Opinion
Case No. 00-71107, Adversary No. 00-7113
April 6, 2000
OPINION
The issue before the Court is whether the Trustee may avoid the lien of a creditor on a motor vehicle pursuant to 11 U.S.C. § 544 where the creditor's lien is not noted on the certificate of title to the car as required by 625 ILCS 5/3-202.
The material facts are not in dispute and this proceeding is before the Court on the Trustee's Motion for Summary Judgment. The Debtors, Michael and Barbara West, purchased a 1999 Dodge van on October 2, 1999. The purchase of the van was financed by National City Bank, and National City Bank's lien is noted on the certificate of title issued on October 21, 1999.
On October 26, 1999, the Debtors negotiated a loan with the Defendant Sangamo Chapter Credit Union. The proceeds of the loan were used to pay off National City Bank on the debt secured by the van. A Payoff and Title Request signed by Michael West was sent to National City Bank on October 26, 1999.
In consideration for the loan from the Sangamo Chapter Credit Union, the Debtors granted the Credit Union a security interest in the Dodge van. However, an application was not filed with the Illinois Secretary of State for the issuance of a certificate of title showing a lien in favor of the Credit Union.
On April 6, 2000, the Debtors filed a petition pursuant to Chapter 7 of the Bankruptcy Code. The Plaintiff, John Swartz, was appointed Trustee of the Chapter 7 estate.
As of the date of filing of the petition in bankruptcy, the records of the Illinois Secretary of State showed title to the van in the names of the Debtors and a lien on the title in favor of National City Bank. The Bank had neither released the lien shown on the title to the van nor released possession of the original title instrument as of the filing date.
On May 24, 2000, National City Bank executed a release of its lien on the face of the title to the van. The Credit Union received the original certificate of title on May 30, 2000.
However, due to the automatic stay, the Credit Union did not file its lien with the Secretary of State.
The Trustee determined that there was equity in the van and filed a Complaint to recover and sell the van, and to avoid the liens of National City Bank and Sangamo Chapter Credit Union. The Trustee has recovered the van and an Order has been entered allowing the Trustee to sell the van. The only remaining issue in this adversary concerns the validity of the lien claimed by Sangamo Chapter Credit Union.
A security interest in a motor vehicle is perfected according to the provisions of the Illinois Vehicle Code. Arena Auto Auctions, Inc. v. Mecum's Countryside Motor Co., Inc., 251 Ill. App.3d 96, 621 N.E.2d 254 (1993). Pursuant to 625 ILCS 5/3-203, a security interest in a motor vehicle for which a certificate of title is required is perfected when the certificate of title is delivered to the Secretary of State with an application containing the name and address of the lienholder as well as the required fee.
See In re Independence Land Title Corp. of Illinois, 9 B.R. 394, 396 (Bankr.N.D.Ill. 1981). This is the exclusive method for perfecting a security interest in a motor vehicle. 625 ILCS 5/3 — 207.
11 U.S.C. § 544, the "strong-arm" provision of the Bankruptcy Code, confers upon the bankruptcy trustee the status of a hypothetical judicial lienholder. In re Wheaton Oaks Office Partners Ltd. Partnership, 27 F.3d 1234, 1244 (7th Cir. 1994). The trustee's hypothetical lien is inferior to any existing perfected lien at the time the petition is filed, but it is superior to any unperfected lien. In re Westfall, 227 B.R. 734 (Bankr.W.D.Mo. 1998). Therefore, Section 544 permits the trustee to take priority over liens and security interests against the debtor's bankruptcy estate which were not perfected, or which were improperly perfected, under applicable state law prior to the debtor's bankruptcy filing. In re DeVincent, 238 B.R. 722 (Bankr.N.D.Ohio 1999).
In this proceeding, it is clear that the Credit Union failed to perfect its security interest in the Dodge van under Illinois law. The Credit Union did not file a timely pre-petition application for a certificate of title showing its lien. Five months passed between the negotiation of the loan and the payoff of the National City Bank, and the filing of the bankruptcy petition.
In that intervening time, the Credit Union did not apply for the issuance of a certificate of title (or a corrected certificate of title) showing its lien.
The Credit Union concedes that its lien is unperfected but argues that its lien should not be avoided because "[t]he Trustee and all other creditors were on notice of the van being secured." However, actual knowledge of the Credit Union's security interest in the van, whether by the Chapter 7 Trustee, the Debtors, or any creditor, does not divest the Trustee of his power to avoid the Debtor's obligations under the Bankruptcy Code's strong-arm provision to the extent that a creditor fails to perfect its security interest. In re Fox, 229 B.R. 160, 167 (Bankr.N.D.Ohio 1999); Sagamore Park Centre Associates Ltd. Partnership v. Sagamore Park Properties, 200 B.R. 332, 339 (N.D.Ind. 1996).
The Credit Union further argues that it was diligent and that it "did everything reasonably possible to comply with the statues (sic)." The Credit Union sent a written request for delivery of the title when it sent the payoff of the National City Bank loan.
The Credit Union also made some telephone calls to National City Bank. The Credit Union asserts that it received a lien release either on November 1, 1999, but a copy was not furnished to the Court. A copy of the February, 2000, lien release letter was attached to the Credit Union's Answer to Motion for Summary Judgment. The Credit Union did not use the release either to obtain a corrected or duplicate title.
The Seventh Circuit rejected a similar argument in In re Keidel, 613 F.2d 172 (7th Cir. 1980). In Keidel, the bank argued that it could not perfect its lien because it was never in possession of the certificate of title and thus could not file an application. The bank also claimed that it had instructed the party in possession of the title to turn over the title for processing. The Seventh Circuit was not persuaded by these arguments:
The Bank asserts that the certificate of title was never in its hands, but was surrendered to the bankrupt by the [former lienholder]. The Bank also claims that the bankrupt was fully instructed to secure the title. But none of these circumstances are of help to the Bank since the bankrupt was under a statutory duty to "cause the certificate, application and the required fee to be delivered to the lienholder (bank)," and the Bank could have enforced this requirement by making its performance a condition of advancing funds. (citation omitted).
In this proceeding, the Credit Union did not condition its advance of funds to the Debtors on National City Bank's delivery of title within the statutory period. Pursuant to 625 ILCS 5/3-205, the party holding the title has a statutory duty to deliver the title within a certain period of time. The Credit Union had a right to enforce these statutory provisions to protect itself, but did not do so. In addition, the Credit Union could have arranged for an assignment of National City's lien.
The Credit Union describes the result of this case as "harsh". Harshness, like beauty, is in the eye of the beholder. As the court explained in In re Dukes, 213 B.R. 202, 205-06 (Bankr. S.D. Ga. 1997):
It can be urged as a matter of moral philosophy that a discharge in bankruptcy is inequitable to a creditor. In that spirit, the avoidance of liens, the setting aside of exempt property and the recovery of preferences in bankruptcy are all "against equity." But the policies embodied in the Code reflect decisions which prefer certain equitable ideas above others. At the core of this policy is the notion that the most equitable system requires the establishment of rights for the Trustee, on behalf of all unsecured creditors, ahead of the rights of any one unsecured creditor. This policy is implemented by section 544(a)(1) through its creation of the trustee's hypothetical judicial lien holder status. While Creditor may feel that "the looms of the law have woven a fabric of injustice," this policy underlying the Code is not open for debate in this forum. Instead, this case must be decided by examining the result on the assumption that this hypothetical status existed at the moment of filing this case.
While it might be appealing here to try to redress apparent injustice by evoking the Court's equitable powers, it must be remembered that such powers are only available where the remedy at law is inadequate. As complicated as this compound hypothetical scenario might seem, there is no evidence offered or reason to conclude that this statutory scheme violates the objectives of equality of distribution of assets. In fact, on the contrary, the evocation of the bankruptcy remedy by the debtor triggers an equality of treatment among all creditors. The elevation of the position of passive unsecured creditors in this case to the same level as the diligent but unperfected lien creditor is sure to be viewed by the latter with dismay and a sense of inequity. Nonetheless, any effort to provide a remedy in response to such a creditor's disappointment would, as precedent, be hopelessly disruptive to a system which depends on orderly and predictable distribution of assets as one of its principal virtues.
(footnotes omitted).
As the Trustee notes in his brief, "[t]he result may be harsh in the view of the Credit Union, but it is perfectly predictable under the statutes. . . ."
For the foregoing reasons, summary judgment is granted in favor of the Plaintiff and against Defendant Sangamo Chapter Credit Union. The lien of Defendant Sangamo Chapter Credit Union on the Dodge van is void.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. BARBARA ANN WEST) Case No. 00-71107 Debtors.
IT IS HEREBY ORDERED that the Trustee's Motion for Summary Judgment be and is hereby granted.
IT IS FURTHER ORDERED that the lien of Defendant Sangamo Chapter Credit Union on the subject 1999 Dodge van be and is hereby declared void.