Strong-Arm Powers

Where a creditor has an unperfected lien (or an unrecorded mortgage) on a bankruptcy debtor’s property, the Bankruptcy Code empowers a trustee (or DIP, or entity that succeeds to the rights of a trustee or DIP) to avoid and preserve the lien for the benefit of the debtor’s bankruptcy estate. The trustee exercises this power through two strong arm provisions. First, the trustee may avoid the unperfected lien based upon its statutorily-granted status as judicial lien creditor or as bona fide purchaser of real property.  11 U.S.C. § 544(a)(1) & (3).   Second, under section 551 of the Bankruptcy Code, the trustee has the right to preserve the avoided interest for the benefit of the debtor’s estate.  The estate is thus put into the shoes of the creditor whose lien is avoided.  With these powers, the trustee may avoid the unperfected liens and apply the value represented by those liens to the debtor’s estate, bypassing junior lienholders.    A second mortgagee does not benefit from the trustee’s avoidance of the lien of the senior mortgagee – unsecured creditors do.  Parts of this definition are paraphrased from In re Traverse, 753 F.3d 19, 26 (1st Cir. 2014).

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