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Creditors’ recoveries often hinge on claw-back lawsuits that trustees bring under bankruptcy law and non-bankruptcy law.  Trustees can file claims based on non-bankruptcy law because Bankruptcy Code Section 544(b) allows them to assert claims that creditors have standing to file outside of bankruptcy.  This powerful tool enables trustees to challenge transactions that date back years before a bankruptcy filing.

Section 544(b) states that trustees “may avoid a transfer of an interest of the debtor that is voidable under applicable law by a creditor holding an [allowable] unsecured claim.” (Emphasis supplied.)  The most common statute that trustees invoke is state fraudulent transfer law.  But do other statutes – federal or state – apply as well?

In re Stone Pine Investments, v Lewis 10th Cir. Court of Appeals, 12/19/23  This appeal arises from an adversary proceeding commenced alongside a debtor’s filing in bankruptcy court.

The Bankruptcy Code provides an appointed trustee several extraordinary remedies to ensure full and equitable distribution of an estate. Among these remedies is the power to invalidate—or “avoid”— certain transactions predating the bankruptcy petition. 11 U.S.C. § 544. The trustee’s avoidance powers are significant but limited by federal law, and substantive state law may control which transactions are voidable.

The Appellants here—several corporate entities and two of their principals—challenge the Trustee’s avoidance of several transactions following the Chapter 7 bankruptcy of Stone Pine Investment Banking, LLC, one business in a complex network of related entities. According to Appellants, the transactions could not be avoided under applicable Colorado law and, in any case, the Trustee was time-barred from pursuing avoidance here. On cross-appeal, the Trustee argues the bankruptcy court erred in its denial of additional equitable claims—tolling and veil piercing—and by capping the judgment against the Appellants.
The bankruptcy and district courts considered these arguments and rejected them. So do we. We exercise our jurisdiction under 28 U.S.C. § 158(d)(1) and affirm. 

Section 544. Trustee as lien creditor and as successor to certain creditors and purchasers

(a) 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 of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
(b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under Section 502 of this title or that is not allowable only under Section 502(e) of this title.
(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in Section 548(d)(3)) that is not covered under Section 548(a)(1)(B), by reason of section 548(a)(2). Any claim by any person to recover a transferred contribution described in the preceding sentence under Federal or State law in a Federal or State court shall be preempted by the commencement of the case.

In re Thomas Perez, BAP No. CC-20-1280-LFT (9th Cir, Ju 17, 2021) Perez’s homestead exemption. Pre-petition, on the advice of counsel, Debtor granted his sister, Maria Perez, a third position lien (“Perez DOT”) on his residence. At the § 341(a) meeting, Trustee questioned Debtor about the Perez DOT and informed him that she intended to have a realtor look at his house, but she did not mention the Perez DOT’s potential avoidability. Debtor then hired new counsel and promptly took steps to have the Perez DOT reconveyed. He also amended his exemptions to claim a $175,000 homestead exemption.

Trustee objected on the ground that, under § 522(g), Debtor was not entitled to a homestead exemption because the Perez DOT had been avoided and recovered for the estate due to Trustee’s efforts. While it was not necessary that Trustee commence a preference action to bar Debtor from asserting an exemption, we agree with the bankruptcy court’s determination that the limited Trustee action in this case falls below the level required to invoke § 522(g).
We AFFIRM.Under Hitt v. Glass (In re Glass), 164 B.R. 759, 765 (9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995), a trustee may defeat a debtor’s exemption on property released from a lien or security interest only if the release occurs after the trustee states or indicates that she will invoke her avoidance powers to recover the property. Otherwise, a debtor is may exempt the property under 11 U.S.C. § 522(g).  We AFFIRM