STRONG ARM CLAUSE - §544(a). Policy: To avoid secret liens on real and personal property.
Policy: To avoid secret liens on real and personal property.
Section 544(a) allows the trustee or DIP to void unperfected Article 9 security interests and unrecorded mortgages on real property by conferring on the trustee or debtor in possession the status of (1) a judicial lien or judgment creditor; or (2) a bona fide purchaser of real property.
The effect is that the trustee can avoid any security interest, lien or encumbrance that a judicial lien creditor or a bona fide purchaser would take free of under state law.
State and Federal Bankruptcy law work hand in hand to avoid the interest. State law determines the trustee’s (or DIP’s) rights, primarily the priority of the trustee’s claim, as a judicial lien creditor or BFP. Federal Bankruptcy law determines the consequence of those rights/priority; namely, that the inferior lien or transfer is avoided. 11 U.S.C. §544(a). Even if state law merely subordinates the unperfected lien or security interest, 544(a) makes it avoidable in its entirety.
David signed documents clearly indicating that the transactions were for the benefit of Minnie, Harry and George and that they hold undivided interests in the stock, Blackacre and the promissory note proportionate to the investments made by each of them (i.e. 40%, 25% and 35%, respectively).
If David files bankruptcy does any of the property held by David as a result of the $100K investment become property of the estate?