IN RE:

GORMAN V. LAWSON

DEBTOR CASE NO. 04-20441

Introduction

Cintel Federal Credit Union ("Cintel") is before the court on the motion for relief from the automatic stay and abandonment that it filed in this case on March 17, 2004. The motion seeks relief from the stay imposed by § 362 of the Bankruptcy Code to take possession and dispose of a 1996 Jeep Cherokee (the "Vehicle") in which it claims a security interest, and an order compelling Lori A. Schlarman, as trustee (the "Trustee") of the bankruptcy estate of Gorman V. Lawson (the "Debtor"), to abandon the Vehicle. On April 6, 2004 the Debtor filed an objection relying on the fact that Cintel's security interest in the Vehicle is not perfected. Having considered the motion, the objection, the supplemental brief filed by Cintel on May 18, 2004, and the parties' arguments, the court will conditionally sustain the motion.

Facts

On December 5, 2001, Nichole R. Lawson, the Debtor's former spouse, obtained a loan from Cintel and granted it a security interest in the Vehicle to secure repayment of the loan. The certificate of title was issued in Ms. Lawson's name on September 30, 2002, but the title does not note the existence of any liens on the Vehicle. ⁽¹⁾

The Debtor and Nichole R. Lawson were divorced on February 3, 2004. The Property Settlement Agreement incorporated into their Decree of Dissolution includes the following sentence: "The Husband shall be awarded the 1996 Jeep Wrangler and shall be responsible for the outstanding debt thereon, if one exists, and agrees to hold the Wife harmless therefrom." On February 29, 2004 the Debtor filed a voluntary petition commencing this Chapter 7 case.

The schedules of assets that the Debtor filed in this case state that the Vehicle has a value of $5,467.37. Cintel's motion is appended with information indicating that the value of the Vehicle is $3,248 to $5,098. Cintel has filed a proof of claim for $4,221.01.

Discussion

The court must first determine what interest the Debtor holds in the Vehicle. The Property Settlement Agreement provided for the award of the Vehicle ⁽²⁾ to the Debtor but, in the same sentence, further provided that the Debtor "shall be responsible for the outstanding debt thereon, if one exists." In addition, Section 355.9-315(1)(a) of the Kentucky Revised Statutes makes clear that "[a] security interest . . . continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest." The court concludes, therefore, that the Decree of Dissolution conferred on the Debtor equitable ownership of the Vehicle but that that interest remains subject to the security interest granted to Cintel by the Debtor's former spouse. See City Nat'l Bank & Trust Co. v. Pyle, 609 P.2d 966, 968-69 (Wash. Ct. App. 1980). This equitable interest became property of the bankruptcy estate when the Debtor filed his Chapter 7 petition. 11 U.S.C. § 541(a)(1); Demczyk v. Mut. Life Ins. Co. (In re Graham Square, Inc.), 126 F.3d 823, 831 (6th Cir. 1997) ("equitable title unquestionably constitutes property of the estate"); see also 11 U.S.C. § 541(a)(5)(B) (property of estate includes property debtor becomes entitled to acquire as result of property settlement agreement or divorce decree during 180-day period following commencement of case).

Insofar as the automatic stay protects property of the debtor, 11 U.S.C. § 362(a)(5), there is always "cause" for relief from the stay in a Chapter 7 case, id. § 362(d)(1). E.g., In re Davenport, 266 B.R. 787, 788-89 (Bankr. W.D. Ky. 2001). A debtor who is unable to exercise his or her right of redemption under § 722 or to negotiate a reaffirmation agreement under § 524(c) simply has no choice but to surrender the collateral. 11 U.S.C. § 521(2); see General Motors Acceptance Corp. v. Bell (In re Bell), 700 F.2d 1053 (6th Cir. 1983). In addition, the automatic stay's protection of property of the debtor expires upon the granting of a discharge, 11 U.S.C. § 362(c)(2)(C), and, in this case, absent an objection, discharge will be granted approximately one month from now.

However, the automatic stay also protects property of the estate, id. § 362(a)(2)-(4), and that protection does not expire until the property is no longer property of the estate, id. § 362(c)(1). The Trustee may seek to avoid Cintel's security interest in the Vehicle due to Cintel's failure to have its lien noted on the Debtor's former spouse's certificate of title, with the lien preserved for the benefit of the estate. 11 U.S.C. §§ 544, 551. On the other hand, the Trustee may conclude that the likelihood of success and the extent of the consequent recovery are outweighed by the trouble and expense of initiating and prosecuting an adversary proceeding. The court is reluctant to grant relief from the stay and compel abandonment of the Vehicle without affording the Trustee a reasonable opportunity to consider her options.

Conclusion

For the foregoing reasons, the court will enter a separate order sustaining Cintel's motion effective thirty days from the entry of the order, provided that the Trustee does not during that period file a complaint to avoid Cintel's security interest. If such a complaint is filed within that thirty-day period, the automatic stay will continue in effect pending the conclusion of the adversary proceeding.

Copies to:

Mark N. Dierks, Esq.

John L. Day, Jr., Esq.

Stuart P. Brown, Esq.

Lori A. Schlarman, Trustee

1. The vehicle identification number on the security agreement appears to omit one digit of the VIN as shown on the title.

2. The court notes that the divorce court awarded a 1996 Jeep Wrangler to the Debtor, while Cintel's motion seeks relief from the automatic stay with respect to a 1996 Jeep Cherokee. Absent evidence to the contrary, the court will assume that the language of the Property Settlement Agreement represents a clerical error and that the divorce court intended to and did award the Vehicle to the Debtor.