Daily Development for
Wednesday, June 7, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

We don't have to think about bankruptcy as much as we did a few years ago, but anyone with a creditor client has been faced with "what if" questions from time to time. Here are some interesting twists of the "strong arm."

BANKRUPTCY; AVOIDANCE OF LIENS; "BUYER IN ORDINARY COURSE:" Liens avoidable only by "Buyer in ordinary course" are not subject to lien avoidance. In re Winn's Stores, Inc., 177 B.R. 253 (Bankr. W.D.Tex. 1995) The trustee was not empowered, as a hypothetical "bona fide purchaser" under Bankruptcy Code section 545, to avoid the fixing of certain Texas statutory liens on property of the estate. Under the Texas Tax Code, the subject liens were not enforceable against "buyers in the ordinary course" (BOC). "Both terms of art, BFP and BOC, are relatively well-defined, nationally and in Texas," and the standards for each are different. To satisfy the requirements for BOC status, a purchaser must, essentially, buy from inventory, that is, in the ordinary course and from a person in the business of selling such goods. BFP status requires a lesser showing. See In re Walter, 45 F.3d 1023 (6th Cir. 1995), reported under the heading: "Bankruptcy; Avoidance of Liens; Federal Tax Liens:" (IRS Liens not avoidable because standard for avoidance is higher than that for ordinary lien creditors.)

BANKRUPTCY; AVOIDANCE OF LIENS; FEDERAL TAX LIENS: Trustee cannot avoid certain federal tax liens that are avoidable by party paying "adequate and full consideration."In re Walter, 45 F.3d 1023 (6th Cir. 1995). Under the Internal Revenue Code, the liens were not enforceable against a "purchaser," who, according to I.R.C. §6323(h)(6), is one who pays "adequate and full consideration." According to the traditional definition, a "bona fide purchaser" under the Bankruptcy Code is one who need only pay "value," which is a lesser standard. Also, according to the I.R.C. the tax lien was not enforceable only if the purchaser acquired possession. Joining the Fifth and Ninth Circuits, the Sixth Circuit Court of Appeals held that a hypothetical bona fide purchaser under bankruptcy law does not enjoy "hypothetical possession." Note: While this case involves motor vehicles, the principles discussed, particularly as to the question of "hypothetical possession," arise out of certain real estate cases (see 45 F.3d at 1031).

BANKRUPTCY; AVOIDANCE OF LIENS; PERFECTION; NEGOTIABLE MORTGAGE NOTES: Trustee can avoid security interest of negotiable mortgage notes where debtor has retained physical possession of notes, even though assignments of notes and mortgages have been executed and recorded. In re Sprint Mortgage Bankers Corp., 177 B.R. 4 (E.D.N.Y. 1995) Certain investors admitted that, pre-petition, "they had lent money to the debtor and that the debtor had given its own obligation" to repay the loans secured by certain real-estate secured notes. To evidence their claim to the underlying mortgage notes, the investors took mortgage assignments properly recorded under New York law. However, the debtor maintained possession of the notes. Under New York law, a security interest in a note must be perfected by possession of the note. Section 9-102(3) of the New York UCC provides that the applicability of Article 9 requirements "is not affected by the fact that the obligation is itself secured" by real property. Therefore, the investors' rights in the underlying mortgages were subordinated to the rights of the trustee.

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Items reported in the Daily Development and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Items in the Daily Development are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.