Opinion
Case No. 697-65404-fra7, Adv. Proc. No. 98-6055-fra.
February 1, 1999
MEMORANDUM OPINION
Plaintiff is the Trustee in the Chapter 7 bankruptcy of Katherine McKay. He commenced this action to avoid an alleged preferential transfer from the Debtor to the Defendant Credit Union. A trial was conducted and the matter was taken under advisement. For the reasons that follow, I find for the Defendant.
BACKGROUND
The Debtor owns, jointly with a domestic partner, a 1991 Ford Taurus purchased on or about July 23, 1996. The purchase was financed by a loan from Key Bank USA and secured by a duly perfected lien in favor of Key Bank.
On June 18, 1997, Debtor and her partner made application to the Defendant for a loan to refinance the vehicle loan with Key Bank. The application was accepted and the loan approved. The principal balance was $6,418.26 at an interest rate of 9.25%, exactly two points lower than the Key Bank rate. Contemporaneously with the promissory note, Debtor and her partner signed a security agreement granting a security interest in the vehicle to the Defendant. That same day, June 26, 1997, Defendant sent to Key Bank the sum of $6,418.26. The payment was processed by Key Bank on July 6, 1997. The following day, the Bank endorsed the Certificate of Title in the box labeled "signature of security interest holder or lessor releasing all interest."
It is not clear exactly when the Certificate of Title was returned to the Defendant. The records of the Motor Vehicle Division reflect that the application for a certificate of title was received by the Motor Vehicles Division on July 23, 1997. In Oregon, the lien is deemed to be perfected as of the date the application is received by the Division. Or. Rev. Stat. § 803.097 (1997). The Defendant's title clerk testified that, while she had no specific recollection, she ordinarily processed 30 titles a day, and ordinarily held a title for processing no more than two days. Assuming three days for the mail, she infers from the date the document was received by the Motor Vehicles Division that she received the Certificate of Title from Key Bank no earlier than July 18. Debtor filed her petition for relief on September 22, 1997.
Plaintiff filed a complaint to avoid the Defendant's perfected security interest in the collateral as preferential under 11 U.S.C. § 547(b). In its Answer, the Defendant claims that its security interest was properly perfected and that the debt created between it and the Debtor was not on account of an antecedent debt.
DISCUSSION
Preferential Transfer
A transfer is preferential under the Bankruptcy Code, and thus potentially avoidable by the Trustee, if the conditions at 11 U.S.C. § 547(b) are met:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The loan was consummated on June 26, 1997, the date the Defendant sent the funds to Key Bank, and was not perfected until July 23, 1997, the date the Certificate of Title was received by the Department of Motor Vehicles.
Section 547(e)(3)(A) provides that 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. . . ." Thus, if perfection occurs within the 10 day period, the transfer would not be deemed to be on account of an antecedent debt and would not be preferential under the Code. That is clearly not the case here, however.
Because perfection of the security interest occurred within 90 days of the petition date and the other requirements of § 547(b) are present (or, at least, uncontested by the Defendant), a prima facie case under § 547(b) has been made by the Trustee. In order to prevent avoidance of its security interest, the Defendant must demonstrate that it meets one of the exceptions found at § 547(c).
Enabling Loan Exception
Section 547(c)(3) is the exception for so-called "enabling loans," or loans which are earmarked to purchase specific property. That section reads as follows:
(c) The trustee may not avoid under this section a transfer — * * *
(3) that creates a security interest in property acquired by the debtor —
(A) to the extent such security interest secures new value that was —
(i) given at or after the signing of a security agreement that contains a description of such property as collateral;
(ii) given by or on behalf of the secured party under such agreement;
(iii) given to enable the debtor to acquire such property; and
(iv) in fact used by the debtor to acquire such property; and
(B) that is perfected on or before 20 days after the debtor receives possession of such property;
The Trustee argues that the loan made by the Defendant is an extension of the original enabling loan because it was used to replace the enabling loan from Key Bank. Because the Defendant's loan was not perfected within the 20 days allowed by § 547(c)(3), nor was Key Bank's lien assigned to the Defendant, perfection of the Defendant's security interest constitutes an avoidable preferential transfer according to the Trustee.
I do not agree. The Defendant was a new creditor, not the same creditor which made the original loan. New money was advanced with different and more beneficial terms. The loan was not given to enable the Debtor to acquire the vehicle, nor was it used for that purpose; the loan was used to satisfy a pre-existing loan. The loan was therefore not an enabling loan subject to the 20 day deadline to perfect under § 547(c)(3).
Contemporaneous Exchange Exception
At trial, the Defendant argued, and presented evidence to support its position, that the contemporaneous exchange exception found at § 547(c)(1) is applicable. Even though that defense was not specifically included in Defendant's Answer, it was presented without opposition from the Plaintiff and will be considered by this court. See Fed.R.Civ.P. 15(b), made applicable by F.R.Bankr.P. 7015. The exception states that the transfer may not be avoided to the extent it was
It could be argued that Defendant's affirmative defense that the transfer was not on account of an antecedent debt encompasses the contemporaneous exchange exception. It has been stated that "[t]he underlying rationale behind the contemporaneous exchange exception `is a simple one, excepting a transfer that is really not on account of an antecedent debt,' but is instead a substantially contemporaneous exchange for new value." In re Marino, 193 B.R. 907, 915 (BAP 9th Cir. 1996),aff'd 117 F.3d 1425 (9th Cir. 1997) (internal citations omitted).
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
The Defendant has the burden of proof with respect to showing that the exchange was intended to be contemporaneous for new value and that the exchange was in fact contemporaneous. The Code does not define "contemporaneous," so it has been left to case law to make the determination. In this Circuit, the leading case in this area is In re Marino, 193 B.R. 907 (BAP 9th Cir. 1996), aff'd 117 F.3d 1425 (9th Cir. 1997). That court stated:
While there will be litigation involving what is substantially contemporaneous in fact, a court need only look to the facts and circumstances of the case and determine whether the delay in perfection was reasonable. The concern over lack of an objective standard is illusory, given that facts and circumstances will differ with each particular case.
193 B.R. at 915. The court adopted the "facts and circumstances" standard over another line of cases which hold that contemporaneity in fact is present only when perfection occurs within 10 days of the underlying transfer as provided by § 547(e)(3)(A). The contemporaneous exchange exception is not available if the security interest relates to an enabling loan.In re Vance, 721 F.2d 259 (9th Cir. 1983).
I find from the evidence presented that the exchange was intended to be contemporaneous. The Debtor and her partner signed a security agreement at the same time that they signed the promissory note. Both the Debtor and the Defendant clearly intended that the security interest and the loan be contemporaneous. I also find from the evidence that the transfer was contemporaneous in fact. There was a ten day delay between the time that the Defendant sent the money to Key Bank and the date that Key Bank processed the payment. It appears there was a further delay by Key Bank in returning the Certificate of Title showing its release of lien. Once received by the Defendant, it appears that the Certificate was processed in the normal course and sent to DMV for filing and perfection of Defendant's security interest. Given these circumstances, the transfer was in fact contemporaneous.
The Trustee argues that even if the exchange was contemporaneous, it was not of "new value" as required by § 547(c)(1)(A). New value for purposes of § 547 is defined at § 547(a)(2):
"new value" means money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.
The Trustee's argument points to the last part of the definition which states that new value does "not include an obligation substituted for an existing obligation." He asserts that a refinancing necessarily substitutes the second loan for the first obligation.
I agree that a new loan with the same or similar terms substituted for an earlier loan from the same creditor may not constitute new value under § 547(c). That is not the case here, however. Here, a new creditor provided new money on more favorable terms to the Debtor in order to pay off an earlier obligation to another creditor.
The Third Circuit has stated with respect to substituted obligations: "In principal, a bankruptcy statute's section on voidable preferences should basically read as follows: `If a creditor tries to change his position after this extension of credit in order to improve his lot in an anticipated bankruptcy (or other collective) proceeding, or if the debtor at the behest of such creditor so tries to change the position for such creditor in order to improve such creditor's lot in an anticipated bankruptcy . . . the creditor must return any advantage so obtained'." In re Spada, 903 F.2d 971 (3d Cir. 1990) (internal citation omitted).
The Eighth Circuit had to determine whether new value was advanced by a creditor when the creditor made payments to other creditors of the debtor. The creditor argued that this met the "new value" exception found at § 547(c)(4). The trustee argued that it was not new value because it merely substituted the later obligation for the earlier obligations. In holding that the payments constituted new value, the court stated:
§ 547(c)(4) generally denies avoidance of a preferential transfer to the extent that the creditor subsequently advances unsecured new value.
we are convinced that the trustee misconstrues section 547(a)(2) when he argues that [the creditor's] payment of [the debtor's] debts to third parties constituted `an obligation substituted for an existing obligation.' What [the creditor] contributed for [the debtor's] benefit was money, albeit paid to creditors rather than directly to [the debtor]. [The creditor's] contribution therefore falls squarely within the definition of new value, and is in no way comparable to `substituted obligation' cases, in which creditors postpone collecting debts by substituting a new obligation of the debtor's for the old one.
In re Bellanca Aircraft Corp., 850 F.2d 1275, 1280-1281 (8th Cir. 1988).
In a case from the Seventh Circuit, a creditor retained a security interest in iron mines that the debtor had purchased from another party. As part of the deal, the creditor agreed to guarantee a $6 million debt that the debtor owed to a second creditor which also had a lien on the mines. The second debt came due, and the debtor asked the first creditor for help. The first creditor paid off the debt to the second creditor and was given iron pellets from the debtor in exchange. The debtor then filed bankruptcy less than 90 days later. The trustee sought to avoid the payment to the creditor from the debtor as a preferential transfer. In response to the creditor's claim that the transaction met the contemporaneous exchange exception at § 547(c)(1), the trustee argued that new value was not given by the creditor because it merely paid off another creditor. In rejecting that view and holding that new value was given, the court cited with approval the holding in Bellanca Aircraft Corp. that a creditor who pays off another creditor is contributing new value to the debtor. "A payment of cash that gets an importunate secured creditor off the debtor's back is a boon to the debtor. . . ." Matter of EDC, Inc., 930 F.2d 1275, 1282 (7th Cir. 1991).
The only real difference in facts between Matter of EDC and the present case, is that in the present case the Debtor granted the Defendant a security interest in the collateral rather than give the collateral to the creditor. The difference is not significant for purposes of determining whether new value was given. The security interest was granted in exchange for new value just as the payment of iron pellets was made in exchange for new value.
CONCLUSION
The transaction between the Debtor and the Defendant in which the Defendant received a perfected security interest in Debtor's vehicle in exchange for a payment in cash to Debtor's creditor Key Bank constituted a contemporaneous exchange under § 547(c)(1). The Defendant's lien is therefore not avoidable as a preferential transfer under § 547(b). Judgment will be entered consistent with this Memorandum Opinion.