TitleMax of Ala., Inc. v. Hambright (In re Hambright)

Decision Date04 February 2022
Docket NumberAdversary Proceeding 20-70016-JHH,Bankruptcy 20-70608-JHH13
CourtUnited States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Alabama



I. Introduction and Overview [2]

This is a proceeding to determine and declare the present interests of a secured party, TitleMax of Alabama, Inc. ("TitleMax"), a chapter 13 debtor, Nauquita L Hambright ("Hambright"), and Hambright's bankruptcy estate (the "Estate"), in and to a 2013 Dodge Challenger (the "Vehicle"). Cross motions for summary judgment are pending before the court, and the material facts are stipulated or undisputed. Both federal and state law are relevant to defining the parties' and the Estate's petition date and present interests in the Vehicle. However, a single state law question predominates-under Alabama law, were the Estate's right(s) and interest(s) in the Vehicle forfeited to TitleMax automatically, and without the necessity of any affirmative enforcement action by TitleMax, after the bankruptcy petition date?

The answer to this question turns on whether the Vehicle, which is in the actual possession of Hambright, is subject to classification as a pledged good under the Alabama Pawnshop Act by virtue of Hambright's pre-bankruptcy pledge of the Vehicle's certificate of title to TitleMax. If so, Hambright's petition date right(s) and interest(s) in the Vehicle (which passed to the Estate on commencement of Hambright's bankruptcy case), and not merely the Estate's petition date right(s) and interest(s) in the Vehicle's certificate of title (if any), may be subject to the Alabama Pawnshop Act's automatic forfeiture provision. This statute provides for the automatic transfer of all right, title, and interest of a pawnor in and to pledged good(s) to the pawnbroker if the pawnor fails to regain possession of the pledged good(s) by paying the secured obligation within 30 days after the obligation's maturity (i.e., a pawnor's forfeiture of legal and equitable title to pledged good(s) is the consequence of the pawnor's failure to timely exercise the pawnor's temporal right to redeem the pledged good(s) from the pawnbroker).

Importantly, a vehicle and a vehicle's certificate of title are separate property under Alabama law, and neither possession of a certificate of title, nor the information recorded thereon, is determinative of where title to the covered vehicle lies. In other words, absolute title to a vehicle, in the intangible sense, is not bound up in the vehicle's certificate of title. A certificate of title's legal significance lies in the information recorded thereon and presumptively evidenced thereby.

There is no allegation that Hambright validly assigned (i.e., endorsed) the Vehicle's certificate of title to TitleMax, meaning its delivery to TitleMax does not evidence an absolute title transfer. The operative certificate merely records that TitleMax holds a first-priority lien on the Vehicle. A secured party's possession of a certificate of title that records the secured party as the first lienholder is necessary to render the secured party's first-priority security interest in the subject vehicle invulnerable to interests subsequently created by the record owner (i.e., perfected); thus, such a certificate is not a chose in action. However, it does not follow that forfeiture of an unendorsed certificate of title to the named lienholder-which certificate is, under the Alabama Certificate of Title Act, the lienholder's to possess until the lienholder's interest in the vehicle is satisfied or deemed satisfied or otherwise discharged-effects an absolute transfer of title to the vehicle to the named lienholder if the vehicle is not also forfeited. A secured party would not obtain a security interest in an unendorsed certificate of title, but not the vehicle covered thereby, expecting foreclosure of the record to manifest in its ownership of the vehicle, because a certificate of title is not a document of title under the Alabama UCC (nor is an unendorsed certificate of title subject to classification as a bearer instrument). As such, if only the Vehicle's certificate, not the Vehicle, is a pledged good subject to the Alabama Pawnshop Act's automatic forfeiture provision, then the Alabama common law, Alabama UCC, and other applicable state laws are relevant to determining the parties' respective rights in and to the Vehicle following forfeiture of the Vehicle's certificate.

As a matter of statutory interpretation, the plain language of the Alabama Pawnshop Act seemingly makes quick work of the question. The Act requires a pawnbroker's possession, and a pawnor's dispossession, of pledged good(s) at the inception of a pawn transaction. A good that secures a pawn, but that the pawnbroker allows to remain in the possession of the pawnor until the pawnbroker elects to exercise its post-default right to take possession, is not a pledged good under the Alabama Pawnshop Act. And, only pledged good(s) are subject to the Alabama Pawnshop Act's statutory, possessory lien and the Alabama Pawnshop Act's automatic forfeiture provision, a narrow, codified exception to the anti-forfeiture rules that undergird the Alabama common law and the anti-forfeiture provisions of the Alabama UCC.

Significantly, the Alabama Supreme Court has held only that a vehicle's certificate of title is a pledged good in a title loan transaction. While some courts have concluded or assumed that vehicles in title loan transactions also are subject to characterization as pledged goods under the Alabama Pawnshop Act, the undersigned has not identified any binding precedent (state or federal) that requires this court to deviate from the Alabama Pawnshop Act's plain language to classify a vehicle in a pawnor's possession, as distinguished from the vehicle's certificate of title, as a pledged good. Accordingly, the court answers the state law question in the negative and concludes that the Vehicle is not a pledged good subject to the Alabama Pawnshop Act's automatic forfeiture provision, necessitating a determination of the parties' interests in the Vehicle under other applicable commercial laws.

The operative pawn ticket and security agreement (the "Agreement") is signed by Hambright and grants security interests in both the Vehicle and the Vehicle's unassigned certificate of title to TitleMax. A written, authenticated security agreement that grants a security interest in tangible personal property (like a vehicle) may be regarded, in Alabama, as a chattel mortgage transferring legal title (not merely a lien) to the secured party. However, under the Alabama common law (which governs to the extent not displaced by the Alabama UCC or another statute), a chattel mortgagee's legal title to mortgaged chattel is (1) conditional until the debtor/mortgagor defaults, (2) defeasible both at law and in equity until the secured party/mortgagee takes possession of the collateral, and (3) unmerged with the debtor/mortgagor's equity of redemption (i.e., equitable title) until this equitable property interest is extinguished by foreclosure or validly transferred to the secured party after the loan's inception.

Alabama Article 9A (which applies to Alabama pawn transactions in the absence of a conflict with the Alabama Pawnshop Act) likewise treats a secured party's security interest in a good (like a vehicle) as something less than absolute title until foreclosure or a voluntary post-default transfer, regardless of the form of the security device (e.g., chattel mortgage, pledge, or conditional sale). Under Alabama Article 9A, as under the common law of chattel mortgages, a debtor retains its rights in a mortgaged good until the secured party forecloses its security interest in the good (by disposition or acceptance) or acquires or extinguishes the debtor's rights via an enforceable, post-default transfer. Moreover, just as the Alabama common law voids contractual provisions signed at a loan's inception that purport to forfeit a debtor's equity of redemption, pre-default contractual provisions that purport to forfeit a debtor's UCC redemption or surplus rights in a mortgaged good to a secured party, or to give effect to a pre-agreed strict foreclosure of a mortgaged good, are void and of no force or effect under the Alabama UCC. A contractual forfeiture, under the Alabama common law and Alabama UCC, is merely effective to render a secured party's legal title to a mortgaged good unconditional and to give the secured party the state law right to take possession of the mortgaged good and to foreclose its security interest in the good in accordance with applicable law.

Finding no conflict with the Alabama Pawnshop Act in recognizing a debtor/pawnor's common law and UCC rights and interests in a non-pledged good (i.e., a good subject to a non-possessory security interest), the court concludes that under the Alabama UCC, Alabama common law, and the Alabama Certificate of Title Act, Hambright held both record and equitable title to the Vehicle on the bankruptcy petition date (subject to TitleMax's validly perfected, first-priority security interest), as well as UCC surplus and redemption rights. Although the Agreement may be construed as transferring legal title to the Vehicle to TitleMax, TitleMax's legal title to the Vehicle remained conditional on the petition date, as Hambright's post-maturity grace period for repaying the secured obligation had not yet expired (and the Agreement expressly provides for forfeiture of legal title to the Vehicle...

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