UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN DIVISION

 

 

IN RE:

JOHNNY SMITH

RUTH SMITH

DEBTORS CASE NO. 97-60417

 

 

MAXIE HIGGASON, TRUSTEE PLAINTIFF

 

VS. ADV. NO. 98-6020

 

GENERAL MOTORS ACCEPTANCE CORPORATION

JOHNNY SMITH and RUTH SMITH DEFENDANTS

 

MEMORANDUM OPINION

This matter is before the Court on Motions for Summary Judgment filed by the plaintiff and defendant General Motors Acceptance Corporation (AGMAC@), and an Amended Motion for Partial Summary Judgment filed by the defendant debtors. The issues before the Court are perfection of GMAC=s lien on a vehicle purchased by the debtors, and whether the debtors may assert an exempt interest in the automobile. 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)(B) and (K).

The parties have entered into Joint Stipulations which set out that the debtors purchased a vehicle on February 28, 1997, and executed a retail installment contract in connection therewith. In registering the vehicle and filing the lien thereon on March 5, 1997, the dealership filed with the Knox County Clerk=s office an Application for Title which designated GMAC as first lien holder. On March 5, 1997, two Certificates of Registration were issued by the Knox County Clerk=s office, one showing the dealership as renewal owner, and the other showing the debtors as transfer owners. On March 24, 1997, a title lien statement was filed in the Clay County Clerk=s office showing GMAC as the secured party. The lien was noted on the Certificate of Title on March 24, 1997, as well. The debtors have claimed a $6,000.00 property exemption in the vehicle.

GMAC has contended that its security interest was properly perfected, and that the plaintiff=s Complaint should be dismissed. As set out by GMAC, the transfer by the debtors, made within 90 days of the filing of their bankruptcy petition on April 29, 1997, would be avoidable as a preference unless it falls within the purview of 11 U.S.C. '547(c)(3)(B). That subsection provides that a transfer may not be avoided as preferential to the extent that it secures new value given in connection with the security agreement enabling the debtor to acquire the collateral, and is perfected on or before twenty days after the debtor takes possession of the property.

The 20-day "relation back" exception for enabling loans found in 11 U.S.C. '547(c)(3) that would allow GMAC to have its security interest considered perfected at the time it attached cannot be satisfied here. As set out in In re Trott, 91 B.R. 808, 810 (Bkrtcy.S.D.Ohio 1988), where the court was called upon to determine when the debtor received "possession" of the collateral for purposes of application of '547(c)(3)(B), possession means "physical control or custody of the collateral, as opposed to the acquisition of a right of ownership therein" through issuance of a certificate of title.

As concerns when the security interest attaches, KRS 355.9-203 provides that there are three conditions that must be fulfilled before a security interest is enforceable and attaches: the debtor has signed a security agreement which contains a description of the collateral, value has been given, and the debtor has rights in the collateral. The debtors herein received possession of the vehicle and fulfilled the three conditions on February 28, 1997, the date they purchased it. GMAC did not perfect its security interest until more than twenty days after that date, and it therefore may not avail itself of the '547(c)(3) exception.

The sole means of perfecting a security interest in a vehicle is by notation of the lien on the Certificate of Title. KRS 186A.190. As concerns when the security interest is deemed perfected, KRS 186A.195(5) provides:

The security interest noted on the certificate of title shall be deemed perfected at the time the security interest attaches (KRS 355.9-203) if the secured party tenders the required fees and submits a properly completed title lien statement and application for first title, or in the case of property previously titled in the name of its debtor, the certificate of title to the appropriate county clerk within ten (10) days of attachment. Otherwise the security interest shall be deemed perfected at the time such fees are tendered and such documents are submitted to the county clerk. (Emphasis added.)

GMAC also refers to KRS 186A.195(3), which comes into play because the vehicle was purchased in one county, but had to be titled in the county of the debtors= residence. That statute provides in pertinent part:

If a title lien statement and the required fees are not received at the time of application for first title of any property in the name of the owner due to owner=s residence in another county, . . . the clerk shall enter into the Automated Vehicle Information System (AVIS) the name and address of the lienholder and the county where the lien is to be noted or that a lien is pending. The clerk shall indicate a title is not to be issued until the lien has been noted and fees, . . . , paid in the county of the owner=s residence or in thirty (30) days.

GMAC contends that because the dealer submitted the Application for Title to the Knox County Clerk on March 5, 1997, that it had done everything it was required to do to perfect its lien in accordance with the requirements of KRS Chapter 186A. GMAC appears to take the position that this is a relation-back provision. The Court does not find it to be so; however, even if it were, the federal relation-back period would prevail.

In In re Beasley, 183 B.R. 857 (Bkrtcy.W.D.Mo. 1995), the court held that state-law relation back periods are inapplicable when deciding whether a preferential transfer has occurred. The court drew extensively from the opinion in In re Loken, 175 B.R. 56 (9th Cir. BAP 1994), in making this determination. The Loken court observed that the 10-day period set out in '547(e)(2) is consistent with the grace period found in the Uniform Commercial Code, and that individual state grace periods were never intended to be relevant under '547. The court reasoned:

We also take note of Congress=s enactment of the Bankruptcy Reform Act of 1994, . . . The Reform Act now allows a creditor twenty days to perfect its purchase money security interest while still qualifying for the enabling loan exception found in Section 547(c)(3). By this change, Congress acknowledged that states were enacting grace periods greater than ten days for such security interests. Congress could have deferred completely to the states by incorporating each state=s own timing into the Code. Instead, it chose to continue having the Code dictate the applicable grace period. Furthermore, Congress did not amend Section 547(e)(1), which provides the definition for >perfection= as used in Section 547.

At page 63. Other cases holding that federal law prevails in determining time of perfection include In re Holder, 94 B.R. 395 (Bkrtcy.M.D.N.C. 1988), In re Walker, 161 B.R. 484 (Bkrtcy.D.Idaho 1993), and In re Ross, 193 B.R. 902 (Bkrtcy.W.D.Mo. 1996).

GMAC also appears to take the position that filing an Application for Title is the equivalent of filing a title lien statement. In order to take advantage of any relation back period, in this case the 20-day period provided for in 11 U.S.C. '547(c)(3), a Aproperly completed title lien statement@ must be tendered to the Aappropriate county clerk@ within the allotted time. The record shows that this did not happen. The title lien statement was filed in the Clay County Clerk=s office on March 24, the date which also appears on the Certificate of Title as the date the lien was filed. March 24, 1997, was therefore the date that GMAC=s security interest was perfected. Since GMAC=s security interest was not perfected within the 20-day time period provided in 11 U.S.C. '547(c)(3)(B) and the presumptive insolvency of the debtors during the preference period has not been challenged, the belated perfection of its lien was a preferential conveyance and avoidable by the trustee.

As concerns the debtors= claim of an exempt interest in the subject vehicle, since the trustee may avoid the transfer as set out above and recover the property or its value for the benefit of the estate pursuant to 11 U.S.C. '547, the avoided lien is preserved for the benefit of the estate by virtue of 11 U.S.C. '551 and the trustee is, effectively, substituted as the holder of the lien in the shoes of GMAC and the debtors= statutory exemption is subordinated to that consensual lien.

In consideration of all of the foregoing it is the opinion of this Court that the trustee has carried forward his burden of demonstrating that he is entitled to judgment as a matter of law, and that his Motion for Summary Judgment should be sustained. GMAC=s Motion for Summary Judgment should be overruled. The debtors= Motion for Partial Summary Judgment should be overruled to the extent that it asserts that the debtor=s exempt interest has priority over the avoided lien which is preserved for the benefit of the estate. An order in conformity with this opinion will be entered separately.

Dated:

 

 

 

 

 

 

 

By the Court -

 

 

Judge

 

Copies to:

Debtors

Maxie Higgason, Esq., Trustee

Gina S. McCann, Esq.

Kenneth Stepp, Esq.