Connelly v. Marine Midland Bank, NA

• Decision Date: 22 May 1986
• Docket Number: No. Civ-85-795E.,Civ-85-795E.
• Citation: 61 BR 748
• Parties: Thomas P. CONNELLY, III, Plaintiff, v. MARINE MIDLAND BANK, N.A., Defendant.
• Court: U.S. District Court — Western District of New York

61 B.R. 748 (1986)

Thomas P. CONNELLY, III, Plaintiff, v. MARINE MIDLAND BANK, N.A., Defendant.

No. Civ-85-795E.

United States District Court, W.D. New York.

May 22, 1986.

Thomas P. Connelly, Buffalo, N.Y., for plaintiff.

John J. Hurley, Buffalo, N.Y., for defendant.

MEMORANDUM AND ORDER

ELFVIN, District Judge.

In this action Thomas P. Connelly, III appeals from a final order of the Bankruptcy Court. The issues presented are whether the Bankruptcy Court erred in vacating a default judgment against Marine Midland Bank, N.A. ("MMB") and in finding that MMB's interest in the debtors' automobile was superior to the trustee's interest.

The essential facts are not in dispute. Mark and Dawn Gearhart, the debtors in this action, had purchased a 1983 Oldsmobile with financing from the General Motors Acceptance Corporation ("GMAC"). GMAC retained a security interest in the vehicle but failed to perfect it. Subsequent to their purchase of the vehicle, the debtors obtained a loan from MMB using the same vehicle as security. MMB timely perfected its security interest.

The debtors filed their petition pursuant to Chapter 7 of the Bankruptcy Code January 28, 1985 and Mr. Connelly was appointed trustee in bankruptcy. At the time GMAC's loan balance was approximately $7,200, MMB's loan balance was approximately $5,077.23 and the vehicle had a value of approximately $4,300.

Upon the trustee's motion pursuant to 11 U.S.C. § 363 and following a hearing held April 15, 1985, the Bankruptcy Court ruled April 22, 1985 that the trustee had a first lien in the vehicle and that the trustee was to sell the vehicle free and clear of MMB's lien with the latter attaching to any sale proceeds in excess of $7,200.

MMB had not appeared at the April 15th hearing and moved April 24th for a rehearing asserting that the earlier Order was void because the court had lacked jurisdiction over MMB. It sought an order compelling the trustee to abandon any interest in the vehicle.

The Bankruptcy Court vacated its April 22nd Order and held that MMB's security interest was superior to the trustee's interest in the vehicle. The trustee appeals from such order.

Bankruptcy Rule 7001 states that a proceeding "to determine the validity, priority, or extent of a lien or other interest in property" is an "adversary proceeding." Pursuant to Bankruptcy Rule 7003, adversary proceedings are to be commenced by the filing of a complaint.

In the instant case the trustee's action had been directed toward obtaining a declaration that his interest in the vehicle was superior to both liens. Such plainly required a determination of the validity, priority or extent of a lien. A holding that the trustee had a first lien could only result from a finding that his lien had priority over MMB's lien. The nature of the action was therefore adversarial and it was required that the action be so commenced. The Bankruptcy Court, therefore, did not err in vacating its April 22nd Order inasmuch as the trustee's failure thus to commence the action deprived it of jurisdiction over MMB's security interest.

Beyond such procedural questions, the trustee asserts that his interest in the vehicle is superior to that of MMB. The trustee argues that 11 U.S.C. § 551 automatically preserves for the estate the value of all security interests he avoids. In essence, he asserts that, having avoided GMAC's first-in-time but unperfected security interest, section 551 preserves for the estate the amount of the lien avoided despite MMB's perfected security interest.

Section 551's language is deceptively straightforward. It declares that "any transfer...