White v. WFS Financial Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
JAMES WYATT, III,
Debtor.
___________________________
WILLIAM D. WHITE, TRUSTEE,
Plaintiff,
v.
WFS FINANCIAL INC.,
Defendant.
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Case No. 04-01245
(Chapter 7)
Adversary Proceeding No.
04-10087
DECISION RE DISMISSING ADVERSARY PROCEEDING
The court previously directed the plaintiff to show cause
why this adversary proceeding ought not be dismissed for reasons
set forth in an order to show cause in a similar proceeding.
The plaintiff adopted the response filed to the order to show
cause in the other proceeding. A final decision has now been
entered in that other proceeding. McCarthy v. BMW of North
America, Inc. (In re Dorton), 2005 WL 1459319 (Bankr. D.D.C.
June 21, 2005) (copy attached). It compels the conclusion that
The decision below is hereby signed. Dated: June
30, 2005.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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2	O:\JUDGTEMP\White vs WFS Decsn re Dismissal.wpdJuly 8, 2003 (12:57pm)
the complaint here must be dismissed as failing to state a claim
upon which relief can be granted. Accordingly, a judgment
follows dismissing this adversary proceeding.
[Signed and dated above.]
S. Martin Teel, Jr.
United States Bankruptcy Judge
Copies to: Office of United States Trustee; Kevin R. McCarthy,
Esq.; WFS Financial Inc., 23 Pasterur, Irvine, CA 92618,
Attention: Thomas Wolfe, President and CEO; WFS Financial Inc.,
P.O. Box 168048, Irving, TX 75016, Attention: Thomas Wolfe,
President and CEO.
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© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
2005 WL 1459319
--- B.R. ---
(Cite as: 2005 WL 1459319 (Bankr.D.Dist.Col.))
Only the Westlaw citation is currently available.
United States Bankruptcy Court,
District of Columbia.
In re Philip Wayne DORTON, Debtor.
Kevin R. McCARTHY, Trustee, Plaintiff,
v.
BMW BANK OF NORTH AMERICA, Defendant.
No. 04-00151, 04-10028.
June 21, 2005.
Background: Chapter 7 trustee brought adversary
proceeding to avoid, as preferential, the purchase-
money security interest that debtor had granted in
connection with his purchase of motor vehicle.
Holding: The Bankruptcy Court, Teel, J., held that
transfer of purchase-money security interest in
debtor's motor vehicle occurred, not less than 90 days
prepetition when certificate of title was issued noting
creditor's purchase-money security interest thereon,
but on date debtor granted security interest and took
possession of car outside 90-day preference period.
Proceeding dismissed.
[1] Bankruptcy k0
Transfer of purchase-money security interest in
debtor's motor vehicle occurred, not less than 90 days
prepetition when certificate of title was issued noting
creditor's purchase-money security interest thereon,
but on date debtor granted security interest and took
possession of car, outside 90-day preference period;
District of Columbia statute providing that notation on
certificate of title was exclusive means of perfecting
security interest in motor vehicle from time certificate
was "outstanding" applied only from date certificate
of title was issued, i.e., "outstanding," and before that
time, lack of any statute addressing perfection of
security interests in motor vehicles meant that
purchase-money interest was continuously perfected
from time it was granted pursuant to common law rule
of "first in time, first in right." Bankr.Code, 11
U.S.C.A. § 547(e)(2)(A), (e)(3); D.C. Official Code,
2001 Ed. § 50-1202.
[2] Bankruptcy k0
Whether creditor took required steps to perfect its
security interest in debtor's motor vehicle was
question governed by District of Columbia law.
[3] Secured Transactions k0
Under District of Columbia law, priority of liens is
governed by common law rule of "first in time, first in
right," except where statute varies this common law
rule.
[4] Automobiles k0
District of Columbia statute providing that notation on
certificate of title is exclusive means of perfecting
security interest in motor vehicle from time certificate
is "outstanding" applies only from date certificate of
title is issued; certificate of title is "outstanding,"
within meaning of certificate-of-title statute, when it
has been issued and delivered or mailed by the
Department of Motor Vehicles (DMV) to holder of
first lien. D.C. Official Code, 2001 Ed. § 50-1202.
[5] Automobiles k0
District of Columbia statute providing that notation on
certificate of title is exclusive means of perfecting
security interest in motor vehicle from time certificate
is "outstanding" imposes no requirement for
perfecting security interest in motor vehicle prior to
issuance of certificate of title. D.C. Official Code,
2001 Ed. § 50-1202.
[6] Secured Transactions k0
While the District of Columbia Uniform Commercial
Code (UCC) may impose general requirements for
perfection of security interests that alter common law
rule of "first in time, first in right," if those
requirements are not imposed with respect to
particular security interest because the UCC looks to
another statute, such as certificate-of-title law, to
determine the perfection issue, then common law rule
governs priority issue where the other statute itself
imposes no additional requirements for perfection
beyond attachment.
[7] Secured Transactions k0
Motor vehicles are property "subject to" certificate-
of-title provision, so that security interest therein is
specifically exempted from perfection requirements of
Article 9 of the District of Columbia Uniform
Commercial Code (UCC), even though no certificate
of title is outstanding. U.C.C. § 9- 311(a).
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Kevin R. McCarthy for plaintiff.
Ronald G. DeWald for defendant.
OPINION REGARDING DISMISSAL OF
ADVERSARY PROCEEDING
TEEL, Bankruptcy J.
*1 The plaintiff, Kevin R. McCarthy, is the trustee of
the debtor's estate under chapter 7 of the Bankruptcy
Code (11 U.S.C.). The defendant, BMW Bank of
North America ("BMW"), holds a security interest in
a motor vehicle in which the debtor, Philip Wayne
Dorton, owned an interest (which became property of
the estate). McCarthy seeks to avoid BMW's security
interest in that estate property as a preference under
11 U.S.C. § 547(b), and seeks ancillary relief flowing
from that avoidance. In a prior order denying
McCarthy's motion for summary judgment, the court
directed McCarthy to show cause why this adversary
proceeding ought not be dismissed based on an
analysis largely repeated below. McCarthy has not
convinced the court that its prior analysis was in error.
The court concludes that BMW's security interest was
continuously perfected, within the meaning of that
term under 11 U.S.C. § 547(e)(1)(B), from the
moment the debtor obtained possession of the car,
first under the common law rule of first in time, first
in right, and then, upon issuance of the certificate of
title for the car, under D.C.Code § 50-1202 by reason
of the security interest being noted on the certificate
of title prior to its issuance. Accordingly, no
preference existed in this case. The court rejects
McCarthy's position that perfection only occurred
once the security interest was noted on the certificate
of title.
I
Except as noted, the pertinent facts are not in dispute.
On October 13, 2003, the debtor and another
individual signed a contract with an automobile dealer
to purchase a car. As part of the contract, the co-
owners executed a security agreement granting the
dealer a security interest in the car to secure payment
of the purchase obligation. The debtor took
possession of the car on October 13, 2003.
The dealer assigned the contract to BMW. On behalf
of BMW, the dealer applied to the District of
Columbia Department of Motor Vehicles ("the
DMV") for a certificate of title. [FN1] The application
for the certificate of title listed BMW as the lien
holder. BMW did not file a financing statement with
the District of Columbia.
On December 24, 2003, more than 20 days after the
debtor took possession of the car, the DMV issued a
certificate of title for the car noting the security
interest of BMW. The debtor filed a voluntary petition
for relief under chapter 7 of the Bankruptcy Code on
January 30, 2004, which was less than 90 days after
BMW's lien was noted on the certificate of title.
II
[1] BMW's security interest attached when the debtor
granted the security interest on October 13, 2003, and
took possession of the car on that date. [FN2] The
court concludes below that BMW's security interest
was continuously perfected from that moment.
Accordingly, under 11 U.S.C. § 547(e)(1)(B), (2)(A),
and (3), the transfer of the security interest occurred
on October 13, 2003. Section 547(e)(1)(B) provides:
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[.]
*2 Under § 547(e)(2)(A) and (3), as relevant here:
a transfer is made ... at the time such transfer takes
effect between the transferor and the transferee, if
such transfer is perfected at, or within 10 days after,
such time ... [and] the debtor has acquired rights in
the property transferred.
October 13, 2003, was more than 90 days before the
filing of the petition commencing the bankruptcy case.
Accordingly, an avoidable transfer does not exist
because the transfer was not "made ... on or within 90
days before the date of the filing of the petition" as
required by § 547(b)(4)(A) in the case of a transfer
other than one to or for the benefit of a creditor who
was an insider. McCarthy has not alleged that BMW
(or the dealer who assigned the security interest to it)
was an insider.
[2] McCarthy contends that perfection of BMW's
security interest only occurred when the certificate of
title was issued. [FN3] Whether or not BMW took any
required steps to perfect its security interest as of the
delivery of the vehicle to the debtor on October 13,
2003, is a question that rests on state law. Fidelity
Financial Services, Inc. v. Fink, 522 U.S. 211, 213 n.
1, 118 S.Ct. 651, 139 L.Ed.2d 571 (1998). The court
thus turns to District of Columbia law.
III
[3] By reason of the definition of perfection in §
547(e)(1)(B), BMW's security interest was perfected
only once it was entitled to priority against a
hypothetical subsequent judicial lien. As a matter of
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District of Columbia law, it is "axiomatic that a prior
lien gives a prior legal right ('first in time, first in
right'), except where statute varies the common law
rule." District of Columbia v. Franklin Inv. Co., 404
A.2d 536, 540 (D.C.1979) (emphasis added; citations
omitted). [FN4]
McCarthy does not dispute that BMW acquired a
security interest in the car at the time of its sale and
delivery to the debtor. Two statutory schemes govern
the perfection and priority of security interests in
motor vehicles, and may alter the common law rule,
namely, the District's certificate of title statute
(D.C.Code § 50-1201 et seq.) ("Liens on Motor
Vehicles or Trailers") and the District's Uniform
Commercial Code. [FN5]
IV
Turning first to the certificate of title statute,
D.C.Code § 50-1202 provides in pertinent part:
During the time a certificate is outstanding for any
motor vehicle ..., no lien against such motor vehicle
... shall be valid except as between the parties and
as to other persons having actual notice, unless and
until entered on such certificate as hereinafter set
forth .... The filing provisions of Article 9 of [the
UCC] do not apply to liens recorded as herein
provided, and a lien has no greater validity or effect
during the time a certificate is outstanding for the
motor vehicle or trailer covered thereby by reason
of the fact that the lien has been filed in accordance
with that article.
[Emphasis added.] Accordingly, once the certificate
of title issued, BMW's lien was effective against a
subsequent judicial lien because BMW's lien was
noted on the certificate of title. In the period prior to
the issuance of the certificate, (1) no certificate of title
was outstanding, and (2) the certificate of title statute
imposed no rule altering the common law rule of
priority.
1.
*3 [4] The certificate of title was "outstanding" only
once it issued. The term "outstanding" is not defined
in § 50-1202. However, § 50-1206 contemplates, as
relevant here, that only after the application is
examined for correctness and various fees and taxes
are paid, "[t]he Director [of the DMV] shall thereupon
issue the certificate ...." and the Recorder of Deeds
then "shall enter the lien information on [the]
certificate ...." Only once that is accomplished, § 50-
1206 provides, "the Director [of the DMV] shall
deliver or mail the certificate to the record holder of
the 1st lien shown thereon or his representative ...."
[FN6] The court concludes that a certificate is
"outstanding" when it has been issued and delivered
or mailed by the DMV to the holder of the first lien.
Thus, no certificate of title was outstanding here until
the DMV mailed or delivered the certificate to BMW.
This conclusion is unaltered by UCC § 9-303(b)
which provides:
(b) Goods become covered by a certificate of title
when a valid application for the certificate of title
and the applicable fee are delivered to the
appropriate authority. Goods cease to be covered by
a certificate of title at the earlier of the time the
certificate of title ceases to be effective under the
law of the issuing jurisdiction or the time the goods
become covered subsequently by a certificate of
title issued by another jurisdiction.
The term "covered by a certificate of title," as
defined in § 9-303(b), is a term of art employed in
other provisions addressing such matters as which
jurisdiction's law governs perfection (§ 9-303(c)) and
the time period during which perfection may be
achieved by taking possession (§ 9-313(b)). The term
is not the same thing as a certificate of title being
"outstanding" as is made evident by UCC § 9-303,
Comment 6 ("External Constraints on This Section")
which states in relevant part:
Ideally, at any given time, only one certificate of
title is outstanding with respect to particular goods.
In fact, however, sometimes more than one
jurisdiction issues more than one certificate of title
with respect to the same goods.
[Emphasis added.] This comment makes clear that
the term "outstanding" refers to when a certificate has
been issued and is in the hands of the public, an event
external to the rules UCC § 9-303 adopts regarding
goods being covered by a certificate of title. The term
"outstanding" does not refer to the technical issue of
when goods "become covered by a certificate of title"
for purposes of determining such issues as which
jurisdiction's law controls perfection. [FN7]
2.
[5] Section 50-1202 itself imposes no requirement for
perfecting a lien prior to issuance of a certificate of
title. Accordingly, unless another statute alters the
common law rule of first in time, first in right, BMW's
security interest was perfected in the § 547(e)(1)(B)
sense pursuant to the common law rule upon
attachment of the security interest and until issuance
of the certificate of title. The court turns to the UCC
to determine whether it alters the common law rule.
V
*4 UCC article 9 ("Secured Transactions") (UCC §
9-101 et seq.) applies to a security interest created by
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an individual debtor in a motor vehicle. [FN8] Among
other topics with respect to security interests, article 9
addresses the priority of security interests over
judicial liens. With respect to the relative priority of a
security interest and a lien creditor's rights (which
include those of a judicial lien as described by §
547(e)(1)(B)), [FN9] UCC § 9-317(a) provides in
relevant part:
(a) A security interest ... is subordinate to the rights
of:
...
(2) Except as otherwise provided in subsection (e),
a person that becomes a lien creditor before the
earlier of the time:
(A) The security interest ... is perfected[.]
The court concludes below that from the moment the
debtor took possession of the car, BMW's security
interest was "perfected" as that term is used in the
UCC--one of the UCC ways for a security interest to
attain priority over a judgment lien--and hence was
"perfected" as that term is used in § 547(e)(1)(B).
[FN10]
A.
[6] The term "perfected" under the UCC is addressed
by UCC § 9-308 which provides in relevant part:
(a) Except as otherwise provided in this section and
§ 28:9-309, a security interest is perfected if it has
attached and all of the applicable requirements for
perfection in §§ 28:9-310 through 28:9-316 have
been satisfied....
[Emphasis added.] McCarthy argues that:
The exceptions referred to in D.C. § 29-308(a) do
not apply here. Therefore, the section necessarily
means that the only way to perfect a security
interest in the Debtor's car is to comply with the
applicable perfection requirements in sections 9-
310 through 9-316. In other words, there is no room
within this language for the common law to provide
an alternative way to perfect a security interest in a
car.
However, if §§ 9-310 through 9-316 impose no
"applicable requirements for perfection," the security
interest is perfected once it has attached: in other
words, the UCC retains the common law rule of first
in time, first in right in that rare circumstance. As
Malakoff, 434 A.2d at 434, indicates:
The Uniform Commercial Code (UCC), effective in
the District of Columbia on January 1, 1965,
preserves this common-law principle [of first in
time, first in right], but refines it through the general
rule that a party who first notifies the public of his
security interest in a particular piece of property,
either through possession of the collateral or filing
of his financing statement (so-called "perfection"),
prevails over all other parties with a security
interest in the same collateral, regardless of which
party first acquired the security interest itself (so-
called "attachment").
[Emphasis added; citation omitted.] The UCC may
have general requirements for perfection that alter the
common law rule, but when, as here, those
requirements are not imposed with respect to a
particular security interest because the UCC looks to
another statute to determine the perfection issue, the
common law rule supplies the priority rule if the other
statute itself imposes no additional requirements for
perfection beyond attachment.
*5 As will be seen, the UCC imposes only the
requirements of § 50-1201 et seq. for perfection of a
security interest in a motor vehicle, and makes
inapplicable the UCC requirements for perfection
(beyond attachment of the security interest to the
collateral) that would otherwise apply. As already
noted in part IV, § 50-1201 et seq. impose no
requirement for perfection when no certificate of title
is outstanding, and the common law rule of first in
time, first in right thus controls priority until a
certificate of title is issued. Thus, BMW's security
interest was perfected upon attachment and until
issuance of the certificate of title.
B.
UCC § 9-310 sets forth a general rule that filing of a
financing statement is necessary to achieve perfection,
and exceptions to that rule. UCC § 9-310 provides in
relevant part:
(a) Except as otherwise provided in subsection (b)
and § 28:9-312(b), a financing statement must be
filed to perfect all security interests ....
(b) The filing of a financing statement is not
necessary to perfect a security interest:
...
(3) In property subject to a statute, regulation, or
treaty described in § 28:9-311(a)[.]
In turn, UCC § 9-311(a) states that "the filing of a
financing statement is not necessary or effective to
perfect a security interest in property subject to: ... (2)
the provisions of section 50-1201 et seq." Motor
vehicles are among the species of property subject to
the provisions of § 50-1201 et seq., and, accordingly,
filing of a financing statement is not required (or
effective) to perfect a security interest in a motor
vehicle. UCC § 9-311(b) provides in relevant part:
Compliance with the requirements of a statute ...
described in subsection (a) for obtaining priority
over the rights of a lien creditor is equivalent to the
filing of a financing statement under this article.
Except as otherwise provided in subsection (d) and
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§ 28:9-313 and 28:9-316(d) and (e) for goods
covered by a certificate of title, a security interest in
property subject to a statute ... described in
subsection (a) may be perfected only by compliance
with those requirements ....
[Emphasis added.]
As discussed next, (1) § 9-311 applies to motor
vehicles even when no certificate of title is
outstanding; (2) the existence under UCC 9-311(b) of
possession as an alternative means of perfection
(beyond compliance with requirements for perfection
under § 50-1201 et seq.) does not make taking
possession a requirement for perfection when all
requirements for perfection under § 50-1201 et seq.
have been taken; (3) the only such requirement under
§ 50-1201 et seq., as incorporated by the UCC, in the
period prior to issuance of the certificate of title is the
common law requirement that the security interest
have attached prior to the competing lien; and (4)
nothing in Comment 5 to UCC § 9-311 alters this
result.
1.
[7] Motor vehicles are property "subject to" the
provisions of § 50-1201 et seq., within the meaning of
UCC § 9-311(a), even when no certificate of title is
outstanding. In McCarthy v. Imported Cars of Md.,
Inc. (In re Johnson), 230 B.R. 466
(Bankr.D.D.C.1999), the parties failed to address the
issue, and the court assumed that, because § 50-1202
sets forth perfection requirements when a certificate
of title is outstanding, a security interest in a motor
vehicle could be (and had to be) perfected by filing a
financing statement under the UCC when a certificate
of title is not outstanding. Johnson, 230 B.R. at 470.
That was an erroneous reading of § 9-311(a).
Although § 50-1202 sets forth a perfection
requirement of noting a lien on a certificate of title
whenever a certificate of title is outstanding, a motor
vehicle is nevertheless "property subject to § 50-1201
et seq." within the meaning of UCC § 9-311(a)(2)
even when a certificate of title is not outstanding. This
is demonstrably the correct interpretation of § 9-
311(a)(2) because § 50-1206 requires inclusion of lien
information on an application for a certificate of title,
and that obviously occurs before issuance of a
certificate of title.
2.
*6 The propriety of focusing on perfection under §
50-1201 et seq. is unaltered by the exceptions to § 9-
311(b) set forth in its concluding sentence. Those
exceptions, §§ 9-311(d), 9-313, and 9-316(d) and (e),
have no relevance here. UCC § 9-311(d) only applies
to goods held as inventory. The remaining exceptions
address perfection by way of possession. Even if
perfection could be achieved by possession, [FN11]
the UCC does not require such a step to achieve
perfection of a security interest in a motor vehicle: it
suffices to comply with whatever requirements the
certificate of title statute imposes for perfection.
Under the UCC, possession is generally an alternative
to the requirement of filing a financing statement
when filing would otherwise be required, and it is an
alternative as well to compliance with whatever
perfection requirements the certificate of title statute
imposes, but it is not mandatory. The only instances in
which possession is mandatory to achieve perfection
are of no relevance here. [FN12]
3.
McCarthy notes that Eldon H. Riley, in 1 Security
Interests in Personal Property § 15:1 (Westlaw
2002), describes § 9-311 as "indicating that
compliance with state certificate of title laws is the
exclusive method of perfection" except in certain
instances where a vehicle is inventory or in the
secured party's possession. McCarthy then argues that
"[b]y engrafting a common law method of perfection
[of a security interest] in a car onto the Uniform
Commercial Code, the Court has gone outside the
UCC and the DMV statute," and "the common law
method of perfection is nowhere to be found in
Sections 9- 310 through 9-316," the provisions that
UCC § 9-308(a) points to as governing when
perfection occurs.
If § 50-1201 et seq. are treated as the controlling
statute regarding perfection once a security interest
has attached (and they are so treated by UCC § 9-
311(b)), McCarthy's argument must fail. [FN13] As
discussed in part IV, Franklin Inv. Co., 404 A.2d at
540, holds that the common law rule of "first in time,
first in right" controls "except where statute varies the
common law rule," and § 50-1201 et seq. do not
purport to vary the common law rule during the period
prior to issuance of a certificate of title.
Even if § 50-1201 et seq. are treated as incorporated
into the UCC, with the UCC treated as the controlling
statute, the UCC itself follows the Franklin Inv. Co.
approach: UCC § 1-103 provides that "[u]nless
displaced by the particular provisions of this subtitle,
the principles of law and equity ... shall supplement its
provisions." Thus, except when displaced by a
particular provision of the UCC, the common law
principle of "first in time, first in right" continues to
answer which lienor takes priority. In the case of
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security interests in cars, the UCC, with exceptions of
no relevance here, leaves the question of priority over
a judgment lien to § 50-1201 et seq. Those provisions,
in turn, do not displace the common law rule of "first
in time, first in right" in the period prior to the
issuance of a certificate of title. Accordingly, the
common law rule supplies the answer during that
period.
*7 McCarthy's argument can fairly be recast as
follows:
Prior to issuance of the certificate of title, BMW
failed to comply with the only express requirement
for perfecting a security interest in a car (applicable
only when a certificate of title is outstanding) of
noting the security interest on the certificate of title.
Therefore, BMW did not comply with the
requirements of § 50-1201 et seq. prior to issuance
of the certificate of title, and had no perfected
security interest until the certificate of title issued.
Section 50-1201 could have expressly provided that
prior to issuance of a certificate of title, to take
priority over a judicial lien a security interest must
have satisfied the common law requirement that it
attached first in time to the car. If the statute had
expressly so provided, McCarthy would be unable
seriously to contend that BMW had failed to comply
with the certificate of title statute's perfection
requirements. Instead, by not displacing the common
law rule and leaving it intact, § 50-1201 et seq.
implicitly provide that prior to issuance of a certificate
of title, the only required step to perfect a security
interest in a car is the common law requirement.
Compliance with the common law requirement,
whether expressly or implicitly set forth by § 50- 1201
et seq., constitutes compliance with the requirements
of those statutory provisions. Accordingly, the
security interest was perfected under UCC § 9- 311(b)
by reason of complying with the common law
requirement.
This analysis is reinforced by the certificate of title
statute's letting the common law rule play a role in
governing perfection against subsequent judicial liens
even after issuance of a certificate of title. Like the
federal tax lien statute (26 U.S.C. § 6323(a)), § 50-
1202 of the D.C. certificate of title statute uses the
term "valid" to address the issue of priority against a
subsequent judgment lien. [FN14] Once a security
interest is noted on the outstanding certificate of title,
it is "valid ... as to other persons" including a holder
of a judgment lien, but that does not answer the issue
of priority over a judgment lien arising after such
notation of the security interest: the common law
obviously provides the answer--the lien that first
became valid prevails.
4.
McCarthy argues that Comment No. 5 to UCC § 9-
311 demonstrates that his analysis is correct.
Comment No. 5 states:
[S]tatutes under which perfection does not occur
until a certificate of title is issued will create a gap
between the time that the goods are covered by the
certificate under Section 9-303 and the time of
perfection. If the gap is long enough, it may result
in turning some unobjectionable transactions into
avoidable preferences under Bankruptcy Code
Section 547. (The preference risk arises if more
than 10 days (or 20 days, in the case of a purchase-
money security interest) passes between the time a
security interest attaches (or the debtor receives
possession of the collateral, in the case of a
purchase-money security interest) and the time it is
perfected.
*8 [Italics added.] The Comment goes on to
recommend a legislative amendment to the certificate
of title statute providing for perfection to occur upon
receipt of the application for a certificate of title.
McCarthy argues that there has been no such
amendment, and that the court should not disregard
the plain provisions of the UCC requiring compliance
with the requirements of § 50-1201 et seq. as
currently written. However, Comment No. 5 simply is
inapplicable to the District of Columbia statute, as
under § 50-1201 et seq., perfection does occur prior
to the issuance of a certificate of title.
5.
McCarthy finally argues that under the court's
common law perfection approach, there is no apparent
time limit in which a secured party must apply for a
certificate of title, let alone have it issued, in order to
receive preference protection, and that a lender would
never have an incentive to submit an application for a
certificate of title in order to protect its security
interest against subsequent judicial liens or security
interests.
Although none are identified by McCarthy, the court
will assume that there are reasons why a state would
want a certificate of title to be issued promptly after
completion of a sale of a motor vehicle. It thus might
be sound policy to encourage prompt applications for
certificates of title by requiring filing of such an
application in order to perfect a security interest in a
motor vehicle, which would have the effect of
displacing the common law rule. However, the
existence of policy grounds for a legislature to elect to
displace the common law rule does not equate with an
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actual act of displacing the rule. Moreover,
McCarthy's argument disregards District of Columbia
statutory provisions which encourage prompt filing of
an application for a certificate of title. [FN15]
VI
As discussed above, BMW's security interest attained
perfected status upon the debtor's acquiring the motor
vehicle and until the issuance of the certificate of title.
Once the certificate of title issued, BMW's security
interest was perfected under § 50-1201 by way of
being noted on the certificate of title prior to its
issuance. Accordingly, BMW has had a continuously
perfected security interest from the moment title
passed to the debtor. See UCC § 9- 308(c) ("A
security interest ... is perfected continuously if it is
originally perfected by one method under this article
and is later perfected by another method under this
article, without an intermediate period when it was
unperfected."). The term "method" is sufficiently
broad to include perfection via being first in time and
entitled to priority under the common law rule when
that rule has not been displaced.
VII
McCarthy could argue that once the certificate of title
was outstanding, only notation of the security interest
on the certificate of title could perfect the security
interest, and that because that occurred within 90 days
of the filing of the petition a preferential transfer
occurred, and the notation occurred more than 20 days
after the debtor obtained possession of the vehicle, §
547(c)(3) cannot be deemed applicable. In other
words, the issue remains whether § 9-308(c) amounts
to an impermissible retroactive perfection provision
under Fink, 522 U.S. at 220.
*9 Fink does not apply here. Fink dealt with a case in
which there was a period of time when, under state
law, the security interest was not perfected and a
judicial lien could have been obtained against a motor
vehicle, and the later perfection of the lien beyond the
20-day mark of § 547(c)(3) could not bring the
security interest into the safe harbor of § 547(c)(3) via
the state law's provision for retroactive effectiveness
of the perfection. Here, in contrast, there never was a
period when the security interest was not perfected. At
every step, BMW's security interest was perfected and
BMW had taken steps to assure that it would remain
perfected. Its security interest is thus not avoidable as
a preference. See Blasbalg v. Tarro (In re Hyperion
Enters., Inc.), 158 B.R. 555, 565-66 (D.R.I.1993).
Had BMW allowed that perfection to lapse, by not
causing the security interest to be noted on the
certificate of title when it first issued, a different case
would be presented. [FN16] However, here there was
never any such lapse in perfection.
VIII
States tend to have one of three statutory
arrangements for using certificate of title statutes to
perfect security interests in vehicles. In re Farnham,
57 B.R. 241, 245 (Bankr.D.Vt.1986). The
"indication," "delivery," and "dual" schemes are as
follows:
Presently, twenty-two states and the District of
Columbia have enacted certificate of title systems
that make the perfection event either the indication
of the lien or the certificate of title or the issuance
of the certificate of title after indication. Twenty-
four states have certificate of title laws that make
mere delivery of the appropriate papers and fees to
the proper officer the act of perfection, even if the
certificate of title is never noted or issued.... Finally,
three states have "dual system" certificate of title
perfection laws that require both the filing of a
financing statement and the use of the certificate of
title.
Id. at 245 (citing Note, Secured Transactions:
Certificate of Title-- Delivery or Notation? The
Lender's Dilemma, 37 Okla. L.Rev. 618, 622 (1984)
(footnotes omitted)).
There are decisions under other state statutes
adopting an exclusively "indication" means of
perfection which would support McCarthy's position
here if the District's statute were of the same
character. In Union Bank & Trust Co., Erie v. Baker
(In re Tressler), 771 F.2d 791 (3rd Cir.1985), the
court dealt with a Pennsylvania motor vehicle statute
which provided in what the court of appeals
characterized as unambiguous language that "[a]
security interest is perfected by notation thereof by the
department on the certificate of title for the vehicle"
and another provision of the motor vehicle statute
provided that the method thereby provided for
perfecting a security interest was exclusive. The court
of appeals offered this colorful language:
We are unpersuaded by the bank's argument that the
Department's lack of efficiency in issuing titles
should somehow provide the basis for an exception
to the federal 10 day perfection requirement [in an
earlier version of the Bankruptcy Code]. The
solution to this problem, if such a problem indeed
exists, should be pursued in Harrisburg by seeking
appropriate legislative action, rather than by
seeking, in this court, an exception to the clear
congressional command in § 547(c)(3)(B).
*10 Tressler, 771 F.2d at 793. [FN17] If the
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District's motor vehicle statute were identical to the
statute involved in Tressler or to the Tennessee statute
involved in several decisions reaching a similar
conclusion, [FN18] the court would unhesitatingly
follow that decision, and reject BMW's argument that
Huenekens v. Abruzzese (In re Abruzzese), 252 B.R.
341 (Bankr.E.D.Va.1999), requires disregard of a
plainly written statute making notation the exclusive
means of perfection.
However, the Pennsylvania statute at issue in Tressler
and the Tennessee statute just mentioned, are
distinguishable from the District's certificate of title
statute which purports only to set requirements for
perfection when a certificate of title is outstanding.
Prior to issuance of the certificate of title, the
District's statute does not proscribe perfection via the
common law rule.
IX
A judgment follows dismissing this proceeding.
FN1. McCarthy questions when the
application was filed, but the outcome is the
same regardless of when the application was
filed.
FN2. The security interest was created in the
same contractual document in which the
debtor agreed to pay for the car. However,
the security interest attached, and thus the
transfer to BMW of the security interest
became effective between BMW and the
debtor, only once the debtor had rights in the
collateral, which was upon delivery of the
car to the debtor. See McCarthy v. Imported
Cars of Md., Inc. (In re Johnson), 230 B.R.
466, 468-69 (Bankr.D.D.C.1999).
FN3. Whether addressed in the context of §
547(b)(4)(A) (no transfer within 90 days of
the petition) or § 547(c)(3) (an exception to
§ 547(b) requiring perfection within 20 days
of the debtor's taking possession of the car),
the critical issue is whether perfection only
occurred when the certificate of title issued.
The parties' initial papers in this proceeding
focused on § 547(c)(3). The 20-day mark
under § 547(c)(3) was November 2, 2003,
less than 90 days prior to the filing of the
petition on January 30, 2003. However, §
547(c)(3)--as an exception to § 547(b)--
becomes irrelevant in light of the court's
conclusion that perfection, and hence
transfer, of the security interest occurred
more than 90 days before the filing of the
petition such that § 547(b) does not apply.
FN4. See also Malakoff v. Washington, 434
A.2d 432 (D.C.1981); District of Columbia
v. Hechinger Properties Co., 197 A.2d 157,
160 (D.C.1964); United States v.
McDermott, 507 U.S. 447, 113 S.Ct. 1526,
123 L.Ed.2d 128 (1993) (applying the same
as federal common law rule); United States
v. New Britain, 347 U.S. 81, 74 S.Ct. 367, 98
L.Ed. 520 (1954) (same).
FN5. The District of Columbia's Uniform
Commercial Code ("UCC" or, when
necessary to distinguish the District of
Columbia UCC from other states' versions,
"D.C. UCC") is found at D.C.Code Ann. §
28:1-101 et seq. (with its provisions
hereafter cited as UCC § 1-101, and so
forth).
FN6. In turn, § 50-1209 contemplates that
the Recorder of Deeds may require the
person holding the certificate to "surrender"
it when necessary to note a new lien or an
assignment of lien on the certificate.
FN7. In Albert v. Nissan Motor Acceptance
Corp. (In re Waiters), Civil Action No. 02-
01588 (D.D.C. July 12, 2004), the district
court assumed, without any analysis, that
when a car becomes "covered by a certificate
of title" a certificate of title is "outstanding."
The court rejects that conclusion based on
the foregoing analysis. In responding to that
analysis as set forth in the court's earlier
decision, McCarthy states that he "tends to
agree more with the Bankruptcy Court's view
that a certificate is not outstanding until
issued than with the District Court's apparent
view that a certificate can be outstanding
before issued." McCarthy's Memorandum
Responding to Court's Order at 6-7.
FN8. UCC § 28:9-109 provides in relevant
part:
(a) Except as otherwise provided in
subsections (c) and (d), this article applies
to:
(1) A transaction, regardless of its form, that
creates a security interest in personal
property or fixtures by contract;
... None of the exceptions in subsections (c)
and (d) apply to a security interest created by
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an individual debtor in a motor vehicle.
FN9. UCC § 9-317 uses the term "lien
creditor" but this includes a judicial lien
creditor. See UCC § 9-102(52)(A) (defining
"lien creditor" as including "[a] creditor that
has acquired a lien on the property involved
by attachment, levy, or the like") and thus is
broad enough to include the type of judicial
lien addressed by § 547(e)(1)(B).
FN10. The UCC has alternative means--
beyond UCC "perfection"--for attaining
priority over a judgment lien (and hence for
attaining "perfection" in the § 547(e)(1)(B)
sense). See, e.g., UCC §§ 9- 317(a)(2)(B)
and § 9-317(e). But BMW does not rely on
any of those alternative means of attaining
priority.
FN11. Once BMW applied for a certificate
of title, it is debatable whether it could have
perfected its security interest by taking
possession. See UCC §§ 9-303(b), 9-313(b),
and 9-316(d) which suggest that once an
application for a certificate of title is filed,
perfection via possession is relevant only
when a certificate of title is applied for in the
District after the security interest was already
perfected under the laws of another state.
However, there is a factual dispute as to
when BMW filed the application.
FN12. UCC § 9-312(b)(3) specifies
possession to be the only means of perfecting
a security interest in money. UCC § 9-
316(e), dealing with perfection against a
purchaser of goods that have become
covered by a certificate of title in a new state
without the security interest being perfected
under the new state's certificate of title
statute, requires possession to perfect.
FN13. The certificate of title statute never
specifically uses the term "perfection" but
the Comment to UCC § 9-311 clarifies what
"perfection" under the certificate of title
statute entails:
5. Compliance with Perfection Requirements
of Other Statute. Subsection (b) makes clear
that compliance with the perfection
requirements (i.e., the requirements for
obtaining priority over a lien creditor), but
not other requirements, of a statute ...
described in subsection (a) is sufficient for
perfection under this Article. Perfection of a
security interest under such a statute ... has
all the consequences of perfection under this
Article.
[Italics added.]
FN14. The statute expressly uses the term
priority only in addressing the priority of
certain liens other than judicial liens. The
statute excludes a judicial lien (or, to quote
the statute, a "lien acquired in any judicial
proceeding") from the definition of "lien."
See D.C.Code § 50- 1201(f)(2) (including
security interests in definition of "lien" but
excluding judicial liens). The statute then
addresses the priority of liens (that is, such
liens as security interests but not judicial
liens) in D.C.Code § 50-1203.
FN15. D.C.Code § 50-1501.2(c)(3) provides
that registration of a motor vehicle in the
District requires that the owner have a valid
certificate of title, and D.C.Code § 50-
1501.04, with an exception for a "special use
certificate" (and other exceptions of no
relevance here), makes it unlawful to operate
a motor vehicle if it is not registered. While
the owner may temporarily operate the
vehicle pursuant to a "special use certificate"
and "special use identification tags" under
D.C.Code § 50- 1501.02(5)(A), those are
restricted to a 30-day duration. Accordingly,
the statutory scheme has built-in incentives
for a certificate of title to be applied for
promptly.
FN16. See Anderson v. Blackman (In re
K a r i s d a , I n c . ) , 9 0 B . R . 1 9 6
(Bankr.D.S.C.1988) (lapse in perfection due
to expiration of financing statement without
filing of continuation statement; filing of
second financing statement within 90 days
before petition date was a preferential
transfer). But see David Gray Carlson,
Security Interests in the Crucible of Voidable
Preference Law, 1995 U. Ill. L.Rev. 211,
232-34.
FN17. Not surprisingly, in 1990 the
Pennsylvania legislature amended its code to
create a "delivery" statute to prevent this
dangerous gap in time. See 75 Pa. Cons.Stat.
Ann. § 1132(b); First Nat'l Bank of Penn. v.
Cech (In re Ambrose), 148 B.R. 244, 247
(Bankr.W.D.Pa.1992).
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FN18. See Waldschmidt v. Smith (In re
York), 43 B.R. 36 (Bankr.M.D.Tenn.1984)
(no perfection in absence of notation of the
lien on the title even if a properly submitted
application is lost by officials of the State of
Tennessee and the applicant is blameless);
Walker v. Ford Motor Credit Co. (In re
C l a r k ) , 1 1 2 B . R . 2 2 6 , 2 3 0
(Bankr.E.D.Tenn.1990) (no relation back if
application has been rejected); Keep Fresh
Filters, Inc. v. Reguli, 888 S.W.2d 437, 445
(Tenn.Ct.App.1994) ("Merely submitting an
application or a certificate of title or to note a
lien on a certificate of title does not result in
perfection of a security interest if the filing
does not lead to a recordation of the lien on
the title.").
2005 WL 1459319 (Bankr.D.Dist.Col.)
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