In re Microband Companies, Inc.

• Citation: 135 BR 2
• Decision Date: 19 October 1991
• Docket Number: Bankruptcy No. 89 B 13323.
• Parties: In re MICROBAND COMPANIES, INCORPORATED, et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

135 B.R. 2 (1991)

In re MICROBAND COMPANIES, INCORPORATED, et al., Debtors.

Bankruptcy No. 89 B 13323.

United States Bankruptcy Court, S.D. New York.

October 19, 1991.

Howard Ressler, Kensington James & Ressler, New York City, for Microband Companies, Inc., et al. (Microband).

Harvey Stickton, Paul Hastings Janofsky & Walker, New York City, for Holman Lend Lease Corp. (Lend Lease).

Michael Schreiber, Berlack Israels & Liberman, New York City, for the Official Unsecured Creditors Committee (Committee).

MEMORANDUM OF DECISION ON PERFECTION OF SECURITY INTEREST

FRANCIS G. CONRAD, Bankruptcy Judge, Sitting by Special Designation.

The matter¹ before us arises from a motion for relief from the automatic stay² to repossess certain motor vehicles, filed by Lend Lease, a division of National Car Rental System, Inc. At a hearing on the motion, we ruled that Lend Lease had perfected its security interest. This Memorandum of Decision memorializes our bench decision and supplements our findings of fact and conclusions of law.

Microband is a debtor-in-possession since December 22, 1989. Microband and Lend Lease entered into a Master Motor Vehicle Lease Agreement (lease agreement) on January 20, 1988. The lease agreement provided Microband, which owned and operated at the time of hearing pay-television services in New York City, Detroit, and Washington, D.C., with 182 motor vehicles. The vehicles have certificates of title issued by the Division of Motor Vehicles for New York, New Jersey, Michigan, and Maryland, respectively.

The certificates of title uniformly list Lend Lease as the owner and either Ford Motor Credit Co. or GMAC as a lienholder. Microband contends that the certificates of title misrepresent the true nature of the parties' agreement and that its ownership of the motor vehicles is undisputed.

The lease agreement states that "it is expressly understood and agreed that this agreement is a lease only and that Microband acquires no right, title or interest in or to the property described herein except as a lessee."³ The parties have stipulated on the record that, for purposes only of this motion, the lease agreement was not intended to be a true lease, but rather, a financing transaction and security agreement.

The only issue before us is whether the designation on the certificates of title listing Lend Lease as "owner" of the vehicles is sufficient to perfect Lend Lease's security interest in the vehicles. Microband's position is that Lend Lease has an unperfected security interest because it has not substantially complied with statutory requirements. Lend Lease, on the other hand, disagrees, contending that its actions were sufficient to put a reasonably diligent person on notice of its interest in the motor vehicles.

Microband cites Wheels, Inc. v. Otasco (In re Otasco), 111 B.R. 976 (Bkrtcy. N.D.Okla.1990), for the proposition that there can be no perfection of a security interest when a certificate of title contains inaccurate denominations of who is an owner and who is a lienholder. In Otasco, the Court, strictly construing the Oklahoma Motor Vehicle Act, found that a motor vehicle leasing agreement, deemed to be a secured transaction, listing the "lessorcreditor" as owner on the certificate of title, was not sufficient to perfect a security interest in the vehicles. Microband insists that we adopt the rationale of the Oklahoma Bankruptcy Court and hold that the "commercial unreasonableness of this attempt to turn a simple forthright disclosure into a guessing game . . . is not `minor,' but is `seriously misleading' and does not rise to the dignity of substantial compliance. . . ." Id., 111 B.R. at 992.

Lend Lease concedes that the certificates of title inaccurately list Lend Lease as owner instead of lienholder. Nevertheless, Lend Lease contends that the certificates of title, though inaccurate, meet the legal threshold requirement that a potential secured party be put on notice of its interest. In re Circus Time, 641 F.2d 39, 42 (1st Cir.1981); In re National Welding of Michigan, Inc., 61 B.R. 314 (W.D.Mich. 1986). Thus, Lend Lease asserts it has perfected its security interest because the certificates of title give clear notice to third parties that it has some interest in the vehicles. See, Load-It, Inc. v. VTCC, Inc. (In re Load-It, Inc.), 774 F.2d 1077 (11th Cir.1985); Equilease Corporation v. McCall (In re McCall), 27 B.R. 106 (Bkrtcy.W.D.N.Y.1983).

A creditor seeking to perfect a security interest in a motor vehicle need not resort to the filing requirements of Article 9 of the Uniform Commercial Code. States have enacted motor vehicle acts that require certificates of title to denote ownership and security interests in motor vehicles.⁴ Generally, a creditor must have its lien noted on the certificate of title to perfect a security interest in a motor vehicle. Thus, the certificate of title serves the same purpose as a financing statement under Article 9, namely, to give notice of a party's interest, but not necessarily the extent or type of interest.

Courts have concluded that state motor vehicle acts may be read in light of UCC § 9-402(8).⁵ Therefore, "absolute compliance with the requirements of the Certificate of Title Acts is not necessary to perfect a security interest in a vehicle." In re Circus Time, supra, 641 F.2d at 42. Rather, substantial compliance is sufficient to perfect a security interest. A security interest is perfected when a certificate of title gives clear notice to potential creditors about the existence of a lien on the motor vehicle. See, In re Load-It, Inc., supra; In re National Welding of Michigan, Inc., supra; Yeager Trucking v. Circle Leasing of Colorado Corporation (In re Yeager Trucking), 29 B.R. 131 (Bkrtcy.D.Colo. 1983); Equilease Corporation v. Loague (In re Loague), 25 B.R. 940 (Bkrtcy. N.D.Miss.1982); Corble Systems, Inc. v. Coors of the Cumberland, Inc. (In re Coors of the Cumberland, Inc.), 19 B.R. 313 (Bkrtcy.M.D.Tenn.1982).

In the seminal case in this area, the First Circuit ruled that a certificate of title containing only minor errors that are not seriously misleading, substantially complies with perfection requirements. Circus Time, supra, 641 F.2d at 43. Courts have stressed that perfection statutes are "intended to facilitate the identification of motor vehicles, the ascertainment of their owners and the prevention of theft or fraud in their transfer." Id., at 44. Therefore, perfection requirements are satisfied when a reasonably diligent person is placed on notice that a party may have an interest in the collateral.

Circus Time involved lease agreements, deemed security interests, for three motor vehicles in Maine and three vehicles in New Hampshire. The certificates of title denominated the "lessor" as owner and no lienholder was listed. The Court held that, under the Maine's and New Hampshire's Uniform Motor Vehicle Certificate of Title and Anti-Theft Acts, the lessor's security interest was perfected even though the "true" owner was not denominated on the certificates of title. Further, the Court reasoned that the lessor had substantially complied with the perfection statutes because a diligent person would be put on notice regarding the lessor's security interest and, therefore, the statutory purposes were effectuated.

Here, perfection of an interest in the subject motor vehicles is governed by the Uniform Commercial Code and the motor vehicle acts of New York, New Jersey, Maryland, and Michigan. To determine whether Lend Lease's security interests are perfected, we must examine the relevant caselaw and statutes of each of these jurisdictions. See, Matter of Rose Way, Inc., 113 B.R. 527, 529 (Bkrtcy.S.D.Iowa 1990) (a "bankruptcy court must look to the state law to determine whether a creditor's security interest was properly perfected."). The following discussion describes the reasoning for our bench ruling that Lend Lease's security interests are perfected in each of the relevant States.

In New York, a security interest is perfected:

By the delivery to the commissioner of the existing certificate of title, if any, an application for a certificate of title containing the name and address of the lienholder and required fee. . . .

N.Y.Veh. & Traf.Law § 2118(b)(1)(A). This statute does not require that a lienholder's name appear on the certificate of title. Rather, mere delivery of a proper application, to obtain a certificate of title, is sufficient to perfect a security interest. See, In re Farnham, supra, 57 B.R. at 241. In re McCall, supra, held that, in New York, perfection is achieved when adequate notice of a security interest is provided to any diligent searcher. In McCall a creditor perfected its security interest by "reserving the certificates of title and keeping the vehicles registered in their name because they certainly put third parties on notice of their interests in the said vehicles." Id. 27 B.R. at 107. Here, Lend Lease has clearly perfected its security interests in New York because even a less than diligent third party was put on notice of Lend Lease's interest. We are aware of General Motors Acceptance Corporation v. Waligora, 24 B.R. 905 (W.D.N.Y.1982), which held to...