A debtor entered into a contract with a company for the purchase of a vehicle. The company issued a certificate of title subject to its security interest to the debtor. Through a series of assignments and mergers, the company assigned the security interest to the lender. The debtor defaulted on the contract, and the lender repossessed the vehicle and applied for a repossession certificate of title in its own name (the “repossession title”). The lender returned physical possession of the vehicle to the debtor but still held the repossession title. The debtor then filed a Chapter 7 bankruptcy petition. After the petition was filed, the lender issued a new certificate of title with its security interest listed (the “replacement title”). The Chapter 7 trustee (the “trustee”) filed a complaint and moved for summary judgment, alleging the lender’s lien listed on the replacement title was avoidable as an unauthorized post-petition transfer or preference and asked that the lender’s claims be disallowed until it released the lien.
In Friesinger v. MyUSA Credit Union, Inc. (In re Badger), No. 21-31277, 2023 Bankr. LEXIS 1175 (Bankr. S.D. Ohio Apr. 26, 2023) (unpublished opinion), the bankruptcy court held that the lender continuously maintained its security interest and, therefore, no transfer occurred that would make the security interest avoidable by the trustee. First, the lender held the security interest as noted on the original certificate that was issued following the purchase of the vehicle. Second, the court found that the lender retained rights in the vehicle even while it had repossession title because, under Ohio law, when a lender holds a repossession title, the debtor still maintains a right of redemption and equitable title until the time the secured collateral is sold. Therefore, the lender did not get full rights to the collateral upon issuance of a repossession title but rather a mechanism to exercise its legal remedies on the vehicle. As such, the lender’s security interest on the vehicle remained (if the lender had sold the vehicle, the security interest would have been paid with the proceeds). Lastly, the lender held the lien as listed on the replacement title issued to the debtor post-petition. The court distinguished the facts of this case from a case where a debtor is sold a vehicle pre-petition, and the lender fails to place a security interest at all on the vehicle until post-petition. Here, the security interest already existed pre-petition. The lender, therefore, had an enforceable and perfected security interest throughout the entire process – in the security interest listed on the original title, in the maintained security interest rights while it held the repossession title, and when it issued a replacement title with its security interest listed. The court found the issuance of the replacement title post-petition when the lender had continuously maintained its security interest was merely a ministerial act and not a transfer of property of the estate (i.e., a new security interest had not been created). Because there was no transfer, the security interest was not avoidable as an unauthorized post-petition transfer under 11 U.S.C. § 549 or as a preference.
By Kristin Meurer [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott [email protected]