Robin Browning Brock v. Branch Banking & Trust Co. (In Re Johnson)

OPINION

In this pre-BAPCPA preference action, the trustee appeals the bankruptcy court’s ruling that the lien on the debtor’s motor vehicle was protected from avoidance by the enabling loan exception, which excepts from avoidance certain security interests perfected within 20 days of the debtor’s possession of the collateral. Although the security interest in this case was not actually perfected until it was noted on the vehicle’s certificate of title a month after the debtor obtained possession, the court concluded that the security interest was deemed perfected under Kentucky law when the creditor tendered the appropriate documents and fees to the county clerk, an act which occurred 14 days after possession. Because the majority of the Panel concludes that perfection as defined by the Supreme Court in Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211, 216, 118 S.Ct. 651, 139 L.Ed.2d 571 (1998), occurred more than 20 days after the debt- or obtained possession, the bankruptcy court’s decision is reversed.

I. ISSUE ON APPEAL

The issue presented is whether the security interest in this case was perfected, as *458defined by federal bankruptcy law, within 20 days of the debtor obtaining possession of the collateral such that the enabling loan exception to preferences is applicable.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”) has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the BAP and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). An order granting summary judgment for the defendant is a final order. Wicheff v. Baumgart (In re Wicheff), 215 B.R. 839, 840 (6th Cir. BAP 1998). An order disposing of a motion to alter or amend a prior judgment is likewise a final order for purposes of appeal. GenCorp, Inc. v. Am. Int'l Underwriters, 178 F.3d 804, 832-33 (6th Cir.1999).

The bankruptcy court’s grant of summary judgment is reviewed de novo. Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001). The bankruptcy court’s interpretation and application of the Bankruptcy Code and pertinent state law are reviewed de novo. Ruskin v. Daimler-Chrysler Servs. N. Am., L.L.C. (In re Adkins), 425 F.3d 296, 298 (6th Cir.2005); Van Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 623 (6th Cir. BAP 2005). The bankruptcy court’s denial of the Trustee’s motion to alter or amend the grant of summary judgment is also reviewed de novo. Cockrel v. Shelby County Sch. Dist., 270 F.3d 1036, 1047 (6th Cir.2001) (Although denial of a motion to alter or amend judgment is typically reviewed for abuse of discretion, “a de novo standard” applies when the “motion seeks review of a grant of summary judgment.”). “De novo review means that the appellate court determines the law independently of the trial court’s determination.” In re Periandri, 266 B.R. at 653. No deference is given to the bankruptcy court’s conclusions of law. Mktg. and Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In re Mktg. and Creative Solutions, Inc.), 338 B.R. 300, 302 (6th Cir. BAP 2006).

III. FACTS

The relevant facts were stipulated before the bankruptcy court. On February 8, 2005, Michael W. Johnson (“Debtor”) purchased a 2005 Dodge Ram pickup truck from Jeep & Suzuki Auto World of Big Stone Gap, Virginia and executed an installment sales contract and security agreement with Branch Banking & Trust Co. (“BB & T”) to finance the purchase. That same day, the Debtor took possession of the truck. On February 17, 2005, Jeep & Suzuki Auto World mailed a title lien statement, application for certificate of title, and required fees to the Letcher County, Kentucky clerk’s office by certified mail, return receipt requested. The Letcher County clerk received the mailed documents and fees on February 22, 2005, as indicated by the signed return receipt. However, the clerk did not stamp the documents as received and upload BB & T’s lien for recordation until March 7, 2005, almost two weeks later. On March 25, 2005, the Commonwealth of Kentucky Transportation Cabinet issued the appropriate certificate of title, reflecting notation of BB & T’s lien on March 7, 2005.

Less than 90 days later, on May 11, 2005, the Debtor filed a voluntary petition *459for relief under Chapter 7 of the Bankruptcy Code.1 Thereafter, Robin Browning Brock, the chapter 7 trustee (“Trustee”), filed a complaint to avoid the lien of BB & T as a preferential transfer. Upon cross motions for summary judgment, the bankruptcy court granted summary judgment in favor of BB & T and dismissed the complaint with prejudice. The Trustee subsequently moved to alter or amend the judgment, but the court denied the motion. The Trustee then timely appealed.

IV. DISCUSSION

Under § 547(b) of the Bankruptcy Code, a trustee may avoid as impermissi-bly preferential certain transfers of interests of the debtor in property that occur within 90 days prior to the filing of a bankruptcy petition, unless the transfer falls within one of the exceptions specified at § 547(c). Although the creation of a security interest is considered a transfer, see 11 U.S.C. § 101(54)(A), and thus subject to potential avoidability, one of the § 547(c) exceptions is the so-called “enabling loan” exception which protects from avoidance the creation of a security interest in property acquired by the debtor, if among other things, the security interest is “perfected on or before 20 days after the debtor receives possession of such property.” 11 U.S.C. § 547(c)(3)(B).2 Perfection, as used in this provision, turns on the definition provided by § 547(e)(1)(B): “a transfer of ... 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.”

In the Fink decision, the Supreme Court clarified what Congress meant in this definition. The Court began by noting that in the bankruptcy context, Congress has used the word “perfection” in at least two different ways. Fink, 522 U.S. at 215, 118 S.Ct. 651. According to the Court, “Congress sometimes used the word ‘perfection’ to mean the legal conclusion that for such purposes as calculating priorities [among liens] perfection of a lien should be treated as if it had occurred on a particular date, and sometimes [Congress] used it to refer to the acts necessary to support that conclusion.” Id. The Court held that § 547(e)(1)(B) was the latter, not the former, and gave as an example of the former, § 546(b)(1)(A), which “speaks of state laws that permit ‘perfection ... to be effective ... before the date of perfection.’” Id. at 215, 118 S.Ct. 651. The Court explained that perfection in the *460§ 547(e)(1)(B) sense was not “the legal conclusion that may be entailed by applying a relation-back rule,” but instead was “the acts taken to trigger an application of the rule.” Id. at 216, 118 S.Ct. 651.

Although [Appellant] and two Courts of Appeals have thought [§ 547(e)(1)(B) ] means that a transfer is perfected as of whatever date an enabling creditor could claim in a priority fight with a contract creditor armed with a judicial lien, the statute does not speak in such terms. Rather, it says that a transfer is perfected “when” a contract creditor “cannot acquire” a superior lien. “[W]hen” and “cannot acquire” are ostensibly straightforward references to time and action in the real world, not tipoffs (like the terms “as if’ and “deemed”) that the clock is being turned back in some legal universe. A creditor “can” acquire such a lien at any time until the secured party performs the acts sufficient to perfect its interest. Such a lien would, of course, lose its priority if, during the relation-back period, the secured party performed those acts; such a possibility does not mean that a contract creditor “cannot” acquire such a lien, however, but merely that its superiority may be fleeting. Not until the secured party actually performs the final act that will perfect its interest can other creditors be foreclosed conclusively from obtaining a superior lien. It is only then that they “cannot” acquire such a lien. Thus, the terms of § 547(e)(1)(B) apparently imply that a transfer is “perfected” only when the secured party has done all the acts required to perfect its interest, not at the moment as of which state law may retroactively deem that perfection effective.

Id.

Although the Supreme Court in the preceding paragraph spoke in terms of acts by the secured party, another passage in the opinion clarifies that:

In speaking below of acts necessary to perfect a security interest under state law, we mean whatever acts must be done to effect perfection under the terms of the applicable state statute, whether those be acts of a creditor or acts of a governmental employee delivering or responding to a creditor’s application.

Id. at 213, n. 1, 118 S.Ct. 651 (emphasis added).

Lastly, in this regard, the Court in Fink emphasized that while state law determines the means of perfection, the timing of perfection for preference purposes is governed by federal law. Id. (“[T]he time within which those acts [to effect perfection under state law] must be done is governed by federal, not state, law, when the issue is the voidability of a preference under the Bankruptcy Code.”). As explained by the Court: “Congress did not intend state relation-back provisions or grace periods to control a trustee’s power to avoid preferences.... Congress quite specifically intended a trustee’s power to avoid prepetition preferences to prevail over any state rules permitting relation back.” Id. at 217, 118 S.Ct. 651.

With this guidance, we turn to the case at hand. The bankruptcy court held that perfection occurred under Kentucky law upon receipt of the title documents and fees by the county clerk on February 22, 2005, and that because this act took place 14 days after the Debtor took possession of the pickup truck on February 8, 2005, perfection fell within the enabling loan exception. This ruling was based upon Kentucky Revised Statute § 186A. 195(5) which provides:

The security interest noted on the certificate of title shall be deemed perfected at the time the security interest attaches *461(KRS 355.9-203) if the secured party tenders the required fees and submits a properly completed title lien statement and application for first title or, in the case of property previously titled in the name of its debtor, the certificate of title to the appropriate county clerk within twenty (20) days of attachment. Otherwise, the security interest shall be deemed perfected at the time that such fees are tendered and such documents are submitted to the appropriate county clerk.

The parties agree that “attachment” within the purview of this statute occurred when the Debtor obtained possession of the truck on February 8, 2005. Because BB & T tendered the required fees and documents to the county clerk within 20 days of attachment on February 8, 2005, it contends that it was deemed perfected under Kentucky Revised Statute § 186A.195(5) that same day. Alternatively, BB & T asserts that regardless of whether perfection is measured under Kentucky Revised Statute § 186A.195(5) from the date of attachment or from the date of tender, both dates occurred within 20 days of the Debtor obtaining possession of the vehicle, and therefore, satisfied § 547(c)(3)(B)’s 20-day perfection requirement. The bankruptcy court agreed, concluding that because perfection is deemed to occur pursuant to Kentucky Revised Statute § 186A.195(5), at the latest, upon tender, and because BB & T tendered the appropriate documents and fees within 20 days of possession,3 the enabling exception provided for in § 547(c)(3) was applicable.

Notably, Kentucky Revised Statute § 186A.195(5) states that a security interest shall be deemed perfected at attachment or tender. It does not state that it is perfected. The dissent and BB & T acknowledge that notation of the security interest on the vehicle’s certificate of title is the only way that a lien on a motor vehicle is perfected in Kentucky. (Ap. Br. at 1-4.). Kentucky law is clear on this point. See Ky.Rev.Stat. Ann. § 186A.190(1) (“[T]he perfection and discharge of a security interest in any property for which has been issued a Kentucky certificate of title shall be by notation on the certificate of title.”); Ky.Rev.Stat. Ann. § 186A.190(2) (“the sole means of perfecting ... a security interest in property for which a certificate of title is required by this chapter is by notation on the property’s certificate of title”).4 More*462over, it is undisputed that actual notation by the county clerk did not take place until March 7, more than 20 days after the debtor obtained possession of the pickup truck on February 8.5 Nonetheless, the dissent and BB & T maintain that once BB & T’s security interest was noted on the certificate of title, perfection was measured from its tender of the required documents and fees to the county clerk pursuant to Kentucky Revised Statute § 186A.195(5)’s “deemed perfected” language.

There are no cases which address how Kentucky Revised Statute § 186A.195(5)’s deemed perfection language interacts with Kentucky Revised Statute § 186A.190’s directive that the sole means of perfecting a security interest on a motor vehicle is by notation. However, it appears from the statutory scheme as a whole that § 186A.195(5) was designed to specify the timing of perfection for the purposes of determining priority among competing creditors. If a secured creditor tenders the appropriate documents and fees and its security interest is subsequently noted on the certificate of title, the timing of its perfection will relate back to the date of tender or to the date of attachment pursuant to § 186A.195(5) and defeat any intervening creditor. In other words, Kentucky Rev. Stat. Ann. § 186A.195(5) is a type of state law that “permits perfection to be effective before the date of perfection.” Fink, 522 U.S. at 215, 118 S.Ct. 651. As such, the statute is precisely the type of perfection rejected in Fink because it engages in a legal fiction to treat perfection for priority purposes “as if’ it occurred on a date other than on which it actually occurred. Kentucky Revised Statute § 186A.195(5)’s use of the word “deemed” is consistent with the Supreme Court’s warning that such words indicate that “the clock is being turned back in some legal universe.” Fink, 522 U.S. at *463216, 118 S.Ct. 651.6

The dissent and BB & T’s assertion that once a lien is noted on the certifícate of title, the timing of perfection is measured from the document tender date, appears to be true for state law purposes. However, Fink directs that federal, rather than state law, determines the timing of perfection in the preference context. Id. at 213, 118 5.Ct. 651. Moreover, the very use of the word “measured” suggests an artificial timing, rather than “time and action in the real world” as § 547(e)(1)(B) requires. Fink, 522 U.S. at 216,118 S.Ct. 651.

The Supreme Court made it unequivocally clear in Fink that perfection for purposes of the enabling loan exception turns not on these fabricated, relation-back type of statutes, but on the “acts necessary to support [the perfection] conclusion.” Id. at 215, 118 S.Ct. 651. Additionally, it confirmed that these necessary acts are not limited to acts by the secured creditor but also include “acts of a governmental employee ... responding to a creditor’s application” if such acts are necessary to effect perfection under state law. Id. at 213 n. 1, 118 S.Ct. 651. Because under Kentucky law a security interest is not truly perfected until actually noted on the certificate of title, it would appear that only at this time is a creditor perfected as defined by § 547(e)(1)(B) for purposes of the enabling loan exception.

The critical inquiry in this regard, as explained by the Court in Fink, is at what point in the process did a contract creditor become unable to “acquire” a lien superior to BB & T’s security interest. Fink, 522 U.S. at 216, 118 S.Ct. 651. BB & T asserts that this point was upon its tender of the requisite title documents and fees and *464that between the time of tender and the date that the clerk noted BB & T’s lien on the title, a contract creditor would not have been able to obtain a superior position because it would have been on notice during this period of time that no certificate of title had been issued, and the only-title ever issued noted BB & T’s lien. BB & T cites no authority for this assertion, and unfortunately, there is no decision from a Kentucky court precisely on point. However, there are a couple of cases which offer some guidance on Kentucky law in this area. In General Motors Acceptance Corp. v. Hodge, 485 S.W.2d 894 (Ky.1972), the Kentucky Supreme Court concluded that notwithstanding GMAC’s filing of a financing statement with the county clerk, the failure of the clerk to note the lien rendered the lien unenforceable as against a purchaser without notice. In reaching this conclusion, the court cited with approval the following passage from American Jurisprudence Second:

Where statutory provision is made for the notation of liens on motor vehicles on the certificate of title, the failure to comply with such provision generally renders the liens unenforceable as against third persons without actual knowledge thereof. In some jurisdictions the recordation of the lien, without the notation, at the same time, of its existence on the certificate of title, is deemed not to convey notice to a third person, and the lien is not enforceable against a purchaser or encumbrancer without notice thereof. It has been held in this respect that where the lien of a chattel mortgagee of a motor vehicle is not noted on the certificate of title, a repairman performing work on the vehicle at the instance of the mortgagor is entitled to priority over the lien of the chattel mortgagee.

Id. at 896-97 (quoting 7A Am.Jur.2d, Automobiles and Highway Traffic § 46). Similarly, in Kentucky Finance Co. v. Spradlin, 717 S.W.2d 843 (Ky.App.1986), the court held that a secured creditor without knowledge who had relied on a clean certificate of title prevailed over an earlier secured creditor whose lien interest had been deleted on a certificate of title forged by the automobile owner who was also a deputy clerk in the county clerk’s office. The court admitted that this result was a harsh one, but one which emphasized the certificate of title as the sole record of liens. Id. at 845.

While these cases do not specifically address the time frame between tender and notation, they do advise us that absent notation on the title, a contract creditor or another purchaser is without notice and may prevail over an enabling secured creditor who has tendered lien documents to the county clerk. Of course, the superior position of the contract creditor would be temporary if the lien of the enabling secured creditor is subsequently noted on the title. But, as explained by the Court in Fink, “such a possibility does not mean that a contract creditor ‘cannot’ acquire such a lien, however, but merely that its superiority may be fleeting.” Fink, 522 U.S. at 216, 118 S.Ct. 651.7

*465In Kentucky, the final act necessary to support the legal conclusion of perfection is notation by the clerk of the lien on the certificate of title. It is only when a security interest is actually noted on the title are other creditors “foreclosed conclusively from obtaining a superior lien.” Id. Regardless of the prior submission of the appropriate documents and fees by a enabling secured party, a contract creditor can acquire a superior interest until such time as the county clerk notes the enabling creditor’s lien on the title. Thus, in the present case, BB & T’s security interest was not perfected as defined by § 547(e)(1)(B) until its security interest was noted on the title. Because this act occurred more than 20 days after the Debtor received possession of the vehicle, the enabling loan exception was inapplicable.

A case with facts substantially similar to those herein, albeit under Colorado law, is Hepner v. AmeriCredit Financial Services, Inc. (In re Baker), 345 B.R. 261 (D.Colo.2006). In Baker, a purchase money creditor delivered the lien and title documentation to the county clerk for recording within 20 days of the debtor’s purchase of a new motor vehicle, but the clerk failed to record the lien until after the 20-day period had expired. When the debtor filed for bankruptcy relief less than 90 days later, the trustee in bankruptcy sought to avoid the creditor’s lien as preferential under 11 U.S.C. § 547(b). In response, the creditor raised the enabling loan exception of 11 U.S.C. § 547(c)(3).

In resolving the issue, the court had to examine the interplay among three Colorado statutes to determine when perfection of a security interest in a motor vehicle occurs under Colorado law. Although one statute indicated that liens on motor vehicles take priority in the same order the lien documentation was filed with the designated government agent, another statute indicated that the lien is not effective until the time a government agent enters the lien and title data into the public central registry. The court concluded that perfection occurred on the date of the latter act since perfection is contingent on providing valid notice of the lien to third parties. In *466reaching this conclusion, the court observed that the perfection statute operated to relate perfection back to the date of delivery, notwithstanding the lack of express relation back language in the provision. In re Baker, 345 B.R. at 273 (“I find no binding authority ... suggesting express relation back language is necessary before a statute can be found to operate in such a manner.... Rather, the key inquiry regarding the existence of a relation back mechanism is whether the statute in question ‘authorizes perfection after another party has acquired interests in the property.’”). Because the Colorado Certificate of Title Act assigned motor vehicle lien priority according to the time the mortgage paperwork was delivered, once perfected, the lien would be superior to certain third party interests acquired in the vehicle after the delivery date. Id. at 273-74.

Nonetheless, the court concluded that the enabling loan exception did not protect the transaction from avoidance. Even though the creditor would have priority from the date of delivery of its lien documents (a date within § 547(c)(3)(B)’s 20-day period), “the final act necessary for perfection — the entry of the lien notices into the Central Registry — did not occur within twenty days of the debtor taking possession of their vehicles.” Id. at 274. “[F]or the enabling loan exception to apply, the final act necessary to achieve perfection under state law must have occurred on or before twenty days of the debtor’s taking possession of the collateral, regardless of any retroactive effective date designated by a relation back provision.” Id. at 266 (citing Fink, 522 U.S. at 216, 118 S.Ct. 651).8

Similarly, in Hanrahan v. Arcadia Financial Ltd. (In re Scott), 245 B.R. 331 (Bankr.N.D.Iowa 2000), a case construing Iowa law, the secured creditor delivered to the county treasurer its application for notation of its lien on the certificate of title within 20 days of the debtor obtaining possession of an automobile, but its lien was not noted until after the 20-day period expired. Id. at 333. After the debtor’s bankruptcy filing less than 90 days later, the trustee moved to avoid the creditor’s security interest as preferential. The creditor asserted the enabling loan defense of § 547(c)(3), arguing that perfection occurred upon delivery of the documents pursuant to § 321.50(1) of the Iowa Code which provides that a “security interest in a vehicle ... is perfected by the delivery to the country treasurer ... of an application for certificate of title which lists the security interest.” Id. at 334. There was no mention of a notation requirement in this paragraph which dealt generally with the secured party’s rights in the vehicle. Rather, the Iowa statute only referenced notation in succeeding paragraphs describing the county treasurer’s duty to note the interest on the vehicle’s title. Id. (quoting Iowa Code §§ 321.50(2) and (3)). Nonetheless, the Iowa Supreme Court had stated in interpreting the provision that a “written application for certificate of title or for notation of the security interest is *467required to establish a security interest in a motor vehicle. The security interest is then perfected by notation upon the certificate of title.” Id. (quoting Blessing v. Norwest Bank Marion, 429 N.W.2d 142, 144 (Iowa 1988)). Based on this interpretation, the bankruptcy court concluded that the secured creditor was not entitled to the enabling loan defense of § 547(c)(3) because the Iowa Supreme Court would not find the creditor’s lien enforceable against a judgment creditor until it was noted on the vehicle’s title. Id. at 334-35; cf. Fluharty v. Citizens Nat’l Bank (In re Horner), 248 B.R. 516 (Bankr.N.D.W.Va.2000) (concluding that enabling exception protected preference from avoidance where under West Virginia law perfection occurs upon delivery as opposed to notation). But see Huennekens v. Abruzzese (In re Abruzzese), 252 B.R. 341 (Bankr.E.D.Va.1999) (concluding that Virginia law provides that perfection occurs on date an ultimately successful application is submitted).

For the foregoing reasons, the majority of the Panel concludes that the enabling loan exception does not protect the perfection of BB & T’s lien from avoidance as a preferential transfer. Although this is admittedly a harsh result for creditors like BB & T, we conclude that it is compelled by Fink. “Congress intended § 547(c)(3)(B) to establish a uniform federal perfection period immune to alteration by state laws permitting relation back.” Fink, 522 U.S. at 220, 118 S.Ct. 651.

V. CONCLUSION

The Debtor obtained possession of his new pickup truck on February 8, 2005. BB & T’s security interest was perfected on March 7, 2005, when the interest was noted on the truck’s certificate of title. Because perfection did not occur within 20 days after the debtor received possession of his truck, the enabling loan exception of 11 U.S.C. § 547(c)(3) was unavailable to protect BB & T’s interest from avoidance as a preferential transfer. The decision of the bankruptcy court is REVERSED.