DECISION RE EFFECT OF § 551
S. MARTIN TEEL, Jr., Bankruptcy Judge.
The issue before the court is whether 11 U.S.C. § 551 applies when the debtor, prior to the commencement of its bankruptcy case, has sold property that is subject to an avoided lien. The court concludes that § 551 does apply.
In these jointly administered cases, Greater Southeast Community Hospital Corporation, Inc., is one of the four debtors, and that entity is referred to as "the debtor" for the purposes of this decision.
Pursuant to 11 U.S.C. § 544, the debtor has obtained an order avoiding a lien the debtor had granted post-petition to an indenture trustee against the debtor's accounts receivable. But Daiwa Healthco-3 LLC asserts that the debtor sold some of the receivables to it before the petition date and contends, on this basis, that § 551 does not apply.
The Relationship Between the Debtor and the Bank of New York as Indenture Trustee
The Bank of New York ("Indenture Trustee") is the successor Master Trustee to NationsBank of Maryland, N.A., under a Master Trust Indenture dated April 21, 1993. Pursuant to the Master Trust Indenture, on April 21, 1993, the debtor and the other "Obligated Group Members"
The Relationship Between the Debtor and Daiwa
The debtor and Daiwa Healthco-2 LLC entered into what was entitled a "Healthcare Receivables Purchase Agreement" ("Purchase Agreement") on March 31, 1997.
This decision concerns the interpretation of 11 U.S.C. § 551 (entitled "Automatic preservation of avoided transfer"), which
Daiwa claims that it is a purchaser of the debtor's accounts receivable and that this pre-petition purchase of the accounts receivable removes them from the estate such that § 551 cannot be brought to bear. The court rejects Daiwa's interpretation. The Bankruptcy Code, when reviewed in its entirety, plainly provides that § 551's exception applies to such avoided liens in property sold by the debtor pre-petition. Even if the statute were ambiguous, Daiwa's interpretation would undo clear bankruptcy policy that had been reflected in the Bankruptcy Act, in favor of allowing an avoided lien to be preserved for the benefit of the estate, even if the property was sold pre-petition by the debtor after the lien had been granted. Finally, any ambiguity in the statute would be resolved against Daiwa's interpretation by the legislative history to the statute.
The Interaction of §§ 541, 544, 550, and 551
The Bankruptcy Code contemplates that when a lien is granted, there has been a transfer of property. 11 U.S.C. § 101(54) defines the term "transfer" to mean "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption." The term "lien" is defined in § 101(37) as a "charge against or interest in property to secure payment of a debt or performance of an obligation." Moreover, § 547(c)(3)
With this backdrop, the court moves to § 544, which is the provision under which the Indenture Trustee's lien was avoided. Section 544(a) provides that "[t]he 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"; it then goes on to state when the transfers are avoidable
Section 550(a) then provides that "[e]xcept as otherwise provided in this section, to the extent that a transfer is avoided under section 544 . . . the trustee may recover, for the benefit of the estate, the property transferred." In other words, the trustee in a lien avoidance case recovers the property that was transferred — the interest in the property conveyed to effect the creation of a lien. See Cullen Ctr. Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1419 (5th Cir.1997) (illustrating that the avoidance of a lien is treated as resulting in a recovery of property under § 550(a)). As under the Bankruptcy Act, the Bankruptcy Code contemplates that the property subjected to a lien that had been avoided "shall be reckoned as a part of [the] estate." Fist Nat'l Bank of Baltimore v. Staake, 202 U.S. 141, 149, 26 S.Ct. 580, 50 L.Ed. 967 (1906) (discussed at length in part IV, below). Section 541(a)(3) expressly provides that "[a]ny interest in property that the trustee recovers under section . . . 550 . . . of this title" is property of the estate.
In contrast, Daiwa argues that § 541(a)(4) is the provision specifically covering liens that are avoided and then become property of the estate.
Of course, the property is not worth anything to the estate if there is a pre-petition deed of conveyance outstanding that would take precedence over the § 550 post-petition interest in the property recovered by the trustee. Only if the avoided senior lien itself were somehow preserved for the benefit of the estate — and thus available to assert against the holder of the pre-petition conveyance — would the recovery of the property be of any benefit to the estate.
The avoided lien itself is not brought back into the estate under § 550, but only the property transferred to effect the creation of the lien. To answer the question of whether the property recovered by the trustee (or the debtor-in-possession acting with the powers of a trustee) would have any benefit for the estate, the court turns to § 551 of the Bankruptcy Code, which deals with the distinct question of whether the lien itself may be preserved for the benefit of the estate.
Under § 551, the lien is preserved for the benefit of the estate, "but only with respect to property of the estate." The phrase "only with respect to property of the estate" is satisfied in this case because the property has been recovered for the benefit of the estate. Thus, when a lien is granted, the Bankruptcy Code treats the transaction as a transfer of property to create the lien. Concepts akin to the title theory of mortgages come into play; it is as though the debtor is making a conveyance of ownership of the property to the lien creditor for the purpose of the lien creditor getting a lien on the property. Section 550 pulls that property back into the estate. Then § 551 preserves the lien for the benefit of the estate.
The lien avoided is preserved only with respect to such property of the estate. For example, suppose there were a federal tax lien for nondischargeable taxes. Such a lien attaches to all property and rights to property of the debtor, wherever located, whether acquired pre- or post-petition. In that case, if the estate took over the entire tax lien, the estate would be able to chase after property that the debtor had obtained
Importantly, the preservation of the lien is automatic under § 551. So simultaneously with the recovery of the property under § 550, the lien is preserved. If there has been a pre-petition sale of the property, that sale is ineffective to prevent the lien from being preserved. As of the petition date, the sale prevented the property from being property of the estate under 11 U.S.C. § 541(a)(1). But upon a § 550 recovery into the estate of the avoided transfer of property to the senior lienor, and a simultaneous § 551 preservation of that lien for the benefit of the estate, the sale's effectiveness must yield to the superiority of the preserved senior lien.
However, the § 550 recovered transfer of property to the lienor and the simultaneous § 551 preservation of the lien is worthless to the estate if the lien was unperfected vis-a-vis the sale. In that event, the § 550 transfer pulled back into the estate must yield to the sale transfer, which trumps the unperfected lien. The sale is effective against the post-petition recovery into the estate of the unperfected interest the lienor had in the property.
The court believes that its interpretation of § 551 is justified despite the decisions cited by Daiwa as having interpreted the statute differently. See In re Ward, 42 B.R. 946 (Bankr.M.D.Tenn.1984); Barber v. Princeville State Bank (In re Ostrom-Martin, Inc.), 161 B.R. 800 (Bankr.C.D.Ill. 1993). Those decisions did not address the effect of § 550 on the analysis of the interpretation of § 551; therefore, they are of no persuasive power with respect to this court's analysis of the provision. Nor is the court convinced by the case cited by the debtor, Hulk v. Rosenbaum (In re Hulk), 8 B.R. 444 (Bankr.D.Conn.1981). That court's conclusory discussion of § 551 overlooked the complementary and interlocking nature of §§ 550 and 551, which is the cornerstone for the court's ruling today.
The Court Need Not Consider Legislative History or Pre-Code Practice
The court's interpretation of the statute is consistent with numerous Supreme Court decisions dealing with the proper interpretation of the Bankruptcy Code and with statutory interpretation in general. See generally Walter A. Effross, Grammarians at the Gate: The Rehnquist Court's Evolving "Plain Meaning" Approach to Bankruptcy Jurisprudence, 23 Seton Hall L.Rev. 1636 (1993).
For example, in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), the Supreme Court interpreted the meaning of § 506(b) of the Bankruptcy Code. In doing so, the Court began "where all such inquiries must begin: with the language of the statute itself." Ron Pair, 489 U.S. at 241, 109 S.Ct. 1026. The Court observed the plain meaning of legislation to be conclusive except "in the rare cases [in which] the literal application of the statute will produce a result demonstrably at odds with the intentions of its drafters." Ron Pair, 489 U.S. at 242, 109 S.Ct. 1026 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)).
Nevertheless, the Court then addressed when seemingly plain language can give way to the policy considerations inherent in the Bankruptcy Code. It pointed to two decisions — Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986); and Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) — in which the Court had given
For guidance, the court also looks to Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), in which the Supreme Court found an ambiguity in the language of § 506(d) of the Bankruptcy Code regarding the proper treatment of liens in bankruptcy. Dewsnup raised issues concerning a fundamental bankruptcy policy — the rule reflected in longstanding case law that liens survive a chapter 7 bankruptcy case. Seizing upon what it viewed as a textual ambiguity, the Court observed that it was "not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected." Dewsnup, 502 U.S. at 417, 112 S.Ct. 773. However plausible the majority in Dewsnup may have been in finding an ambiguity in the statute at issue there, Daiwa's arguments here present no plausible basis for finding an ambiguity.
In reading the Bankruptcy Code as a whole, the court fails to see any ambiguity in the role played by § 551. The court's recitation of the analysis of §§ 541(a)(3), 544, and 550 demonstrates that it is dealing with specific language that is part of — and consistent with — the Bankruptcy Code's statutory scheme. The plain reading of this unambiguous statute does not produce an absurd result, nor "does [it] conflict with any significant state or federal interest, nor with any other aspect of the Code." Ron Pair, 489 U.S. at 245, 109 S.Ct. 1026. In fact, the court's plain reading is the only reading that "produces a substantive effect that is compatible with the rest of the law." United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).
When interpreting a plainly written statute, the text should trump the use of pre-Code practice. "[W]hether pre-Code practice is retained or abandoned, the text means precisely what it says." Dewsnup, 502 U.S. at 434, 112 S.Ct. 773 (Scalia, J., dissenting); cf. id. at 419-20,
Staake and Bankruptcy Policy
Even if the Bankruptcy Code, taken as a whole, were ambiguous the interpretation Daiwa urges would have to be rejected as causing anomalous results Congress would not likely have intended. First, Daiwa's interpretation would cause an unwarranted windfall to Daiwa as purchaser: Daiwa would no longer have to contend with the avoided lien of the Indenture Trustee, a result that would not occur outside bankruptcy.
Moreover, if § 551 were ambiguous, it ought to be interpreted in a way that preserves the result in Staake instead of completely abandoning that result. Courts "will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure." Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 563, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990); Cohen v. De La Cruz, 523 U.S. at 219-20, 118 S.Ct. 1212. And, if pre-Code practice were not dispositive, the legislative history demonstrates that Congress designed § 551 to make the preservation automatic for the benefit of the estate, thereby strengthening pre-Code practice. Moreover, Daiwa's interpretation would be defeated by a review of how the issue addressed was handled under pre-Code law and how the legislative history views the statute. Resort to those extra-statutory sources of interpretation is unnecessary, however, because the statute itself is plainly written.
In First National Bank of Baltimore v. Staake, 202 U.S. 141, 26 S.Ct. 580, 50 L.Ed. 967 (1906), the Supreme Court interpreted § 67f of the Bankruptcy Act, which provided
In Staake, the Court dealt with the precise situation that this court faces — namely, an avoided lien. Here, the stipulated order in the adversary proceeding avoided the Indenture Trustee's lien. But the property on which the lien rested has been conveyed by the debtor prior to the commencement of the bankruptcy case. Daiwa maintains that the papers pursuant to which it obtained an interest in the debtor's accounts receivable had constituted a sale such that the property was no longer owned by the debtor upon the commencement of the bankruptcy case.
The Court in Staake held that despite the arguments by the purchaser of the property, the trustee was permitted to have the lien preserved for the benefit of the estate. In so ruling, the Court specifically rejected the argument "that the bankruptcy court has nothing to do with the property, since it really did not belong to the bankrupt." Staake, 202 U.S. at 147, 26 S.Ct. 580. Rather, the Court remarked:
Id. at 148, 26 S.Ct. 580. The Court continued, "The liens acquired in this case were liens upon property which, as to attaching creditors, was the property of the bankrupt, and Congress may lawfully insist that it shall be reckoned as a part of his estate, and pass to the trustee." Id. at 149, 26 S.Ct. 580.
The policy that the Court adopted in reaching this interpretation of the statute rested upon the most elemental of bankruptcy principles — equality amongst creditors.
It is difficult to believe that Congress would have renounced the result that had been accomplished in Staake without some word as to why it deemed it appropriate to abandon this statutory provision embodying a fundamental principle of bankruptcy law. The legislative history of § 551 makes no mention of any intention to overrule Staake and to eschew the effect of § 67f of the Bankruptcy Act. To the contrary, the legislative history indicates that Congress intended § 551 to strengthen the impact of § 67f of the Bankruptcy Act by making the preservation automatic for the
Using either (1) the statutory language of § 551 read in conjunction with § 550 or (2) pre-Code practice and legislative history leads to identical results. No contradiction arises between the two options. Ambiguity or no ambiguity in the statute, the result in Staake is preserved. Accordingly, the court concludes that assuming there was a pre-petition sale of accounts receivable to Daiwa, the debtor's rights under § 551 apply and the avoided lien is preserved for the benefit of the estate upon those accounts receivable.
On May 27, 1999, the Foundation and three of its affiliated entities (the debtor; Greater Southeast Management Company; and Fort Washington Nursing Home, Inc.) filed chapter 11 petitions. Pursuant to an order entered July 1, 1999, the four bankruptcy cases have been jointly administered.