4.5 Property Interests Preserved for the Benefit of the Estate

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

4.5 PROPERTY INTERESTS PRESERVED FOR THE BENEFIT OF THE ESTATE

4.501 In General. Section 541(a)(4) provides that the bankruptcy estate includes property interests either preserved for the estate or ordered transferred to the estate under section 510(c) or section 551. Both sections

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enable a trustee or a debtor-in-possession exercising trustee powers to obtain for the estate certain liens held by creditors. Also available to benefit the estate are the effects of the avoidance of certain liens held by creditors.

4.502 Liens Securing Subordinated Claims. Section 510(c) authorizes a court to apply principles of equitable subordination of claims or interests. ¹⁶⁰ Courts invoke this power when a particular creditor or equity interest holder has committed an act that under equitable principles justifies treating the creditor or interest holder in a less advantageous manner than otherwise would be mandated by the applicable distribution ¹⁶¹ or treatment ¹⁶² provisions applicable to the case. Section 510(c)(2) allows the court to order that a lien which secures a subordinated claim be transferred to the bankruptcy estate.

4.503 Miscellaneous Avoidable Transfers.

A. In General. Section 551 refers to seven other Bankruptcy Code sections under which transfers can be avoided and preserves for the benefit of the bankruptcy estate any transfer that is avoided under any of those other sections.

B. Liens in Exempt Assets. Liens in certain exempt assets are potentially avoidable ¹⁶³ and include certain security interests ¹⁶⁴ in basic consumer goods, ¹⁶⁵ in assets used for the debtor's livelihood, ¹⁶⁶ and in health aids. ¹⁶⁷ The right to avoid these liens belongs to the debtor, since the purpose is to free up assets so that the debtor can exempt them from the property of the estate.

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C. Estate Enhancement Avoidances. Also avoidable are liens and other transfers avoidable by a trustee or a debtor-in-possession exercising trustee "strong arm" powers under rights enjoyed by a judicial lien creditor, ¹⁶⁸ a creditor with an unsatisfied execution, ¹⁶⁹ or a bona fide purchaser of real property with a perfected interest. ¹⁷⁰ The seven referenced sections also include the power to avoid certain statutory liens, ¹⁷¹ preferences, ¹⁷² fraudulent and voluntary conveyances, ¹⁷³ and unauthorized transfers made after the filing of the bankruptcy case. ¹⁷⁴

D. Proceeds of Assets Subject to Tax Liens. Under section 724(a), the trustee can also avoid certain secured claims that are not tax claims but whose holders benefit from a provision that subordinates the payment of taxes to certain other kinds of claims. ¹⁷⁵ Debtor's counsel in a case in which there is a tax lien may be able, upon court approval, to use this payment reordering provision to effectively recover attorney fees and expenses from funds that otherwise would be used to pay taxes.

4.504 Liens Securing Disallowed Claims.

A. Invalid Claims. Section 551 also preserves for the benefit of the estate any lien that is void under section...