Stites & Harbison, PLLC

On December 21, 2007, the Bankruptcy Appellate Panel for the Sixth Court ("BAP"), reversing the bankruptcy court, held that a secured creditor's lien on a titled vehicle, which was "deemed perfected" under Kentucky law when the creditor tendered the requisite documents to the county clerk, was an avoidable preference because the county court clerk issued the appropriate certificate of title more than twenty (20) days after the debtor received possession of the vehicle and within ninety days from the filing of the bankruptcy petition. Brock v. Branch Banking & Trust Co., No. 06-8055, 2007 Bankr. LEXIS 4209 (6th Cir. BAP December 21, 2007). The BAP reviewed Kentucky Revised Statute § 186A.195(5), which states that a security interest in a titled vehicle shall be "deemed perfected" at attachment or tender, and determined that "deemed perfected" and "perfected" are not the same thing, noting that under Kentucky Revised Statute § 186A.192(2) actual perfection only occurs when the lien is noted on the certificate of title. BB & T, the creditor, argued unsuccessfully that, under Kentucky law, when actual perfection occurs by the notation of the lien on the title certificate, it relates back to tender. The BAP rejected that argument, finding that relating actual perfection back to "deemed perfection" was a "legal fiction." The BAP reasoned that even though perfection is measured from the tender date "for state law purposes," federal preference law "determines the timing of perfection in the preference context."

In a persuasive dissent, Judge Jennie D. Latta distinguished the cases relied upon by the bankruptcy trustee and the majority, some of which involved 11 U.S.C. § 544 and not § 547. Judge Latta stated: "The real issue in this case is: When is a lien on a motor vehicle 'perfected' under Kentucky law for purposes of the Bankruptcy Code?" Brock, 2007 Bankr. LEXIS at *53. She then suggested four possibilities: (1) at attachment (i.e., when the debtor obtained possession of the vehicle because the under Kentucky law perfection is deemed to have occurred at attachment if tender is timely); (2) at tender, because the Bankruptcy Code requires that all acts for perfection must have occurred within twenty days after attachment, which acts are tender; (3) on the date of acknowledgement of receipt by the county clerk and updating into the computer system; or (4) the date the lien was actually noted on the title, which here was more than twenty (20) days after attachment. Id. at *53-54. Judge Latta determined that perfection occurred on attachment (i.e., when the debtor obtained possession of the vehicle) because under her interpretation of Kentucky law, if tender is timely, perfection occurs on attachment. Id. at *54 and *61. Judge Latta distinguished this case from others where state law seeks to extend the relation-back period in excess of that allowed under 11 U.S.C. § 547(e)(2)(B), which was a twenty (20) day period prior to the 2005 amendments to the Bankruptcy Code and which is now a thirty (30) day period. Judge Latta found no Kentucky case law directly on point, but cited Fields Motors Co. v. Sturgill, 279 Ky. 47, 192 S.W.2d 1003 (Ky. 1939), as analogous. In Fields, there was a filed chattel mortgage on a vehicle followed by a judicial attachment. The Kentucky Supreme Court gave priority to the chattel mortgage because it was tendered for recordation, even though it was not recorded. Id. at *59-60.

Creditors have long struggled with perfection problems resulting from dilatory behavior by government employees. Kentucky Revised Statute § 186A.195(5), which states that a security interest in a titled vehicle shall be "deemed perfected" at attachment or tender, is an attempt to protect creditors who timely take all of the steps they can take to perfect their liens from the consequences of such dilatory behavior. The ruling here, however, which is based on construing "deemed perfected" as something other than what the clear intent of the statute is, defeats the purpose of the statute, without advancing any bankruptcy policy.

Creditors who operate under Tennessee law should not suffer the same fate, because T.C.A. § 55-3-126 avoids "deemed perfected" and instead states:

(a) Except as provided for manufactured homes complying with the requirements of § 55-3-138, a lien or security interest in a vehicle of the type for which a certificate is required shall be perfected and shall be valid against subsequent creditors of the owner, subsequent transferees, and the holders of security interest and liens on the vehicle by compliance with this chapter.

(b) (1) A security interest or lien is perfected by delivery to the department or the county clerk of the existing certificate of title, if any, title extension form, or manufacturer's statement of origin and an application for a certificate of title containing the name and address of the holder of a security interest or lien with vehicle description and the required fee.

(2) The security interest is perfected as of the date of delivery to the county clerk or the department.

The Kentucky legislature may have to amend its statute to avoid further judicial mischief. In the meantime, on purchase money vehicle loans the creditor taking a lien on titled vehicles in Kentucky may have to deny the debtor possession of the vehicle until after the lien is noted on the certificate of title to avoid a preference avoidance using the "enabling loan" defense provided under 11 U.S.C. § 547(c)(3)(B); and, in the case of non-purchase money loan, the creditor may have to delay its advance of funds to debtor until after the lien is noted on the certificate of title to avoid a preference avoidance using the "new value" defense under 11 U.S.C. § 547(c)(4). These solutions are not very practical in the typical single automobile purchase, but they might be justified for more expensive collateral, e.g., a commercial loan on a truck fleet.

Robert C. Goodrich, Jr., is a Member in the firm's Nashville office where he is a member of the Creditors' Rights & Bankruptcy Service Group.