The debtors purchased the vehicle in Kansas. At the time of the purchase, the vehicle had an Illinois certificate of title. The parties executed an agreement on the back of the Illinois title, listing the debtor as the purchaser and the creditor as the lienholder. A month before the debtor filed for bankruptcy, the creditor filed a notice of security interest (the “Notice”) with the Kansas Department of Revenue using the department’s “E-lien site.” The Notice indicated that the creditor had a security interest in the debtor’s vehicle. The department confirmed the Notice. The creditor did not submit anything in Illinois. Later, the debtors filed for Chapter 13 bankruptcy, and the case was subsequently converted to a Chapter 7 bankruptcy. The debtor did not apply for a Kansas certificate of title until after filing for bankruptcy but ultimately did receive a Kansas title, which listed the debtor as the owner and noted the creditor’s security interest. When the creditor filed its motion for relief from the automatic stay to foreclose on the vehicle, the vehicle was covered by the Kansas title. The Chapter 7 trustee objected to the creditor’s motion, arguing that the creditor’s security interest in the vehicle was unperfected and, therefore, avoidable. As a result, the court had to decide whether Illinois or Kansas law applied in determining if the creditor’s security interest in the vehicle had been perfected before the bankruptcy petition date.
In In re Alexander, No. 22-10612, 2024 WL 2096171, 2024 Bankr. LEXIS 1093 (Bankr. D. Kan. May 6, 2014) (unpublished opinion), the bankruptcy court held that Kansas certificate-of-title law applied and, thus, the creditor’s lien was perfected under Kansas Revised UCC Article 9. The court explained that Kansas choice-of-law rules controlled, and the only issue was which state’s certificate-of-title law applied in order to determine if the creditor’s interest had been perfected. The court found that under Kansas choice-of-law rules, the applicable law is determined only by where the vehicle is covered by a certificate of title. Specifically, section 84-9-303 of the Kansas Revised UCC provides that “the applicable state law is the law of the jurisdiction that issues the certificate of title covering the vehicle.” The court looked to other courts who have also applied UCC § 9-303 and found that one state’s title ceases to control the perfection of a security interest when an application is made in a new state for that state’s title. The trustee argued that because her rights as trustee (and hypothetical lien holder) began before the application for Kansas title was filed, Illinois law should govern perfection. However, the bankruptcy court found no authority that a bankruptcy filing would change the applicability of UCC § 9-303 if the change in which state’s certificate of title covers the vehicle occurs after the bankruptcy was filed but before a lien priority dispute arose. Here, two different certificates of title covered the vehicle at separate times, but at the time of the dispute, the vehicle was covered by a Kansas title, and Kansas law governed perfection. The court then explained further that even if the title was determined from the bankruptcy filing date, the Notice submitted by the creditor was acted as a certificate of title under Kansas law. Therefore, because the creditor complied with Kansas law regarding the perfection of its security interest, its interest was perfected before the bankruptcy petition had been filed.
By Kristin Meurer, [email protected]
Edited By Hayden Mariott, [email protected]