Page 58 - Bankruptcy Volume 1

Practitioners providing bankruptcy-related services may be engaged to act as trustee or examiner or to
advise the trustee, the examiner, the debtor-in-possession, the creditors’ committee, the equity commit-
tee, or other interested parties. When providing services in any of these capacities, practitioners should
understand the characteristics of transactions that may make them avoidable in bankruptcy. Likewise,
practitioners specializing in forensics and valuation such as Certified in Financial Forensics (CFF) and
Accredited in Business Valuation (ABV) are uniquely suited to provide consulting services in conjunc-
tion with proving and defending against avoidance actions — most frequently preferential transfers and
fraudulent conveyances. Such services routinely include identifying potential avoidable transactions, in-
vestigating the facts and circumstances around the transactions, analyzing a debtor’s historical financial
condition and solvency, valuing property exchanged, and providing expert testimony, among others.

Trustee as a Lien Creditor and as Successor to Certain Creditors and Purchasers (11 USC
544)

11 USC 544(a), commonly referred to as the strong-arm clause, establishes the trustee as having rights
and avoidance powers commonly referred to as strong-arm powers. In particular, 11 USC 544(a) estab-
lishes the trustee as a creditor having the same rights and powers as a judicial lien creditor, a creditor
with an unsatisfied lien, and a bona fide purchaser of real property. These strong-arm powers establish
the trustee as a lien creditor, allowing avoidance of any transfers of security interests in personal and real
property that are unperfected on the petition date.

11 USC 544(a)(1) provides that the trustee has the rights and powers of a hypothetical creditor (that is,
independent of whether such a creditor actually exists) with a judicial lien fn 7 on all property as of the
timing of the petition date. As a hypothetical judicial lien creditor, the trustee may avoid unperfected se-
curity interests in personal property as of the time of commencement of the bankruptcy. 11 USC
544(a)(2) extends the rights and powers of a hypothetical creditor (that is, independent of whether such a
creditor actually exists) that as of the petition date obtains an execution against the debtor which is un-
satisfied as of the petition date. 11 USC 544(a)(3) provides that the trustee has the rights and powers of a
hypothetical bona fide purchaser fn 8 for value of real property (excluding fixtures) (that is, independent
of whether such a purchaser actually exists) with a perfected security interest as of the petition date. As a
hypothetical bona fide purchaser with a security interest, the trustee may avoid unperfected security in-
terests in real property as well. The avoidance powers granted by 11 USC 544(a) allow the trustee to
avoid any unrecorded or concealed prepetition transfers of interests in the debtor’s personal or real prop-
erty that may emerge subsequent to the filing. Of note, although 11 USC 544(a) grants the trustee the
power to avoid unperfected security interests as of the petition date, creditors may still have rights to
perfect or continue to perfect security interests postpetition if permitted by non-bankruptcy law. fn 9

In addition to the powers granted by the strong-arm clause, 11 USC 544(b) grants the trustee the power
to "avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor

fn 7 11 USC 101(36) defines a judicial lien to mean a "lien obtained by judgment, levy, sequestration, or other legal or equitable pro-
cess or proceeding."

fn 8 A bona fide purchaser is "one who buys something for value without notice of another’s claim to the item or of any defects in the
seller’s title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims." Black’s Law
Dictionary, 7th ed., s.v. "bona fide purchaser."

fn 9 11 USC 546(b).

56 © 2020 Association of International Certified Professional Accountants