In re Walker
| Decision Date | 03 December 1993 |
| Docket Number | Bankruptcy No. 92-02863. Adv. No. 93-6020. |
| Citation | 161 BR 484 |
| Parties | In re Delwin J. WALKER and Billie Janiece Walker, Debtors. L.D. FITZGERALD, Trustee, Plaintiff, v. FIRST SECURITY BANK OF IDAHO, N.A., Defendant. |
| Court | U.S. Bankruptcy Court — District of Idaho |
Jim Spinner, Service, Gasser & Kerl, Pocatello, ID, for plaintiff.
Craig W. Christensen, Pocatello, ID, for defendant.
FACTS.
The facts in this case are derived from a Stipulation of Facts submitted to the Court, which also contains certain documentary exhibits. A review of the Stipulation and exhibits shows that on July 3, 1992, Debtors Delwin and Janiece Walker purchased a 1989 Ford Taurus from Ted's, Inc. (Ted's), a Pocatello auto dealer. In connection with the purchase, Debtors executed an Installment Sale Contract, Security and Disclosure Agreement (the Contract). In the Contract, Debtors granted a security interest in the vehicle to Ted's to secure the payment of the $9,042.18 balance of the purchase price they agreed to finance.
Debtors took physical possession of the car the same day. Also on July 3, Ted's executed an assignment form on the back of the Contract and transferred all of its right, title, and interest under the Contract without recourse to Defendant First Security Bank of Idaho, N.A.
On July 6, 1992, Ted's sent by regular mail to the Bannock County office of the Idaho Department of Motor Vehicles (Bannock County) the following documents:
Upon review of these documents, Bannock County determined there was an error in the motor vehicle identification number in one of the documents and returned them to Ted's.
Upon receipt of the returned documents, Ted's corrected the identification number and resubmitted the documentation to Bannock County. The parties' Stipulation does not state the date Ted's resubmitted the documents to Bannock County, nor is there a stipulation as to the date the documents were again received by Bannock County. There is, however, a handwritten circled notation on the face of the Report of Sale and Application for Certificate of Title stating: "7.17.92; 9:00" followed by certain illegible initials. In their arguments to the Court the parties have presumed, and to the extent necessary herein the Court adopts their presumption as a finding of fact, that such notation was placed upon the document by an employee of Bannock County and correctly indicates the date and time the documents were received a second time by Bannock County.
Bannock County thereafter submitted the documents to the Department of Motor Vehicles in Boise for issuance of a State of Idaho certificate of motor vehicle title. The title issued by the State shows the Debtors as owners of the auto and Defendant as the lienholder. The title certificate further shows a "print date" of July 23, 1992, and that Defendant's lien was "recorded" on July 17, 1992.
Debtors stopped making payments on the vehicle and filed a Chapter 7 bankruptcy petition with this Court on September 2, 1992. Later, Debtors surrendered the vehicle and pursuant to an agreement of the parties, it was sold by Plaintiff Trustee L.D. Fitzgerald at an auction. This sale generated $4,835 in proceeds which are being held in Plaintiff's trust account pending resolution of this action.
STATUS OF THE CASE AND BACKGROUND.
Plaintiff instituted this adversary proceeding to avoid the Debtors' transfer of the security interest in the vehicle to Ted's and the Defendant pursuant to Sections 544 and 547(b)1 of the Code. The parties have agreed to reserve further action on the Section 544 claim until after determination of the issues arising under the Section 547 preference claim.
In their Stipulation the parties also agreed, and the Court concurs, that only one element of the alleged preference claim under Section 547(b) remains unresolved. See Stipulated Facts, ¶ 16. The sole undecided preference element concerns whether the transfer of the security interest in the vehicle from the Debtors to Defendant was "for or on account of an antecedent debt." See 11 U.S.C. § 547(b)(2). Additionally, Defendant has asserted an affirmative defense to the preference claim which must be addressed by the Court arguing that the transfer of the security interest in this case is protected by the so-called "enabling loan" exception to preference avoidance. 11 U.S.C. § 547(c)(3).2
In resolving both of the remaining legal issues, the Court must determine when, for preference purposes, the "transfer" of the security interest from Debtors to Defendant occurred. A transfer of a security interest made on account of an antecedent debt is avoidable in bankruptcy by a trustee as a preference.3 It is thus imperative that Plaintiff show that the transfer of the security interest took place, legally, at some time after the creation of Debtors' obligation to finance the purchase of the vehicle.4
Similarly, Congress excepted purchase money security interests from avoidance, but only if the creditor can demonstrate that the transfer of the security interest was "perfected on or before 10 days after the debtor receives possession of such property." 11 U.S.C. § 547(c)(3)(B). The transfer date of the security interest is therefore also crucial in determining whether Defendant can take advantage of this defense.
Fixing the date of the transfer under the preference statute in this case presents the Court with a considerable challenge in interpreting the Code. Section 547(e)5 provides the general rules concerning the date a transfer occurs for preference purposes. While the language of these provisions is complex, simply stated the statutes dictate that a transfer is deemed made at the time it takes effect between the parties if it is perfected within ten days thereafter. 11 U.S.C. § 547(e)(2)(A). If it is not perfected within ten days, the transfer is deemed to have occurred when it is perfected. 11 U.S.C. § 547(e)(2)(B).
There is, therefore, a ten day "grace period" of sorts in the statute. If the creation of the debt occurred at the same time the transfer took effect between the parties, perfection within the grace period will insulate the transfer from avoidance because the statute will regard the transfer as has having occurred simultaneously with the creation of the underlying debt. In other words, no preference can be shown to have occurred because there will not be a transfer on account of an antecedent debt.
The issue under the enabling loan exception to avoidance is similar, but not identical. In order for the statute to apply, the transfer must be perfected within ten days of the date the debtor receives possession of the collateral. 11 U.S.C. § 547(c)(3)(B). In a situation where the debtor does not receive possession of the property at the time the security agreement is executed, for example, a transfer may still be protected from avoidance even if it is perfected more than ten days after the effective date of the security agreement, so long as the perfection date is not more than ten days from the date of the debtor's taking possession of the property.
In the facts before the Court here, however, because Debtors received the vehicle on the same date they signed the Contract, if the transfer of the security interest was perfected within ten days of that date (i.e. July 3, 1992), the security interest is unavoidable under both statutes.
To ultimately conclude whether the transfer is avoidable, the Court must answer the following question: At what point in time was the transfer of the security interest in the car granted by Debtors to Defendant "perfected" for purposes of Section 547 of the Bankruptcy Code? Congress also provided a statutory basis to answer this question. As will be seen, however, this determination is not a simple one.
Section 547(e)(1)(B) declares that:
a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.
11 U.S.C. § 547(e)(1)(B). The Bankruptcy Code does not control when this hypothetical judicial lien creditor's rights become superior to the rights of the transferee. Rather, the Court must consult state law in its analysis. 4 L. King, Collier on Bankruptcy, ¶ 547.162, p. 547-68 (15th ed. 1992); In re Gulino, 779 F.2d 546, 550 (9th Cir.1985). In this case, the Court must establish the date on which Defendant obtained state law rights which would defeat a competing judicial lien creditor under state law. However, while state law controls when Defendant's security interest was perfected as against a hypothetical judicial lien creditor, the Bankruptcy Code determines the consequences of that finding for preference purposes. In re Holloway, 132 B.R. 771, 773 (Bankr.N.D.Okla.1991).
In Idaho, creation of a security interest in a motor vehicle is governed by the Idaho Uniform Commercial Code, but perfection of that security interest is exclusively controlled by the terms of the Idaho Motor Vehicle Title Act. Idaho Code § 28-9-302(3)(b), (4); Idaho Code § 49-512; Simplot v. Owens, 119 Idaho 243, 805 P.2d 449 (Ct.App.1990). Until recently, when the relevant statutes were amended by the Idaho Legislature, the law provided that a security interest in an automobile was perfected as of the date the required title documents were submitted to the Idaho Department of Motor Vehicles, or its statutory agents, the counties.6 The perfection or "recording date" was shown on the certificate of title, and therefore, it was a matter of simple calculation to determine whether that date fell within either of the grace periods established by Sections 547(e)(2) or (c)(3) of the Code. As a result, bankruptcy trustees were frequently...
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