11 U.S.C. § 550 — Liability of transferee of avoided transfer

Page 179 TITLE 11—BANKRUPTCY § 550 (B) that is not authorized under this title or by the court. (b) In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose be- fore the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has. (c) The trustee may not avoid under sub- section (a) of this section a transfer of an inter- est in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of an interest in such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such real property, against whom applicable law permits such transfer to be per- fected, could not acquire an interest that is su- perior to such interest of such good faith pur- chaser. A good faith purchaser without knowl- edge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected. (d) An action or proceeding under this section may not be commenced after the earlier of— (1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed or dismissed. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2601; Pub. L. 98–353, title III, § 464, July 10, 1984, 98 Stat. 379; Pub. L. 99–554, title II, § 283(o), Oct. 27, 1986, 100 Stat. 3117; Pub. L. 103–394, title V, § 501(d)(18), Oct. 22, 1994, 108 Stat. 4146; Pub. L. 109–8, title XII, § 1214, Apr. 20, 2005, 119 Stat. 195.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 549 of the House amendment has been re- drafted in order to incorporate sections 342(b) and (c) of the Senate amendment. Those sections have been con- solidated and redrafted in section 549(c) of the House amendment. Section 549(d) of the House amendment adopts a provision contained in section 549(c) of the Senate amendment. SENATE REPORT NO. 95–989 This section modifies section 70d of current law [sec- tion 110(d) of former title 11]. It permits the trustee to avoid transfers of property that occur after the com- mencement of the case. The transfer must either have been unauthorized, or authorized under a section that protects only the transferor. Subsection (b) protects ‘‘involuntary gap’’ transferees to the extent of any value (including services, but not including satisfaction of a debt that arose before the commencement of the case), given after commencement in exchange for the transfer. Notice or knowledge of the transferee is irrel- evant in determining whether he is protected under this provision. Editorial Notes AMENDMENTS 2005—Subsec. (c). Pub. L. 109–8 inserted ‘‘an interest in’’ after ‘‘transfer of’’ in two places and substituted ‘‘purchaser of such real property’’ for ‘‘purchaser of such property’’ and ‘‘such interest’’ for ‘‘the interest’’. 1994—Subsec. (b). Pub. L. 103–394 inserted ‘‘the trustee may not avoid under subsection (a) of this section’’ after ‘‘involuntary case,’’. 1986—Subsec. (b). Pub. L. 99–554 substituted ‘‘made’’ for ‘‘that occurs’’, and ‘‘to the extent’’ for ‘‘is valid against the trustee to the extent of’’, and inserted ‘‘is’’ before ‘‘given’’. 1984—Subsec. (a). Pub. L. 98–353, § 464(a)(1), (2), sub- stituted ‘‘(b) or (c)’’ for ‘‘(b) and (c)’’ in provisions pre- ceding par. (1) and inserted ‘‘only’’ between ‘‘author- ized’’ and ‘‘under’’ in par. (2)(A). In the original of Pub. L. 98–353, subsec. (a)(2) of section 464 thereof ended with a period but was followed by pars. (3), (4), and (5). Such pars. (3), (4), and (5) purported to amend subsec. (a) of this section in ways not susceptible of execution. In a predecessor bill [S. 445], these pars. (3), (4), and (5) formed a part of a subsec. (b) of section 361 thereof which amended subsec. (b) of this section. Such subsec. (b) of section 361 of S. 445 was not carried into Pub. L. 98–353, § 464. Subsec. (c). Pub. L. 98–353, § 464(c), amended subsec. (c) generally. Prior to amendment, subsec. (c) read as follows: ‘‘The trustee may not avoid under subsection (a) of this section a transfer, to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value or to a purchaser at a judicial sale, of real property located other than in the county in which the case is commenced, unless a copy of the petition was filed in the office where con- veyances of real property in such county are recorded before such transfer was so far perfected that a bona fide purchaser of such property against whom applica- ble law permits such transfer to be perfected cannot ac- quire an interest that is superior to the interest of such good faith or judicial sale purchaser. A good faith pur- chaser, without knowledge of the commencement of the case and for less than present fair equivalent value, of real property located other than in the county in which the case is commenced, under a transfer that the trustee may avoid under this section, has a lien on the property transferred to the extent of any present value given, unless a copy of the petition was so filed before such transfer was so perfected.’’ Subsec. (d)(1). Pub. L. 98–353, § 464(d), substituted ‘‘or’’ for ‘‘and’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–554 effective 30 days after Oct. 27, 1986, see section 302(a) of Pub. L. 99–554, set out as a note under section 581 of Title 28, Judiciary and Judicial Procedure. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 550. Liability of transferee of avoided transfer (a) Except as otherwise provided in this sec- tion, to the extent that a transfer is avoided Page 180 TITLE 11—BANKRUPTCY § 550 1 So in original. Probably should be ‘‘subsection’’. under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property trans- ferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. (b) The trustee may not recover under section 1 (a)(2) of this section from— (1) a transferee that takes for value, includ- ing satisfaction or securing of a present or an- tecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such transferee. (c) If a transfer made between 90 days and one year before the filing of the petition— (1) is avoided under section 547(b) of this title; and (2) was made for the benefit of a creditor that at the time of such transfer was an in- sider; the trustee may not recover under subsection (a) from a transferee that is not an insider. (d) The trustee is entitled to only a single sat- isfaction under subsection (a) of this section. (e)(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of— (A) the cost, to such transferee, of any im- provement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property; and (B) any increase in the value of such prop- erty as a result of such improvement, of the property transferred. (2) In this subsection, ‘‘improvement’’ in- cludes— (A) physical additions or changes to the property transferred; (B) repairs to such property; (C) payment of any tax on such property; (D) payment of any debt secured by a lien on such property that is superior or equal to the rights of the trustee; and (E) preservation of such property. (f) An action or proceeding under this section may not be commenced after the earlier of— (1) one year after the avoidance of the trans- fer on account of which recovery under this section is sought; or (2) the time the case is closed or dismissed. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2601; Pub. L. 98–353, title III, § 465, July 10, 1984, 98 Stat. 379; Pub. L. 103–394, title II, § 202, Oct. 22, 1994, 108 Stat. 4121.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 550(a)(1) of the House amendment has been modified in order to permit recovery from an entity for whose benefit an avoided transfer is made in addition to a recovery from the initial transferee of the transfer. Section 550(c) would still apply, and the trustee is enti- tled only to a single satisfaction. The liability of a transferee under section 550(a) applies only ‘‘to the ex- tent that a transfer is avoided’’. This means that liabil- ity is not imposed on a transferee to the extent that a transferee is protected under a provision such as sec- tion 548(c) which grants a good faith transferee for value of a transfer that is avoided only as a fraudulent transfer, a lien on the property transferred to the ex- tent of value given. Section 550(b) of the House amendment is modified to indicate that value includes satisfaction or securing of a present antecedent debt. This means that the trustee may not recover under subsection (a)(2) from a subse- quent transferee that takes for ‘‘value’’, provided the subsequent transferee also takes in good faith and without knowledge of the transfer avoided. Section 550(e) of the House amendment is derived from section 550(e) of the Senate amendment. SENATE REPORT NO. 95–989 Section 550 prescribes the liability of a transferee of an avoided transfer, and enunciates the separation be- tween the concepts of avoiding a transfer and recov- ering from the transferee. Subsection (a) permits the trustee to recover from the initial transferee of an avoided transfer or from any immediate or mediate transferee of the initial transferee. The words ‘‘to the extent that’’ in the lead in to this subsection are de- signed to incorporate the protection of transferees found in proposed 11 U.S.C. 549(b) and 548(c). Subsection (b) limits the liability of an immediate or mediate transferee of the initial transferee if such secondary transferee takes for value, in good faith and without knowledge of the voidability of the transfer. An imme- diate or mediate good faith transferee of a protected secondary transferee is also shielded from liability. This subsection is limited to the trustee’s right to re- cover from subsequent transferees under subsection (a)(2). It does not limit the trustee’s rights against the initial transferee under subsection (a)(1). The phrase ‘‘good faith’’ in this paragraph is intended to prevent a transferee from whom the trustee could recover from transferring the recoverable property to an innocent transferee, and receiving a retransfer from him, that is, ‘‘washing’’ the transaction through an innocent third party. In order for the transferee to be excepted from liability under this paragraph, he himself must be a good faith transferee. Subsection (c) is a further limita- tion on recovery. It specifies that the trustee is enti- tled to only one satisfactory, under subsection (a), even if more than one transferee is liable. Subsection (d) protects good faith transferees, either initial or subsequent, to the extent of the lesser of the cost of any improvement the transferee makes in the transferred property and the increase in value of the property as a result of the improvement. Paragraph (2) of the subsection defines improvement to include phys- ical additions or changes to the property, repairs, pay- ment of taxes on the property, payment of a debt se- cured by a lien on the property, discharge of a lien on the property, and preservation of the property. Subsection (e) establishes a statute of limitations on avoidance by the Trustee. The limitation is one year after the avoidance of the transfer or the time the case is closed or dismissed, whichever is earlier. Editorial Notes AMENDMENTS 1994—Subsecs. (c) to (f). Pub. L. 103–394 added subsec. (c) and redesignated former subsecs. (c) to (e) as (d) to (f), respectively. 1984—Subsec. (a). Pub. L. 98–353, § 465(a), substituted ‘‘549, 553(b), or 724(a) of this title’’ for ‘‘549, or 724(a) of this title’’. Subsec. (d)(1)(A). Pub. L. 98–353, § 465(b)(1), inserted ‘‘or accruing to’’ after ‘‘by’’. Page 181 TITLE 11—BANKRUPTCY § 552 Subsec. (d)(1)(B). Pub. L. 98–353, § 465(b)(2), substituted ‘‘the value of such property’’ for ‘‘value’’. Subsec. (d)(2)(D). Pub. L. 98–353, § 465(b)(3), sub- stituted ‘‘payment of any debt secured by a lien on such property that is superior or equal to the rights of the trustee; and’’ for ‘‘payment of any debt secured by a lien on such property.’’ Subsec. (d)(2)(E), (F). Pub. L. 98–353, § 465(b)(3), (4), struck out subpar. (E) ‘‘discharge of any lien against such property that is superior or equal to the rights of the trustee; and’’ and redesignated subpar. (F) as (E). Subsec. (e)(1). Pub. L. 98–353, § 465(c), substituted ‘‘or’’ for ‘‘and’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 551. Automatic preservation of avoided transfer Any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or any lien void under section 506(d) of this title, is pre- served for the benefit of the estate but only with respect to property of the estate. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2602.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 551 is adopted from the House bill and the al- ternative in the Senate amendment is rejected. The section is clarified to indicate that a transfer avoided or a lien that is void is preserved for the benefit of the estate, but only with respect to property of the estate. This prevents the trustee from asserting an avoided tax lien against after acquired property of the debtor. SENATE REPORT NO. 95–989 This section is a change from present law. It specifies that any avoided transfer is automatically preserved for the benefit of the estate. Under current law, the court must determine whether or not the transfer should be preserved. The operation of the section is automatic, unlike current law, even though preserva- tion may not benefit the estate in every instance. A preserved lien may be abandoned by the trustee under proposed 11 U.S.C. 554 if the preservation does not ben- efit the estate. The section as a whole prevents junior lienors from improving their position at the expense of the estate when a senior lien is avoided. § 552. Postpetition effect of security interest (a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any se- curity agreement entered into by the debtor be- fore the commencement of the case. (b)(1) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debt- or and an entity entered into a security agree- ment before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor ac- quired before the commencement of the case and to proceeds, products, offspring, or profits of such property, then such security interest ex- tends to such proceeds, products, offspring, or profits acquired by the estate after the com- mencement of the case to the extent provided by such security agreement and by applicable non- bankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. (2) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, and not- withstanding section 546(b) of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such se- curity agreement extends to property of the debtor acquired before the commencement of the case and to amounts paid as rents of such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties, then such security interest extends to such rents and such fees, charges, ac- counts, or other payments acquired by the es- tate after the commencement of the case to the extent provided in such security agreement, ex- cept to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2602; Pub. L. 98–353, title III, § 466, July 10, 1984, 98 Stat. 380; Pub. L. 103–394, title II, § 214(a), Oct. 22, 1994, 108 Stat. 4126; Pub. L. 109–8, title XII, § 1204(2), Apr. 20, 2005, 119 Stat. 194.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 552(a) is derived from the House bill and the alternative provision in the Senate amendment is re- jected. Section 552(b) represents a compromise between the House bill and the Senate amendment. Proceeds coverage, but not after acquired property clauses, are valid under title 11. The provision allows the court to consider the equities in each case. In the course of such consideration the court may evaluate any expenditures by the estate relating to proceeds and any related im- provement in position of the secured party. Although this section grants a secured party a security interest in proceeds, product, offspring, rents, or profits, the section is explicitly subject to other sections of title 11. For example, the trustee or debtor in possession may use, sell, or lease proceeds, product, offspring, rents or profits under section 363. SENATE REPORT NO. 95–989 Under the Uniform Commercial Code, article 9, credi- tors may take security interests in after-acquired prop- erty. Section 552 governs the effect of such a prepetition security interest in postpetition property. It applies to all security interests as defined in section 101(37) of the bankruptcy code, not only to U.C.C. secu- rity interests. As a general rule, if a security agreement is entered into before the commencement of the case, then prop- erty that the estate acquires is not subject to the secu- rity interest created by a provision in the security agreement extending the security interest to after-ac- quired property. Subsection (b) provides an important exception consistent with the Uniform Commercial Code. If the security agreement extends to proceeds, product, offspring, rents, or profits of the property in question, then the proceeds would continue to be sub- ject to the security interest pursuant to the terms of