In re Burnette
| Decision Date | 26 October 1981 |
| Docket Number | Bankruptcy No. 1-81-00300,Adv. No. 1-81-0226. |
| Citation | 14 BR 795 |
| Parties | In re Raymond R. BURNETTE, Stephanie Burnette, Debtors. Richard P. JAHN, Jr., Trustee, Plaintiff, v. FIRST TENNESSEE BANK OF CHATTANOOGA, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Harold L. North, Jr., Tanner, Jahn, Atchley, Bridges & Jahn, Chattanooga, Tenn., for plaintiff.
Arthur C. Grisham, Jr., Smith & Grisham, Chattanooga, Tenn., for defendant.
The trustee in bankruptcy brought this suit against the bank to avoid its security interest in a pick-up truck belonging to the debtor, Raymond Burnette, Jr. He bought the truck and took possession of it on November 14, 1980.
The dealer's security interest was assigned to the bank. On December 4, 1980, twenty days after the sale, the bank filed an application for a certificate of title with its lien noted. Such a certificate was issued. The bank's security interest was perfected, at the latest, when it filed the application for a title certificate.1 On February 11, 1981, the debtor filed a petition in bankruptcy.
The trustee contends that perfection of the security interest twenty days after it was given and within ninety days of bankruptcy effected a preferential transfer to the bank. The bank argues that it did not, because under Tennessee law its security interest was "continuously perfected" from the time of the sale.
The parties agree that there is only one question. It involves the "antecedent debt" requirement of the preference statute. Preferential transfers include only transfers "for or on account of an antecedent debt owed by the debtor before such transfer was made." 11 U.S.C. § 547(b)(2). The other elements of a preferential transfer are not in dispute.
The question is when the transfer of the security interest occurred. Under the preference statute the general rule is that a transfer is made when it is perfected. 11 U.S.C. § 547(e)(2). Thus, a delay in perfecting a security interest may make it a transfer on account of an antecedent debt, even though between the debtor and the secured party the transfer and the debt were made at the same time. See, e.g., In re Kelley, 3 B.R. 651, 6 B.C.D. 395, 2 C.B.C.2d 15 (Bkrtcy.E.D.Tenn.1980); In re Butler, 3 B.R. 182, 6 B.C.D. 32, 1 C.B.C.2d 533 (Bkrtcy.E.D.Tenn.1980).
The preference statute provides its own exception to the rule that a transfer is made when it is perfected. If a transfer is perfected within ten days after it becomes effective between the parties, the delay is ignored. 11 U.S.C. § 547(e)(2)(A). That is the so-called ten day "grace period". The bank did not file within the ten days.
The bank argues that despite its failure to file within the ten days, its security interest was always perfected because it filed within a twenty day grace period given by § 9-301(2) of the Uniform Commercial Code (UCC) in Tennessee. It provides:
If the secured party files with respect to a purchase money security interest before or within twenty (20) days after the collateral comes into the possession of the debtor, he takes priority over the rights of . . . a lien creditor which arise between the time the security interest attaches and the time of filing.2
This is an exception to the general rule of § 9-301(1)(b):
Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of . . . a person who becomes a lien creditor without knowledge of the security interest and before it is perfected.
The problem in this case is determining how the twenty day grace period of UCC § 9-301(2) relates to the preference statute, particularly in light of the preference statute's own ten day grace period.
It could be argued that the UCC grace period is irrelevant because, in a conflict with state law, the preference statute would control. But the preference statute refers to state law to determine when a transfer is perfected. The bank's argument ultimately depends on the definition of perfection in the preference statute.
Section 547(e)(1)(B) provides:
For the purposes of this section . . . a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.
In other words, a security interest is perfected when a judicial lien creditor cannot obtain priority over it.
The theory of the bank's argument is that a creditor who obtained a judicial lien within the twenty days could not have had priority over its security interest. Therefore, the bank argues it was "continuously perfected" during the twenty days, and of course, during the ten day grace period given by the preference statute.
The legislative history shows that Congress intended for ten days to be a uniform grace period.
The predecessor to the present statute was § 60 of the Bankruptcy Act of 1898. The original § 60 did not make it clear whether a transfer that had to be recorded to be effective against some creditors was to be treated as made when made or when recorded. In 1903 Congress amended § 60 to make the date of recording the time of the transfer. Congress's effort was less than successful. It amended § 60 several more times before 1938. Hirschfeld v. Nogle, 5 F.Supp. 234, 24 A.B.R.(N.S.) 363 (E.D. Ill.1933); 3 Collier on Bankruptcy ¶ 60.36 (14th ed. 1964). Finally, in 1938 Congress found the right track.
The fumbling of previous legislative enactments proved that drastic and incisive action was needed. Moreover, it must be borne in mind at all times that throughout a period of thirty-five years, beginning in 1903, it was fairly evident that Congress intended to strike down secret transactions by establishing a test as to perfection of transfer that would fix the date of notoriety of the transfer as the time when its preferential character should be determined. It was only the expression of this intent that proved faulty.
3 Collier on Bankruptcy ¶ 60.38 at 941-942 (14th ed. 1964).3
The 1938 amendment adopted a perfection test to determine the time of transfer. Perfection occurred when a bona fide purchaser from the debtor or a creditor could not acquire rights superior to the transferee. Unfortunately, the bona fide purchaser test was too stringent. Some transfers were avoided that should have been protected. 3 Collier on Bankruptcy ¶ 60.38 at 943-946 (14th ed. 1964). To cure the problem, Congress once again amended § 60.
The amendment is the forerunner to the present definition of perfection. Section 60(a)(2) of the Bankruptcy Act provided:
For the purposes of subsections a and b . . . a transfer of property other than real property shall be deemed to have been made or suffered at the time when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee.
Under § 60(a)(2) it was established that where priority over a later judicial lien required recording, then the time of recording generally was the time of the transfer. See, e.g., Holahan v. Gore, 278 F.Supp. 899 (E.D.La.1968); In re Schindler, 223 F.Supp. 512 (E.D.Mo.1963).
There was an exception, § 60(a)(7). It is the forerunner of an exception on which the bank also relies, § 547(c)(3). Section 60(a)(7) provided:
Section 547(c)(3) of the Bankruptcy Code provides:
This is known as the "enabling loan" exception. Section 60(a)(7) referred to grace periods under state law but limited their effectiveness to twenty-one days. A longer grace period provided by state law would not help a transferee who failed to perfect within twenty-one days.
The ten day grace periods in § 547(e)(2) and (c)(3) were meant to operate the same way. The idea was that the preference statute should establish a uniform grace period.
In 1966 the National Bankruptcy Conference established the "Committee on the Coordination of the Bankruptcy Act and the Uniform Commercial Code", more commonly known as the Gilmore Committee, after its chairman, Professor Grant...
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