Section 6.43 “Strong-Arm” Powers

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

A. (§6.43) “Strong-Arm” Powers

Subsection (a) of 11 U.S.C. § 544 is derived from former § 70(c) of the Bankruptcy Act, Pub. L. No. 95-598, 92 Stat. 2549, and is known as the “Strong Arm” section because it gives the trustee the power of a hypothetical judicial lien creditor without regard to knowledge as of the date of bankruptcy. SeeIn reKingsley, 865 F.2d 975, 977 n.2
(8^th Cir. 1989); In reBranderhorst, 843 F.2d 311, 312 (8^th Cir. 1988). The powers include the right to avoid any obligation incurred by the debtor that would be voidable by an actual creditor with a judicial lien because it is unperfected and inferior to the interest of the trustee. In re Crawford,274 B.R. 798, 804 (B.A.P. 8^th Cir. 2002). The trustee’s lien, in the trustee’s strong-arm capacity as a hypothetical judgment lien creditor, is inferior to any existing lien that is properly perfected at the time the petition is filed, but is superior to any improperly perfected lien or unsecured creditor. In re Merrill,
258 B.R. 750, 752 (Bankr. W.D. Mo. 2001) (Federman, C.J.). Section 544 is used to avoid secret or unperfected liens. In re Vanguard Airlines, Inc., 295 B.R. 908 (Bankr. W.D. Mo. 2003) (Venters, B.J.).

Subsection (a) of § 544 provides that 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” as if the trustee were:

· a judicial lien creditor;

· an execution lien creditor that is returned unsatisfied; or

· a bona fide purchaser for value.

As the statute indicates, the hypothetical judicial or execution lien dates from the filing of bankruptcy. On the filing date, federal law treats the trustee or the estate fiduciary as if they had a judicial or execution lien on the debtor’s nonexempt property. The court in In re Ellison, 245 B.R. 361 (Bankr. W.D. Mo. 1999) (Federman, B.J.), likened the bankruptcy trustee to a creditor holding a lien on all of the debtor’s assets as of the commencement of the bankruptcy case. If the judicial lien or execution lien has priority under state law over other creditors, the trustee has the power to avoid the inferior lien and liquidate the collateral for the benefit of the estate. In re Smith, 245 B.R. 625, 629 (Bankr. W.D. Mo. 2000) (Federman, C.J.).

Relying on Missouri’s definition of lien creditor (§ 400.9-102(52)(C), RSMo Supp. 2006, which includes a bankruptcy trustee) and the priority rules of § 400.9-317(a)(2), RSMo Supp. 2006, the trustee has priority over an unperfected security interest. See also U.C.C. § 9-317, cmt. 4, 9 U.L.A. 212 (2002); In re Gaylord Grain L.L.C., 306 B.R. 624 (B.A.P. 8^th Cir. 2004); Merrill, 258 B.R. at 752.

As a judicial lienholder or execution lienholder, the trustee has a lien on all lienable property of the debtor that is property of the estate. The lien is inferior to any existing, properly perfected lien, but is superior to any unperfected lien, improperly perfected lien, or unsecured lien. In re Westfall, 227 B.R. 734, 737...