Opinion
21-31277 Adv. 22-3010
04-26-2023
In re MATTHEW D. BADGER, Debtor. v. MyUSA Credit Union, Inc., Defendant. Patricia J. Friesinger, Trustee, Plaintiff,
Chapter 7
DECISION DENYING CHAPTER 7 TRUSTEE'S MOTION FOR SUMMARY JUDGMENT (DOC. 16)
GUY R. HUMPHREY, UNITED STATES BANKRUPTCY JUDGE
I. Findings of Fact
The relevant facts have been stipulated to by the parties. Doc. 15. On January 28, 2016 the debtor, Matthew D. Badger (the "Debtor"), entered into a Retail Installment and Security Agreement with Beau Townsend Ford, Inc. to purchase a 2013 Lincoln MKS (the "Contract"). Jt. Stip. ¶ 1. That same day, the seller assigned its rights in the Contract to Heartland Federal Credit Union ("Heartland"). Jt. Stip. ¶ 2. The debtor also signed an Application for Certificate of Title to allow for a certificate of title to be issued in the name of the debtor with Heartland listed as a lienholder. Jt. Stip. ¶ 4; Jt. Exhibit II. A certificate of title was issued a short time later. Jt. Stip. ¶ 5.
Due to the Debtor's contractual default, on September 11, 2019 Heartland repossessed the vehicle and applied for a new certificate of title in its name. Jt. Stip. ¶ 6. However, that same day, after negotiation between the Debtor and Heartland, the vehicle was returned to the Debtor. Nevertheless, Heartland obtained a repossession certificate of title on October 23, 2019. Jt. Stip. ¶ 8; Jt. Exhibit IV.
The Debtor has possessed the vehicle from September 11, 2019 to the present. The Debtor also made all payments on the Contract from September 11, 2019 until the Debtor filed his Chapter 7 bankruptcy petition on July 25, 2021.
On July 1, 2021 Heartland merged with MyUSA Credit Union ("MyUSA"). Jt. Stip. ¶ 11.
For simplicity, the court will refer to MyUSA for the balance of this decision.
On August 27, 2021 a new certificate of title was issued in the name of the Debtor, which listed MyUSA as a lienholder. Jt. Stip. ¶ 13.
The Chapter 7 Trustee, Patricia Friesinger (the "Trustee"), filed a complaint alleging that MyUSA's lien noted on the post-petition certificate of title was avoidable, either as an unauthorized post-petition transfer or a preference, sought the release of the lien, and for any claim of MyUSA to be disallowed until the lien was released. Doc. 1. MyUSA filed an answer and an amended answer. The Trustee moved for summary judgment. Doc. 16. After MyUSA filed its response to the motion, the court took the matter under advisement.
II. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference (Amended General Order 05-02) of the District Court for the Southern District of Ohio in accordance with 28 U.S.C. § 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A),(F), (K), and (O) and, to the extent required, the parties have knowingly and voluntarily consented to this court entering final judgment. Doc. 6, ¶ II.E.2. See Wellness Int'l Network v. Sharif, 575 U.S. 665, 686 (2015) (stating that Article III allows bankruptcy courts to enter final judgment on Stern claims submitted by consent of the parties).
III. Summary Judgment Standard
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a) (made applicable in this contested matter by Federal Rule of Bankruptcy Procedure 7056). A factual disagreement is genuine if "a rational trier of fact could find in favor of either party on the issue." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27, 30 (B.A.P. 6th Cir. 1998) (citing Schaffer v. A.O. Smith Harverstone Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996)). A fact is material if it might affect the outcome of the suit under substantive law. Niecko v. Emro Mktg. Co., 973 F.2d 1296, 1304 (6th Cir. 1992) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). When reviewing a motion for summary judgment, a court views all evidence and draws all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
IV. Analysis
The Trustee argues that, based on the stipulated facts, MyUSA's placement of its lien on the post-petition certificate of title should be avoided as an unauthorized post-petition transfer and, in the alternative, as a preferential transfer. See 11 U.S.C. §§ 547 and 549. In response, MyUSA argues that it "was required to restore the status-quo to pre-bankruptcy status. The lien placed post-petition was the same lien placed pre-petition. This fact pattern is not the fact pattern Congress intended to address when it passed the avoidance statute." Doc. 16 at 1. Neither party cited case law that is relevant to the substantive legal question before the court.
The parties have stipulated that a new title, listing MyUSA as a lienholder, was issued post-petition. Jt. Stip. ¶ 13. It is beyond debate that the "creation of a lien" constitutes a transfer. 11 U.S.C. § 101(54)(A). However, as will be explained, under Ohio law, MyUSA maintained its secured status throughout the relevant time-period and therefore no transfer occurred. See Logan v. Chesrown Rapid Credit (In re Weaver), 131 B.R. 804, 806 (Bankr. S.D. Ohio 1991) (noting that "544, 547 and 549 all require a transfer of the property of the debtor or the debtor's estate."). Instead, MyUSA completed a ministerial act under Ohio law when it corrected the vehicle title post-petition. After obtaining a repossession title, an interim step for a secured vehicle lender to exercise its state law remedies to liquidate its collateral, it chose not to exercise its right to sell the vehicle to a third party, or credit bid its interest to obtain free and clear ownership in the vehicle.
A. The Debtor's Interest in the Vehicle was Property of the Estate on the Petition Date.
To begin, as the issue was raised by the Trustee, the debtor's interest in the vehicle was property of the Chapter 7 estate on the date the Debtor filed his Chapter 7 petition. See 11 U.S.C. §§ 547(b) and 549(a) (requiring a transfer of estate property). The undisputed fact is that MyUSA was the listed owner of the vehicle on the repossession title on the petition date. Under the Bankruptcy Code, with exceptions not relevant here, estate property is established as of the petition date. 11 U.S.C. § 541(a). Although property of the estate is a concept in bankruptcy law, property interests are defined by state law. Church Jt. Venture v. Blasingame (In re Blasingame), 986 F.3d 633, 638 (6th Cir. 2021). Ohio's Vehicle Certificate of Title Law governs over any conflicting provision of the Uniform Commercial Code. Zurn v. Kessler (In re Kessler), Nos. 20-51377, 20-05057, 2022 WL 982735, at *4, 2022 Bankr. LEXIS 890, at *9 (Bankr.N.D.Ohio March 31, 2022). That law provides that legal property interests in vehicles are evidenced by the name listed on the certificate of title. Ohio Rev. Code § 4505.04. Therefore, MyUSA had legal title to the vehicle because it was the listed owner on the repossession title. See Ohio Rev. Code § 4505.10 (describing the process of obtaining a repossession title); Nat'l City Bank v. Elliott (In re Elliott), 214 B.R. 148, 151 (B.A.P. 6th Cir. 1997). ("[§ 4505.10] allows a secured creditor to obtain a repossession title to facilitate the process of transferring ownership to the successful bidder at the auction sale.").
Nevertheless, on the petition date the Debtor was in possession of the vehicle and was making payments to MyUSA with MyUSA's consent. Thus, the Debtor maintained not only a possessory interest in the vehicle, but also an equitable interest by virtue of its state law rights of redemption. Elliott, 214 B.R. at 151; In re Cepero, 226 B.R. 595, 598-99 (Bankr. S.D. Ohio 1998); see also McCaughey v. Garlyn Shelton, Inc., 208 Fed.Appx. 427, 435 (6th Cir. 2006) (stating, in dicta, that, if Ohio law applied, a party not holding a certificate of title, but with possession, has an equitable interest in the vehicle). Upon the filing of the Chapter 7 petition, the debtor's interest in the vehicle became property of the estate. Lawrence v. Ky. Trans. Cabinet (In re Shelbyville Road Shoppes, LLC), 775 F.3d 789, 794 (6th Cir. 2015). See also 11 U.S.C. § 541(a)(1) (providing that property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case.").
To the extent the vehicle is not property of the estate, it would provide an additional reason for the court denying summary judgment. See Zurn v. Kessler (In re Kessler), Nos. 20-51377, 20-05057, 2022 WL 982735, at *4-7, 2022, Bankr. LEXIS 890, at *9-18 (Bankr.N.D.Ohio March 31, 2022) (determining when a financed vehicle was given to the debtor pre-petition, but the lender held the certificate of title on the petition date, the vehicle was not property of the bankruptcy estate. Due to Ohio Revised Code § 4505.04, the court determined that the Trustee's avoidance theories under 11 U.S.C. §§ 544 and 549 cannot succeed and the lender was granted summary judgment).
B. Under Ohio Law, MyUSA Maintained Its Lien on the Vehicle Post-Petition.
Ohio Revised Code § 4505.04(A) states that:
(A) No person acquiring a motor vehicle from its owner, whether the owner is manufacturer, importer, dealer, or any other person, shall acquire any right, title, claim, or interest in or to the motor vehicle until there is issued to the person a certificate of title to the motor vehicle…
(B) … no court shall recognize the right, title, claim, or interest of any person in or to a motor vehicle sold or disposed of, or mortgaged or encumbered, unless evidenced:
(1) By a certificate of title …
Upon the pre-petition sale of the vehicle to the Debtor, a certificate of title was issued in the Debtor's name with MyUSA as a lienholder. See Saturn of Kings Automall, Inc. v. Mike Albert Leasing, Inc., 751 N.E.2d 1019, 1022 (Ohio 2001) (Finding that "[t]he Ohio Certificate of Motor Vehicle Title Law was enacted in order to 'create an instrument evidencing title which would more adequately protect innocent purchasers of motor vehicles.'") (citation omitted). The question turns to the status of that lien when MyUSA obtained a repossession title.
Ohio Revised Code § 4505.10, in pertinent part, then provides as follows:
(A) In the event of the transfer of ownership of a motor vehicle by operation of law, as upon inheritance, devise, bequest, order in bankruptcy, insolvency, replevin, or execution sale, a motor vehicle is sold to satisfy storage or repair charges, or repossession is had upon default in performance of the terms of a security agreement as provided in Chapter 1309. of the Revised Code and the secured party has notified the debtor as required by division (B) of section 1309.611 of the Revised Code, a clerk of a court of common pleas, upon the surrender of the prior certificate of title or the manufacturer's or importer's certificate, or, when that is not possible, upon presentation of satisfactory proof to the clerk of ownership and rights of possession to the motor vehicle, and upon payment of the fee prescribed in section 4505.09 of the Revised Code and presentation of an application for certificate of title, may issue to the applicant a certificate of title to the motor vehicle. Only an affidavit by the person or agent of the person to whom possession of the motor vehicle has passed, setting forth the facts entitling the person to the possession and ownership, together with a copy of the journal entry, court order, or instrument upon which the claim of possession and ownership is founded, is satisfactory proof of ownership and right of possession. If the applicant cannot produce that proof of ownership, the applicant may apply directly to the registrar of motor vehicles and submit the evidence the applicant has, and the registrar, if the registrar finds the evidence sufficient, then may authorize a clerk to issue a certificate of title . . . (emphasis added).
Upon issuance of the repossession title under § 4505.10, full ownership rights did not vest in MyUSA. Instead, the Debtor maintained a right of redemption until the vehicle could be sold through a repossession sale. Such sale could be a credit bid by MyUSA or to a third-party purchaser. Elliott, 214 B.R. at 151; Wallace v. G.M.A.C. (In re Wallace), 102 B.R. 114, 116 (Bankr. S.D. Ohio 1989). Until a sale occurred, the Debtor's right of redemption would not have been extinguished. Ohio Rev. Code § 1309.623 (providing a debtor may redeem collateral by "[f]ulfillment of all obligations secured by the collateral[.]"). This right of redemption was explained under a similar Kansas statute:
A "repossession title" provides nothing more than a mechanism by which a creditor may pass legal or record title to a transferee upon exercising its remedies under the UCC. Because the plaintiff retained legal and equitable title in the repossessed vehicle on the date of her Chapter 13 petition and the defendant's "repossession title" was merely a mechanism for passing legal title upon exercising
remedies under the UCC, the Court concludes that the repossessed vehicle became part of the plaintiff's bankruptcy estate pursuant to section 541 and that the defendant needed relief from the automatic stay prior to any disposition of the repossessed vehicle.Estis v. Credit Union of Johnson County (In re Estis), 311 B.R. 592, 598 (Bankr. D. Kan. 2004) (footnotes omitted); see also In re Robinson, 285 B.R. 732, 736-38 (Bankr. W.D. Okla. 2002) (stating that Oklahoma law recognizes the right of redemption upon repossession).
While the repossession title was in place, MyUSA continued to maintain lien rights in the vehicle. Again, MyUSA could have followed state law procedure to credit bid that lien, or it could have sold the vehicle to a third party. In the latter event, the lien would have been paid from that sale. The belated issuance of the new post-petition certificate of title in the Debtor's name with MyUSA's lien listed reflected the intention of the parties that MyUSA did not intend to further exercise its state law remedies. Instead, its action reflected the reality that the Debtor was continuing to make payments on the note and re-gained possession of the vehicle by agreement with MyUSA. Therefore, this case is distinguishable from the typical fact pattern in which a vehicle is sold to a debtor pre-petition and the lender fails to place a lien on the vehicle at all. See e.g. Parker v. Lewis (In re Jones), No. 11-3127, 2011 WL 5869610, at *6-7, 2011 Bankr. LEXIS 4669, at *18-19 (Bankr.N.D.Ohio Nov. 22, 2011) (finding a lien on the vehicle could be avoided when the lender failed to perfect a lien by placing a lien on the certificate of title); see also Rhiel v. Wells Fargo Fin. Acceptance (In re Fields), 351 B.R. 887, 890 (Bankr. S.D. Ohio 2006) (noting that Ohio Revised Code § 4505.13(B) requires, to perfect a lien on a vehicle, either placing a lien on the certificate of title or "by the clerk's entering the notation into the automated title processing system if no physical certificate of title has yet to be entered").
For reasons not in the record, MyUSA did not address the repossession title when it returned the vehicle to the Debtor pre-petition. Nevertheless, under Ohio law, MyUSA maintained its lien rights when it held a repossession title, and the act of issuing a new certificate of title with MyUSA's lien post-petition was ministerial. See Robinson, 285 B.R at 739 n.7 (granting a turnover motion, when lender had possession of the vehicle and a repossession title and stating that "this ruling will necessitate re-issuance of the certificate of title to reflect Debtor as the legal owner and [the lender] as the lienholder," and further noting the court was "prepared to issue any order to facilitate returning the parties to the status quo ante."). Stated another way, at no point in the process did the debtor have a free and clear interest in the vehicle - at all times throughout this process MyUSA continued to have an enforceable and perfected lien on the vehicle - first, with its lien noted on the original title; second, through holding the repossession title; and third, through issuance of the replacement title with its lien noted on that title. Pursuant to Ohio Revised Code Chapter 4505, the Debtor never owned or had an interest in the vehicle without any such interest being subject to MyUSA's lien. Specifically, the Debtor never owned the vehicle without either: a) MyUSA's lien noted on the certificate of title; or b) MyUSA being in possession of repossession title in its name.
But see also City of Chicago v. Fulton, 141 S.Ct. 585, 592-95 (2021) (Sotomayor, J., concurring) (agreeing with the majority decision that passively retaining property of the estate does not violate 11 U.S.C. § 362(a)(3) and turnover of property from a creditor requires an adversary proceeding due to Federal Rule of Bankruptcy Procedure 7001(1)).
C. Because MyUSA's Lien on the Vehicle was Continuous, a Transfer did not Occur and the Lien of MyUSA Is Not Avoidable by the Trustee.
The elements of a preference are described in § 547(b) of the Bankruptcy Code:
(b) Except as provided in subsections (c), (i) and (j) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under subsection (c), 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.
An avoidance of an unauthorized post-petition transfer is governed by 11 U.S.C. § 549, which states, in relevant part:
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate-
(1) that occurs after the commencement of the case; and
(2) (A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.
To avoid a transfer under § 549, it must be shown "1) that the unauthorized transfer occurred after the commencement of the case; 2) that the transfer involved property of the estate; 3) that [MyUSA] transferred the property; and 3) that the transfer was not authorized by the court or the Bankruptcy Code." In re Anderson, 511 B.R. 481, 497 (Bankr. S.D. Ohio 2013). But as explained, MyUSA did not perfect a new lien post-petition when the certificate of title replacing the repossession title was issued. Rather, that certificate of title memorialized a lien that remained in place throughout both the pre-petition and post-petition periods.
Generally, a post-petition lien may be a preference because the transfer (i.e. the placing of the lien on the title) is deemed as a legal fiction to have occurred immediately prior to the petition date if it is not perfected by the later of the petition date or 30 days after the vehicle transfer. 11 U.S.C. § 547(e)(2)(C). Here, however, MyUSA maintained its lien rights when it acquired a repossession title and, therefore, no transfer occurred when MyUSA obtained a new certificate of title with the Debtor listed as the vehicle owner and MyUSA as a lienholder. While the Debtor at all pertinent times had interests in the vehicle, whether as title owner or with respect to his redemption rights, those rights and interests at all times were subject to MyUSA's lien rights and interests in the vehicle as reflected by the various titles which were issued under Ohio Revised Code Chapter 4505. Therefore, the Trustee cannot avoid MyUSA's lien as a recoverable preference. 11 U.S.C. § 547(b) (allowing a trustee to avoid a preferential transfer).
The Trustee refers to the transfer alternatively when "the debt was reinstated." Doc. 16 ¶ 3. However, the court determines that any underlying debt on the note held by MyUSA existed at all relevant times both pre-petition and post-petition. The Debtor received his discharge on November 9, 2021. See Doc. 31 (Order of Discharge).
V. Conclusion
For the reasons explained, the Trustee's motion for summary judgment is denied. Doc. 16. The court will enter a separate order consistent with this decision. Copies to: Counsel for the Plaintiff Counsel for the Defendant
IT IS SO ORDERED.