Recent Case Summary

Court awards monetary judgment in lieu of avoidance of lien under §550

When the Trustee prevailed in his action to avoid a vehicle lien as preferential, he sought judgment in the amount of the value of the car at the time the bankruptcy petition was filed, rather than avoidance of the lien and possession of the car to sell. The value of the car had depreciated by over $5,000.00 during the 17 months since the Debtor filed the case, even though the Debtor had maintained possession and continued making payments on the vehicle. The creditor contested the Trustee’s right to a judgment under §550, arguing that the only remedy was avoidance of the lien and sale of the vehicle. The Bankruptcy Court held for the Trustee, and awarded a judgment based on the petition date value of the vehicle. Appeal was taken to the BAP. In re Taylor, 2008 WL 2579100 (9th Cir. BAP. 2008).

The Appellate Panel affirmed, holding that avoidance of a lien does not destroy the security interest. Rather, it allows either (1) the transfer of the security interest or (2) the transfer of the value of the security interest to the estate. When appropriate to restore the bankruptcy estate to where it was when the case was filed, the BAP found that a monetary judgment may well be the correct result.

Comment: This case might be helpful in the situation where an asset has “evaporated” from the estate under §521, prior to the Trustee bringing an action to avoid a lien against the property. If the Trustee can obtain a judgment for the value of the avoided lien under §550, it is immaterial that she cannot avoid the lien and take possession of the non-estate property.