Opinion
Case No. 01-43053-H4-7, Adv. No: 02-3196
August 20, 2002
MEMORANDUM OF DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT DOCKET (#7 #10)
On December 3, 2001, Plaintiffs Jose and Rosalinda Perez filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Defendant Bayou City Federal Credit Union, an ostensibly secured creditor, submitted an application to the Harris County Tax Assessor/Collector's office on March 21, 2002 to have its lien on Plaintiffs' 2000 GMC Yukon disclosed on the Certificate of Title. As a result of Defendant's act to perfect its lien on Plaintiffs' vehicle, Plaintiffs filed this adversary proceeding alleging willful violation of the automatic stay and requesting avoidance of the lien, recovery of payments on the lien made post-petition, and damages. Defendant claims there was no violation of the automatic stay. Plaintiffs and Defendant both filed motions for summary judgment. On August 5, 2002, this matter came before the Court to hear the motions for summary judgment. At the conclusion of the hearing, the Court took the matter under advisement. Upon consideration of the motions, all responses, and arguments of counsel at the hearing, this Court finds Defendant willfully violated the automatic stay under § 362(a)(5), however, Plaintiffs may not avoid Defendant's lien on the 2000 GMC Yukon. As such, Plaintiffs take nothing from this judgment.
FACTUAL BACKGROUND
Bayou City Federal Credit Union is a financial service corporation doing business within the State of Texas. On March 19, 1999, Rosalinda Perez entered into a Loanliner Disbursement Voucher and Security Agreement (Note 1) with Bayou City. Then on December 13, 2000, Plaintiff entered into another Loanliner Disbursement Voucher and Security Agreement (Note 2) for the refinancing of their 2000 GMC Yukon truck. As part of the loan agreement, Plaintiffs offered Bayou City their vehicle as collateral to secure the loan. Bayou City paid off the dealer's lien on the 2000 GMC Yukon truck and retained the Certificate of Title to the vehicle but never recorded its lien on that Certificate of Title. Finally on November 28, 2001, Plaintiff executed a Loanliner Open-End Disbursement Voucher and Security Agreement (Note 3) with Defendant. Each of the three notes contained cross-collateralization language stating, "Collateral securing other loans with us may also secure this loan." Each of the three notes further provided that payments for the loans were to be automatically deducted from Mrs. Perez's payroll check each month.
Subsequently, on December 3, 2001, Jose and Rosalinda Perez voluntarily filed for Chapter 7 relief under the Bankruptcy Code. On December 10, 2001, Ronald Groth, Defendant's president, signed and filed a Proof of Claim alleging a secured claim of $33,630.10 for the vehicle and two other cross-collateralized loans. In an attempt to retain possession of their vehicle, Rosalinda Perez verbally represented her intentions to reaffirm her debts with Bayou City. On February 20, 2002, Bayou City mailed a Reaffirmation Agreement for the three notes to Mrs. Perez. The Reaffirmation Agreement was never executed by Mrs. Perez based on the advice of her counsel. Five days later, Debtors requested a copy of the title to the 2000 GMC Yukon. Defendant first mailed to Debtors a Certificate of Title for a Ford Explorer and then, once the mistake was discovered, mailed an illegible copy of the Certificate of Title for the 2000 GMC Yukon. Finally in response to Debtors' March 13, 2002 letter requesting a clear copy of the title for the vehicle, Defendant mailed the title for the 2000 GMC Yukon showing that the dealer's lien had been paid off and that Bayou City's lien had not been noted on the title.
In an attempt to correct an allegedly inadvertent clerical error, Bayou City sent an application on March 21, 2002 to the Harris County Tax Assessor/Collector's office to have its lien on the 2000 GMC Yukon disclosed on the Certificate of Title. The application was dated March 19, 2002. The Title Application Receipt showed the registration of the vehicle had been changed from Mr. Perez's name to both Mr. and Mrs. Perez's name. Defendant notified Debtors as to the perfection of the lien. On March 22, 2002, Debtors demanded that Defendant release the lien on their vehicle and return the original title, however, Defendant refused. During this time, Debtors continued to make payments on the lien post-petition. Finally, on April 3, 2002, Debtors filed this adversary proceeding against Defendant for the willful violation of the automatic stay under 11 U.S.C. § 362(a)(4) and (a)(6), seeking: (1) avoidance of the lien under 11 U.S.C. § 522(h); (2) refund of the payments made post-petition; (3) award of $5,000 in compensatory damages and $3,000 in attorney's fees; and (4) punitive damages trebling the amount on the Proof of Claim form. An order discharging Debtors was entered in the main bankruptcy case on April 12, 2002.
DISCUSSION
State law governs security agreements between the parties. In re Hancock, 126 B.R. 270, 272 (Bankr.E.D.Tex. 1991). A security interest arises when the debtor has signed a written security agreement that provides a description of the collateral, when value has been given, and when the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party. TEX. REV. CODE ANN. § 9.203(a) (Vernon 2002). If all three elements are met, the security interest is enforceable against the debtor. § 9.203(b).
Security interests can attach to after-acquired property as well as secure future advances. TEX. REV. CODE ANN. § 9.204(a), (c) (Vernon 2002). The comments to § 9.204 state: "Under subsection (c), collateral may secure future as well as past or present advances if the security agreement so provides. . . . Indeed, the parties are free to agree that a security interest secures any obligation whatsoever." § 9.204 cmt. 5.
Under Article 9.301(a)(2), perfection of security interests on vehicles is governed by the Texas Certificate of Title Act. TEX. REV. CODE ANN. § 9.301(a)(2) (Vernon 2002). In order to perfect, the Act specifically requires that there be a notation of the lien on the Certificate of Title of the vehicle. TEX. REV. CIV. STAT. ANN. art. 6687-1, § 41(a) (Vernon 1977). Perfection only determines the order of priority of the security agreements. In re Hancock, 126 B.R. at 272.
In re Hancock states the unperfected status of a creditor does not divest the creditor of its security interest in the collateral. Id. In Hancock, the debtor executed a security agreement for $8,370.01 in favor of Longview Bank and Trust Company (" Longview Bank"). The debtor's 1985 318 BMW was one of the items listed as collateral under the security agreement. Longview Bank failed to record its lien on the vehicle's Certificate of Title before the debtor filed for Chapter 7 bankruptcy. The Court held that Longview Bank had failed to properly perfect its lien, but as a matter of state law, Longview Bank retained a security interest on the vehicle despite its unperfected status. See also In re Salvage, 92 B.R. 259, 261 (Bankr.S.D.Ohio 1988) (Bank's unperfected security interest, while not enforceable against third parties, remains valid between the debtor and the bank).
In the present case, Debtors granted Bayou City a security interest in their 2000 GMC Yukon when they signed the security agreement as evidenced by Note 2. Since all three notes contained cross-collateralization language, Notes 1 and 3 are also secured by Debtors' 2000 GMC Yukon. Despite the fact that Note 1 was executed prior to granting Defendant a security interest in the vehicle and Note 3 was executed after this granting, § 9.204 permits a security interest to attach to past as well as future advances. There is no evidence (or pleading) of any different intention by the parties. Since Bayou City did not record its lien on Debtor's Certificate of Title until after Debtors had filed their Chapter 7 petition, as of the date of the petition, Bayou City's act of perfection is subject to avoidance under 11 U.S.C. § 362(a)(5).
Plaintiffs filed for Chapter 7 relief under the Bankruptcy Code on December 3, 2001. Defendant submitted its application to the Harris County Tax Assessor/Collector's office on March 21, 2002.
Avoidance of the Lien
Section 544 of the Bankruptcy Code specifically grants a trustee powers to avoid certain transfers of property. When the trustee fails to exercise these powers, 11 U.S.C. § 522(h) permits a debtor to use the trustee's avoidance powers for the purpose of claiming exemptions. 11 U.S.C. § 522(h) (1994); In re Hancock, 126 B.R. at 273. Section 522(h) provides:
The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if —
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
11 U.S.C. § 522(h). Under this provision, the debtor can assert rights as a hypothetical lien creditor who is in a priority position to any unsecured creditors. 11 U.S.C. § 544(a) (1994); TEX. REV. CODE ANN. § 9.301(a)(2) (Vernon 2002); In re Hancock, 126 B.R. at 273.
The limiting language in § 522(h) states the debtor must comply with § 522(g)(1) before the debtor can exercise any avoidance powers granted under § 522(h). See, e.g., In re Brown, 113 B.R. 318, 319 (Bankr.W.D.Tex. 1990) ("Section 522(h) permits a debtor to avoid transfers (e.g. liens), . . . however, the predicate condition to the debtors bringing such an action is that the subject transfer not be a `voluntary transfer of such property by the debtor.'"); In re Weaver, 78 B.R. 135, 137-38 (Bankr.N.D.Tex. 1987) ("Debtors' right to stand in the shoes of the Trustee with respect to a § 544 avoiding powers are limited, however, by § 522(g). . . ."); In re Dipalma, 24 B.R. 385, 387 (Bankr.D.Mass. 1982) (empowering the debtor to avoid certain transfers under § 522(h) if the debtor meets subsection (g)(1)); 4 COLLIER ON BANKRUPTCY, 522.12[2][b] (15th ed. 1998) ("Section 522(h) refers back to subsection (g)(1) as a limitation on the debtor's power."). Section 522(g)(1) requires the debtor to have not voluntarily transferred property that the debtor could have exempted and further requires the debtor to have not concealed such property. 11 U.S.C. § 522(g)(1) (1994). A debtor, therefore, has a trustee's avoidance powers under § 522(h) only if the debtor meets the following four requirements:
Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if —
(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and
(B) the debtor did not conceal such property.
11 U.S.C. § 522(g)(1).
a. The trustee could have avoided but did not avoid the transfer,
b. The debtor can claim the property transferred as exempt,
c. The original transfer of the property was not a voluntary transfer by the debtor, and
d. The debtor did not conceal such property.
11 U.S.C. § 522(h); In re Weaver, 78 B.R. at 138.
Section 522 does not specifically define what is meant by "voluntary transfer" or when a transfer is deemed to have occurred. The Bankruptcy Code defines transfer as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest." 11 U.S.C. § 101(54) (1994). Under this definition, a transfer is deemed to occur upon the granting of an interest in the debtor's property. Several courts have held that such a transfer is a voluntary transfer. See, e.g., In re Ulrich, 203 B.R. 691, 693 (Bankr.C.D.Ill. 1997) (granting of a security interest in the debtor's vehicle to the bank was a transfer under § 101(54) and failing to prove that the bank's lien was not a voluntary act by the debtor); In re Hancock, 126 B.R. 270, 273 (Bankr.E.D.Tex. 1991) (executing a security agreement with the bank secured by the debtors' automobile is a voluntary transfer); In re Salvage, 92 B.R. 259, 261 (Bankr.S.D.Ohio 1988) (granting the bank a security interest in the debtors' Oldsmobile is not an involuntary transfer); In re Dipalma, 24 B.R. 385, 387 (Bankr.D.Mass. 1982) ("The voluntary grant of a security interest, as opposed to a lien created by operation of law or the fixing of a judicial lien, is clearly a voluntary transfer."); In re Lamping, 8 B.R. 709, 711 (Bankr.E.D.Wis. 1981) (transferring an interest in property by executing a security agreement with a lien holder is a voluntary transfer).
One of the primary aspects of Plaintiffs' avoidance argument hinges on the conclusion that Defendant's act of applying for a lien notation on the Certificate of Title constituted a "transfer" for purposes of § 522. The Court concludes, based on the foregoing statutory and case authority, that the actual transfer occurred at the time of Debtors' conveyance of a security interest. By the time "perfection" occurred in March of 2002, the transfer had long since occurred as a matter of law.
Applying the four factors under § 522(h) to the case at bar, Debtors cannot exercise any of the trustee's avoidance powers because Debtors voluntarily transferred an interest in their vehicle to Defendant. Mrs. Perez executed a security agreement with Bayou City on December 13, 2000 that granted Defendant a security interest in the 2000 GMC Yukon truck. Thus, the granting of the interest in Debtors' property was a voluntary transfer. As such, Debtors do not meet the predicate conditions under § 522(g)(1) to exercise any avoidance powers provided under § 522(h). Consequently, Defendant's lien on Debtors' vehicle cannot be avoided.
Mrs. Perez signed a Loanliner Disbursement Voucher and Security Agreement with Bayou City on December 13, 2000, as evidenced by Note 2, to refinance their 2000 GMC Yukon.
Willful Violation of the Automatic Stay
When a debtor files a petition for bankruptcy, the stay automatically becomes effective. 11 U.S.C. § 362(a) (1994). The stay provision is a way for debtors to obtain a fresh start to reorganize their financial obligations without the harassment of creditors. Riggs Nat'l Bank of D.C. v. Perry, 729 F.2d 982, 984 (4th Cir. 1984); See also United Savings Ass'n of TX v. Timbers of Inwood Forest Ass'n (In re Timbers of Inwood Forest Ass'n), 793 F.2d 1380, 1409 (5th Cir. 1986), aff'd en banc, 808 F.2d 363 (5th Cir. 1987) (preventing creditors from pursuing their own claims against the debtor at the detriment of other creditors); 3 COLLIER ON BANKRUPTCY, 362.03 (15th ed. 1997) (providing creditors protection also by promoting equality of distribution). The automatic stay under Chapter 7 of the Bankruptcy Code remains effective until a court grants the debtor a discharge. 11 U.S.C. § 362(c).
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. H.R. Rep. No. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6296-97.
The stay is applicable to a wide variety of actions listed under § 362(a). For purposes of this proceeding, only § 362(a)(4), (a)(5), and (a)(6) are applicable to the discussion. Specifically, § 362(a) provides:
Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, . . . operates as a stay, applicable to all entities, of —
. . .
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
. . . .
11 U.S.C. § 362(a). The Bankruptcy Code defines lien as "[a] charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(37). Under § 362(a)(4), a creditor may not take an interest in, create, or perfect any liens against the property of the estate. When the debtor exempts property from the estate, § 362(a)(4) is no longer applicable; however, § 362(a)(5) prevents a creditor from creating or perfecting a lien against the property of the debtor, which includes any exempt property. Riggs Nat'l Bank of D.C., 729 F.2d 982, 986 (4th Cir. 1984) (Widener, J., concurring and dissenting); See also Walker v. Cadle Co. Inc. (In re Walker), 168 B.R. 114, 121 (Bankr.E.D.La. 1994) (abandoning the trailer by the trustee caused the trailer to become property of the debtor, not property of the estate, which is also protected by the automatic stay); 3 COLLIER ON BANKRUPTCY, 362.03[6][c] (15th ed. 1997) (exempting property from the bankruptcy estate terminates the protection afforded to debtors under § 362(a)(4)). In accordance with the purpose of the stay, § 362(a)(6) also prohibits creditors from pursuing their own remedies against the debtor to collect or assess their pre-petition claims. 11 U.S.C. § 362(a)(6).
Once the automatic stay becomes effective and notice of the bankruptcy filing is received, creditors are subject to all of the provisions of the Bankruptcy Code relating to the stay. In re Lile, 103 B.R. 830, 836 (Bankr.S.D.Tex. 1989); See also Wagner v. Ivory (In re Wagner), 74 B.R. 898, 904 (Bankr.E.D.Pa. 1987) ("Knowledge of the bankruptcy filing has been held to be the legal equivalent of knowledge of the automatic stay."). Under § 105(a), the bankruptcy judge has discretionary power, sua sponte, to enforce any provisions of the automatic stay against any creditors. 11 U.S.C. § 105(a) (2002); Metro. Life Ins. Co. v. Alside Supply Ctr. of Knoxville (In re Clemmer), 178 B.R. 160, 167 (Bankr.E.D.Tenn. 1995) (refusing to exercise the bankruptcy court's power under § 105(a) to impose sanctions against the defendant for violations of the automatic stay because the defendant lacked standing); Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir. 1990) (per curiam) (permitting bankruptcy judges to use their power under § 105(a) to impose civil contempt sanctions against a creditor for violating the automatic stay).
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 U.S.C. § 105(a).
When a creditor violates the automatic stay, the "violation of the stay does not by itself warrant an award of monetary damages or the imposition of sanctions." In re Lile, 103 B.R. 830, 836 (Bankr.S.D.Tex. 1989). Under § 362(h), however, a debtor may recover actual damages, attorney's fees, and punitive damages when the violation of the stay is a willful violation. 11 U.S.C. § 362(h). Courts have defined a willful violation to have occurred when the violation is done deliberately and with knowledge of the bankruptcy filing. Walker v. Cadle Co. Inc. (In re Walker), 168 B.R. 114, 121 (Bankr.E.D.La. 1994); In re Lile, 103 B.R. at 836; Sapp v. Wilson (In re Sapp), 91 B.R. 520, 522-23 (Bankr.E.D.Mo. 1988). "Willfulness" does not mean specific intent. Cadle Co. Inc., 168 B.R. at 121.
An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney's fees, and, in appropriate circumstances, may recover punitive damages. 11 U.S.C. § 362(h).
Upon a finding that the violation of the automatic stay is a willful violation, the debtor must prove that he was injured by the violation. In re Adams, 212 B.R. 703, 708 (Bankr.D.Mass 1997) (stating debtor must prove the violation occurred, the violation was committed willfully, and the debtor was injured by the willful violation before damages will be awarded to the debtor under § 362(h)). Courts have held that proof of actual damages is required before actual, attorney's fees, or punitive damages will be awarded to the debtor. See, e.g., Aiello v. Providian Fin. Corp., 257 B.R. 245, 249 (Bankr.N.D.Ill. 2000), aff'd, 239 F.3d 876 (7th Cir. 2001); In re Tipton, 257 B.R. 865, 875 (Bankr.E.D.Tenn. 2000); In re Fernandez, 227 B.R. 174, 180 (9th Cir. BAP (Cal.) 1998), aff'd, 208 F.3d 220 (9th Cir. 2000); In re Robinson, 228 B.R. 75, 80 (Bankr.E.D.N.Y. 1998); In re Adams, 212 B.R. 703, 708 (Bankr.D.Mass. 1997); In re Synder, 198 B.R. 9, 15 (Bankr.N.D.N.Y. 1996); In re Palumbo Family Ltd. P'ship, 182 B.R. 447, 471 (Bankr.E.D.Va. 1995); In re Debolt, 177 B.R. 31, 40 (Bankr.W.D.Pa. 1994); In re Transp. Sys. Intern., Inc., 110 B.R. 888 (Bankr.D.Minn. 1990), aff'd, Lovett v. Honeywell, Inc., 930 F.2d 625, 628 (8th Cir. 1991). In certain circumstances, courts may award attorney's fees without any proof of other compensatory damages, however, bankruptcy judges have discretion to limit awarding attorney's fees when the damages only stem from the costs of appearing in court to litigate the violation or from having counsel notify the creditor of the violations of the stay. In re Robinson, 228 B.R. at 85 (awarding reasonable attorney's fees without the debtor having incurred any other compensatory damages related to the violation of the stay); See also Price v. Pediatric Academic Ass'n, Inc., 175 B.R. 219, 222 (Bankr.S.D.Ohio 1994) (limiting attorney's fees especially if the only damages amount to the cost of appearing in court and notifying creditors).
In the instant case, Defendant violated the automatic stay when it perfected its lien on Debtors' 2000 GMC Yukon. Although Debtors only plead that Defendant was in violation of § 362(a)(4) and (a)(6), the Court, pursuant to the powers granted to it under § 105(a), finds Defendant violated § 362(a)(5) and that the violation was a willful violation. Section 362(a)(4) is not applicable to this case because Debtors had already exempted their vehicle from the estate by the time Defendant had attempted to perfect its lien on the automobile. Section 362(a)(5), on the other hand, remains effective in protecting Debtors' vehicle because the subsection applies to property of the debtor, which includes exempt property. Since Defendant is in violation of § 362(a)(5), it is unnecessary to determine whether Defendant is also in violation of § 362(a)(6).
The violation of § 362(a)(5) by Defendant was willful. Debtors had filed for bankruptcy on December 3, 2001. Ten days later, Mr. Groth, president of Bayou City, filed a Proof of Claim form with the court. The Proof of Claim filing shows Defendant had knowledge of the bankruptcy filing by Debtors. Equipped with this knowledge, Defendant deliberately sent an application dated March 19, 2002 to the tax assessor's office to perfect its lien on Debtors' vehicle over three months after the bankruptcy petition was filed. Although Defendant claimed that it was attempting to correct an inadvertent clerical error when it sent the application to the tax assessor's office, the specific intent of Defendant is irrelevant since a willful violation only requires that the act in violation was made deliberately or intentionally. Having found the stay was violated, the question remains: what to do about it?
As noted above, Bayou City's postpetition action to perfect its lien is subject to avoidance under 11 U.S.C. § 362(a)(5). However, shortly after the March 2002 attempt to perfect by Bayou City, Debtors were discharged on April 12, 2002. Consequently, on April 12, 2002, the automatic stay applicable to the property of the debtor ceased to exist by operation of law. 11 U.S.C. § 362(c)(2)(C) (1994).
While the Court is usually very amenable to avoiding actions taken in violation of the stay, under the circumstances of this case, it seems to make little sense to avoid Bayou City's lien notation when it could immediately reassert its lien and seek perfection in the absence of the stay. The Court hastens to add any willful violation of the stay is committed at the creditor's peril. The instant practical approach to a very unusual situation should not encourage anyone to ever violate the stay.
Despite the willful violation of the automatic stay by Defendant, Debtors should not, under the circumstances of this case, be able to recover any damages from Defendant absent proof of actual injury. Debtors claimed $5000 in compensatory damages, $3000 in attorney's fees, and punitive damages. Debtors, however, failed to prove that they suffered any actual injury by Defendant's violation. Given the earlier conclusion made in this case and the end result that Debtors are and should be responsible for payment of the truck lien, the Court concludes that Debtors are not entitled to any damages under § 362(h).
In summary, the Court finds that Defendant violated § 362(a)(5) of the automatic stay when it sent its application to the Harris County Tax Assessor/Collector's office on March 21, 2002. However, Bayou City shall retain its lien on Debtors' 2000 GMC Yukon. Finally, Debtors are precluded from recovering any monetary damages or attorney's fees from Defendant.
A separate form of order shall be entered on this same date.