Michigan Bankruptcy Blog

Chapter 7 Trustee is Not a "Lien Creditor" as to Lien Preserved for the Benefit of the Estate

In re Neal, Bankr. E.D. Mich., Feb. 8, 2010 (Case No. 08-57254, Hon. Steven Rhodes).

In this case, the chapter 7 debtors claimed an exemption in their house, which was also subject to an unperfected mortgage. The trustee commenced an adversary proceeding, and the court set aside the mortgage. The trustee then tried to sell the house, but the debtors allegedly failed to cooperate with the trustee and refused to vacate the house.

The trustee filed a motion to compel the debtors to vacate the house, and the debtors moved to compel the trustee to abandon the house. The debtors argued that the trustee only held a lien that had to be foreclosed and that the debtors retained a right to redemption.

The court disagreed with the debtors and held that a trustee does not act as a lien creditor when a lien has been preserved under 11 U.S.C. § 551. Rather, the trustee is simply selling property as required by the Bankruptcy Code. The court further held that the debtors' exemption was not superior to the trustee's right to sell the property and that the debtors would be entitled to payment only to the extent that there was equity in the property. Accordingly, the court found in favor of the trustee. 

Categories: Chapter 7, Eastern District of Michigan