In re Moeri

• Decision Date: 08 August 2003
• Docket Number: Bankruptcy No. 02-30718-JES.,Adversary No. 02-2366.
• Citation: 300 B.R. 326
• Parties: In re Peter N. MOERI and Lynda L. Moeri, Debtors. John M. Scaffidi, Trustee, Plaintiff, v. Kenosha City Credit Union and State of Wisconsin (Department of Transportation), Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

300 B.R. 326

In re Peter N. MOERI and Lynda L. Moeri, Debtors John M. Scaffidi, Trustee, Plaintiff, v. Kenosha City Credit Union and State of Wisconsin (Department of Transportation), Defendants.

Bankruptcy No. 02-30718-JES.

Adversary No. 02-2366.

United States Bankruptcy Court, E.D. Wisconsin.

August 8, 2003.

Michael F. Dubis, Esq., Waterford, WI, for Plaintiff-Trustee.

Roger T. Lambert, Esq., Brookfield, WI, for Defendant-Kenosha City Credit Union.

DECISION

JAMES E. SHAPIRO, Bankruptcy Judge.

At issue is whether the lien of Kenosha City Credit Union ("defendant") in debtor's 1999 Jeep is avoidable as a preferential transfer.

The trustee argues that, under Wis. Stats. § 342.19¹, a lien is perfected upon delivery of the prerequisite documents and fee to the Wisconsin Department of Transportation ("Department"). In this case, approximately 48 days passed from the time that the debtor signed the loan documents with the defendant to the time when the defendant's lien was perfected. Such perfection was within the 90-day preference period while the debtor was insolvent. The trustee submits that the perfection was tardy within the meaning of § 547(c)(3)(B)² of the Bankruptcy Code as having occurred beyond the permissible 20-day grace period afforded under § 547(c)(3)(B) after the debtor received possession of the Jeep and, consequently, the lien is subject to avoidance as a preferential transfer.

In response, the defendant relies upon the "earmarking" doctrine as a defense. The defendant further argues it should not be held responsible for any delay in perfection because it did not create the delay, alleging that such delay was caused solely by the Department. In support of this assertion, the defendant cites Swanson, Trustee v. General Motors Acceptance Corp. (In re Kahl), Case No. 01-32245 Adversary No. 02-2207 (on appeal to the district court).

The issue has been presented to the court upon a motion for summary judgment brought by the trustee together with a stipulation of facts and briefs by the parties.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F) and (O).

STATEMENT OF FACTS

In August of 1999, the debtor, Peter N. Moeri ("debtor"), entered into a car lease with DaimlerChrysler Services North America, LLC ("Chrysler") involving a 1999 Jeep. This lease contained an option to purchase. On or shortly before May 28, 2002, the debtor exercised his option to purchase the Jeep. Chrysler provided the financing for the Jeep. On May 28, 2002, the application for title, prepared by CarMax Auto Superstores, was electronically sent to the Department. The title application provided for Chrysler's purchase money security interest.

On June 17, 2002, the debtor applied for a refinancing loan with the defendant. After approving the debtor's loan, the defendant then contacted Chrysler to obtain an oral payoff of the loan. On June 24, 2002, the debtor signed the necessary loan documents. On June 25, 2002, the defendant then mailed to Chrysler the payoff loan balance of $13,973.22 and requested Chrysler to send to it the "paid lein[sic] perfection."

A gap in time then followed.

At some time between mid-July and early August of 2002, the defendant received a lien release from Chrysler; however, it did not also receive from Chrysler the certificate of title for the Jeep. The debtor had not been provided with the certificate of title when he purchased the Jeep from Chrysler. The defendant needed the certificate of title in order to apply for a replacement certificate of title to show the defendant as lienholder. The defendant then contacted the Department, shortly after it obtained Chrysler's lien release, inquiring into the status of the certificate of title to the Jeep. The Department informed the defendant that, although a title to the Jeep had been issued in the debtor's name, it was being held by the Department as undeliverable due to an incorrect address listed for the debtor. The defendant provided the Department with the debtor's correct address. On August 9, 2002, the defendant received from the debtor the original certificate of title to the Jeep listing the debtor as the owner and Chrysler as the lienholder. The defendant immediately delivered to the Department the original certificate of title, the lien release from Chrysler, the application for a new certificate of title containing defendant's name and address as lienholder, and the required fee. All of these documents and the fee were received by the Department on August 12, 2002.

On August 22, 2002, the debtor filed a petition in bankruptcy under chapter 7.

DID THE TRANSFER OCCUR WITHIN THE 90-DAY PREFERENCE PERIOD, BUT AFTER THE GRACE PERIOD FOR SUCH PERFECTION?

The trustee states that he is entitled to avoid the defendant's security interest because the requirements to meet the exception to avoidance under § 547(c)(3) were not met. Under this exception, a purchase money security interest that secures new value and is perfected within 20 days after the debtor takes possession is not a preference, even if it occurs within 90 days before a bankruptcy petition is filed. However, § 547(c)(3) does not apply in this case. It only pertains to a purchase money security interest. The defendant does not hold a purchase money security interest in the Jeep because it refinanced Chrysler's purchase money loan.

Sec. 547(e)(2),³ not § 547(c)(3), applies to a refinanced loan. Under § 547(e)(2)(A), the transfer occurred when the defendant obtained its security interest from the debtor (i.e., when the defendant made the loan to the debtor). If the defendant had perfected its security interest within 10 days thereafter, its security interest would have been immune from a preference challenge. However, the defendant did not perfect its security interest until approximately 48 days after it made the loan to the debtor. Therefore, under § 547(e)(2)(B), the transfer from the debtor to the defendant occurred when the defendant perfected its security interest within the 90-day preference period.

EARMARKING DOCTRINE

The defendant claims that, notwithstanding the tardiness in perfection, under the earmarking doctrine, there was no avoidable preferential transfer because its lien was simply a substitution for that of Chrysler which had been on the title. Under the earmarking doctrine, there is no avoidable preferential transfer of debtor's property interest when the new lender and the debtor agree to use loan funds to pay a specified antecedent debt and where the agreement's terms are actually performed and the transaction, viewed as a whole, does not diminish the debtor's estate.

There is authority to support the defendant's claim of earmarking as a defense. In re Heitkamp, 137 F.3d 1087 (8th Cir.1998) applied earmarking as a defense to a mortgagee who forgot to record its mortgage until a few days before the debtors filed their bankruptcy petition. The court in Heitkamp declared that the mortgage was merely replacing a previously recorded subcontractors' security interest and, under the earmarking doctrine, the transfer was not avoidable under § 547(b). 137 F.3d at 1089; accord In re Ward, 230 B.R. 115 (8th Cir. BAP 1999). Heitkamp has been sharply criticized. In In re Messamore, 250 B.R. 913 (Bankr.S.D.Ill.2000), Judge Meyers provided a concise analysis of earmarking and its relationship to § 547(b) of the Bankruptcy Code. Judge Meyers pointed out that, while the earmarking doctrine may apply to payments of funds from a subsequent creditor to the original creditor, it has no application with respect to the subsequent creditor's obligation to timely record its lien, which is a separate and distinct transfer. Judge Meyers stated, 250 B.R. at 917-18 (in discussing Heitkamp) the following:

However, the court's analysis failed to distinguish between the transfer of borrowed funds to the original creditor and the subsequent transfer that occurred when the new creditor belatedly perfected its security interest in the debtor's property. The earmarking doctrine while appropriate to prevent avoidance of the transfer of borrowed funds to the original creditor, was wrongly invoked as a defense for the new creditor's tardy perfection.

The defendant attempts to distinguish the instant case from Messamore by pointing out that, in Messamore, unlike the case at bar, the debtors obtained a lien release from the prior secured creditor which the defendant argues gave the debtors "actual dominion and control over the collateral." The defendant then reasons that by the debtors having obtained the lien release from the prior secured creditor, they then had the ability to dispose of the collateral (a mobile home) because they held "a free and clear, open or otherwise unencumbered title to the mobile home." The defendant points out that in the instant case, by contrast, there was never any "open title" by which the debtor could sell, encumber or otherwise control any equity superior to either the defendant or Chrysler. That argument is unavailing. Chrysler's lien was extinguished when the defendant paid Chrysler in full. The fact that the lien release was given by Chrysler to the defendant and not to the debtors and had not been removed from the records of the Department is of no significance.

In re Prindle, 270 B.R. 743, 747 (Bankr.W.D.Mo.2001) asserts that the earmarking doctrine necessarily assumes that the creditor held a continuing security interest. In the case at bar, the defendant did not have such a continuing security interest despite the defendant's argument to the contrary. The defendant first became a duly perfected lienholder upon delivery on August 12, 2002 to the Department of the certificate of title to the 1999 Jeep with the debtor's name as owner along with the defendant's application for designation as a lienholder and with the required fee. The defendant's failure to timely perfect made its security interest vulnerable to attack by the bankruptcy tr...