In re Shreves

• Decision Date: 12 June 2001
• Docket Number: Adversary No. 00-1189.,Bankruptcy No. 00-12666.
• Citation: 272 B.R. 614
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re David A. SHREVES and Linda L. Shreves, Debtors. Martin P. Sheehan, Trustee, Plaintiff, v. Valley National Bank, Defendant.

272 B.R. 614

In re David A. SHREVES and Linda L. Shreves, Debtors Martin P. Sheehan, Trustee, Plaintiff, v. Valley National Bank, Defendant.

Bankruptcy No. 00-12666.

Adversary No. 00-1189.

United States Bankruptcy Court, N.D. West Virginia.

June 12, 2001.

COPYRIGHT MATERIAL OMITTED

Thomas Fluharty, Clarksburg, WV, for debtor.

Martin P. Sheehan, Wheeling, WV, for plaintiff.

Julia A. Chincheck, Charleston, WV, for defendant.

MEMORANDUM OPINION AND ORDER

L. EDWARD FRIEND, II, Bankruptcy Judge.

This matter comes before the Court pursuant to the trustee's Complaint to Set Aside Transfer of Interest. The trustee seeks to set aside the security interest of defendant Valley National Bank ("Valley") in a 1997 GMC Jimmy ("vehicle") that was perfected within ninety days of the debtors' bankruptcy filing and more than four months after the interest was obtained. The Court has jurisdiction pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157.

I. FACTS

The facts of this case center on three distinct transactions: first, the purchase of the vehicle by David A. Shreves and Linda L. Shreves ("debtors") financed by United National Bank ("United"); second, the subsequent refinancing agreement between the debtors and Valley; and third, the perfection of Valley's interest during the preference period.

Sometime prior to April 3, 2000, the debtors obtained a loan from United for the purpose of purchasing a 1997 GMC Jimmy, and granted United a security interest in the vehicle. However, on April 3, 2000, before United perfected its interest, the debtors refinanced this loan through Valley. Valley executed a check on April 5, 2000 and sent it to United.

United recorded its lien on the West Virginia motor vehicle title on April 21, 2001. Ten days later, on May 1, 2000, United released this lien. The West Virginia Department of Motor Vehicles ("DMV") did not record Valley's lien on the title until August 11, 2000. Consequently, from May 1, 2000, until August 11, 2000, no lien was recorded on the vehicle title.

The reason for the late recordation appears to be delay by both Valley and the debtors. Sometime in June 2000, Valley sent a "Request for Title" and an "Application to Record Lien" form for the debtors to execute and return. Sometime in July 2000, Valley received the title and the executed application form from the debtors. On August 8, 2000, Valley submitted its application to record the lien to the DMV, and on August 11, 2000, the DMV issued a title recording Valley's lien.¹ On October 18, 2000, the debtors filed a petition under Chapter 7 of the Bankruptcy Code, and Martin P. Sheehan was appointed as trustee of the bankruptcy estate. Thereafter, on December 11, 2000, the trustee filed this adversary proceeding to set aside Valley's security interest.

Following a January 30, 2001 telephonic pretrial conference, the Court granted the trustee thirty days to submit a brief in support of his position, and the debtors thirty days to file a responsive brief. Upon receipt of these briefs, the Court took the matter under advisement.

II. DISCUSSION

The trustee seeks to avoid Valley's lien perfection as preferential under 11 U.S.C. § 547(b). Valley raises three defenses: first, under 547(c)(1), the "substantially contemporaneous exchange" exception; second, the state law doctrine of equitable subrogation; and third, the earmarking doctrine.

A. Substantially Contemporaneous Exchange Defense

Preferences are governed by 11 U.S.C. § 547. This section provides, inter alia, that:

(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

The trustee bears the burden of proving the five elements set forth under § 547(b). See 11 U.S.C. § 547(g). Even if the trustee proves the elements of a preference, his avoidance power may be limited by enumerated exceptions as set forth in § 547(c).

The burden shifts to the creditor to prove nonavoidability under these exceptions. See id. Of the exceptions listed under § 547(c), Valley raises only § 547(c)(1), the "substantially contemporaneous exchange rule" as a defense. Section 547(c)(1) provides that:

(c) The trustee may not avoid under this section a transfer —

(1) to the extent that such transfer was —

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

Under the Code, Valley must first prove that the transfer was intended by the parties to be a contemporaneous exchange for new value given to the debtor, and further that the transfer was in fact a substantially contemporaneous exchange. The grant of the security interest at the time of the refinancing is sufficient evidence of the intent of Valley and the debtors to make a contemporaneous exchange for new value. More problematic for Valley, however, is the demonstration that the transfer was actually substantially contemporaneous, since the perfection of the security interest occurred more than four months after the security agreement.

This Court has had a number of occasions to consider preference cases where a creditor has not timely perfected its security interest. Most often, these cases arise where there has been an "enabling loan" creating a purchase money security interest that was ultimately perfected more than ten or twenty days after the debtors acquired the collateral, but within ninety days of bankruptcy. These cases arose following the Fourth Circuit Court of Appeals decision in Wachovia Bank and Trust Co. v. Bringle (In re Holder), 892 F.2d 29 (4th Cir.1989), and the United States Supreme Court case of Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211, 118 S.Ct. 651, 139 L.Ed.2d 571 (1998).

In Holder, the debtor purchased a truck on July 27, 1987, signing a security agreement with Wachovia Bank & Trust Co. ("Wachovia") in exchange for a loan. 892 F.2d at 29. Wachovia delivered the necessary paperwork to the North Carolina Division of Motor Vehicles nineteen days later, on August 12, 1987, and the lien was recorded on the same day. Id. Eighty-two days after the debtor received possession of the truck, the debtor filed for relief under Chapter 13 of the Bankruptcy Code. Id. The trustee filed a motion to avoid Wachovia's lien as preferential, and Wachovia asserted § 547(c)(1), the "contemporaneous exchange" defense. See id. at 29-30.

The sole question before the Fourth Circuit was whether § 547(c)(1) is applicable to protect purchase money security interests perfected more than ten days after the debtor receives possession of the vehicle. Id. at 29. At the time of the transfer in question, § 547(c)(3) provided that to qualify for the enabling loan exception, the security interest must be perfected on or before ten² days after the debtor's receipt of possession. The court concluded that the contemporaneous exchange exception did not apply to purchase money security transactions perfected more than ten days after the debtor received possession of the collateral.

Subsequent to Holder, the United States Supreme Court considered, in Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211, 118 S.Ct. 651, 139 L.Ed.2d 571 (1998), the § 547(c)(3) "enabling loan" exception to the trustee's preference avoidance power as it related to state law relation-back periods. Under § 547(c)(3) as it existed after 1994, an enabling loan made by a creditor who obtains a security interest is excepted from the preference period so long as the interest is perfected within twenty days of the debtor's receipt of possession of the collateral. In a non-bankruptcy context, state law often allows for a longer relation-back or grace period. In West Virginia, the relation back period is sixty days. W. Va.Code § 17A-4-A-4 (2000). In Fink, the applicable Missouri statute in question provided for a thirty-day period. Fink, 522 U.S. at 213, 118 S.Ct. 651.

The issue in Fink was whether a creditor who performs the acts necessary to perfect its interest outside the § 547(c)(3) twenty-day period, but within the otherwise applicable state law relation-back period can invoke the "enabling loan" exception provided by § 547(c)(3). The Court held that a transfer of a security interest is "perfected" under § 547(c)(3) on the date the necessary state law perfection steps are taken, but that a creditor may invoke the enabling loan exception only by satisfying the state law perfection requirements within the twenty-day period provided by the Bankruptcy Code.

Following the Supreme Court and Fourth Circuit opinions, this Court decided In re Horner, 248 B.R. 516 (Bankr.N.D.W.Va.2000). In Horner, this Court recognized that although federal law mandates that a creditor must perfect its security interest within twenty days of the debtor receiving possession of the subject property, it is state law that determines whether the interest has actually been perfected. Horner, 248 B.R. at 518, citing Fink, 522 U.S. at 212, 118 S.Ct. 651. Horner involved a purchase money security interest in a motor vehicle where the creditor made application for a lien within the twenty-day period, but the lien was not...