In re Kincaid
| Decision Date | 25 March 1998 |
| Docket Number | Bankruptcy No. 97-37007,Adversary No. A97-38800. |
| Parties | In re James KINCAID, aka James Gordon, and Suzanne Kincaid, aka Suzanne Gordon, Debtors. Brian L. BUDSBERG, Chapter 11 Trustee for the bankruptcy estate of James Kincaid, aka James Gordon and Suzanne Kincaid, aka Suzanne Gordon, Plaintiffs, v. PREMIER CREDIT CO./Dealer Finance II; Automotive Finance Co.; Donald Medley; Maria Diamond; Barry Coleman; Reliable Creditor Association, Inc.; Washington State Department of Licensing; et al., Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Western District of Washington |
Steven Levy, Fife, WA, for defendants.
Brian Budsberg, Olympia, WA, for Ch. 7 Trustee.
Christine Ford, Tacoma, WA, for Simpson Credit Union and American General Finance.
Andrew Gala, Seattle, WA, for Premier Credit Co./Dealer Finance II.
Bradley Jones, Seattle, WA, for Arcadia Financial Ltd.
Deborah Crabbe, Seattle, WA, for Automotive Finance Corp.
James MaGee, Tacoma, WA, for, debtors.
Laurin Schweet, Mercer Island, WA, for Harborstone Credit Union Key Bank of Washington U.S. Bank.
Gordon Hauschild, Tacoma, WA, for Reliable Credit Ass'n.
Defendants/creditors, Premier Credit Co./Dealer Finance II, Inc. (DF) and Automotive Finance Corporation (AFC) seek to foreclose their security interests in certain motor vehicles in Prestige Auto Sales Superstore's (Prestige) inventory. Prestige is a sole proprietorship owned by James Kincaid and Suzanne Kincaid (Debtors) DF and AFC contend their liens on the Debtors' business inventory have priority over the liens of Arcadia Financial, Ltd., American General Finance, Inc., Harborstone Credit Union, Key Bank of Washington, Simpson Credit Union and U.S. Bank (Consumer Lenders), who claim a security interest in motor vehicles that entered the Debtors' inventory generally by way of trade-in or consignment. This matter is before the court on the parties' summary judgment motions.
Consumer Lenders loaned money to their customers and secured the loans by taking security interests in their customers' motor vehicles. The Consumer Lenders perfected their security interests by noting these interests on the certificates of title, as authorized by RCW 46.12.095.1 At a later date, the Consumer Lenders' customers traded in or consigned their motor vehicles to Prestige, whose owners subsequently filed bankruptcy. The record does not indicate that any of the Consumer Lenders knew about their customers' transactions with Prestige. It is undisputed that none of the Consumer Lenders filed financing statements, which is a means of protecting a security interest in a motor vehicle that becomes inventory.
The instant dispute arises from the Debtors' grant of a security interest in inventory to DF and AFC. DF and AFC advanced money to the Debtors in exchange for a security interest in all motor vehicles in the Debtors' inventory. DF filed a UCC-1 financing statement on April 12, 1994. AFC filed its financing statement on June 17, 1997.
DF and AFC (collectively Flooring Lenders) moved for summary judgment arguing that the Consumer Lenders' interests became unperfected when they failed to file financing statements on their customers' consigned or traded motor vehicles. The Flooring Lenders contend that RCW 62A.9-302(3)(b) requires secured parties to file financing statements to maintain perfection of motor vehicle security interests, even if the secured parties had previously perfected their interests under RCW 46.12.095 by noting their security interests on the certificates of title.
Does a security interest survive the transfer of a motor vehicle to a motor vehicle dealer's inventory where the secured party notes its interest on the certificate of title but does not file a financing statement?
The Revised Code of Washington, Section 62A.9-302 sets forth the rules for perfecting security interests. Perfection is normally achieved by filing a financing statement. See RCW 62A.9-302. But security interests in motor vehicles are not, as a general rule, perfected by filing a financing statement. RCW 62A.9-302(3)(b). Rather, a security interest in a motor vehicle is perfected by the secured party noting its interest on the certificate of title. RCW 62A.9-302(3)(b); RCW 46.12.095(1). But this rule is also subject to exception. Where the motor vehicle is in a motor vehicle dealer's inventory, perfection is achieved by filing a financing statement. See RCW 62A.9-302(3)(b).
This court agrees with the Consumer Lenders that the plain reading of the statute supports their position. RCW 62A.9-302(3)(b) provides, in pertinent part:
(Emphasis added.) Subsection (b) clearly states that "the filing provisions of this Article (Part 4) apply to a security interest . . . created by him as debtor." RCW 62A.9-302(3)(b) (emphasis added). The word "him" refers to the "person who is in the business of selling goods of that kind." RCW 62A.9-302(3)(b). In other words, by its plain terms, subsection (b) applies only to persons who create security interests in their own business inventory.
Such is not the case here. The Consumer Lenders and their customers created the security interests in accordance with RCW 46.12.095; and, the security interests were in consumer goods, not inventory. Since the statute's language is clear, this court must apply it in accordance with its plain meaning. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989). Thus, this court finds that RCW 62A.9-302(3)(b) does not require the Consumer Lenders to perfect their security interests a second time by filing financing statements.2
Any other reading would lead to the result that consumer lenders would have no method of protecting themselves against flooring lenders with financing statements on file with the Secretary of State. In such instances, the consumer lenders' customers could always defeat the consumer lenders' perfected security interests by trading or consigning the vehicle to a dealer with a flooring financing statement on file.
Not only does the plain language of the statute compel this result, this result comports with the policies underlying Article 9 of the Uniform Commercial Code.3 The aim of Article 9 is to facilitate secured transactions by reducing the risks and costs of extending credit. Uniform Commercial Code Comment, RCW 62A.9-101. The costs of extending credit are, in turn, reduced by bringing all consensual security interests in personal property under a uniform notice filing system.4 The key to the system is notice filing.5 Notice filing allows a potential creditor to discover whether the borrower's personalty is already encumbered and to stake a claim to the collateral should it decide to extend credit. In re Copeland, 531 F.2d 1195, 1203-04 (3rd Cir.1976); Norwest Bank St. Paul, N.A. v. Bergquist (In re Rolain), 823 F.2d 198, 199 (8th Cir.1987).
In keeping with the objective of reducing the costs of secured transactions, the Uniform Commercial Code (Code) drafters have attempted to allocate burdens to those who can best shoulder them. F. Stephen Knippenberg, Debtor Name Changes and Collateral Transfers Under 9-402(7): Drafting from the Outside-In, 52 Mo.L.Rev. 57, 69-95 (1987). Since the secured party has absolute control of filing proper notice and is in the best position to ensure its accuracy, the secured party can best shoulder the pre-filing burdens. Knippenberg, supra, 52 Mo.L.Rev. at 68, 85. But, at the filing desk, the secured party's control over the document ends, and its costs of monitoring the collateral increases. Knippenberg, supra, 52 Mo.L.Rev. at 69. It is at this juncture that the drafters shift the burdens to the unsecured party. See Bank of West v. Commercial Credit Fin. Servs., 852 F.2d 1162, 1173 (1988) (); see also Fleet Factors Corp. v. Bandolene Indus. Corp., 86 N.Y.2d 519, 634 N.Y.S.2d 425, 429, 658 N.E.2d 202, 206 (1995) (). One drafter has noted that the costs of post-filing monitoring may erode the net savings to the cost of secured transactions. Knippenberg, supra, 52 Mo.L.Rev. at 85; Fleet Factors, 634 N.Y.S.2d at 429, 658 N.E.2d at 206. Thus, once properly perfected, a secured party generally has minimal post-filing burdens.6
This principle is reflected in RCW 62A.9-306(2). This provision states that "a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party."7 RCW 62A.9-306(2). In other words, as a general rule, a secured party has no duty to monitor the collateral post-filing.
This principle is also reflected in RCW 62A.9-402(7). Subsection (7) of RCW 62A.9-402, that dictates whether a creditor must refile a financing statement after collateral is transferred, provides that a secured party need not refile a financing statement upon transfer of the collateral. "A filed financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer." RCW...
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