§ 50.7     Postpetition Transfers
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 50.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Section 549 authorizes avoidance of transfers of property of the estate that occur after commencement of the case and that are not otherwise authorized by the Bankruptcy Code. For the same reasons discussed above with respect to the other avoidance and recovery powers,1 there is good reason to question whether the postpetition avoidance power in § 549(a) is available to a Chapter 13 debtor, except to protect an exemption. Section 549(a) is worded, “the trustee may avoid a transfer of property of the estate . . . that occurs after the commencement of the case; and . . . that is not authorized under this title or by the court.”2 There is no provision of Chapter 13 authorizing a Chapter 13 debtor to exercise the avoidance powers of a trustee under § 549(a). Section 522(h), by cross-references to §§ 522(g) and 549, permits a Chapter 13 debtor to avoid a postpetition transfer only “to the extent” the debtor could have exempted the transferred property.3 This has not stopped some courts from allowing Chapter 13 debtors to recover and avoid postpetition transactions without mention of exemptions. Because the Chapter 13 estate includes postpetition income and property acquired by the debtor,4 the power to avoid postpetition transfers can be of significant use in a Chapter 13 case.

[2]

For example, a garnishment or execution after the petition, even if applicable only to property acquired postpetition, may be avoidable or recoverable in a Chapter 13 case.5 Postpetition income of the debtor that is paid to a creditor pursuant to a prepetition contract or court order may be recoverable by the debtor under § 549 if the transfer is not authorized by the Bankruptcy Code or by a bankruptcy court order.6 It has been held that criminal restitution payments by a Chapter 13 debtor after the filing of the petition are postpetition transfers within the scope of § 549 that may be avoided and the monies claimed exempt under § 522(h) and (g).7 One court held that a Chapter 13 debtor has standing under § 549 to recover unauthorized postpetition tax collections by the IRS.8 A foreclosure sale after the petition may be an avoidable postpetition transfer under § 549, in addition to violating the automatic stay.9 Even a postpetition transfer that does not violate the automatic stay—for example, a transfer protected by an exception to the stay—may be avoidable by the debtor under § 549 if the transfer is not authorized by the Bankruptcy Code or a bankruptcy court order.10

[3]

Chapter 13 debtors with alimony or support obligations are especially likely to face executions and garnishments after the filing of the petition. The expanded definition of property of the estate in a Chapter 13 case in § 130611 includes a debtor’s postpetition wages and overcomes the exception to the automatic stay for the collection of alimony, maintenance or support in § 362(b)(2).12 Smart debtors with alimony or support problems provide for curing all defaults through the plan. A postpetition levy for alimony or support that is not first authorized by the bankruptcy court would be a postpetition transfer recoverable under § 549.

[4]

The power to recover postpetition transfers may be useful if the debtor is engaged in business, incurs postpetition trade credit, and a postpetition trade creditor then seeks to prefer itself through a postpetition collection effort.

[5]

Several reported decisions have discussed the special defense in § 549(c) in the context of an action by a Chapter 13 debtor to avoid a postpetition transfer of property. Avoidance under § 549 is not available with respect to “a transfer of real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value” unless a copy of the petition or a notice of the petition is filed “where a transfer of such real property may be recorded to perfect such transfer” before the transfer is so perfected that a bona fide purchaser could not defeat the interest of a good-faith purchaser.13 In other words, § 549(c) provides a sort of safe harbor to any good-faith purchaser of real property without knowledge of the Chapter 13 case who gave fair equivalent value and recorded the transfer before notice of bankruptcy was recorded.

[6]

The § 549(c) defense arises in Chapter 13 cases when the debtor seeks to avoid a postpetition foreclosure sale or the postpetition recording of a deed by the purchaser at a prepetition sale. Use of the defense in this context is complicated by the fact that the postpetition foreclosure sale or recording of a deed typically violates the automatic stay and is void or voidable as a separate sanction for the stay violation.14 On various theories, several reported decisions resolve the interaction of the automatic stay and the defense in § 549(c) by holding that a Chapter 13 debtor cannot recover the purchaser’s interest that is protected by § 549(c) notwithstanding that the postpetition foreclosure sale or deed recording violated the automatic stay.15

[7]

Perhaps this issue deserves another look. The Bankruptcy Appellate Panel for the Ninth Circuit in Value T Sales, Inc. v. Mitchell (In re Mitchell)16 carefully analyzes §§ 362 and 549(c) and concludes that the protection of postpetition transfers in § 549(c) is not available when the transfer violates the automatic stay. In Mitchell, the Chapter 13 case was filed one day before a foreclosure sale. The sale proceeded, and the purchaser took without notice of the petition. The purchaser moved for relief from the stay and for a declaration that the foreclosure sale was excepted from the stay by § 549(c). Distinguishing other Ninth Circuit authority,17 the BAP explained:

[C]ourts squarely confronting the question have ruled that § 549(c) does not apply outside the context of a § 549 avoidance action. . . . [Section] 549 protects the estate from unauthorized transfers by the debtor. Congress saw fit to protect BFPs in § 549 but not in § 362, presumably expressing its intent to afford greater protection to BFPs who purchase from debtors than to those purchasing at sales violating the automatic stay. . . . We find no convincing authority for interpreting § 549(c) as an additional exception to the automatic stay.18
[8]

Even in a jurisdiction inclined to allow § 549(c) to protect a postpetition transferee, there is an interesting language issue with respect to when § 549(c) applies. As quoted above, § 549(c) protects a good-faith purchaser without knowledge of the Chapter 13 case when the purchaser gave “present fair equivalent value” for the postpetition transfer. At least one reported Chapter 13 decision recognizes that “present fair equivalent value” in § 549(c) is different from “reasonably equivalent value”—the standard for measuring whether a transfer is a fraudulent conveyance under § 548(a)(1)(B). In Ford v. Loftin (In re Ford),19 this difference in wording was outcome determinative because the presumption recognized by the Supreme Court in BFP v. Resolution Trust Corp.20—that the price paid at a regularly conducted foreclosure sale is “reasonably equivalent value” for purposes of a fraudulent conveyance action—does not apply when a purchaser asserts the § 549(c) defense:

[Section] 548(a)(1)(B) refers to transfer for less than “reasonably equivalent value” whereas § 549(c) refers to “present fair equivalent value.” . . . [T]he use of “present fair” indicates an intent that the protection of § 549(c) be limited to truly innocent purchasers who have actually paid a fair price in the transaction. . . . Neither the holding nor the rationale of [BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994),] is applicable to interpretation of § 549. . . . [E]ven if § 549(c) is applicable here, Fed. R. Bankr. P. 6001 requires defendants to prove the payment of “present fair equivalent value” to invoke the protections of § 549(c) and  . . . this burden is not carried by proof of the price paid at a regularly conducted foreclosure sale.21
[9]

It is not routine in Chapter 13 cases for debtors’ counsel to record the petition or a notice of filing in the registrar’s office in every case in which the debtor owns real property. But at least in Chapter 13 cases in which the debtor is in the midst of a foreclosure at the petition, immediately filing a copy of the petition or a notice of bankruptcy in the appropriate real property records makes good sense as a hedge against § 549(c) problems. The debtor may not be entirely clear on how far the foreclosure has progressed and notice just to the foreclosing creditor will not provide complete protection for the debtor.


 

1  See § 50.1  Turnover of Property§ 50.2  Relief from Garnishments§ 50.3  Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances, § 50.4  Avoidance Powers after BAPCPA§ 50.5  Preferences after BAPCPA and § 50.6  Fraudulent Transfers after BAPCPA.

 

2  11 U.S.C. § 549(a) (emphasis added).

 

3  See In re Grant, 303 B.R. 205 (Bankr. D. Nev. 2003) (Debtor has standing under § 522(h) to challenge recording of trustee’s deed after petition, but foreclosure sale before petition divested the debtor of all property interests under Nevada law; postpetition recording of trustee’s deed did not violate automatic stay and is not avoidable under § 549.); Glendenning v. Third Fed. Sav. Bank (In re Glendenning), 243 B.R. 629, 638–39 (Bankr. E.D. Pa. 2000) (In an action to upset a postpetition judicial sale, “[t]he Trust also questions the Debtor’s standing, since § 549(a) references only ‘the trustee’s’ right to invoke that Code section. However, to the extent the Proceeding is based on § 549, 11 U.S.C. § 522(h)(1) confers standing on the Debtor to maintain such an action.”).

 

4  11 U.S.C. § 1306. See § 46.1  What Is Property of the Chapter 13 Estate? and § 46.2  Property of the Chapter 13 Estate—Changes by BAPCPA.

 

5  See also § 52.2 [ Relief from Garnishments ] § 50.2  Relief from Garnishments.

 

6  See, e.g., Koonce v. McDonald (In re Koonce), 262 B.R. 850 (Bankr. D. Nev. 2001) (Prepetition assignment in trust of future lottery proceeds as collateral for loan violates Massachusetts Lottery law and is void; accordingly, on Chapter 13 debtor’s complaint, with trustee as an involuntary plaintiff, lottery proceeds paid to lender postpetition are recoverable under § 549.).

 

7  Department of Pub. Welfare v. Johnson-Allen (In re Johnson-Allen), 69 B.R. 461 (Bankr. E.D. Pa. 1987), aff’d, 871 F.2d 421 (3d Cir. 1989), aff’d sub nom. Pennsylvania Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 110 S. Ct. 2126, 109 L. Ed. 2d 588 (1990).

 

8  Matravers v. United States (In re Matravers), 149 B.R. 204 (Bankr. D. Utah 1993).

 

9  See, e.g., Glendenning v. Third Fed. Sav. Bank (In re Glendenning), 243 B.R. 629 (Bankr. E.D. Pa. 2000) (Chapter 13 debtor has standing under § 549(a) and § 522(h)(1) to upset postpetition judicial sale of residence conducted in violation of the automatic stay.). But see Martin v. North Penn Sav. & Loan (In re Martin), 253 B.R. 346, 351 (M.D. Pa. 2000) (Foreclosure sale after the Chapter 13 petition was not a prohibited postpetition transfer under § 549 because the foreclosure sale was consistent with a stipulated order in settlement of a motion for relief from the stay. “A foreclosure sale conducted pursuant to an order granting relief from an automatic stay is a transfer authorized by the court, and does not violate § 549.”).

 

10  See, e.g., Franklin v. Kwik Cash of Martin (In re Franklin), 254 B.R. 718, 722 (Bankr. W.D. Tenn. 2000) (Although postpetition presentment of check by a deferred presentment service provider did not violate the automatic stay because of the exception in § 362(b)(11), checking account balance was property of the Chapter 13 estate, and the postpetition transfer may be avoided by the debtors in a complaint under § 549. Deferred presentment service agreement dated May 8, 2000, permitted Kwik Cash to present the debtors’ check for payment on May 22. The debtors filed Chapter 13 petition on May 23. Kwik Cash deposited the debtors’ check on May 22, and the check was presented for payment on June 1, 2000. Sections 542(c) and 362(b)(11) recognize the “commercial realities” that banks without notice of a bankruptcy filing can honor checks postpetition with no consequences. However, “[w]hen First Citizens transferred the $230 in cash to Kwik Cash it effected a post-petition transfer of property of the estate. Pursuant to § 549 of the Bankruptcy Code, this transfer may be avoided and the debtor may recover this money. . . . Kwik Cash is entitled to file an unsecured proof of claim.”).

 

11  See § 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1  What Is Property of the Chapter 13 Estate?.

 

12  See §§ 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3  Additional Protection for Postpetition Property and Income and 69.1 [ Alimony and Support Exception ] § 58.5  Alimony and Support Exception.

 

13  11 U.S.C. § 549(c).

 

14  See §§ 75.1 [ Examples of Stay Violations, and Not ] § 62.1  Examples of Stay Violations, and Not and 78.1 [ Remedies for Violation of Stay ] § 62.5  Remedies for Violation of Stay.

 

15  See In re Fulmer-Vaught, 218 B.R. 56, 57–58 (Bankr. W.D. Mo. 1998) (Consistent with Carpio v. Smith (In re Carpio), 213 B.R. 744 (Bankr. W.D. Mo. 1997), purchaser at foreclosure sale conducted after the Chapter 13 petition who gave value without notice or knowledge of the bankruptcy case is protected from avoidance by § 549(c) notwithstanding that the foreclosure itself is void. Debtor filed on morning of December 16. Foreclosure sale was afternoon of December 16. “Counsel for the debtor did not telephone the creditor or counsel for the creditor. Counsel for the debtor did not fax the creditor or counsel for the creditor. Instead, counsel for the debtor mailed the notice of filing bankruptcy to the creditor’s office in St. Louis. . . . [I]t is essential to emphasize the obligations of counsel for a debtor when filing bankruptcy. The obligation is to notify the creditor who is going to foreclose immediately by the most expeditious means of communication available. . . . [F]ailure to do so may well result in sanctions against debtors’ counsel for creating a problem which is not at all necessary or appropriate.” Court notes, “[A] foreclosure subsequent to the filing of the bankruptcy is void rather than voidable, but . . . § 549(c) preserves the purchase by the innocent purchaser in this case.”); Carpio v. Smith (In re Carpio), 213 B.R. 744 (Bankr. W.D. Mo. 1997) (Debtor cannot upset postpetition purchase at foreclosure sale on day of Chapter 13 petition or recording of trustee’s deed one week later because purchaser was without knowledge of the bankruptcy case, paid fair value, and is protected from avoidance by § 549(c). However, damages, including punitive damages, are assessed against other participants in foreclosure sale who had knowledge of the bankruptcy case and willfully violated the automatic stay.); In re Stork, 212 B.R. 970 (Bankr. N.D. Cal. 1997) (Purchaser at prepetition foreclosure sale is entitled to annulment of the automatic stay to validate recording of foreclosure deed 16 days after the filing of bankruptcy. Under § 549(c) recording of deed is not subject to avoidance because debtor had not recorded a notice of bankruptcy.). See also In re Samaniego, 224 B.R. 154 (Bankr. E.D. Wash. 1998) (Section 549 is no help to Chapter 13 debtor in battle with prepetition purchaser at tax sale. Sale occurred two weeks before petition. Tax sale deeds were recorded two days after the filing and were void because in violation of the automatic stay. However, because debtors only retained bare legal title after the tax sale, automatic stay was annulled retroactively to validate the postpetition recording of the tax sale deeds.).

 

16  279 B.R. 839 (B.A.P. 9th Cir. 2002).

 

17  See Schwartz v. United States (In re Schwartz), 954 F.2d 569 (9th Cir. 1992).

 

18  279 B.R. at 843–44. Accord Ford v. Loftin (In re Ford), 296 B.R. 537 (Bankr. N.D. Ga. 2003) (Section 549(c) is not available as a defense to violation of the automatic stay.).

 

19  296 B.R. 537 (Bankr. N.D. Ga. 2003).

 

20  511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994).

 

21  296 B.R. at 551–56.