In re Reinertson

Decision Date27 August 1998
Docket NumberAdversary No. 97/00062.,Bankruptcy No. 97-30214-7
Citation224 BR 137
PartiesIn re Douglas Allen REINERTSON, Katherine Marie Reinertson, Debtors. Don TORGENRUD, Trustee, Plaintiff, v. MISSOULA FEDERAL CREDIT UNION, Defendant and Third Party Plaintiff, v. Douglas Allen REINERTSON Katherine Marie Reinertson and Jolly Wholesale, Inc., a Montana Corporation, Third Party Defendants.
CourtU.S. Bankruptcy Court — District of Montana

Don Torgenrud, St. Ignatius, MT, for plaintiff.

Richard J. Samson, Christian, Samson & Jones, P.C., Missoula, MT, for Missoula Federal Credit Union.

Harold V. Dye, Dye & Moe, P.L.L.P., Missoula, MT, for Jolly Wholesale, Inc.

C.J. Tornabene, Marsillo, Tornabene, Schuyler & McKenna, PLLC, Missoula, MT, for Douglas and Katherine Reinertson.


JOHN L. PETERSON, Bankruptcy Judge.

In this adversary proceeding Plaintiff Don Torgenrud, Chapter 7 Trustee in the above-captioned bankruptcy case, seeks avoidance of the security interest of the Defendant Missoula Federal Credit Union ("MFCU") as a preference pursuant to 11 U.S.C. § 547(b), when MFCU's predecessor-in-interest to a retail installment contract with the Debtors, Jolly Wholesale Inc. ("Jolly"), sold and delivered possession of a 1994 Dodge Intrepid (the "vehicle") to the Debtors Douglas Allen Reinertson ("Douglas") and Katherine Marie Reinertson ("Katherine") on December 24, 1996, but the purchase money security interest in the vehicle, granted as a condition of the enabling loan from MFCU, was not perfected until January 15, 1997. MFCU filed an answer and third party complaint against Jolly for damages, and against the Debtors to enforce the reaffirmation agreement with the Debtors approved in the above-captioned bankruptcy case by Order entered March 17, 1997. The Debtors filed a counterclaim against MFCU praying for rescission of the reaffirmation agreement based upon mutual mistake, and for attorney's fees and payments made by the Debtors pursuant to the reaffirmation agreement. Jolly filed a cross claim enforce the reaffirmation agreement against the Debtors.

For the reasons set forth below, Judgment shall be entered in the Plaintiff's favor avoiding MFCU's purchase money security interest as a preference and disallowing MFCU's secured claim; in Debtors' favor dismissing MFCU's and Jolly's claims to enforce the reaffirmation agreement against the Debtors and discharging their claims against the Debtors, and vacating the Court's Order entered March 17, 1997, approving the reaffirmation agreement; and in Jolly's favor dismissing MFCU's claim against Jolly for lack of "related to" jurisdiction. This Order contains the Court's findings of fact and conclusions of law pursuant to F.R.B.P. 7052.


The Plaintiff filed this preference complaint on June 25, 1997. MFCU filed its answer and third party complaint on March 12, 1998, against Jolly seeking damages under their agreement for the purchase of retail installment contract (Exhibit A), and against the Debtors for enforcement of the reaffirmation agreement (Exhibit B-2). MFCU's answer admits all the allegations of the Plaintiff's complaint, including that its security interest is subject to avoidance under § 547(b)1, except for the date the Debtors took possession. The Debtors filed their answer denying MFCU's third party complaint and asserting a counterclaim seeking rescission of the reaffirmation agreement with MFCU on the basis of mutual mistake, due to their belief that MFCU's lien was properly perfected when they entered into the reaffirmation agreement. Jolly filed its answer asserting this Court lacks jurisdiction to decide MFCU's contract claim against it, and asserting a cross claim against the Debtors to enforce the reaffirmation agreement. After the Debtors filed a reply to Jolly's claim, the Court set the matter for trial on June 3, 1998, and ordered the parties to submit exhibits and witness lists no later than three (3) business days before trial. On June 2, 1998, the day before trial, MFCU filed an amended answer admitting the Debtors took possession on December 24, 1996, but contending that its lien is not a voidable preference because MFCU did not approve the enabling loan until December 27, 1996. No answers have been filed to MFCU's amended third party complaint.

Trial of this cause was held at Missoula on July 2, 1998. The parties appeared represented by counsel. Douglas, Jack Palmer ("Palmer") (Jolly's owner), and Sandy Wells of MFCU testified, and exhibits were admitted into evidence without objection. At the close of the testimony the Court took the matter under advisement and allowed the parties ten (10) days to file briefs. Jolly and MFCU's briefs have been filed and reviewed by the Court. The Plaintiff failed to file a brief. The matter is ready for decision.

The issues are:

(1) Whether the transfer of MFCU's security interest in the vehicle perfected on January 15, 1997, constitutes a preference under § 547(b) which is avoidable by the Trustee;

(2) Whether the "enabling loan" exception of 11 U.S.C. § 547(c)(3) prevents the Trustee from avoiding this preference when MFCU's security interest was perfected more than 20 days after the Debtors received possession of the vehicle;

(3) Whether the reaffirmation agreement should be rescinded based upon mutual mistake of the parties when MFCU's security interest and status as a creditor with a claim secured by the vehicle are avoided as a preference by the Trustee, and the Debtor failed to promptly rescind, failed to return the vehicle to MFCU, and failed to make payments under the reaffirmation agreement; and

(4) Whether this Court lacks "related to" jurisdiction to decide MFCU's third party complaint against Jolly.


The Debtors purchased the 1994 Dodge Intrepid from Jolly on December 24, 1996, for the sum of $15,495. Exhibit 1 is the retail installment contract between the Debtors and Jolly. Exhibit 1 was signed by the Debtors on December 24, 1996, and Debtors took possession of the vehicle on that date. Debtors granted Jolly a security interest in the vehicle pursuant to the terms of Exhibit 1. Also pursuant to Exhibit 1, Jolly assigned its rights and interests thereunder to MFCU as of December 24, 1996.

Jolly and MFCU operated under a financing agreement for the purchase of retail installment contracts (Exhibit A) dated September 2, 1996, which was in effect when the Debtors purchased the vehicle. Under Exhibit A, MFCU agreed to purchase from Jolly retail installment contracts such as Exhibit 1 for the sale of private automobiles. Exhibit A provides for debtor eligibility requirements and gives MFCU "the sole and exclusive discretion to accept or reject any proposed transaction for any reason whatsoever within a reasonable time including that time actually necessary to obtain adequate information on the debtor after the documents have been submitted to MFCU."

In fact, MFCU accepted Exhibit 1, but not before a delay caused by the Christmas holiday. The Debtors purchased the vehicle and took possession on December 24, 1996, in the late afternoon after MFCU had closed its doors. Palmer testified that Jolly delivered possession of the vehicle to the Debtors with the understanding that MFCU could deny the Debtors credit. However, MFCU did not deny the Debtors credit. Because of the Christmas holiday, Exhibit 1 was not delivered to MFCU until December 26, 1997, together with the Debtors' credit application (Exhibit D). MFCU accepted Debtors' application and wrote Jolly a check in the sum of $14,790 on December 27, 1996, for the assignment of Exhibit 1.

Title problems with the vehicle caused further delays before MFCU perfected its security interest in the vehicle on January 15, 1997. The vehicle title Jolly held was issued by the State of Michigan. Other dealers had owned the vehicle before Jolly, which purchased the vehicle in Florida on October 10, 1996. For purposes of perfecting MFCU's purchase money security interest in the vehicle, the State of Montana would not accept the Michigan vehicle title. The Michigan title was mailed to the Montana Department of Motor Vehicles ("DMV") at its Deer Lodge office after January 1, 1997, for the purpose of obtaining a Montana title for the vehicle. Palmer testified that the Deer Lodge DMV office was shut down for a period of three days. Jolly obtained a Montana title for the vehicle on January 13, 1997. Exhibit C. The DMV issued the Debtors a certificate of title (Exhibit 2) on February 14, 1997, showing MFCU as having a lien as of January 15, 1997.

The Debtors filed a joint voluntary Chapter 7 petition on January 29, 1997. In their Statements and Schedules they list MFCU as a creditor holding a claim secured by the vehicle. In their Statement of Intention the Debtors express their intention to retain the vehicle by reaffirming the debt with MFCU. Their Statement of Financial Affairs does not list the vehicle purchase and MFCU's perfection of its lien. MFCU filed two Proofs of Claim on February 11, 1997, one for an unsecured claim in the sum of $3,013.95, and a secured claim in the sum of $14,959.34.

The meeting of creditors was held as scheduled on March 3, 1997. The Plaintiff, who was not the original trustee appointed in this case, examined the Debtors. Richard Samson, who was the original trustee later substituted for by the Plaintiff, appeared on behalf of MFCU.

Shortly after the creditors' meeting the Debtors and MFCU executed on March 7, 1997, a reaffirmation agreement in the amount of $11,600, with monthly payments in the sum of $294. On the reaffirmation agreement, next to "Description of Security" the parties entered "1994 Dodge Intrepid". Under part 4, where the Debtors affirm their belief why the reaffirmation agreement is in their best interests, the agreement states "I need this car to get to work." Pursuant to its discretion granted pursuant to 11 U.S.C. § 524(c), the Court ordered the...

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