Chapter Fifteen. Avoiding Powers-- Introduction After reading this chapter, you will be able to: Describe the concept and purpose of the trustee’s avoiding powers List the general limitations upon the trustee’s avoiding powers

Avoiding Powers The abilities given a trustee to avoid certain pre- or postfiling transactions that would otherwise be valid under nonbankruptcy law are known as the avoiding powers. Preferences, fraudulent transfers, and the ability to set aside unauthorized postpetition transfers are the most common avoiding powers.

Strong Arm Clause Section 544 gives the trustee various powers collectively and commonly known as the strong arm powers, or the strong arm clause. The strong arm rights collectively place the trustee in full command of all a debtor’s assets affected by the bankruptcy proceeding.

Limitations on Avoiding Powers Section 546 contains several limitations on the exercise of the trustee’s avoiding powers. Actions on the avoiding powers must be commenced within one year of the trustee’s appointment or two years after the entry of the order for relief, whichever is later, but any action must be commenced before the close or dismissal of the case. This provision is essentially a statute of limitations upon the exercise of the trustee’s avoiding powers.

Limitations on Avoiding Powers A second limitation on the exercise of the trustee’s avoiding powers concerns the limited rights of certain creditors to perfect or to continue the perfection of a security interest in property notwithstanding the commencement of a bankruptcy proceeding.

Limitations on Avoiding Powers A third limitation on exercise of a trustee’s avoiding powers concerns the rights of creditors to reclaim goods under either common law or the Uniform Commercial Code.

Statutory Lien Avoidance Section 545 allows a trustee to avoid certain types of statutory liens. A statutory lien is a lien created by operation of law, not by court order or agreement. The first type of lien that is avoidable is a lien that purports to become effective only upon the debtor’s insolvency, the filing of a bankruptcy proceeding, or having a financial condition that fails to meet a defined standard. Second, a statutory lien may be avoided if it cannot be enforced against a bona fide purchaser of the debtor’s property at the commencement of a bankruptcy proceeding, whether or not such a purchaser exists except for a purchaser at a government tax lien sale.