The collapse of a commercial construction project may result in reorganization or liquidation through an insolvency proceeding overseen by a bankruptcy trustee or receiver. As part of the wind-down process, following the liquidation of assets the fiduciary has an obligation to equitably distribute any remaining and recovered assets to the estate’s creditors. Consequently, in order to properly allocate the assets, the fiduciary has a duty to analyze all creditor claims, including statutory lien claims.

Mechanic’s Lien Validity

The first step in examining the validity of statutory lien claims is to gather and evaluate the supporting documentation for each claim of lien. Inadequate documentation can present its own unique challenges, and the trustee or receiver may be obligated to object to a claim, even if it is listed on the debtor’s bankruptcy schedules as undisputed, in order to obtain supporting documentation.

Section 522(b)(3)(A) of the Bankruptcy Code generally permits a debtor to claim exemptions under the state or local law applicable on the date of the filing of the petition. Which state or local exemption scheme applies is determined by a debtor’s domicile during the 730 days immediately preceding the petition date, but what happens if you live in two places? In In re Felix, a case that should certainly become a bar exam problem, the Sixth Circuit Bankruptcy Appellate Panel and the bankruptcy court before it recently answered this very question.

The cases begin with a simple premise. Mr. and Mrs. Felix owned two houses: a house in Reynoldsburg, Ohio, they purchased in 2004, and a house in Upper Marlboro, Md., they purchased in 2009.

Bankruptcy trustees are armed with several familiar tools to recover assets for the benefit of the bankruptcy estate. One commonly used tool is state law avoidance powers, which is granted to trustees by § 544(b). However, trustees (and their attorneys) should be aware that § 548 provides an additional, independent cause of action to avoid transfers. The importance of this additional federal remedy was illustrated recently in the Northern District of Iowa.

In late 2016, debtor Bill Vorhes filed for chapter 7 bankruptcy. Mr. Vorhes’s schedules disclosed that he owned several assets and that he had transferred several assets — including farmland, equipment and securities — to several self-settled trusts. The bankruptcy trustee initiated adversary actions to avoid Mr. Vorhes’s transfers to the various trusts, and early on the trustee won summary judgment that the transfers were voidable under Iowa’s Uniform Voidable Transactions Act (UVTA) (via § 544(b)) as a matter of law. Using that finding as offensive mutual collateral estoppel, the trustee sought to avoid a transfer of real estate to the “Blue Mountain Wagyu Trust,” also under Iowa’s UVTA.