TURK, Chief Judge.
These consolidated actions, involving essentially identical factual situations, are appeals from an Order of the Bankruptcy Court. Appellees are individuals who have been adjudged bankrupt and granted discharges. Their bankruptcy cases have been closed. Appellant is a finance company which, prior to the filing of the bankruptcy petitions, lent the appellees money. To secure these loans, the creditor obtained and perfected blanket security agreements designating the debtors' household goods as collateral.
The debtors, in filing their petitions, did not list appellant as a secured creditor. The court assumes (although this is not certain from the record) that the appellant was listed on the schedules accompanying the petitions as an unsecured creditor.
Appellant remained mute during the bankruptcy proceedings and then, when the cases were closed, filed state court replevin actions to enforce its liens. The debtors removed the actions to the Bankruptcy Court and moved that court to reopen their bankruptcy cases to allow them to file lien avoidance actions under 11 U.S.C. § 522(f).
Understanding of certain procedural aspects of the Bankruptcy Code is vital to consideration of the issues presented by this appeal. Accordingly, the preliminary paragraphs of this opinion will constitute somewhat of a necessary digression.
At the commencement of a bankruptcy case, an "estate" is created. 11 U.S.C. § 541(a). This estate consists of, inter alia, "(1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Property in which the debtor has only legal title, however, becomes part of the estate only to that extent. Any equitable interest in the property that the debtor does not hold does not become a part of the estate. 11 U.S.C. § 541(d).
In order to give the debtor a "grub stake," the Code allows him to exempt from the estate certain items, including "[t]he debtor's interest, not to exceed $200 in value in any particular item, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor." 11 U.S.C. § 522(d)(3).
The debtor takes his exemptions out of property of the estate. Accordingly, he cannot exempt items to the extent they are encumbered by valid security interests; he can only claim exemptions to the extent of his equity interest in the goods.
Many liens, however, are thought to be oppressive to the debtor. The ones at issue here are of that type: a finance company, such as appellant, often lends money to a debtor and takes back a blanket security interest covering all of the debtor's possessions.
Within the context of the bankruptcy action, this provision makes much sense. The debtor will hold property which falls within one of the exemptions found in § 522(d). The property, however, will be encumbered by a security interest and will not, pro tanto, be included as part of the bankrupt's estate under § 541. See p. 638, supra. Section 522(f) enables the debtor to avoid the security interest.
Once the interest is avoided, § 522(i)(1) operates. It provides:
Thus, when the lien is avoided, the equitable interests in the collateral merges with the legal title. In re Losieniecki, 17 B.R. 136, 137-38 (Bkrtcy., W.D.Pa.1981). The debtor then claims his exemptions.
Other portions of § 522 are consistent with this scenario. Subsections (i)(2), (g), and (j) of § 522, when read together, insure that the liens are avoided only to the extent that the debtor has remaining unused exemptions. Further, § 522(i)(2) provides that, notwithstanding § 551, the avoided transfer is held for the benefit of the debtor (§ 551 would otherwise automatically preserve the avoided transfer for the benefit of the estate).
Section 522(i)(1) contemplates three distinct steps: (1) avoidance of the transfer; (2) "recovery"; and (3) exemption of the property recovered. The "recovery" step is explicitly made subject to the trustee's ability to "recover" the property transferred after avoiding a transfer under § 550.
Since the debtor's right to "recover" property is expressly made subject to § 550, the section can be interpreted to read as follows:
According to appellant, the debtor's right to "recover" the avoided transfer is limited by § 550(e) which provides:
Because of this section, says appellant, the debtor's lien avoidance complaints, filed after their cases were closed, are barred. In other words, the transfers, once "avoided," must be "recovered" into the bankrupts' estates, and then exempted.
To prevail in this argument, appellant must establish three propositions: first, that a lien avoidance complaint under § 522(f) is ineffectual to assist the debtor unless followed and completed by "recovery" and "exemption" under § 522(i)(1);
With regard to the first of these hurdles, the debtor argue that they are not seeking to "recover" anything—all they desire is avoidance of the liens on their household goods. To support this they point to the authorities distinguishing between "avoidance" and "recovery." The appellant creditor argues that lien avoidance is incomprehensible without the corresponding "recovery" and, then, exemption.
This point must be resolved in favor of the creditor. Even though certain steps contemplated by the Code do not make a great deal of sense once the bankrupt's case has been closed, the provisions at issue were undoubtedly written with the § 541 estate in mind. That is, it must have been contemplated that lien avoidance actions would be filed in the context of a bankrupt's estate; that, once avoided, the transfer would be "recovered"—brought into the estate—; and from there the debtor would take his exemptions. This being so, it is rational to assume that the same would hold true after the estate were closed; viz., that a debtor seeking to avoid a lien would be required to do so in the context of "avoidance" + "recovery" + "exemption." The debtor could not simply avoid the transfer and dispense with the other two steps.
Accordingly, it is necessary to consider the remaining obstacles to creditor's argument. The second problem involves the meaning of the word "recover." According to the creditor, this refers to bringing the transferred property interest—the lien— into the estate. Again, this makes perfect sense prior to the closing of the estate: the encumbered portion of the property, once avoided, must be brought into the estate, or else remain in limbo. "Recovery" is rendered necessary by the fact, discussed earlier, that the beneficial interest held by the creditor does not, at the commencement of the bankruptcy case, become part of the estate.
If, in fact, liens are "property," then the court finds no affirmative basis for concluding that "recovery" is meant in the restrictive
This rationale, of course, depends upon the definition of "property," which is appellant's third hurdle, and to which this court now turns. Debtors contend that "property" refers to the physical collateral, and not the intangible interests in that collateral, such as the security interests at issue here.
There is much persuasive support for creditor's contention. See Bkr.L.Ed. Legislative History § 81:3 (citing Congressional Record P H 11,090 (Sept. 28, 1978)). Cases under the just compensation clause of the Fifth amendment are also instructive:
United States v. General Motors Corp., 323 U.S. 373, 377-78, 65 S.Ct. 357, 359-60, 89 L.Ed. 311 (1945); accord, Pruneyard Shopping Center v. Robins, 447 U.S. 74, 82 n. 6, 100 S.Ct. 2035, 2041 n. 6, 64 L.Ed.2d 741 (1980). Further, the Court recently held that liens such as those in issue here are "property" for purposes of the just compensation clause. United States v. Security Industrial Bank, ___ U.S. ___ at ___ - ___, 103 S.Ct. 407, at 410-412, 74 L.Ed.2d 235 (1982) (§ 522 cannot be applied retroactively to avoid pre-enactment liens).
There are also indications to the contrary. Section 550(d), for example, allows a good faith transferee a lien on "property recovered" to secure improvements in the "property transferred." This suggests that § 550 may be more concerned with physical recovery of the collateral. But this does not preclude the finding that § 550 as a whole refers to any property, including liens, whereas § 550(d) is only operable when the "property" recovered is a member of that subclass consisting only of property amenable to "improvement." Buttressing this argument is 11 U.S.C. § 541(a)(3) which includes as the estate's "property" "[a]ny interest in property that the trustee recovers under Section . . . 550. . . ." (emphasis added).
Based on the foregoing, one must allow that the drafters of the Code were less than meticulous in their use of the words "property" and "recovery." Either reading is plausible, but the court concludes that the one chosen does the least amount of violence to the wording of the statutory provisions involved. When faced with deciding whether a much earlier law contained a
Most of the courts to address the issue thus far have rejected the foregoing analysis,
In light of this disposition, the court need not address the remaining issue as to whether the Bankruptcy Judge utilized an incorrect standard in deciding to reopen the matters. The cases cannot be reopened to avoid the statute of limitations that, this court holds, is contained in the Code. See note 11, supra.
Accordingly, the decision of the Bankruptcy Court is reversed.
See also In re Losieniecki, 17 B.R. 136, 138 (Bkrtcy., W.D.Pa.1981); In re Giles, 9 B.R. 135, 139 n. 4 (Bkrtcy., E.D.Tenn.1981), aff'd, 18 B.R. 708 (E.D.Tenn.1982); In re Morgan, 6 B.R. 701, 703 (Bkrtcy., M.D.Tenn.1980).
See also In re Morgan, 6 B.R. 701, 703 (Bkrtcy., M.D.Tenn.1980).
Other cases holding against the debtor in such actions have done so on equitable grounds, rather than accepting that a statute of limitations applies. See, e.g., In re Coomes, 20 B.R. 290 (Bkrtcy., W.D.Ky.1982); In re Towns, 16 B.R. 949, 954-55 (Bkrtcy., M.D.Iowa 1982) (debtor barred by laches from filing § 522(f) action when creditor has relied on discharge by filing replevin action in good faith).
The remaining cases have held for the debtor. See e.g. cases at note 17, supra; In re Gortmaker, 14 B.R. 66, 67-68 (Bkrtcy., D.S.D.1981).