KSB

Judge Nugent

10-05005 Parks v. Brooks et al (Doc. # 75)

Parks v. Brooks et al, 10-05005 (Bankr. D. Kan. Jul. 15, 2011) Doc. # 75

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SO ORDERED.
SIGNED this 14 day of July, 2011.


________________________________________
ROBERT E. NUGENT
UNITED STATES CHIEF BANKRUPTCY JUDGE
PUBLISH

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:
)
TRAVIS JOE BROOKS, ) Case No. 09-12383
) Chapter 7

Debtor. )
____________________________________)
)
LINDA S. PARKS, Trustee )
)
Plaintiff, )


v. ) Adversary No. 10-5005
)
TRAVIS JOE BROOKS, )
EMPRISE BANK, as Successor to )
FIRST COMMERCIAL BANK, N.A., )
DALE PRATHER and PATRICIA )
PRATHER, )

)
Defendants. )
____________________________________)


MEMORANDUM OPINION

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This case presents yet another opportunity to consider the extent of the remedies available
to a trustee who has successfully avoided an unperfected security interest in the frequently-
encountered situation where a lender has perfected its mortgage interest in real property but failed
to perfect its lien in the manufactured or mobile home that is set on the property. Recent case law
developments in the Tenth Circuit warrant another look at this oft-litigated question. Invoking her
powers under 11 U.S.C. §§ 544(a) and 551, the chapter 7 trustee seeks to avoid and preserve for the
bankruptcy estate Emprise Bank’s unperfected lien in a mobile home that the debtor continues to
occupy and claims as part of his exempt homestead.

In her Complaint, the Trustee sought to recover “either the proceeds of the Loan or the
Mobile Home.”1 She further demanded judgment against the Bank and the debtor “for turnover of
the Mobile Home or for any and all outstanding payments on the Loan . . . [and] for all future
payments on the Loan.”2 The debtor did not file an answer, but no default judgment has been
requested against him. A default judgment was entered against the defendants Prather.

The Trustee and the Bank submitted this matter to the Court on stipulated facts and briefs.3
The Court has subject matter jurisdiction over this matter.4 After careful consideration of the
stipulations, briefs, and applicable authorities, the Court is prepared to rule.

1 Dkt. 1, ¶ 13.

2 Dkt. 1, ¶ 14.

3 Adv. Dkt. 72. The trustee Linda Parks appeared by her attorney Scott M. Hill.
Emprise Bank appeared by its attorney Karl R. Swartz. The defendants Dale and Patricia Prather
did not appear and the trustee previously took default judgment against them, eliminating any
interest or title the Prathers may have had in the subject property. Adv. Dkt. 46.

4 28 U.S.C. § 1334(b) and § 157(b)(1). These proceedings are core proceedings under 28

U.S.C. § 157(b)(2)(A), (K) and (O).
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Facts

Travis Joe Brooks filed his chapter 7 bankruptcy petition on July 28, 2009. He owns a
mobile home that is situated upon real property at Gas, Allen County, Kansas, which he claims as
his exempt homestead. Debtor executed a promissory note in 2003 that renewed a debt in the
principal amount of approximately $38,000. That note was originally secured by a mortgage in
favor of First Community Bank, subsequently acquired by Emprise Bank (both lenders are referred
to herein as the “Bank”). The granting clause of the mortgage states “. . . Borrower does hereby
mortgage, grant and convey to Lender . . .” two tracts after whose legal descriptions appears the
language, “Tract I also includes a mobile home . . . TOGETHER WITH all the improvements now
or hereafter erected on the property, and all easements, appurtenances, and fixtures, now or hereafter
a part of the property. . . All of the foregoing is referred to in this Security Instrument as the
Property.”5 It does not contain any language referring to the granting of a “security interest” per se,
nor does it mention the Uniform Commercial Code. The Bank contends that it never took a lien in
the mobile home because the mortgage is not a security agreement and, accordingly, argues there
is no lien for the trustee to avoid and preserve.6 The title to the mobile home was never eliminated
under KAN. STAT. ANN. § 58-4214 (2005) nor did the Bank ever perfect a security interest in it under
KAN. STAT. ANN. § 58-4204 (2010 Supp.).7

5 Dkt. 72, Exhibit B.

6 See In re Seibold, 351 B.R. 741 (Bankr. D. Idaho 2006) (The trustee cannot preserve a
nonexistent lien; where a security agreement did not exist under applicable state law, there is
nothing for the trustee to avoid.).

7 In the absence of eliminating the title to the mobile home as provided by the statute, the
Bank was required to note its lien on the certificate of title in order to perfect a security interest
in the mobile home.

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The Bank’s mortgage covers Tract I (including the mobile home) in Gas, and Tract II in Iola,
Kansas. Nothing in the stipulations tells the Court whether the debtor retains the property in Iola
and nothing in the Court’s file indicates that the Bank has recovered or realized upon that property
or that the debtor has abandoned it. The trustee’s appraiser valued the Iola tract at $5,000. The
Bank accepts this value. Both parties provided appraisal evidence concerning the Gas property
where the mobile home is set.8 The Trustee’s appraiser essentially “backs into” the Trustee’s value
by deducting his estimate of the various other components of the Bank’s collateral from the Bank’s
debt. By comparison, the Bank’s appraiser submitted two Uniform Residential Appraisal Reports,
one for Tract I and the garage, and one for the whole.9 The Bank’s appraiser values Tract I and the
garage at $12,800 and values Tract I, the garage, and the mobile home at $35,400. This leaves
$22,600 for the mobile home. Thus, the total value of Tracts I and II, with the mobile home, is
$40,400. The Bank’s appraiser further concludes that the net value of the home, after removal from
Tract I, is $10,500. The Court finds that the foregoing values are accurate and supported by the
expert report. The Bank filed a proof of claim for $31,532, the principal amount of the note the
debtor owed on the date of the petition.

These stipulated facts yield two issues: first, did the Bank take a lien in the mobile home that
can be avoided and preserved by the trustee and, second, if it did, what is the trustee’s remedy
beyond preservation of the lien under § 551?

Analysis and Conclusions of Law

8 Photographs included with the appraisers’ reports suggest the home is set on a crawl

space.
9 Dkt. 72, Exhibit F.
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1. Did the Debtor Grant a Security Interest in the Mobile Home?
With respect to the first issue, this matter is similar, but not identical to, the Moore case this
Court recently decided.10 In Moore, the mortgages clearly referenced taking a UCC security interest
in the fixtures. The Court concluded that the bank in Moore had taken a lien in the fixtures, that it
was not perfected, and that it could be avoided and preserved for the estate.

To determine whether the Bank has a security interest in the mobile home in this case, we
look first to the Uniform Commercial Code, and, in particular, the attachment provision in KAN.
STAT. ANN. § 84-9-203 (2010 Supp.). That section provides that a security interest attaches when
it becomes enforceable and that a security interest becomes enforceable when three conditions have
occurred.11 First, the secured party must have given value; second, the debtor must have acquired
rights in the collateral; and third, the debtor must have authenticated a security agreement that
provides a description of the collateral. In this case, it is clear that the Bank advanced the debtors
funds and that the debtors had rights in the mobile home at the time of the advance. Whether the
debtors “authenticated a security agreement” requires further consideration.

A “security agreement” is defined in KAN. STAT. ANN. § 84-9-102(a)(72) (2010 Supp.) as
“an agreement that creates or provides for a security interest.” A “security interest” is defined in
KAN. STAT. ANN. § 84-1-201(b)(35) (2010 Supp.) as “an interest in personal property or fixtures
which secures payment or performance of an obligation.” The Bank’s mortgage describes the
mobile home, albeit in general terms, and states the tract of real estate where it is set. Because title

10 J. Michael Morris, Trustee v. Dickinson County Bank (In re Moore), Adv. No. 095157;
Case No. 09-11051 (Bankr. D. Kan. Mar. 23, 2011).
11 Section 84-9-203(a) and (b).
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to the mobile home has not been eliminated as provided by statute, the mobile home is deemed
personal property.12 The mortgage is an “agreement” between the debtors and the Bank.13 In
addition to the reference to the mobile home in the granting clause, the clause that begins with the
words “TOGETHER WITH,” references “fixtures.” “Fixtures,” in turn, are defined in the Uniform
Commercial Code at KAN. STAT. ANN. § 84-9-102(a)(41) (2010 Supp.) as “goods that have become
so related to particular real property that an interest in them arises under real property law.” The
Bank’s mortgage specifically grants a security interest in the mobile home and, if that is not enough,
in fixtures. Finally, the mortgage is signed by the debtors and is therefore authenticated.14 Thus,
the Bank has a lien in the mobile home that the Trustee may avoid; the parties stipulate that the
Bank’s lien was unperfected and is therefore avoidable.

2.
What Remedy is Available to the Trustee Beyond Preservation of the Lien
Under § 551?
The Trustee requests not only the avoiding of the Bank’s lien, but also a share of the stream
of payments being received by the Bank on its note. Over a period of many years, trustees in this
Court have avoided unperfected liens that encumber exempt property like cars and manufactured
homes and attempted, often with success, to collect the obligations that were secured by those liens.
Relying on a variety of theories, the trustees argue that merely preserving avoided liens is not
sufficient to restore the estate to its pre-transfer position without the trustees being permitted to
collect part of the payment stream of the underlying obligations. This Court has traditionally

12 See KAN. STAT. ANN. § 58-4214 (2005).
13 The Court also observes that the mortgage is referred to as a “Security Instrument.”
Dkt. 72, Exhibit B.
14 KAN. STAT. ANN. § 84-9-102(a)(7) (2010 Supp.).
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allowed that remedy in chapter 7 cases where the trustee successfully avoided a lien on an exempt
asset that the debtor retains and continues to service the underlying debt.15 A series of decisions in
the appellate courts of the Tenth Circuit casts doubt on the availability of this remedy.

Before perusing the case law in this area, we review the applicable statutes in the Bankruptcy
Code. Section 551 provides that “[a]ny transfer avoided under section . . . 544 . . . is preserved for
the benefit of the estate but only with respect to property of the estate.” Section 551 coins the
“automatic preservation rule;” its effect is to place the estate automatically in the shoes of the
avoided creditor (i.e. giving the avoided lien to the estate) and preserves the avoided lien’s priority.16
Section 550(a) provides that “the Trustee may recover, for the benefit of the estate, the property
transferred, or, if the court so orders, the value of such property, from – (1) the initial transferee of
such transfer or the entity for whose benefit such transfer was made . . .” The permissive language
of § 550(a) and inclusion of the terms “if the court so orders” suggest that additional remedies
beyond automatic preservation of the avoided lien remedy are discretionary and not mandatory. If
avoidance and preservation alone fully satisfies the estate, a § 550(a) recovery is not warranted.17
A trustee is entitled to “only a single satisfaction” under § 550(a).18

 The Court’s study of §§ 551 and 550(a) reveals that it has been a fertile ground of discussion
for the Tenth Circuit appellate courts. Several decisions speak to the rights of the bankruptcy trustee

15 See Nazar v. North American Savings Bank FSB (In re Born), Adv. No. 05-5067; Case
No. 04-14382 (Bankr. D. Kan. Mar. 2, 2006), aff’d 357 B.R. 630 (10th Cir. BAP 2006).
16 See Hon. William L. Norton, Jr. and William L. Norton, III, 4 NORTON BANKRUPTCY
LAW AND PRACTICE § 71:1 and 71:2 (3rd Ed. 2008) (hereafter “Norton’s”).
17 Norton’s cites the avoidance of a lien as such a situation. See 4 Norton’s, § 70:3.
18 Section 550(d).
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upon successfully avoiding a lien. The Court reviews the progression of those cases leading up to
and culminating with the Tenth Circuit Court of Appeals’ most recent pronouncement in Trout.19

In In re Rubia,20 the Tenth Circuit Bankruptcy Appellate Panel (BAP) addressed whether a
trustee who avoided an unperfected vehicle lien could force the lender who continued to receive
payments post-petition to turn them over as part of his remedies. In Rubia, the debtor borrowed
money on his 1994 Ford Ranger truck. The debtor claimed the truck as his exempt means of
conveyance under Kansas law21 and continued to make his loan payments to the credit union even
after he filed his bankruptcy. After the trustee sued to avoid the credit union’s lien, the credit union
agreed that the lien should be avoided, but continued to contest the trustee’s claim that he should
also recover the post-petition payments. The bankruptcy court sided with the lender and the trustee
appealed to the BAP. There the BAP held that the avoidance of the credit union’s lien merely meant
that the credit union could no longer look to the truck to satisfy its debt. Any payments it had
received were to be credited against its now unsecured claim. The value of the trustee’s lien was
limited to the amount of the credit union’s debt that the lien formerly secured as of the petition
date.22 With regard to what the trustee could collect from the debtor, the BAP majority stated
unequivocally–

19 Rodriguez v. Drive Financial Services, L.P. (In re Trout), 609 F.3d 1106 (10th Cir.
2010).
20 Morris v. Vulcan Chemical Credit Union (In re Rubia), 275 B.R. 324 (10th Cir. BAP
2001), aff’d sub nom. In re Rubia, 23 Fed. Appx. 968 (10th Cir. Dec. 12, 2001).
21 See KAN. STAT. ANN. § 60-2304(b) (2005).
22 275 B.R. at 328.
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However, absent an agreement between the Trustee and the debtor requiring the

debtor to pay for the Ranger, the Trustee has no right to collect anything from the

debtor inasmuch as the Trustee's rights are solely in the Ranger.23
Thus, Rubia stands for the rule that the recovery of a trustee avoiding a non-possessory lien is
limited to the collateralized property, up to the amount of the debtor’s debt to the lienholder on the
date of filing, and does not include any right to payments made by the debtor. The Tenth Circuit
affirmed the BAP’s decision in an unreported order.

The BAP next addressed avoidance and recovery issues in In re Born.24 In that case, the
debtor retained and continued to make payments on his mobile home even though the trustee
successfully avoided the lender’s lien on it. The trustee attempted to value the preserved lien as a
multiple of the lender’s pre-petition debt rather than the value of the mobile home itself. Instead,
this Court ordered that the trustee be permitted to recover a share of each payment the debtor made
based upon the value of the mobile home relative to the value of the home and the real estate it
occupied.25 While the BAP referred to this means of realization as “novel,” it noted that the payment
division was not at issue on appeal and “offer[ed] no opinion as to whether a trustee or a lender
could be compelled to accept such payments in lieu of more traditional means of lien foreclosure
or satisfaction.”26 Instead, the BAP focused on the issue of the value the trustee could recover and
concluded that when a trustee avoids a lien, he has an interest in the property that is subject to it and

23 Id. at 328-29.
24 Nazar v. North American Savings Bank, et al., (In re Born), 357 B.R. 630 (10th Cir.
BAP 2006).
25 Nazar v. North American Savings Bank, et al., (In re Born), Adv. No. 05-5067; Case
No. 04-14382 (Bankr. D. Kan. Mar. 2, 2006), Adv. Dkt. 33, Memorandum Op. at 6-7.
26 357 B.R. at 632.
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not in the underlying debt or any stream of payments it might generate. Therefore, the trustee’s
recovery, if any, is limited to the value of the property or the debt, whichever is less.

Next, in Haberman, the Tenth Circuit Court of Appeals squarely considered whether the
automatic preservation of a lien under § 551 gives the trustee the right to collect the debt that the
avoided lien secures or whether the trustee’s right of recovery is limited to the value of the
collateral.27 In Haberman, the debtors borrowed approximately $3,000 from a bank to buy a
computer. To secure repayment of the note, the bank took a security interest in the debtors’ 1980
Pontiac. Unfortunately, the bank did not properly perfect its lien and the trustee avoided it using his
hypothetical lien creditor powers under § 544. In the course of the trustee’s adversary proceeding,
the bankruptcy court authorized the bank to continue to collect payments, subject to the surrender
of some of the collected funds should the trustee prevail. While the adversary proceeding
progressed, the debtors paid off the note. What they paid exceeded the value of the car by $1,000.
When the trustee won the lien’s avoidance, he sought to recover all of the payments the debtors had
made, not just the car’s value, and asserted that when he avoided the lien, he succeeded not only to
the lien itself, but also the contractual payment obligations that it secured. The bankruptcy court
granted judgment for only the value of the car at the petition date and the trustee appealed. The BAP
affirmed and the trustee appealed their order to the Tenth Circuit.

The Circuit Court framed the issue as whether, upon avoidance, the trustee recovers the
avoided lien or its value or the actual amount of the creditor’s note. It held that § 551 operates to
preserve the avoided lien, not any other rights that the lien holder may have had. The court relied
on § 551's express language preserving liens and transfers, but not contractual promises for future

27 Morris v. St. John Nat’l Bank (In re Haberman), 516 F.3d 1207 (10th Cir. 2008).
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payments, to hold that upon avoidance, the trustee does not “become” the creditor.28 Rather, he only
succeeds to the property interest that was avoided. Thus in Haberman, the Tenth Circuit held that
the trustee could only recover the $2,000 value of the car instead of all of the payments collected
by the Bank.

That left the question of whether § 550(a)’s recovery provisions require the bankruptcy court
to allow a trustee to recover the “value” of an avoided lien in addition to its preservation. The Tenth
Circuit answered in the negative in In re Trout.29 In that case, a trustee had avoided the unperfected
purchase money security interest a lender took in motor vehicles. The bankruptcy court denied the
trustee’s demand for a money judgment for the value of the vehicles as of the petition date and
instead concluded that preserving the avoided lien for the estate’s benefit was sufficient. The BAP
and Tenth Circuit affirmed.

The Tenth Circuit concluded that relief under § 550(a) is not automatic and, as it previously
held in Haberman, that a trustee avoiding a creditor’s non-possessory lien steps into the creditor’s
shoes with the same rights in the collateralized property that the lienholder formerly held.30 If
preserving the lien makes the estate whole, allowing a judgment against the lienholder under §550(a)
would afford the trustee the second satisfaction that is barred by § 550(d). Instead, according to
Trout, § 550(a) allows the court to fashion a remedy that returns the estate to its pre-transfer
position. Only when the collateral has already been realized upon, or it is unrecoverable for some
reason, should the court consider an award of its value as opposed to the mere preservation of the

28 Id. at 1211.
29 Rodriguez v. Drive Financial Services, L.P. (In re Trout), 609 F.3d 1106 (10th Cir.


2010).
30 609 F.3d at 1009, citing Haberman, 516 F.3d at 1210.
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lien.31

Distilling the rules in these four cases, the Court concludes that nothing in the bankruptcy
code authorizes the Trustee to collect the underlying debts or allows her to “become the creditor”
as the trustee alleged in Rubia. Whatever the Trustee may recover is limited by the lesser of the
underlying debt as allowed in Rubia or the value of the collateral of the avoided lien as found in
Born. Haberman establishes that § 551 preserves for the estate only the former lienholder’s interest
in the collateralized property, leaving the former lienholder’s contractual rights to payment
undisturbed. Finally, Trout holds that § 550(a) does not mandate that the trustee receive the value
of an avoided lien, but rather provides the bankruptcy court with the discretion to fashion relief that
places the estate in the position it would have occupied had the avoided transfer not occurred. This
is the touchstone: what is necessary to replace the estate in its pre-transfer position? The scope of
relief can be as narrow as mere preservation of the lien under § 551 or, in appropriate circumstances,
as broad as a money judgment against the former lienholder for the value of the collateral if the
collateral is not otherwise recoverable under § 550(a). All four decisions make it very clear that,
in the absence of some sort of agreement with the debtor, the trustee does not have the right to
enforce the lienholder’s right to collect the note payments. What then should Trustee Parks expect
to recover in respect of her avoided lien in the debtor’s mobile home in this case?

As noted in the findings of fact, the Court has concluded that the mobile home was worth
$22,600 at the petition date. The entirety of the mortgaged property has a value of $40,400. The
Tract II property contributes $5,000, or 12.38 percent of the total value while the Tract I real

31 609 F.3d at 1111-13. The Circuit Court expressly rejected circumstances where the
collateral for the lien is diminishing in value as a basis for awarding the value of the avoided lien
under § 550(a). Id. at 1112.

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property and garage contribute $12,800 or 31.68 percent. The mobile home therefore contributes

55.94 percent of the total value. The Bank’s claim amounts to $31,532 as of the date of filing.
Because the debtor intends to remain in the homestead, the Court values the mobile home as it is
currently used, rather than as if the Trustee removed it. The Court therefore concludes that the value
of the Trustee’s avoided and preserved lien in the mobile home at Gas is not more than 55.94 percent
of the Bank’s pre-petition debt, or $17,639, and that the Trustee may not recover more than that
amount in realizing upon her lien. The Bank’s secured claim is therefore reduced in a like amount
to $13,893 and a corresponding unsecured claim in the amount of $17,639 is allowed. The Bank’s
remaining secured claim is secured by the Tract I real property and garage and the Tract II real
property.
This is not an appropriate case for the Trustee to recover the value of the avoided lien under
§ 550(a) because preserving the avoided lien is itself sufficient to make the estate whole.32 None
of the circumstances that might justify allowing recovery of the value of the lien rather than its
preservation are present here. The debtors remain in their homestead and continue to pay the Bank
their note payment. The mobile home has not been repossessed, foreclosed upon, or destroyed. The
Trustee has no right to possess the mobile home because the debtors have claimed it as part of their
exempt homestead. Had the mobile home been repossessed, foreclosed upon, sold or destroyed, the
Trustee would, under Trout’s reasoning, have a cognizable claim for recovery of the value of the
mobile home.33 Allocating a portion of the payments to the estate as the Trustee requests is the same

32 The Trustee may obtain the avoided and preserved lien or the value of the avoided
lien, but not both. See Trout, supra at 1108, n. 2; § 550(d).

33 See Tidwell v. Chrysler Credit Corp. (In re Blackburn), 90 B.R. 569, 573 (Bankr.

M.D. Ga. 1987)(vehicle repossessed pre-petition and sold to good faith purchaser) and Morris v.
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as granting the Trustee a money judgment against the Bank for its value. Because no circumstances
exist that would warrant that result, the Trustee’s request for that relief should be denied.
Preservation of the lien under § 551 places this estate in the position it occupied before the lien was
granted.

In so holding, the Court recognizes its prior decision in Born where it authorized the
recovery of allocated payments to address the lien interests of both the bank (as to the land) and the
trustee (as to the home).34 The Court concludes that awarding this form of relief in the absence of
the circumstances identified by the Tenth Circuit in Trout is no longer appropriate.35 The Court also
recognizes that a preserved lien in a mobile home, by itself, may not have the immediate liquid value
that the Trustee anticipated receiving from the prorated payment stream. Prudent business judgment
requires that trustees evaluate case by case whether avoiding and preserving liens of this type
sufficiently benefits the creditors of their various estates to justify those actions.36

Judgment should therefore be entered for the Trustee avoiding and preserving for the estate

Kan. Drywall Supply Co., Inc. (In re Classic Drywall, Inc.), 127 B.R. 874, 877 (D. Kan. 1991)
(supplier removed merchandise from warehouse and sold a portion of it).

34 Nazar v. North American Savings Bank FSB (In re Born), Adv. No. 05-5067; Case No.
04-14382 (Bankr. D. Kan. Mar. 2, 2006), aff’d 357 B.R. 630 (10th Cir. BAP 2006). In examining
the relief awarded to the trustee, the BAP stated: “While this method of realization upon an
avoided lien seems somewhat novel, it is not at issue in this appeal. Bank does not contest the
forced allocation of payments. We offer no opinion as to whether a trustee . . . could be
compelled to accept such payments in lieu of more traditional means of lien foreclosure or
satisfaction.” 357 B.R. at 632.

35 The Court notes that Born was neither mentioned nor discussed in Trout.

36 While it does not bear on the issue at hand, the Court takes note that the Trustee has
pursued the remedy of avoiding a $17,639 lien in an attempt to pay an unsecured claim pool of
$639. See Claims Register, Case No. 09-12383. This leads the Court to wonder how litigation
of this magnitude was justified and, further, how compensating Trustee’s counsel for pursuing
this litigation can be justified in light of the economy of this case.

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the Bank’s security interest in the mobile home at Gas, Kansas, up to the amount of $17,639. The
Bank is allowed an unsecured claim in the amount of $17,639. The Trustee’s request for the value
of the avoided lien by recovery of a pro-rated share of debtor’s note payments is denied. A
judgment on decision will issue this day.

# # #

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