Freeman),18 the following considerations supported Chapter 13 debtors' use

15Id. at ___, 157 L.Ed.2d at 1031-39.

16See Pub. L. No. 95-598, Title I, § 101, Ch. 13, subch. I, §§ 1303 & 1304, 92 Stat. 2549, 2646

(codified at 11 U.S.C.A. §§ 1303 & 1304).

17See, e.g., Freeman v. Eli Lilly Federal Credit Union (In re Freeman), 72 B.R. 850 (Bankr. E.D. Va. 1987); Ottaviano v. Sorokin & Sorokin, P.C. (In re Ottaviano), 68 B.R. 238 (Bankr. D. Conn. 1986); Einoder v. Mount Greenwood Bank (In re Einoder), 55 B.R. 319 (Bankr. N.D. Ill. 1985); Russo v. Ciavarella (In re Ciavarella), 28 B.R. 823 (Bankr. S.D.N.Y. 1983); In re Hall, 26 B.R. 10 (Bankr. M.D. Fla. 1982); see also Federal Nat'l Mortgage Assoc. v. Fitzgerald (In re Fitzgerald), 237 B.R. 252, 262 n. 14 (Bankr. D. Conn. 1999) (stating that courts in District of Connecticut had consistently concluded Chapter 13 debtors could use trustee avoiding powers and citing cases; appears opposing party did not question debtor's standing).

1872 B.R. 850 (Bankr. E.D. Va. 1987).

11

of those powers: (1) the legislative history of § 1303 contains a statement that the section

does not imply that debtors do not also possess other powers concurrently with trustees;

(2) where the trustee does not act, it is reasonable to assume the avoidance powers should

be among those Congress referred to in that history as concurrently possessed by Chapter

13 debtors; (3) the practical reality is that Chapter 13 trustees are mostly concerned with

administrative matters and have little incentive to pursue avoiding actions; and (4) debtors

are the true representatives of the Chapter 13 estate and decide how much money is to be

paid to the trustee for distribution to creditors.19

This Court does not find these considerations to be sufficient to overcome

Congress's failure to expressly give Chapter 13 debtors the right to use the trustee

avoiding powers. The legislative history Freeman referred to in the first two points noted

above reads:

Section 1303 . . . specifies rights and powers that the debtor has exclusive of the trustees. The section does not imply that the debtor does not also possess other powers concurrently with the trustee. For example, although section [323] is not specified in section 1303, it is certainly intended that the debtor has the power to sue and be sued.20

This vague reference to mostly unspecified powers certainly seems a weak foundation on

which to base a Chapter 13 debtor's ability to use the extraordinary trustee avoiding

powers. The fact Congress explicitly granted most, but not all, trustee rights and powers

19Id. at 853-55.

20124 Cong. Rec. H11106 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S17423 (daily ed. Oct. 6,

1978), remarks of Rep. Edwards and Sen. DeConcini).

12

to Chapter 11 and 12 debtors21 further undermines the theory that Congress implicitly

intended to grant similar rights and powers to Chapter 13 debtors. The one specific

power mentioned in this history is far from illuminating. Section 323 provides that the

trustee in a bankruptcy case is the representative of the estate and has the capacity to sue

and be sued.22 Because bankruptcy trustees operate in representative capacities created

and defined by the Bankruptcy Code (and a few other statutes), their capacity to sue and

be sued might not be presumed if Congress had not expressly provided it. On the other

hand, only individuals are eligible to be Chapter 13 debtors and, so far as the Court is

aware, individuals are always presumed to have the capacity to sue and be sued, except

those who are minors or have been determined to have insufficient mental ability. As a

result, there would seem to be no need, as there is for trustees, to expressly provide in the

Code that such debtors have the capacity to sue and be sued. Further, the history supplies

no defining principle that could be applied to determine which trustee rights and powers

Congress intended for Chapter 13 debtors to share with the trustee. Should they be as

broad as those given to Chapter 11 and 12 debtors? Broader? Narrower? The history

suggests no answer to these questions.

As the Supreme Court made clear once again in Lamie, it has little desire to rely on

legislative history when interpreting the Bankruptcy Code, and would almost certainly

2111 U.S.C.A. §§ 1107(a) & 1203.

2211 U.S.C.A. § 323(a) & (b).

13

demand something more clear than § 1303's history to support the view that Congress

intended Chapter 13 debtors to have any trustee powers not expressly conferred by the

text of the Code. The power to sue and be sued, the one power actually identified, would

seem to be the only one that Court might conceivably be willing to imply from the history.

Implying a broad range of additional powers would almost certainly exceed the Court's

limited willingness to rely on legislative history.

The other two considerations mentioned in Freeman are no more convincing than

the legislative history. Standing Chapter 13 trustees like the one serving in this case are

entitled to a percentage of the money paid through the plans they administer,23 so

Congress might reasonably have thought this would give such a trustee sufficient

incentive to pursue avoidance actions in appropriate circumstances, and consequently

believed that Chapter 13 debtors would have no need to use the avoiding powers

themselves, except as allowed under § 522 to enhance their exemptions. Even if

experience has shown such a view to be mistaken, the Supreme Court has made clear its

view that Congress, not the courts, must adjust the Code to reflect that experience. And

this Court is not convinced that Chapter 13 trustees always decline to pursue avoidance

actions. In this case, for example, rather than following a never-sue policy, the trustee

might have considered attacking BA's mortgage and decided the costs and risks of

litigation were too great and the potential benefits too small to justify it. In addition,

23See 11 U.S.C.A. § 1326(b)(2) & 28 U.S.C.A. § 586(e)(1)(B).

14

unlike the Freeman court, this Court does not believe that Chapter 13 debtors have a great

deal of freedom to decide how much money to pay into their plans; instead, the

requirements for plan provisions and the standards the plans must meet to qualify for

confirmation largely control how much Chapter 13 debtors must pay.24 In short, the

reasoning of Freeman and other older cases allowing Chapter 13 debtors unlimited use of

the trustee avoiding powers appear most unlikely to carry much weight with the Supreme

Court today.

The Court believes it should also address two more recent decisions that offer

different reasons to allow Gilliam's effort to use § 544(a)(3) without first obtaining the

trustee's participation. In Wood v. Mize (In re Wood),25 the court did side with the

majority of courts and conclude that Chapter 13 debtors have no standing to assert the

trustee avoiding powers.26 Then, however, the court ruled that the Chapter 13 trustee was

an indispensable party who should be added as a party plaintiff to prosecute the action.27

This Court is uncertain about its authority to take such a step in a suit commenced by a

party with no standing,28 but would decline to exercise it in this case anyway. Under

24See 11 U.S.C.A. §§ 1322 & 1325.

25301 B.R. 558 (Bankr. W.D. Mo. 2003).

26Id. at 561-62.

27Id. at 562.

28See United States ex rel. Texas Portland Cement Co. v. McCord, 233 U.S. 157, 159-64 (1914)

(where suit under statute was brought before cause of action accrued, intervention after accrual did not cure premature nature of suit); see also 7C, Wright, Miller & Kane, Fed. Prac. & Pro.: Civil 2d, § 1917 (1986) (intervention cannot cure jurisdictional defect that would have barred federal court from hearing

15

Gilliam's approach, if she were allowed to avoid BA's mortgage, about $84,000 from the

sale of her home would become available to her through the homestead objection.

Although she has proposed to contribute $10,000 from those proceeds to her plan (and

without saying so, keep the other $74,000), her amended plan is not yet confirmed, so it

would not bind her to pay the $10,000 to the trustee. Even assuming she would go ahead

with that proposal, the benefit she offers her unsecured creditors would be minimal. The

trustee's 8% fee would be deducted from the $10,000, leaving $9,200 to be distributed

through the plan. Her original plan already proposed to pay the priority tax debt and the

one filed unsecured debt she wants to place in the special class to be paid in full, so the

Court assumes those claims would not affect the distribution of the $10,000. The $9,200

balance, then, would be distributed pro rata among the remaining three unsecured claims:

BA's claim for almost $95,000, and claims for $325 and $2,941.25. This means BA

would have over 96% of the general unsecured claims under Gilliam's plan, and paying it

with money that would otherwise be paid to it anyway cannot be considered a benefit to

be obtained from Gilliam's avoidance action. The other two general unsecured claims

would receive about $370 as a result of the mortgage avoidance. Even if the Court has

the authority to forcibly add the Chapter 13 trustee as a plaintiff, the Court would decline

to do so to gain such a small benefit for Gilliam's unsecured creditors.

original action). These authorities suggest the Chapter 13 trustee would have to bring a separate suit, not intervene in Gilliam's, to try to avoid BA's mortgage. If that is so, it seems questionable for the Court simply to draft the trustee as a party plaintiff.

16

About a month after the Supreme Court decided Lamie, the Ninth Circuit

Bankruptcy Appellate Panel charted a new course in Houston v. Eiler (In re Cohen)29 to

the conclusion that Chapter 13 debtors can exercise the trustee avoiding powers. The

BAP prefaced its analysis by stating that the text of Chapter 13 does not give anyone

authority to use the trustee avoiding powers.30 Then the BAP discussed the decisions that

adopt what it called a narrow construction of the Bankruptcy Code, and find no Chapter

13 debtor standing to pursue trustee avoiding actions because there is no explicit statutory

authority for it. Preferring instead the holistic approach to the Code that the Supreme

Court applied in United Savings Association v. Timbers of Inwood Forest Associates,

Limited,31 the BAP suggested that a Chapter 13 debtor's right to remain in possession of

property of the estate, including interests in property recovered through the trustee

avoiding powers, exclusive right to use, sell, or lease property of the estate, subject to

court approval, and exclusive right to propose a plan, coupled with a Chapter 13 trustee's

lack of a duty to pursue avoiding actions, led to the conclusion that Chapter 13 debtors

must have standing to use the trustee avoiding powers.32 The BAP then gave an example

it felt showed that Chapter 13 debtors must have standing to bring such avoidance actions

when the trustee does not: if a Chapter 13 debtor has only $30,000 in disposable income

to fund a plan but had made a transfer that a trustee could unquestionably avoid and

recover a net of $100,000, the debtor could not propose a confirmable plan without

avoiding the transfer because the best-interest-of-creditors test for plan confirmation

requires paying unsecured creditors at least as much as they would receive in a Chapter 7

liquidation.33 Since the BAP assumed a Chapter 13 debtor could not get a plan confirmed

under these circumstances, the BAP declared that it would be an odd system that would

require a Chapter 13 debtor to depend on the recovery of an avoidable transfer in order to

propose a confirmable plan, but not allow the debtor to avoid the transfer when the trustee

declined to do so.34

While the Ninth Circuit BAP's analysis is inventive, this Court sees a number of

problems with it. First, the BAP not only failed to square its analysis with Hartford

Underwriters or Lamie, it did not even cite either case. Second, while Chapter 7 trustees

are given a duty that Chapter 13 trustees are not to collect and reduce to money the

property of the estate,35 that does not mean Chapter 13 trustees do not have standing to

use the Chapter 5 avoiding powers if they want to. Chapter 5 of the Code applies in

Chapter 13 cases,36 and the avoiding powers are all given to the trustee.37 The Court

33Id. at 897.

34Id. at 897.

35See 11 U.S.C.A. § 704(1) & §1302(b)(1).

3611 U.S.C.A. § 103(a).

37See 11 U.S.C.A. §§ 542, 543, 544, 547, 548 & 549.

18

believes the difference in Chapter 7 and Chapter 13 trustee duties simply gives Chapter

13 trustees more discretion not to use the avoiding powers; it does not eliminate their

standing to use them. Third, the Chapter 13 debtor's rights to possess and use property of

the estate — including property recovered through the avoiding powers — and to propose

a plan need not be construed to prevent a Chapter 13 trustee from using an avoiding

power. Instead, while the debtor would have the right to possess and use any recovery the

trustee might obtain, the recovery would also force the debtor to craft a plan that takes the

recovered property into account in order to satisfy the standards for obtaining plan

confirmation.38 That is, much like a Chapter 7 trustee, a Chapter 13 debtor would in some

way have to devote the recovered property to paying creditors. Finally, to rely on a

hypothetical avoidance recovery to prevent confirmation of a Chapter 13 plan on the best-

interest-of-creditors ground, an objecting party would have to show that a Chapter 7

trustee would be at least more likely than not to make the recovery, and the Chapter 13

trustee's refusal to seek the recovery would seem to be fairly strong evidence against that

showing. In any event, the BAP's hypothetical seems unlikely to occur in practice. If a

trustee can unquestionably avoid a transfer and recover $100,000 for the estate, the

Court does not understand why a Chapter 13 trustee would not exercise his or her power

to avoid it. Of course, in reality, an avoidance recovery is rarely certain, and a Chapter 13

38See 11 U.S.C.A. §§ 1322 & 1325.

19

trustee must take the costs, risks, and potential benefits of litigation into account when

deciding whether to use an avoiding power.

In fact, the debtors and the trustee involved in Cohen had tried another approach to

resolve the standing problem that the BAP found so troubling: the trustee executed a

contract assigning the estate's avoiding powers to the debtors in exchange for their

promise to pay any net proceeds to the estate.39 According to the BAP, this approach

failed because they did not obtain the bankruptcy court's approval of their agreement.40

With court approval, this simple maneuver would solve the debtor standing problem, and

also provide both trustee and court protection against the risk that a debtor might try to

use the avoiding powers solely for harassment or other improper purposes. Ultimately,

this Court does not find Cohen any more persuasive than the older cases that concluded

Chapter 13 debtors have direct standing to use the Chapter 5 trustee avoiding powers.

3. Even if Debtor Gilliam had standing and BA's mortgage were avoided, Gilliam

herself would not be freed from her obligation to satisfy the mortgage.

Even if the Court were to conclude that Gilliam had standing to pursue this

avoidance action, she misunderstands the effect of successfully avoiding BA's mortgage.

Outside of bankruptcy, BA's mortgage is still enforceable against her, even if it could

lose priority to third parties. Under § 551, if avoided, the mortgage would be preserved

39305 B.R. at 890.

40Id. at 891.

20

for the benefit of the estate.41 So just like a mortgage avoided by a Chapter 7 trustee, the

mortgage would remain enforceable against Gilliam.42 Avoiding the mortgage through

§ 544 alone cannot enhance Gilliam's homestead exemption. If she could avoid the

mortgage through § 522(h), the mortgage could be preserved for her benefit under

§ 522(i)(2), rather than the estate's benefit under § 551.43 But, as explained earlier,

Gilliam cannot avoid it that way because it was a voluntary transfer. If the mortgage were

avoided under § 544 and preserved for the benefit of the estate under § 551, the proceeds

of the sale of the homestead would belong to the bankruptcy estate to the extent of the

value of the mortgage, which in this case would apparently equal the amount owed to BA

(assuming its claim is fully allowed as filed). Nothing about § 544 or § 551 would give

Gilliam any personal right to treat the mortgage as if it no longer existed and keep the sale

proceeds herself, except to the extent they exceeded the value of BA's and KSB's

mortgages. This is the major difference between the trustee avoiding powers and the

avoiding powers conferred on debtors in § 522. The trustee avoiding powers free

property from transfers or interests for the benefit of the bankruptcy estate and the

creditors, not for the benefit of the debtors; as far as the debtors are concerned, the

4111 U.S.C.A. § 551.

42See Morris v. Vulcan Chemical Credit Union (In re Rubia), 257 B.R. 324, 327 (10th Cir.

B.A.P.), aff'd by unpub. op. 2001 WL 1580933 (10th Cir. 2001); Morris v. Citifinancial (In re Trible), 290 B.R. 838, 844-45 (Bankr. D. Kan. 2003); Morris v. St. John Nat'l Bank (In re Haberman), 2004 WL 2035341, slip op. at 9-11 (Bankr. D. Kan. 2004).

4311 U.S.C.A. § 522(i)(2).

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recovered property remains subject to the transfer or interest the trustee avoids. Only the

debtor avoiding powers provided by § 522 enable debtors to free property from claims

that they would otherwise have to satisfy to keep the property.

CONCLUSION

For these reasons, the Court concludes that Gilliam cannot avoid BA's mortgage

on her former home, or the proceeds from its sale. She cannot avoid it under § 522(h)

because she voluntarily gave the mortgage to BA, and she cannot avoid it under

§ 544(a)(3) because she has no standing to use that power directly. Consequently,

Gilliam's motion for summary judgment must be denied, and BA's motion for summary

judgment must be granted. This ruling renders all the remaining issues raised in this

adversary proceeding moot. The Clerk's Office is hereby directed to schedule a status

conference in the main case at which the parties should be prepared to discuss Gilliam's

Chapter 13 plan, and any disputes that remain about the disposition of the proceeds of the

sale of her house. Gilliam will need to amend her plan to take this decision into account.

# # #

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