Morris v. Vulcan Chemical Credit Union (In Re Rubia)

OPINION

CLARK, Bankruptcy Judge.

J. Michael Morris, Chapter 7 trustee (“Trustee”), appeals an Order of the United States Bankruptcy Court of the District of Kansas dismissing his complaint seeking the turnover of certain funds from Vulcan Chemical Credit Union (“VCCU”). For the reasons set forth below, we AFFIRM the bankruptcy court’s Order.

I. Background

The debtor obtained three loans from VCCU: one secured by a 1993 Ford Ranger (“Ranger”); one secured by a 1993 Ford Taurus; and a signature loan. The only loan relevant to this appeal is the loan secured by the Ranger (“Ranger Loan”) which is memorialized in a Credit Agreement and an Advance Request Voucher and Security Agreement. Although the Security Agreement is dated February 1998, VCCU did not perfect its security interest in the Ranger until September 1998.

On November 10, 1998, the debtor filed a petition seeking protection under Chapter 7 of the Bankruptcy Code. At that time, the debtor owed VCCU approximately $10,440.00 on the Ranger Loan. The debtor continued to possess the Ranger postpetition, claiming it to be exempt. We have no record that the debtor’s claimed exemption was challenged. Although the debtor did not reaffirm the Ranger Loan, he continued to make payments on it after the petition date, paying VCCU a total of $1,186.00 (“Postpetition Payments”). VCCU filed a proof of claim in the debtor’s case, asserting a claim for the portions of the three loans that remained unpaid by the debtor on the petition date. In addition to an unsecured claim, VCCU asserted a secured claim based, in part, on the Ranger Loan.

In February 1999, the Trustee filed an Application with the bankruptcy court representing that he and VCCU had agreed that VCCU’s lien on the Ranger was avoidable because it was perfected within ninety days of the debtor’s petition date. The bankruptcy court approved the Trustee’s Application, avoiding VCCU’s lien and preserving the lien for the benefit of the estate (“Agreed Order”).

After the entry of the Agreed Order, the debtor continued to possess the Ranger. Although he ceased making payments to VCCU, he continued to make postpetition payments related to the Ranger to the Trustee. VCCU amended its proof of claim to reduce the amount of its secured claim due to the avoidance of its hen on the Ranger and to correspondingly increase the amount of its unsecured claim.

The Trustee subsequently filed a Complaint for Turnover and to Determine Rights (“Complaint”) against VCCU and the debtor, alleging that the Postpetition Payments were recoverable from VCCU as property of the estate. The debtor failed to answer the Complaint, and a default judgment was entered against him, which provided that “all payments respecting the avoided lien of [VCCU] in the ... Ranger will be made to the estate.” Appellant’s Appendix, p. 38, Order Granting Default Judgment Against Defendant Robert Max Rubia dated Oct. 22, 1999 ¶ 2. Furthermore, the default judgment directed the debtor to name the Trustee as the loss payee with regard to any insurance policy respecting the Ranger, and to provide the Trustee with continuous proof of insurance.

VCCU moved to dismiss the Complaint for lack of subject matter jurisdiction, arguing that (1) the Trustee had in rem rights against the Ranger, not in personam claims against VCCU, and (2) the Postpetition Payments were not property of the estate. The bankruptcy court denied VCCU’s motion to dismiss, holding that it had jurisdiction over the dispute.

After a trial, the bankruptcy court ruled from the bench that the Postpetition Payments were not recoverable by the Trustee because they were not property of the estate inasmuch as they were made from the debtor’s postpetition earnings. In a separate Order incorporating its bench ruling, the bankruptcy court dismissed the Complaint against VCCU with prejudice.

The Trustee filed a timely notice of appeal from the bankruptcy court’s final Order, and all parties have consented to this Court’s jurisdiction by failing to elect to have the appeal heard by the United States District Court for the District of Kansas. 28 U.S.C. § 158(a)(1) & (c)(1); Fed. R. Bankr.P. 8001-8002, 10th Cir. BAP L.R. 8001-1; see Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (order is final if it “ ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ”) (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945)).

II. Discussion

The issue in this appeal is whether the Trustee may recover the Postpetition Payments from VCCU. We review this question of law de novo. See Fed. R. Bankr.P. 8013; Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988); Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir.1996).

The Trustee argues that the bankruptcy court erred in dismissing his Complaint because the Postpetition Payments are recoverable as property of the estate. In particular, he maintains that the avoided lien in the Ranger is property of the estate under 11 U.S.C. § 541(a)(4),² and the Post-petition Payments are “proceeds” thereof under § 541(a)(6). While we question whether the Postpetition Payments are “proceeds,” we will not address this issue because a review of the rights of VCCU, the debtor, and the Trustee reveals that the Trustee is not entitled to the Postpetition Payments.

Prior to the filing of the debtor’s Chapter 7 petition, VCCU held a claim against the debtor, secured by a lien on the Ranger. The debtor owed VCCU a debt pursuant to the terms of the Credit Agreement, and he had the right to use the Ranger. If the debtor defaulted under the terms of the Credit Agreement, VCCU could look to the Ranger to satisfy its claim against the debtor.

After the filing of the debtor’s petition, VCCU and the debtor held the same rights that they held prepetition. The Trustee held an avoidance action against VCCU as a result of the perfection of the lien on the Ranger within ninety days of the debtor’s petition date.

After the entry of the Agreed Order, the fixing of VCCU’s lien on the Ranger was avoided, and the fixing of that hen was automatically “preserved for the benefit of the estate.” 11 U.S.C. § 551; see S.Rep. No. 989, 95th Cong., 2d Sess. 91 (1978), U.S.Code Cong. & AdmimNews 1978, p. 5963; ELR.Rep. No. 595, 95th Cong., 1st Sess. 376 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787 (providing that lien is automatically preserved upon avoidance). This interest arising under § 551 is, as argued by the Trustee, property of the estate under § 541(a)(4). See C & C Co. v. Seattle First Nat’l Bank (In re Coal-X Ltd. “76”), 60 B.R. 907, 913 (Bankr.D.Utah 1986) (citing authority). However, contrary to the Trustee’s position, the nature of that interest does not give the Trustee the right to collect VCCU’s debt from the debtor postpetition. See In re Closson, 100 B.R. 345 (Bankr.S.D.Ohio 1989).

Rather, as a result of the Agreed Order, VCCU holds an unsecured claim against the debtor’s estate for the entire amount of its debt as represented by its Credit Agreement. See 11 U.S.C. § 502(h). Only VCCU, not the Trustee, has the right to collect that debt. See Closson, 100 B.R. at 347-48; see also C & C Co. v. Seattle First Nat’l Bank (In re Coal-X Ltd. “76”), 103 B.R. 276, 280 (D.Utah 1986) (“By avoiding and preserving the lien, the trustee simply steps into the [secured creditor’s] shoes and succeeds to the [creditor’s] rights with regard to the lien.”) (emphasis added), ajfd in relevant part and rev’d in part, 881 F.2d 865, 866 (10th Cir.1989); 5 Collier on Bankruptcy ¶ 551.02[1] (Lawrence P. King ed., 15th ed. rev.2000) (preservation is of lien only, not other rights held by the creditor). The avoidance of the fixing of its lien merely means that VCCU may no longer look to the Ranger to satisfy the debt. Of course, VCCU is required to reduce its unsecured claim against the estate to reflect any reduction of its debt, including any reduction resulting from the debtor’s Postpetition Payments.

The debtor’s debt to VCCU may be discharged and, if so, he, not the Trustee, may or may not have a cause of action against VCCU for any postpetition payments that he made to VCCU on that discharged debt. If the debtor’s debt to VCCU is not discharged, the debtor’s post-petition payments are merely satisfaction of that debt, and no cause of action against VCCU would exist.³

The Trustee holds the lien position that VCCU held in the Ranger prior to the lien’s avoidance. See, e.g., Retail Clerks Welfare Trust v. McCarty (In re Van de Kamp’s Dutch Bakeries), 908 F.2d 517, 519 & n. 2 (9th Cir.1990) (it is well-established “that a trustee who avoids an interest succeeds to the priority that interest enjoyed over competing interests” and such succession may be pointless) (citing cases); accord 5 Collier on Bankruptcy ¶ 551.01[l]-[2] (Lawrence P. King ed., 15th ed. rev.2000). The value of the Trustee’s lien position is measured by the value of the Ranger, but it is limited by the amount of the debtor’s debt to VCCU on the petition date. See Coal-X, 103 B.R. at 280 & n. 6 (“[T]he extent and value of the preserved ... lien in the trustee’s hands ... turns on the amount of the [creditor’s] underlying [prepetition] claim against the debtor.”), ajfd in relevant part and rev’d in part, 881 F.2d at 866 (lien was properly limited to the amount of the creditor’s prepetition claim against the debtor).⁴ The Trustee has no right to any payment made to VCCU on the debt, but rather he only has rights in the Ranger up to the amount of VCCU’s debt on the petition date.⁵

The dissent states that its rationale is based on fairness inasmuch as the debtor may be required to pay the amount of the Postpetition Payments twice: once to VCCU, and once to the Trustee. The Trustee may recover from the Ranger the amount of the debtor’s petition date debt to VCCU, if the Ranger is worth that amount. If the Ranger is not worth that amount, the Trustee’s rights in the Ranger are limited to what VCCU’s rights would have been had its hen not been avoided-the value of the Ranger. Assuming that the debt to VCCU is discharged, the debtor has no liability on the prepetition debt. It is only because the record shows that the debtor has retained possession of the Ranger that the dissent assumes that the debtor is required to pay the amount owing on the Ranger to the Trustee, including any amounts that the Trustee is unable to recover from VCCU. However, absent an agreement between the Trustee and the debtor requiring the debtor to pay for the Ranger, the Trustee has no right to collect anything from the debtor inasmuch as the Trustee’s rights are solely in the Ranger. Our record contains no information about such an agreement, and the debtor is not a party to this appeal. We therefore do not know what, if anything, the debtor has agreed or may agree to pay to the Trustee, or even whether such an agreement would be appropriate, and we may not assume that the value of the Ranger is the value of the prepetition debt because we have no record that the Ranger has been valued. Finally, we note that unsecured creditors were not harmed and, in fact, were bene-fitted by the Postpetition Payments because VCCU’s unsecured debt has been reduced.

III. Conclusion

For the reasons set forth above, the Trustee is not entitled to recover the Post-petition Payments and, therefore, the bankruptcy court’s Order is AFFIRMED.

2 . All future statutory references are to title 11 of the United States Code.

3 . The debtor in this case has remained in possession of the Ranger and has been paying the Trustee postpetition. Our record contains no information related to the debtor’s continued possession of the Ranger, or of a postpetition agreement between the Trustee and the debtor under which the Trustee has a right to postpetition payment from the debtor. Furthermore, the debtor is not a party in this appeal. As such, we may not assume facts not in the record, or make any ruling related to the Trustee’s postpetition rights vis-a-vis the debtor over whom we have no jurisdiction.

4 . Thus, in this case where no junior liens against the Ranger exist, the Trustee is entitled to the Ranger, subject to any exemption rights of the debtor. If a junior lien did exist, the Trustee would be entitled to $10,400.00, the amount of VCCU’s prepetition debt, from the Ranger, with the junior lienor taking any residual value. The debtor's Postpetition Payments to VCCU do not, as argued by the dissent, reduce the amount of the Trustee’s claim against the Ranger, but rather only reduce the amount of VCCU’s unsecured claim against the estate. Unlike the dissent, we are unwilling to base our decision on a speculated valuation of the Ranger or the lien, and because of the above rationale, we have no need to.

5 . The dissent correctly states that we do not explain how the estate realizes its claim against the Ranger. This lack of explanation is not mistaken, however, inasmuch as we do not view that issue to be before us. The only issue in this case is whether the Trustee may recover the Postpetition Payments from VCCU. In deciding whether recovery against VCCU is appropriate, we need not decide how the Trustee will act in regard to the avoided lien against the Ranger, and we do not have the record or jurisdiction over the debtor to do so. Rather, we only can decide whether VCCU is liable to the estate for the Postpetition Payments made to it by the debtor. We do not, as stated by the dissent, argue that "the estate has no right to collect Postpetition Payments by virtue of the estate’s claim.” We merely say that the Trustee cannot collect VCCU’s prepetition debt from the debtor, and that the Trustee cannot recover the Postpetition Payments from VCCU. As such, we never reach the issue of whether the Postpetition Payments are "proceeds” of the avoided lien and, therefore, property of the estate under § 541(a)(6). But, even if we were to address the issue, we disagree with the dissent that the Postpetition Payments are "proceeds” as this word is defined as "whatever is received upon the ... collection ... of collateral....” Kan. Stat. Ann. § 84-9-306(1) (emphasis added). This case simply does not involve collection of collateral.