DEBTOR CASE NO. 96-60784





VS. ADV. NO. 97-6010







This matter is before the Court on cross Motions for Summary Judgment by the plaintiff and defendant Cumberland Valley National Bank (Athe Bank@). The question before the Court is whether a preferential transfer of the debtor=s interest in secured property took place so as to allow the plaintiff trustee to avoid that transfer. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(F).

The parties have entered into Joint Stipulations which set out that the debtor and her former husband purchased an automobile in December 1992 with funds borrowed from the Bank. The Bank therefore became a secured creditor. In November 1995, the debtor and here husband were divorced, and the Final Decree entered therein provided that the debtor would retain the subject automobile and be responsible for any debt owing against it. The debtor agreed to hold her former husband harmless in regard to this debt.

In July 1996, the debtor entered into a transaction with the Bank and the Laurel County Clerk=s Office to remove the name of her former husband from the title to the subject automobile and place title to the automobile in her name only. The transaction consisted of executing a new Promissory Note and Security Interest by the debtor and the Bank; however, no new money was loaned. The parties have further stipulated that a new title to the subject automobile could not be issued until the previous lien on it was released. The December 2, 1992, lien was therefore released and a new security agreement and title lien statement were recorded simultaneously with the release. The Bank took these actions merely to accommodate a customer and was in no way compelled to do so.

The plaintiff=s Complaint alleges that the transaction set out above constitutes a preferential transfer pursuant to 11 U.S.C. '547(b). He also alleges a fraudulent transfer pursuant to 11 U.S.C. '548 but has not presented any argument on that allegation. Section 547(b) provides that the trustee may avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor; for or on account of an antecedent debt; made while the debtor was insolvent; on or within 90 days of the filing of the petition. The transfer must also enable the creditor to receive more than it would receive if the transfer had not been made and a Chapter 7 distribution took place. In order to prevail, the trustee must establish all the elements of '547(b).

The plaintiff contends that the release of lien as to the debtor=s husband in July 1996 meets the requirements of '547(b). While several elements of that section appear to be present, others are questionable. First of all, the plaintiff has not established that an actual transfer took place. The parties have stipulated that when the debtor=s husband=s name was removed from the automobile title, the lien released, and a new security agreement and title lien statement issued, that no new money changed hands.

The Bank has alleged that KRS 355.9-301(2) provides that an intervening lien creditor cannot acquire an interest superior to the properly perfected purchase money lien creditor=s. The July 1996 security agreement was filed almost simultaneously with the release of the December 1992 security agreement covering the same vehicle. The new security agreement was a refinance of the original debt, making KRS 355.9-301(2) applicable to the Bank=s purchase money security interest pursuant to the July 1996 agreement. The purchase money status of a creditor=s security interest survives the subsequent refinancing of the same loan by the same creditor.

The Bank cites in support of this argument In re Conn, 16 B.R. 454 (Bkrtcy.W.D.Ky. 1982). There the court held that the purchase money character of a security interest survives refinancing. The majority of courts agree with this position. Further, since the plaintiff is in the position of a lien creditor, he falls within the purview of KRS 355.9-301(2), since the Bank=s security interest was obtained and perfected long before the filing of the debtor=s case. The Bank=s position is only strengthened by the fact that in this matter, there was not even an actual refinancing, or new money changing hands. The plaintiff has not responded to this argument.

The plaintiff seems to concentrate his efforts on the contention that the Bank somehow gained an advantage by releasing the debtor=s husband from his obligation. The plaintiff equates this Aadvantage@ with the last element of '547(b), that the Bank would receive more from the alleged transfer than from a Chapter 7 distribution. He argues in his Memorandum in Support of Motion for Summary Judgment as follows:

Apparently the benefit that is conferred herein is the fact that the debtor and her former husband, who had gone through a very contentious divorce were no longer parties to the same liability and by having the name of the co-debtor husband removed from the title the bank would deal with only one individual in it=s collection or recovery aspects of the situation. Due to the contentious nature of the divorce, .... a substantial benefit was conferred upon the both the bank and the debtor by particular device. The method whereby the debtor may collect the funds is enhanced and the parties with whom they have to deal is reduced by one half.

The Court is unable to discern how any of this allows the secured creditor, the Bank, to receive more in satisfaction of its debt than it would in a Chapter 7 distribution. Even if the plaintiff=s argument were applicable, and it is not, it would seem that its logic is turned around. The Bank could be said to have weakened its position by agreeing to release a potential source of satisfaction of the debt, the debtor=s husband.

In conclusion, therefore, the Court finds that the plaintiff has not established all the elements of 11 U.S.C. '547(b) and so may not avoid the subject transfer as preferential. Cumberland Valley National Bank is entitled to judgment as a matter of law that it is the holder of a valid security interest in the 1992 Buick Skylark VIN #1G4NJ14NC632734, and that its lien is superior to that of the plaintiff. An order in conformity with this opinion will be entered separately.





By the Court -




Chief Judge

Copies to:


Maxie Higgason, Esq., Trustee

Robert L. Brown III, Esq.