Super Trustees?

Faster than speeding bullets, more powerful than locomotives and able to liquidate fully exempt property with a single motion—they’re super trustees! Taking their cue from a Superman comic book, trustees around the country are attempting to exert their self-proclaimed super trustee powers by filing motions to liquidate exempt property, particularly homesteads, to pay domestic support obligations. According to these trustees their superpowers derive, not from some Kryptonian heritage, but rather BAPCPA’s amendment to section 507(a)(1)(A).

In 2005, Congress made several changes to the bankruptcy code to benefit payees of domestic support obligations. Significantly absent from these extensive amendments was any mention of the power to liquidate exempt property. Despite the lack of express authorization for such power, trustees have argued that the amended language in section 507 gives them “implied authority” to liquidate all of the debtor’s assets, whether exempt or not, to pay domestic support obligations. The amended language of section 507(a)(1)(C) states that: “If a trustee is appointed…the administrative expenses of the trustee…shall be paid before payments of [DSO claims], to the extent that the trustee administers assets that are otherwise available for the payment of [DSO claims].” The trustees argue that Congress, in adding the trustee compensation provision and using the term “assets” instead of “property of the estate,” impliedly bestowed upon them this superpower. Given the additional fees that the trustees would generate for themselves by liquidating exempt assets (admittedly a less than altruistic motive), no one can blame them for wanting these superpowers, but here’s why this one won’t fly.

Pursuant to section 522(b)(1), debtors may exempt certain assets “from property of the estate.” Exempt assets are effectively withdrawn from the property of the estate. One of the historic purposes of exemption schemes has been to demarcate the line between property that the trustee can and cannot administer. The limited language of section 507(a)(1)(C) is simply insufficient to alter this line. Recently, in In re Quezeda, 2007 WL 438258 (Bankr. S.D. Fla. Feb. 7, 2007), the court observed that section 507(a)(1)(C) cannot be read as a grant of authority for a trustee to liquidate exempt assets when section 507 itself simply provides the priorities for distribution of property of the estate. No changes were made to the sections most relevant to the trustee’s authority to sell property—namely sections 363 and 704—that would grant trustees sweeping power to liquidate exempt assets. It should also be noted that the language relied upon by the trustees was added only after it was pointed out in the dissenting view of a House Report that absent adequate compensation trustees would be more likely to abandon non-exempt assets back to the debtor instead of administering them. Rather than giving superpowers to the trustee to liquidate exempt assets, the language of section 507(a)(1)(C) was merely intended to give trustees an incentive to administer non-exempt assets when the total of those assets was less than the DSO obligation.

Liquidation of exempt assets by trustees comes at a price to either the DSO obligee, whose claim may be reduced by the trustee’s administrative expenses, to the debtor, whose fresh start would be jeopardized by the loss of exempt property, or both. Regardless of who pays the price, it is clear that administration of such property by the trustee is unnecessary. DSO claimants and state enforcement agencies have the tools necessary to enforce DSO claims without having to pay administrative expenses to a trustee. The new noticing responsibilities for trustees in section 704 indicate that the role Congress envisioned for them is one of facilitation by putting interested parties on notice rather than enforcement by liquidation of exempt assets.

In the early days, Superman’s powers were relatively constrained. He was super strong, super fast and could jump really high. Animators later found these powers too limiting so they gave Superman the ability to fly. Congress has given trustees broad powers to administer property of the estate. Nothing, however, suggests that it viewed those powers as so limiting that it gave trustees the unprecedented ability to liquidate exempt assets. This is one where the trustees’ supersuits should go back into the closet.