IN RE:  FRANCOIS PALE   FATIMATA AMADOU PALE CASE NO. 98-60907  ADV. NO. 98-6054 SUMMARY JUDGMENT AUTOMOBILE LIEN

 

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN

IN RE:

FRANCOIS PALE

FATIMATA AMADOU PALE CASE NO. 98-60907

DEBTORS

JAMES R. WESTENHOEFER, Trustee PLAINTIFF

VS. ADV. NO. 98-6054

NATIONAL CITY BANK; FRANCOIS PALE,

and FATIMATA AMADOU PALE DEFENDANTS

 

MEMORANDUM OPINION

This proceeding is before the court on cross motions for summary judgment filed by the plaintiff who is the chapter 7 trustee and the defendant debtors, Francois and Fatimata Pale (the "Pales"). The parties agree there is no dispute as to the material facts, and indeed the court finds no genuine issue as to any material fact in regard to these parties. The issue presented is whether the debtors can claim an exemption in a 1994 Chevrolet Cavalier automobile ahead of the trustee after he avoids the lien of the defendant National City Bank.

FINDINGS OF FACT:

The relevant facts are that in 1997 the debtors refinanced various loans with funds from National City Bank. The bank took a second mortgage on the debtors' home and security interests in certain personal property including a 1994 Chevrolet Cavalier. The trustee and the Pales agree that when the debtors filed for relief under chapter 7 of the U. S. Bankruptcy Code on August 4, 1998, a notation of the security interest of National City Bank was not on the Certificate of Title for the 1994 Chevrolet Cavalier. James R. Westenhoefer was duly appointed and qualified as trustee in the Pales' bankruptcy case.

On September 17, 1998 a section 341 hearing was conducted. On October 2, 1998 the Pales filed an amendment to Schedule B listing the Chevrolet automobile as an asset, valued at $2,500, and an amendment to Schedule C claiming a $2,500 exemption in the automobile pursuant to KRS 427.010. The trustee did not file an objection to the claimed exemption but filed this adversary proceeding on November 16, 1998 pursuant to section 544 of the Bankruptcy Code, asking the court to declare the lien of National City Bank in the automobile void as to the trustee, to require the Pales to provide proof of insurance or deliver possession of the automobile to the trustee, to order sale of the Chevrolet Cavalier, and for any equitable relief.

CONCLUSIONS OF LAW:

The security interest of National City Bank in the 1994 Chevrolet Cavalier, apparently unperfected at the time of filing, August 4, 1998, is ineffective as between the bank and the trustee holding the rights of a hypothetical judgment lien creditor. 11 U.S.C. 544(a); KRS 355.9-301(1)(b) and (3). The transfer of property, or its value, having been recovered by the trustee is automatically preserved for the benefit of the bankruptcy estate. 11 U.S.C. 551.

The debtors assert there was no objection by the trustee to their claimed exemption, and therefore it is deemed allowed. The court agrees. 11 U.S.C. 502(a). The trustee appears to agree as well. See Plaintiff's memo filed May 13, 1999, p. 2, which states, "As Trustee, he saw of no reason to object: their exemption would be allowed only after the lien avoided is satisfied in full."

In other words, the trustee does not object to the Pales' claim of exemption to the automobile but to their claim of priority ahead of the trustee. On this point the court holds for the trustee. The trustee as hypothetical judgment lien creditor is substituted as the holder of the lien and thus has priority over the debtors' statutory exemption. In re Smith (Maxie Higgason, Trustee v. General Motors Acceptance Corporation, et al.), 97-60417, AP 98-6020 (Bankr. E.D.Ky. (J. Howard) 4/28/99) (debtors' motion for partial summary judgment overruled to extent it asserted debtors' exempt interest had priority over avoided lien preserved for benefit of bankruptcy estate, debtors' statutory exemption in automobile being subordinate to lien preserved for benefit of estate); In re Milcher, 86 B.R. 103 (Bankr. W.D.Mich. 1988) (fact that bankruptcy trustee was able to avoid creditor's unperfected security interest by virtue of status of judicial lienholder did not give trustee judicial lien on debtors' property such that debtors could avoid trustee's interest as impairing exemption; property recovered by trustee was automatically preserved for benefit of estate).

Because the security interest is based on a consensual lien, any exemption available to the debtors is what remains beyond the avoided unperfected security interest. 11 U.S.C. 522(f), (g), and (h); 11 U.S.C. 544(a)(1). The debtors' claimed exemption is subordinated to the consensual lien in the automobile. Therefore in order to realize on their claimed exemption, the debtors must have equity in the property.

Having so concluded, there being no issues of fact, the trustee is entitled to summary judgment as a matter of law and the Pales' motion for summary judgment is overruled. The security interest of National City Bank in the 1994 Chevrolet Cavalier can be avoided by the trustee and preserved for the benefit of the bankruptcy estate, and thus subject to sale by the trustee.

Dated:

By the court

___________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE

 

Copies to:

James R. Westenhoefer, Esq.

Marcia A. Smith, Esq.

U. S. Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN

 

IN RE:

FRANCOIS PALE

FATIMATA AMADOU PALE CASE NO. 98-60907

DEBTORS

 

JAMES R. WESTENHOEFER, Trustee PLAINTIFF

VS. ADV. NO. 98-6054

NATIONAL CITY BANK; FRANCOIS PALE,

and FATIMATA AMADOU PALE DEFENDANTS

 

ORDER

In accordance with the memorandum opinion this day entered, IT IS ORDERED that the motion of the trustee for summary judgment against the debtors, Francois and Fatimata Amadou Pale, is SUSTAINED and that the motion of the debtors against the trustee is OVERRULED.

Dated:

By the court

___________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE

 

Copies to:

James R. Westenhoefer, Esq.

Marcia A. Smith, Esq.

U. S. Trustee