In re Morgan
| Decision Date | 18 March 2003 |
| Docket Number | Bankruptcy No. 01-31549.,Adversary No. 02-3066. |
| Citation | 291 B.R. 795 |
| Parties | In re Norma MORGAN, Debtor. Dean B. Farmer, Trustee, Plaintiff, v. LaSalle Bank, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Hodges, Doughty & Carson, PLLC, Keith L. Edmiston, Esq., Knoxville, TN, for Dean B. Farmer, Trustee.
Stone & Hinds, P.C., George F. Legg, Esq., Knoxville, TN, for LaSalle Bank.
This adversary proceeding is before the court upon the Complaint filed by the Plaintiff, Dean B. Farmer, Chapter 7 Trustee (Trustee), seeking a determination that insurance proceeds paid the Defendant, LaSalle Bank (LaSalle), after the Debtor's bankruptcy petition was filed constituted a postpetition transfer under 11 U.S.C.A. § 549 (West 1993), recoverable pursuant to 11 U.S.C.A. § 550 (West 1993 & Supp.2002). Alternatively, the Trustee asserts that the insurance proceeds are property of the Debtor's bankruptcy estate under 11 U.S.C.A. § 541 (West 1993), and the Trustee, in his position as hypothetical lien creditor under 11 U.S.C.A. § 544 (West 1993 & Supp.2002), is entitled to a turnover thereof pursuant to 11 U.S.C.A. § 542 (West 1993 & Supp.2002). LaSalle filed its Answer on August 14, 2002, raising the affirmative defense of equitable subrogation.
Presently before the court are cross motions for summary judgment filed by the Trustee on January 27, 2003 (the Trustee's Motion), and by LaSalle on February 19, 2003 (LaSalle's Motion).1 The court heard oral argument on the two motions on March 6, 2003. The record before the court consists of facts and documents stipulated by the parties pursuant to the Stipulations of the Parties filed on November 27, 2002.
This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(A), (E), (K), and (O) (West 1993).
The facts are not in dispute. On January 18, 1999, the Debtor purchased a pre-owned 1998 Chevrolet Malibu (the Automobile) from Beaty Chevrolet. Pursuant thereto, she executed a Sales Contract with Beaty Chevrolet. The Automobile purchase was financed by a loan through First American National Bank (First American) which was secured by the Automobile. First American's lien on the Automobile was noted on the Tennessee Certificate of Title issued on February 1, 1999. On February 12, 1999, the Debtor refinanced the loan with LaSalle and as collateral, LaSalle was granted a security interest in the Automobile pursuant to a Promissory Note and Security Agreement executed by the Debtor. Loan proceeds received from LaSalle were used to fully satisfy the Debtor's obligation to First American. The Debtor commenced her bankruptcy case by the filing of a Voluntary Petition under Chapter 7 on March 27, 2001.
On April 30, 2001, AmSouth Bank, successor in interest to First American, wrote a letter to LaSalle, confirming that it had no interest in the Debtor's Automobile. On May 10, 2001, LaSalle applied to the Tennessee Department of Safety for a duplicate Tennessee Certificate of Title. Likewise, on May 10, 2001, LaSalle executed an Application for Notation of Lien on Certificate of Title evidencing itself as the lienholder, which was received by the Tennessee Department of Title and Registration on May 14, 2001. The State of Tennessee issued a Duplicate Certificate of Title on May 17, 2001. The Certificate of Title evidencing LaSalle as lienholder was issued on May 21, 2001. Until that date, First American was the lienholder noted on the Certificate of Title.
Also in April 2001, the Debtor was involved in an automobile accident resulting in a total loss to the Automobile. The Debtor subsequently conveyed title of the Automobile to State Farm Insurance Company (State Farm), her insurance carrier. In November 2001, State Farm paid LaSalle $7,479.03 in full satisfaction of the Debtor's indebtedness to LaSalle.
On May 11, 2002, and July 12, 2002, the Trustee made written demands to LaSalle for evidence of its perfected security interest in the Automobile and, thus, in the proceeds received from State Farm. LaSalle did not respond to either request, and the Trustee filed the Complaint commencing this adversary proceeding on May 7, 2002.
The Trustee asserts that LaSalle's lien on the Automobile was not perfected as of the date that the Debtor's bankruptcy was filed and, thus, (1) LaSalle's postpetition notation of lien on the Tennessee Certificate of Title for the Automobile was a violation of the automatic stay provisions of 11 U.S.C.A. § 362(a)(4) (West 2003) and should be voided; (2) the Trustee, in his position as a hypothetical lien creditor under § 544, has priority over LaSalle's unperfected security interest; (3) LaSalle's unperfected security interest should be avoided under § 544 and recovered by the Trustee pursuant to § 550; (4) the $7,479.03 payment from State Farm to LaSalle, as a result of the Debtor's automobile accident, was a postpetition transfer under § 549, recoverable by the Trustee pursuant to § 550; and/or (5) the proceeds paid to LaSalle as a result of the Debtor's automobile accident were property of the Debtor's bankruptcy estate, subject to turnover to the Trustee pursuant to § 542.
LaSalle argues that, under the doctrine of equitable subrogation, its lien was perfected prepetition and, accordingly, it did not violate the automatic stay when it obtained a Duplicate Tennessee Certificate of Title evidencing itself as lienholder on the Automobile. Similarly, LaSalle maintains that the insurance proceeds received from State Farm were not property of the Debtor's bankruptcy estate, and it should not be required to turnover the proceeds to the Trustee.
Accordingly, if LaSalle's security interest in the Automobile was properly perfected at the time that the Debtor filed her bankruptcy petition by virtue of subrogation of First American's lien rights, the insurance proceeds were not property of the Debtor's bankruptcy estate, and LaSalle did not violate the automatic stay when it had its lien noted on the Automobile's certificate of title. However, if LaSalle's security interest was not properly perfected, the Trustee has a superior interest in the Automobile, the insurance proceeds received by LaSalle were property of the Debtor's bankruptcy estate, and LaSalle must turnover the proceeds to the Trustee for distribution to the Debtor's creditors.
Summary judgment is governed by Rule 56 of the Federal Rules of Civil Procedure made applicable to adversary proceedings pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure. Rule 56 dictates that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c).
The moving party bears the initial burden of proving that there are no genuine issues of material fact, entitling it to judgment as a matter of law. Owens Corning v. Nat'l Union Fire Ins. Co., 257 F.3d 484, 491 (6th Cir.2001). The burden then shifts to the nonmoving party to produce specific facts showing a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citing FED. R. CIV. P. 56(e)). The nonmoving party must cite specific evidence and may not merely rely upon allegations contained in the pleadings. Harris v. Gen. Motors Corp., 201 F.3d 800, 802 (6th Cir.2000). The facts and all resulting inferences will be viewed in the light most favorable to the nonmoving party. See Matsushita, 106 S.Ct. at 1356. This court must then decide whether "the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986).
In this case, the parties have stipulated that there are no genuine issues of material fact and have, in fact, stipulated to the material facts. Therefore, the question before the court is, based upon the facts and the stipulated exhibits, which party is entitled to judgment as a matter of law.
The first question before the court is whether LaSalle's security interest in the Automobile was properly perfected. Issues such as the method for achieving perfection of a security interest and the time at which a security interest is perfected are matters of state law. Hendon v. Gen. Motors Acceptance Corp. (In re B & B Utils., Inc.), 208 B.R. 417, 421 (Bankr.E.D.Tenn.1997). In Tennessee, the perfection of a security interest in a motor vehicle is governed by title 55, chapter 3 of the Tennessee Code Annotated (collectively the Tennessee Certificate of Title Statute). Specifically, section 55-3-126, as it existed in 2001, provides, in pertinent part:
(a) A lien or security interest in a vehicle of the type for which a certificate is required shall be perfected and shall be valid against subsequent creditors of the owner, subsequent transferees, and the holders of security interest and liens on the vehicle by compliance with this chapter.
(b)(1) A security interest or lien is perfected by delivery to the division of motor vehicles or the county clerk of the existing certificate of title, if any, title extension form, or manufacturer's statement of origin and an application for a certificate of title containing the name and address of the holder of a security interest or lien with vehicle description and the required fee.
(2) The security interest is perfected as of the time of its creation if the delivery is completed within twenty (20) days thereafter. Otherwise, a security interest is perfected as of the date of delivery to the county clerk or the division of motor vehicles.2
....
(c) When the security interest is perfected as provided for...
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