By: Elizabeth Filardi
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Morris v. St. John National Bank,
the Tenth Circuit concluded that a bankruptcy trustee who successfully avoids a lien under the Bankruptcy Code does not automatically assume all the rights the original lienholder may have against the debtor.
Here, the debtors borrowed $3,050 from the bank, using their 1980 Pontiac Trans Am as security.
On the date the debtors filed for bankruptcy, they still owed the bank $3,237.50 on the loan, but the fair market value of the car was only $2,000.
The Trustee successfully avoided the bank’s lien on the car. While §551 preserved the lien for the benefit of the estate,
the issue was whether bankruptcy law permitted the trustee to recover the full amount owed or whether the trustee was limited to the value of the bank’s security interest in the car itself.
The Tenth Circuit concluded that a trustee who avoids a lien pursuant to 11 U.S.C §544 and preserves it under §551 is limited to the value of the lien and does not acquire the bank’s right to collect any debt amount beyond the value of the security interest.
Consequently, the trustee’s recovery was limited to the $2,000 value of the secured interest on the debtor’s car and could not recoup the full $3,237.50 value owed on the loan at the time of the bankruptcy filing.