Thursday, July 8, 2010

FYI: 6th Cir Says Auto Finance Co Did Not Meet "Enabling Loan Exception"

The U.S. Court of Appeals for the Sixth Circuit recently held that the “enabling loan exception” of Section 547(c)(3) of the Bankruptcy Code did not protect an auto finance company’s security interest from avoidance as a preferential transfer during a Chapter 7 bankruptcy proceeding, because under Kentucky law final perfection of a vehicle lien does not occur until physical notation is made on the title, which did not occur within 20 days after the debtor received possession of the collateral.  A copy of the opinion is attached.

 

Plaintiff-Debtor executed an installment sales contract and security agreement with defendant Branch Banking & Trust Company (“BB&T”) to finance an automobile purchase on February 8, 2005, and took possession of the automobile that same day.  The title documentation and fees were received by the Letcher County, Kentucky clerk’s office on February 22.  However, the county clerk did not stamp the documents as received and upload BB&T’s lien for recordation until March 7.  Less than ninety days later, Debtor filed for Chapter 7 bankruptcy, and the bankruptcy trustee filed a complaint to avoid the lien of BB&T as a preferential transfer.

 

The Bankruptcy Court held that BB&T’s security interest was perfected on February 22, and that the “enabling loan exception” protected BB&T’s interest. The Bankruptcy Appellate Panel disagreed, holding that that BB&T’s interest was not protected by the exception because perfection occurred on March 7.  The Sixth Circuit Court of Appeals affirmed. 

 

Under Section 547(b) and (c) of the Code a “trustee may avoid certain transfers of interest in property that occur on or within 90 days preceding the filing date of the bankruptcy petition.”  However, the “enabling loan exception” under Section 547(c)(3) protects a purchase money security interest if the security interest is perfected within 20 days after the debtor receives possession of the collateral.

           

Perfection of a security interest is determined by state law, and therefore the question before the Court was whether perfection of a security interest on a motor vehicle under Kentucky state law “require[s] physical notation on the actual certificate of title as ultimately issued by the county clerk, or is perfection accomplished as and when the required paperwork and fee are submitted to the county clerk?”  Upon certification to the Kentucky Supreme Court, that Court concluded that “final perfection of a vehicle lien does not occur until physical notation is made on the title.”  Johnson v. Branch Banking & Trust Co., -S.W.3d-, 2010 WL 2470849, at *1 (Ky. June 17, 2010). 

 

Accordingly, the Sixth Circuit held that because perfection did not occur within 20 days after Debtor received possession of the truck, the enabling loan exception of Section 547(c)(3) did not protect BB&T’s interest from avoidance as a preferential transfer.

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

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