Federal Deposit Insurance Corporation, Appellant, v. Gloria B. Davis, Appellee, 733 F.2d 1083 (4th Cir. 1984)

This is an action for the sale of certain real estate allegedly conveyed by David S. Davis (Davis) to his wife, Gloria B. Davis, in fraud of Davis's creditors. The Federal Deposit Insurance Corporation (FDIC) appeals from an order of the district court granting summary judgment to Gloria Davis. We conclude that the district judge erred in granting summary judgment and, therefore, reverse the order and remand the case for trial.

In 1973, Davis and Coachwood Investments, Inc., executed and delivered to American Bank & Trust Company a promissory note secured by a real estate mortgage. When American Bank & Trust Company closed the following year, the note and mortgage were purchased by the FDIC.

Thereafter, in 1974, and again in 1978, Davis conveyed to his wife substantial parcels of real estate for nominal consideration. The FDIC subsequently brought an action in state court against Coachwood Investments, Inc., and Davis to recover on the note and to foreclose upon the mortgage. The FDIC obtained a deficiency judgment which it filed against Davis in Lexington County, South Carolina, on July 2, 1980.

On August 27, 1980, Davis filed for bankruptcy and a trustee in bankruptcy was appointed. Although the judgment debt of Davis to the FDIC was listed in the bankruptcy schedules, the trustee in bankruptcy neither attacked the conveyances by Davis to his wife nor attempted to avoid the judgment lien of the FDIC. The case was closed and Davis was discharged in bankruptcy on November 13, 1980.

The FDIC subsequently brought this action against Gloria Davis in federal district court to compel the judicial sale of the property Davis transferred to his wife, and to have the proceeds of this sale applied toward the judgment the FDIC had obtained against Davis. The district judge refused to allow the FDIC to attack Davis's conveyances on the grounds that (1) the FDIC's judgment lien had been acquired less than two months before Davis filed for bankruptcy, while Davis was insolvent, and was therefore voidable at the instance of the trustee in bankruptcy, and (2) no individual creditor could attack such conveyances independently of the trustee in bankruptcy. The district court granted summary judgment for Gloria Davis and the FDIC appeals.

On appeal, the FDIC argues that the district judge erred in concluding that the FDIC could not attack the allegedly fraudulent conveyances. We agree and hold that, as a secured party with an unavoided lien, the FDIC had a right to attack the conveyances.

Under Sec. 547 of the Bankruptcy Reform Act of 1978¹  (the "Bankruptcy Code"),²  the trustee may avoid as preferential any transfer of property of the debtor to a creditor on account of an antecedent debt which was made while the debtor was insolvent and made within ninety days before the date the petition was filed. 11 U.S.C. § 547(b).³  The acquisition by a creditor of a lien on property of the debtor can be a preferential transfer under Sec. 547. 11 U.S.C. § 101(40). Thus, by perfecting a judgment lien on July 2, 1980, the FDIC received a preferential transfer, because Davis filed his petition on August 27, 1980, fewer than ninety days after that date.⁴ 

Preferences under Sec. 547, however, are voidable, not void. Fischer v. Pauline Oil & Gas Co., 309 U.S. 294, 301-02, 60 S. Ct. 535, 538-39, 84 L. Ed. 764 (1940).⁵  Consequently, the trustee must take affirmative steps in the bankruptcy court to set aside a preferential transfer. The trustee in Davis's bankruptcy did not attack the FDIC's judgment as a preference.

In finding that the FDIC's lien could still be avoided by the trustee, the district judge apparently assumed that a voidable lien remained voidable forever. To the contrary, the Bankruptcy Code specifically states that a trustee may not commence an action under Sec. 547 after the earlier of two years from the time he is appointed or from the time the case is closed or dismissed. 11 U.S.C. § 546(a). The bankruptcy case was closed on November 13, 1980, less than three months after Davis's trustee was appointed. The trustee chose not to attack the FDIC's lien before the case was closed and, therefore, would have no power to attack the lien now.⁶ 

The FDIC further contends that the district judge erred in holding that under Glenny v. Langdon, 98 U.S. 20, 25 L. Ed. 43 (1878), no individual creditor could attack an allegedly fraudulent conveyance independently of the trustee in bankruptcy. We agree.

In Glenny, the Supreme Court held that the unsecured creditors of a bankrupt debtor could not assert the rights granted a trustee under the bankruptcy law. This holding is inapplicable to the facts of the instant case, as the FDIC is seeking to enforce a secured judgment lien which exists under state law independently of the trustee's rights under bankruptcy law.

Once a bankruptcy case has been closed, creditors having unavoided liens on fraudulently conveyed property can pursue their state law remedies independently of the trustee in bankruptcy. See Branch v. Human, 215 Ga. 209, 109 S.E.2d 732 (1959) (a judgment lien is enforceable against property which the bankrupt debtor has fraudulently conveyed, even where the lien was acquired within four months of the debtor's petition for bankruptcy, if the lien has not been avoided in the bankruptcy proceeding); Matney v. Combs, 171 Va. 244, 198 S.E. 469 (1938) (a judgment creditor does not lose any of his rights to assert his lien if the trustee does not avoid a fraudulent conveyance). When the bankruptcy case was closed the FDIC had an unavoided lien which attached to the property. It was, therefore, free to attack a fraudulent conveyance of that property.

For the foregoing reasons, we reverse the order of the district court and remand the case for trial.

REVERSED.