In re Sutton

• Decision Date: 16 March 2007
• Docket Number: No. 06-6059WD.,06-6059WD.
• Citation: 365 B.R. 900
• Parties: In re Andy Lee & Kerri Lynn SUTTON, Debtors. J. Kevin Checkett, Trustee, Appellant, v. Andy Lee & Kerri Lynn Sutton, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

365 B.R. 900

In re Andy Lee & Kerri Lynn SUTTON, Debtors.

J. Kevin Checkett, Trustee, Appellant, v. Andy Lee & Kerri Lynn Sutton, Appellees.

No. 06-6059WD.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: January 25, 2007.

Filed: March 16, 2007.

COPYRIGHT MATERIAL OMITTED

Victor F. Weber, Kansas City, MO, Kevin Checkett, Carthage, MO, appeared on the brief, for Appellant.

Shannon L. Davis, Springfield, MO, Robert A. Grosser, Springfield, MO, appeared on the brief, for Appellees.

KRESSEL, Chief Judge, MAHONEY and McDONALD, Bankruptcy Judges.

McDONALD, Bankruptcy Judge.

Chapter 7 Trustee, J. Kevin Checkett, appeals from the order of the bankruptcy court¹ overruling Trustee's objection to Debtors' claim of exemption of the full market value of a 1999 Dodge Truck. We affirm.

I.

Debtors, Andy and Kerri Sutton, purchased a 1999 Dodge Truck (the "Vehicle"). Jimmy Richardson, the father of Kerri, loaned Debtors $7,000.00 to finance Debtors' purchase of the Vehicle. (the "Loan"). Debtors did not execute a written promissory note in favor of Richardson outlining their obligation under the Loan. In fact, there are no written documents memorializing the parties' rights and obligations with respect to the Loan. Additionally, Richardson testified at trial that the parties never intended to create a lien in his favor to secure Debtors' obligations under the Loan.

The car dealer inquired of Debtors if someone had loaned them the cash to purchase the Vehicle and Debtors informed the dealer of the Loan. The car dealer then suggested that Debtors note Richardson as a lien holder on the application for title on the Vehicle. (the "Application for Title"). Kern testified at trial that she agreed to note her dad as a lien holder on the Application for Title so that he would have a "say so" if they ever wanted to sell the Vehicle.

Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on October 14, 2005. Debtors claimed the entire fair market value of the Vehicle, $7,500.00, as exempt under Mo.Rev.Stat. §§ 513.430(5) & 513.440. Debtors also listed Richardson as a secured creditor on their Schedule D with a claim of $6,800.00, which was the balance on the Loan. Sometime post-petition Debtors sold the Vehicle and Richardson released whatever interest he may have had in the Vehicle so that the sale could close.

Trustee filed an action to avoid Richardson's interest in the Vehicle under Trustee's strong-arm powers contained in 11 U.S.C. § 544(a). Richardson did not dispute the substantive allegations in Trustee's complaint and conceded that he did not have a security interest in the Vehicle.

Trustee also filed an objection to Debtors' claim of exemption of the entire value of the Vehicle. Trustee argued in his objection that Debtors could not exempt the Vehicle under 11 U.S.C. § 522(g)(1), which prevents a debtor from exempting property in which the debtor made a pre-petition voluntary transfer that the trustee later avoids.

The bankruptcy court entered judgment in favor of Trustee on his action under § 544(a), but overruled his objection to Debtors' exemption of the Vehicle in two separate orders dated July 21, 2006. In the order entering judgment in favor of Trustee on his § 544(a) action, the bankruptcy court found that because Debtors had not authenticated a written security agreement in favor of Richardson as required by Missouri's version of Article 9, Mo.Rev.Stat. § 400.9-203(b), Richardson did not possess an interest in the Vehicle.

The bankruptcy court held in its order overruling Trustee's objection that because Debtors did not execute a valid security agreement in favor of Richardson, they did not make a pre-petition voluntary transfer of an interest in the Vehicle to him. The bankruptcy court, therefore, found that § 522(g)(1)(A) was inapplicable and that Debtors could exempt the full market value of the Vehicle under Missouri law and overruled Trustee's objection.

Trustee then filed a motion with the bankruptcy court to amend or alter its judgment overruling Trustee's objection under Bankr.R. 9023. Trustee argued in his motion to amend that Debtors authenticated a valid security agreement in favor of Richardson when they noted him as the lien holder on the Application for Title. Trustee asserted that because Debtors did transfer an interest in the Vehicle to Richardson, § 522(g)(1)(A) did apply to prevent Debtors from exempting the value of Richardson's putative interest in the Vehicle, which was $6,800.00.

The bankruptcy court rejected Trustee's argument, holding that a notation that the creditor is a lien holder on an application for title is not a security agreement under Missouri's version of Article 9. The bankruptcy court, therefore, reiterated its earlier finding that Debtors did not make a voluntary transfer of an interest in the Vehicle to Richardson and that § 522(g)(1)(A) was inapplicable and denied Trustee's motion to alter or amend its judgment in an order dated August 14, 2006.

Trustee filed his notice of appeal on August 23, 2006. The notice of appeal only identifies the bankruptcy court's order denying Trustee's objection to Debtors' claim of exemption and the subsequent order denying Trustee's motion to alter or amend the judgment. The bankruptcy court, however, expressly premised its order overruling Trustee's objection on its finding in the adversary proceeding that Debtors did not convey an Article 9 security interest in the Vehicle to Richardson. The notice of appeal, therefore, preserved both the exemption issue and the Article 9 issue for appellate review. See Greer v. St. Louis Reg. Med. Ctr., 258 F.3d 843, 846 (8th Cir.2001).

II.

We review the bankruptcy court's findings of fact for clear error and its conclusion of law de novo. Bankr.R. 8013; In re Neal, 461 F.3d 1048, 1052 (8th Cir.2006). The bankruptcy court's finding that the Application for Title does not meet the statutory definition of a security agreement under Missouri's version of Article 9 is a question of law that we review de novo. In re Shores, 332 B.R. 31, 34 (M.D.Fla.2005). The bankruptcy court's interpretation of § 522(g)(1)(A) that the statute only applies if the debtor made a voluntary transfer of an interest in the property in question is also a question of law that we review de novo. Neal, 461 F.3d at 1052.

III.

A. Introduction

The issue before us is whether § 522(g)(1) applies so that Debtors may not exempt the entire value of the Vehicle. Section 522(g)(1) provides in relevant part that:

Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if — (1)(A) such transfer was not a voluntary transfer of such property by the debtor...

Relevant to the issue in dispute here, § 522(g)(1)(A) prohibits a debtor from exempting property to the extent that the trustee recovers the debtor's voluntary transfer of an interest in that property for the benefit of the estate. Kaler v. Overboe (In re Arzt), 252 B.R. 138, 141-42 (8th Cir. BAP 2000). We find that the, bankruptcy court correctly held that Debtors did not voluntarily transfer an interest in the Vehicle to Richardson so that § 522(g)(1)(A) is inapplicable for the following reasons.

B. Debtors did not transfer an interest in the Vehicle to Richardson under Article 9 of the Uniform Commercial Code.

The question of whether. Debtors transferred an interest in the Vehicle to Richardson is governed by state law. Moon v. Anderson (In re Hixon), 387 F.3d 695, 700 (8th Cir.2004). Therefore, we look to Missouri law to determine if Debtors made a pre-petition transfer of an interest in the Vehicle to Richardson.

Trustee first contends that Debtors granted a security interest in the Vehicle to Richardson under Missouri's version of Article 9 of the Uniform Commercial Code by noting Richardson as the lien holder on the Application for Title. Under Missouri's version of Revised Article 9 a creditor's security interest attaches to the collateral if: (1) the creditor has given value; (2) the debtor has rights in the collateral; and (3) the debtor has authenticated a security agreement that provides a description of the collateral.² Mo.Rev.Stat. § 400.9-203(b)(1)-(3). Unless the creditor's interest has attached to the collateral, the creditor has no enforceable interest in the collateral. Mo.Rev.Stat. § 400.9-203(a); Gasaway v. Erwin (In re Shelton), 472 F.2d 1118, 1121 (8th Cir.1973).

There is no dispute that Richardson gave value and that Debtors had obtained a right in the Vehicle. The only question, therefore, in determining whether Richardson's interest attached to the Vehicle is whether Debtors authenticated a valid security agreement. Trustee maintains that the Application for Title constitutes a valid security agreement under Missouri law. We disagree.

A security agreement is simply defined as an agreement that creates a security interest. Mo.Rev.Stat. § 400.9-102(a)(72). A security agreement need not be denominated as such or have any particular form. In re Smith, 167 B.R. 895, 897 (Bankr.E.D.Mo.1994). All that is required under Article 9 for a document to be a security agreement is an objective manifestation in the language of the document of the debtor's agreement to grant a security interest in the collateral in favor of the creditor. United States v. Mo. Farmers Assoc., 580 F.Supp. 35, 37 (E.D.Mo.1984) aff'd. 764 F.2d 488 (8th Cir.1985) cert. denied 475 U.S. 1053, 106 S.Ct. 1281, 89 L.Ed.2d 588 (1986); See also Mo.Rev.Stat. § 400.9-102 cmt. 3.b.

Although there is a split of authority on the issue, the Eighth Circuit has held that under the prior version of Article 9, a notation on an application for title that a...