Opinion
Case No. 93-10075, Chapter 7, Adversary No. 93-2051
July 27, 1994
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This case is an adversary proceeding brought by the chapter 7 trustee, Randy L. Royal, to avoid a lien alleged to be a preferential transfer to the defendant, Rocky Mountain Bank, F.S.B. (hereafter RMB). The parties have submitted the case to the court on stipulated facts and memoranda of law. The court has considered the pleadings filed in this adversary, the file in the underlying case, and the applicable law, and does hereby render its decision.
Findings of Fact
On February 17, 1993, the debtors in the underlying bankruptcy case, Timothy Bruce Potter and Lisa Kaye Potter, purchased a 1993 Dodge Intrepid from Bill Barth Chrysler, a dealer located in Gillette, Wyoming. The debtors paid for the Dodge Intrepid with a trade-in and a purchase money (enabling) loan from RMB. On the same date as the purchase, the debtors took possession of the vehicle and executed a Retail Installment Contract and Security Agreement which Bill Barth Chrysler assigned to RMB.
Upon the filing of a financing statement March 12, 1993, the Sheridan County Clerk issued a Certificate of Title reflecting the RMB lien. These events occurred 23 days after the debtors executed the installment contract and took possession of the vehicle.
The debtors filed a voluntary chapter 7 petition in bankruptcy on March 19, 1993. On a statement filed to comply with 11 U.S.C. § 521(2)(A), the debtors indicated their intention to reaffirm the obligation to RMB. No such agreement was filed, and RMB was subsequently granted relief from the § 362 automatic stay to foreclose its security interest in the 1993 Dodge Intrepid.
Conclusions of Law
This adversary proceeding was filed by the trustee to avoid an alleged preferential transfer under 11 U.S.C. § 547(b). The adversary is a core proceeding, and the court has jurisdiction pursuant to 28 U.S.C. § 157(a), (b)(1) (b)(2)(F) and § 1334.
The trustee alleges that when RMB perfected its security interest more than ten days after the loan was given and the security agreement was signed, the filing of the lien was a transfer on account of an antecedent debt which is not protected by § 547(c)(3) and is avoidable under § 547(b). The parties have framed the legal issues as: whether the contemporaneous exchange provisions of § 547(c)(1) are applicable to the perfection of a purchase money security interest; and whether RMB's lien perfection was, in fact, substantially contemporaneous with granting the lien.
The creation of a security interest in a vehicle is a transfer for purpose of § 547(b). Under § 547(e)(1) (2) of the Code, that transfer occurs when it is perfected. The Tenth Circuit Court of Appeals addressed the application of the preference statutes in another case involving a purchase money security interest in In re Hesser, 984 F.2d 345, 348 (10th Cir. 1993). The court applied state law to determine the date of perfection of the security interest, or the date "when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee." 11 U.S.C. § 547(e)(1)(B).
In Wyoming, a security interest in a vehicle takes effect "from and after the time of filing, and not before, as to all creditors, subsequent purchasers, and holders of a security interest in good faith for valuable consideration and without notice." Wyo. Stat. § 34.1-9-302(f) (1991). Although Wyoming law provides twenty (20) day grace period to determine a lien's priority, the time of perfection is the date of filing. Wyo. Stat. §§ 34-1-9.301(b) 34.1-9-312(d) (1991). Consequently, RMB's security interest was perfected on March 12, 1993.
The court in Hesser applied federal law to determine the time of the transfer. Under § 547(e)(2)(A), the Code provides a ten-day grace period in which a lien can be perfected. However, RMB's lien was not recorded within the time allowed by this expanding provision. Further, this transfer is not protected by the ten-day defense provided in § 547(c)(3)(B), the subsection specifically applicable to enabling loans.
In this case, all elements of a voidable preference are satisfied. The perfection of RMB's lien is a transfer to a creditor which occurred within 90 days of the petition filing date. The debtors' insolvency is presumed under § 547(f) and has not been rebutted. By receiving the value of the vehicle through foreclosure, RMB has received more than it would have from distribution in this case. RMB's security interest was perfected on March 12, 1993, and this transfer was on account of an antecedent debt owed on February 17, 1993.
RMB argues that § 547(c)(3) is not the only excepting provision applicable. The bank urges this court to apply the contemporaneous exchange provisions of § 547(c)(1), the subsection generally applied to protect cash sale transactions and collateral substitutions, rather than installment loans. RMB cites several bankruptcy court decisions applying that subsection to protect otherwise preferential transfers and directs the court's attention to the policy arguments contained in those cases.
Several circuit courts of appeals have held that the "contemporaneous exchange" provisions do not provide a defense for creditors who fail to timely perfect. See, e.g., In re Arnett, 731 F.2d 358 (6th Cir. 1984) (non-enabling loan); In re Davis, 734 F.2d 604 (11th Cir. 1984); and In re Holder, 892 F.2d 29 (4th Cir. 1990). Those courts held that the provisions of § 547(c)(3) are the exclusive exception applicable to secured, purchase money loans. The specific nature of the provision is meant to be exclusive and, to hold otherwise, renders § 547(c)(3) meaningless. In In re Tressler, 771 F.2d 791, 794 (3rd Cir. 1985), the court stated that to allow § 547(c)(1) as a defense, renders § 547(c)(3) a "vestigial appendage to the statute."
The Court of Appeals for the Seventh Circuit applied § 547(c)(3) and protected an obligation perfected outside the ten-day period. However, that loan was a letter of credit transaction secured by existing assets, rather than a purchase money loan. In re Pine Top Ins. V. Bank of America Nat. Trust Sav., 969 F.2d 321 (7th Cir 1992).
The Tenth Circuit Court of Appeals has not addressed whether, in its view, § 547(c)(1) might except secured, purchase money loans from avoidance. In Hesser, the court discussed the policy arguments in favor of requiring enabling loan creditors to strictly follow the statutory time limits when perfecting their liens. Such a strict reading of the statute conflicts with the more expansive arguments put forth by RMB.
In the cases where the courts were amenable to applying the contemporaneous exchange provisions, factors outside the creditor's control either contributed to or caused the delay in perfection. In re Martella, 22 B.R. 649 (Bankr.D.Colo. 1992); In re Phillips, 103 B.R. 893 (Bankr.S.D.Ohio 1989). Thus, the facts distinguish those cases from the situation before this court.
Nor can RMB rely on In re Telecash Indus., Inc., 104 B.R. 401 (Bankr.D.Utah 1989) as suggested. The court in that case was not dealing with a purchase money security interest, and the court implied that if it were, the result may have been different. Id. at 403.
In this case, no factors have been established which provide an equitable defense for RMB. There is no suggestion of anything other than negligence on the part of Bill Barth Chrysler and/or RMB for failing to timely record the lien on the title as required by Wyoming law.
The court is not convinced that the perfection of RMB's lien was, in fact, a substantially contemporaneous exchange. And, as previously noted, the perfection of RMB's security interest was not timely under 11 U.S.C. § 547(c)(3).
Accordingly, the court holds that the lien of Rocky Mountain Bank, F.S.B., should be avoided as a preferential transfer. The court will issue a judgment in accordance with this decision.