JIM D. PAPPAS, Bankruptcy Judge.
The Plaintiff in this avoidance action, chapter 7
On November 7, 2013, Jace Reed Parker ("Debtor") purchased a 2010 Jeep Liberty Sport Utility Vehicle ("the Vehicle"). The purchase was financed by a loan extended to him by Creditor in the amount of $21,400.07. Under the loan agreement, the Vehicle was to serve as security for the loan, and to perfect its security interest, Creditor prepared an application for issuance of a certificate of title to the Vehicle noting its lien. Perhaps imprudently, it gave the title application to the Debtor to file with the Idaho Transportation Department. Debtor never did so. As a result, no certificate of title reflecting Creditor as a lienholder was ever issued for the Vehicle.
Debtor made several monthly loan payments to Creditor, including three during the ninety days prior to February 25, 2014, totaling $1,063.68, and several more thereafter totaling $1,770.24. The Vehicle's whereabouts and condition are currently unknown.
On February 25, 2014, Debtor filed a chapter 13 petition. Bk. Dkt. No. 1. On June 16, 2014, Debtor's chapter 13 plan was confirmed. Bk. Dkt. No. 37. The confirmed plan provided for payments to Creditor as a secured creditor, however, when Creditor filed its proof of claim on June 18, 2014, it indicated that it was an unsecured creditor owed $24,732.39. The chapter 13 trustee then filed a motion to modify the plan to, in essence, reclassify Creditor as an unsecured creditor. Bk. Dkt. No. 39. That modification was approved in an order by the Court entered on August 7, 2014. Bk. Dkt. No. 43.
On March 17, 2015, the chapter 13 trustee filed a motion to convert the bankruptcy case to chapter 7. Bk. Dkt. No. 48. Without objection from Debtor, the Court entered an order converting the case to chapter 7 on May 11, 2015. Bk. Dkt. No. 50.
On February 17, 2016, Trustee commenced this adversary proceeding against Creditor. Dkt. No. 1. In his complaint, he alleges five separate claims for relief: 1) to avoid Creditor's lien in the Vehicle under § 544(a)(1), and for a money judgment equal to the alleged value of the Vehicle on the date of the loan transaction in the amount of $21,400.07; 2) to avoid the prepetition payments made by Debtor to Creditor within 90 days of the bankruptcy date as preferences under § 547(b) in the amount of $1,063.68; 3) to avoid several postpetition payments made recently by Debtor to Creditor under § 549(a) in the amount of $1,770.24; 4) to "recover" the avoided transfers under § 550(a); and 5) to "preserve" the avoided transfers for the benefit of the estate under § 551.
Creditor's branch manager was personally served with a copy of the complaint and a summons in Massachusetts on April 8, 2016. Dkt. No. 5. On May 10, 2016, Trustee filed an application for entry of a clerk's default, Dkt. No. 6; it was entered on May 18, 2016, Dkt. No. 8. Then, on May 26, 2016, Trustee filed a motion for entry of a default judgment. Dkt. No. 9. Following hearings, as well as some briefing, the Court took the Motion under advisement. Dkt. Nos. 14-17, 19-21.
Entry of a default judgment in bankruptcy court is governed by Civil Rule 55, made applicable in adversary proceedings by Rule 7055. It requires a two-step process, beginning with, first, "entry of the party's default (normally by the clerk), and [second,] entry of a default judgment." Cashco Fin. Servs., Inc. v. McGee (In re McGee), 359 B.R. 764, 770 (9th Cir. BAP 2006). While entry of the party's default is a necessary step, it does not entitle a plaintiff to a default judgment. Instead, the Court has an independent duty to determine the sufficiency of a claim before entering a default judgment. Kubick v. FDIC (In re Kubick), 171 B.R. 658, 662 (9th Cir. BAP 1994).
In reviewing the Motion, the Court begins by deeming the factual allegations pled in Trustee's complaint to be true; it need not independently enter findings of fact. Adriana Intern. Corp. v. Thoeren, 913 F.2d 1406, 1313 (9th Cir. 1990) (noting that "a default judgment generally precludes a trial of the facts except as to damages"); but see, DIRECTV, Inc. v. Hoa Huynh, 503 F.3d 847, 854 (9th Cir. 2007) (declining to assume the truth of allegations in complaint that merely restate statutory language when evaluating a motion for default judgment).
Here, the Court finds the allegations in Trustee's complaint to be sufficiently well-pled to meet the minimum standards set forth in the case law, and therefore, deems them to be true facts.
Trustee's complaint sought relief under §§ 547, 549, and 544. The Court will discuss each of those claims in turn.
Trustee alleges that Debtor made payments to Creditor on the loan of $354.56 per month, totaling $1,063.68, within the 90 days preceding the bankruptcy petition filing date. Trustee alleges he may avoid and recover these payments as a preference. In order for him to do so, under § 547(b), he must prove that a transfer of Debtor's property was made:
§ 547(b); see also Krommenhoek v. Estate of Pfankuch Food Servs., Inc. (In re Pfankuch), 08.3 IBCR 91, 92-93 (Bankr. D. Idaho 2008).
Trustee has sufficiently alleged facts to support each of these elements in his complaint. Dkt. No. 1 at ¶¶ 22-25. Creditor has not responded to the allegations. Assuming the allegations to be true, Trustee is entitled to avoid the transfers, and to recover them via a money judgment against Creditor for $1,063.68.
A trustee may avoid a debtor's transfer of property of the estate that occurs after the commencement of the case and that is not authorized by the Code or Court. § 549(a). In the complaint, Trustee alleges that Debtor made payments on the loan to Creditor after he filed the bankruptcy petition on February 25, 2014, using property of the estate, and that such payments were not authorized by the Code or this Court. Dkt. No. 1 at ¶¶ 27-29. The payments totaled $1,770.24. Id. at ¶ 30.
Because Trustee has alleged facts to support the elements for a § 549(a) avoidance in the complaint without contradiction by Creditor, the Court adjudges that the transfers should be avoided and recovered by Trustee via a money judgment against Creditor for $1,770.24.
The Code grants a bankruptcy trustee so-called "strong arm" powers under § 544(a). It provides, in pertinent part:
State law governs the extent of Trustee's rights as a hypothetical judicial lien creditor. Hopkins v. Brasseaux (In re Saunders), 08.1 IBCR 16, 17 (Bankr. D. Idaho 2008). In Idaho, a security interest in a motor vehicle can be perfected only by complying with Idaho's certificate of title laws, which require that a creditor's lien be noted on the title certificate issued by the Idaho Transportation Department. Gugino v. Canyon Fin. of Boise, Inc. (In re Green), 09.2 IBCR 44, 46 (Bankr. D. Idaho 2009). In particular, Idaho Code § 49-510(1) provides:
Here, based upon the allegations in Trustee's complaint, it is uncontested that Creditor's security interest in the Vehicle was not properly perfected under Idaho law as of the date of Debtor's bankruptcy filing because its lien was never noted on the Vehicle's certificate of title. Because Creditor's security interest was not perfected as against a judicial lien creditor under Idaho law, Trustee is entitled to avoid Creditor's security interest for the benefit of the bankruptcy estate. In re Lifestyle Home Furnishings, LLC, 10.1 IBCR at 24.
Assuming Creditor's lien is avoidable, then, what relief other than avoidance is available to Trustee?
The goal of the Code, through lien avoidance, is to put the bankruptcy estate in the same position it would have been in but for the granting of the lien. Rodriguez v. Daimlerchrysler Fin. Servs. Americas LLC (In re Bremer), 408 B.R. 355, 358 (10th Cir. BAP 2009). Both §§ 550 and 551 set forth the remedies to accomplish this.
Section 551 provides that "[a]ny transfer avoided under section. . . 544 . . . of this title, or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate." This relief is automatic and does not require a separate pleading or procedure. Indeed, "[§] 541(a)(4) makes property preserved by § 551 a part of the property of the estate and essentially effects its `recovery' from the transferee. Thus the liens, once avoided and preserved, become property of the estate[]." In re Bremer, 408 B.R. at 358.
However, a trustee has the discretion to seek an alternate remedy to preservation of the avoided lien, using § 550. Such a remedy protects and benefits the bankruptcy estate when lien preservation under § 551 is inadequate. In particular, § 550 specifies two options for relief following lien avoidance under § 544(a).
First, "to the extent that a transfer is avoided under section 544 . . . of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property . . . ." § 550(a). Under this Code provision, then, the Court may, in exercising its discretion, award a trustee either the actual property transferred, or the value of that property. USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880, 890 (9th Cir. 2010) ("Bankruptcy courts have discretion whether to award recovery under § 550, even when the transferred property is a lien."); In re Bremer, 408 B.R. at 359 (holding that the bankruptcy court has discretion to award the trustee recovery of the property, or its value).
In connection with the Motion, Trustee initially argued that he should be entitled to both lien preservation and to a money judgment against Creditor for the value of the avoided lien. However, Trustee has since modified this request. Because the Vehicle cannot be located, Trustee now seeks only a money judgment against Creditor for the value of the Vehicle, since recovery of the actual property transferred by Debtor to Creditor — the lien on the Vehicle — would be of no benefit to the estate. However, how the Court should value the avoided lien remains unresolved under the Motion and is the issue that persuaded the Court to take the Motion under advisement.
Again, the purpose of § 550 is to "restore the [bankruptcy] estate to the financial condition it would have enjoyed if the transfer had not occurred." Aalfs v. Wirum (In re Straightline Invs. Inc.), 525 F.3d 870, 883 (9th Cir. 2008) (internal citations omitted). For this purpose, the Code does not describe how the Court is to assign a "value" to the property in an avoided transfer, nor does it establish the date on which that value should be determined. However, case law and expert commentary guide the Court.
A bankruptcy court "ordinarily determines the value of the property to be the value at the time of the transfer, but has discretion on how to value the property so as to put the estate in its pretransfer position." Joseph v. Madray (In re Brun), 360 B.R. 669, 674 (Bankr. C.D. Cal. 2007); see also, Riske v. The David Austin Seitz Irrevocable Tr. (In re Seitz), 400 B.R. 707, 722 (Bankr. E.D. Mo. 2008) (noting that, typically, "courts equate `value' with the fair market value of the subject property at the time of the transfer."). This is especially true when the property in question may have declined in value subsequent to the transfer. In re Seitz, 400 B.R. at 722 (quoting In re Brun, 360 B.R. at 674; COLLIER ON BANKRUPTCY ¶ 550.02[3][a] (16th ed.)). "However, there is both case law and a strong equitable argument for allowing the trustee to recover either the greater of the value of the transferred property at the transfer date or the value at the time of the recovery." In re Seitz, 400 B.R. at 707 (citing In re Brun, 360 B.R. at 674; Langhorne v. Warmus (In re Am. Way Serv. Corp.), 229 B.R. 496, 530-31 (Bankr. S.D. Fla. 1999); Govaert v. B.R.E. Holding Co., Inc. (In re Blitstein), 105 B.R. 133, 137 (Bankr. S.D. Fla. 1989); COLLIER ON BANKRUPTCY ¶ 550.02[3] (15th ed. rev. 2005)).
The appropriate rationale for valuation in this context, as explained by the bankruptcy court in In re Brun, is as follows:
In re Brun, 360 B.R. at 674 (internal citations omitted)(emphasis in original). In other words, where the target property appreciates in value after it is transferred, in order to implement the intent of Congress in enacting the avoiding powers, bankruptcy courts may value the property as of the date of the judgment for recovery, and not the date of transfer. However when there is evidence that the property's value has declined, bankruptcy courts may look to the date of the transfer in fashioning the trustee's recovery so the estate does not suffer the burden of the post-transfer depreciation of the asset.
Awarding the value of the avoided lien, versus merely avoiding that lien, has been recognized as acceptable by bankruptcy courts in at least two scenarios: first, "[w]here the property is unrecoverable or its value diminished by conversion or depreciation, courts will permit the recovery of value." In re Taylor, 599 F.3d at 891 (quoting In re Bremer, 408 B.R. at 358-59); and second: "when the value is readily determinable and a monetary award would work a savings for the estate." Id.
Valuing an avoided security interest, according to the Ninth Circuit, requires two calculations:
In re Taylor, 599 F.3d at 891.
In In re Taylor, the bankruptcy court concluded that the value of the avoided security interest was not readily ascertainable, and thus the only remedy available to the bankruptcy court was to return to the estate the transferred property — the security interest — and not the value of the property. Likewise, in this action, the true value of Creditor's security interest in the Vehicle at the time it was granted by Debtor is not readily ascertainable. While the Court can discern with some certainty the amount of payments Debtor made on the debt, and the outstanding balance on the loan, those figures only satisfy one aspect of the equation. The other information necessary to fashion a remedy is the value of the secured asset, the Vehicle, which now is missing, and therefore, undeterminable. In other words, on this record, the Court simply cannot determine the value of the transferred property. Given these circumstances, In re Taylor instructs that the Court order the return of the security interest to the estate.
However, as explained above, the aim of § 550 is to put the estate back in its pre-transfer position. Avoiding and preserving the lien, standing alone, would not do that. An avoided lien on a missing car is worth nothing to the estate's creditors. And so, exercising its discretion, the Court concludes that it should instead award Trustee the value of the transferred property.
But what is that value? Early on, Trustee sought to value the lien by reference to the original amount borrowed by Debtor from Creditor, $21,400.07. Complaint, Prayer for Relief, Dkt. No. 1 at ¶ B. However, payments have been made by Debtor to Creditor on the loan, and the Vehicle's value has almost certainly depreciated.
Trustee's uncontested motion for a default judgment presented interesting, perhaps challenging issues, regarding the appropriate remedy to be awarded to Trustee. However, the well-pled facts alleged in the complaint establish that Trustee is entitled to a default judgment which avoids and recovers the various transfers made by Debtor to Creditor, both before and after the bankruptcy filing.
The Motion is granted, and Trustee is directed to submit a form of proposed default judgment for entry by the Court consistent with this Memorandum.