Opinion
Case No. 14-57535
03-11-2015
In re: Thomas A. Neville, III and Cynthia A. Neville, Debtors.
Chapter 7 ORDER: (1) GRANTING METRO SHORES CREDIT UNION'S MOTION FOR RELIEF FROM STAY; AND (2) DENYING AS MOOT METRO SHORES CREDIT UNION'S OBJECTION TO DEBTORS' AMENDED SCHEDULES
I. INTRODUCTION
This is a no-asset Chapter 7 bankruptcy case. Metro Shores Credit Union loaned Cynthia A. Neville $17,999.18 to purchase a car. Because of a clerical error, Metro Shores did not perfect its security interest before Neville and her husband ("Debtors") filed bankruptcy: it failed to apply to the Michigan Secretary of State for a certificate of title to reflect its lien on the car.
In an attempt to recast Metro Shores' position, Debtors amended their schedules to list the car as an unsecured claim. Metro Shores' objection to Debtors' amendments and motion for relief from stay are pending. The Court heard argument on March 9, 2015.
Because Neville's grant of the lien to Metro Shores was a voluntary transfer under 11 U.S.C. § 522(g)(1) and the lien is a purchase money security interest under 11 U.S.C. § 522(f)(1), Debtors cannot avoid Metro Shores' unperfected lien. The Court GRANTS Metro Shores' motion to lift the automatic stay and DENIES AS MOOT its objection to Debtors' amended schedules.
II. BACKGROUND
In 2011, Neville voluntarily agreed to pay Metro Shores $17,999.18 for a 2011 Ford Fiesta. As part of the loan transaction, Neville signed a Loan and Security Agreements and Disclosure Statement that read, in part:
Collateral securing other loans with the credit union may also secure this loan. You are giving a security interest in your shares and dividends and, if any, your deposits and interest in the credit union; and the property described below:
Collateral
Property/Model/Make
Year
I.D. Number
FORD
FIESTA/FORD
2011
3F***********2355
Three years later, Debtors filed a Chapter 7 bankruptcy petition. Initially, Debtors represented on Schedule D - creditors holding secured claims - that Metro Shores held a $10,500.00 secured claim. Debtors also filed a statement of intention indicating they would retain the car and reaffirm the debt. Metro Shores sent Debtors a proposed reaffirmation agreement and a copy of the insurance certificate indicating its lienholder status. However, a notation on the certificate of title states "no secured interest on record." Based on this notation, Neville refused to sign the reaffirmation agreement and filed amended schedules.
Two months after filing bankruptcy, Debtors included Metro Shores on their amended Schedule F - creditors holding unsecured nonpriority claims. They also listed the car on their amended Schedule C - property claimed as exempt. Debtors claim that Metro Shores' failure to perfect its security interest transforms its claim from secured to unsecured. Metro Shores objects to this treatment and seeks relief from the automatic stay to repossess and sell the car.
III. ANALYSIS
A. Metro Shores is a Secured Creditor
To perfect a security interest in a car, a creditor must file with the Michigan Secretary of State "a properly tendered application for a certificate of title on which a security interest in a vehicle is to be indicated." Mich. Comp. Laws. § 257.217(10). Metro Shores concedes that it did not perfect its security interest. Failure to perfect, however, does not equate to a finding that Metro Shores is an unsecured creditor. Nat'l Bank of Royal Oak v. Frydlewicz, 67 Mich. App. 417, 420 (finding plaintiff was an unperfected secured creditor when it failed to perfect its interest).
"The purpose of a lien notation on a certificate of title or of any form of security interest perfection is to provide notice to third parties. Outside of bankruptcy, a lack of perfection would allow a subsequent creditor to obtain a lien having priority over that of the unperfected creditor." Noland v. HSBC Auto Fin., Inc. (In re Baine), 393 B.R. 561, 566 (Bankr. S.D. Ohio 2008) (internal citation omitted).
"[A] creditor obtains a security interest in property, and becomes 'secured' with respect to the property, by entering into a security agreement." Noland v. HSBC Auto Fin., Inc. (In re Baine), 393 B.R. 561, 566 (Bankr. S.D. Ohio 2008); see also 11 U.S.C. § 101(51) (defining security interest as a "lien created by an agreement"). In Michigan, security agreements are valid and enforceable against debtors if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) the debtor has authenticated a security agreement that provides a description of the collateral. Mich. Comp. Laws § 440.9203(2). The parties do not dispute that there was a valid security agreement. And Metro Shores' "failure to note its lien on the certificate of title . . . does not change the fact that [it] has a security interest and is a secured creditor; rather, the lack of notation of its lien on the certificate of title simply means that [Metro Shores'] security interest is not 'perfected.'" In re Baine, 393 B.R. at 566.
In sum, although Metro Shores did not perfect its lien, it still holds an unperfected security interest in the car that secures the debt.
B. Debtors Cannot Avoid Metro Shores' Lien
Having determined that Metro Shores holds a security interest in the car, the next question is whether Debtors may avoid it.
Under 11 U.S.C. § 544(a)(1), a trustee has the rights and powers of a judicial lien holder and can avoid an otherwise valid lien. Id. at 566 (trustee can avoid unperfected liens). But the Bankruptcy Code does not afford chapter 7 debtors such broad power. Pomilio v. MERS (In re Pomilio), 425 B.R. 11, 17 (Bankr. E.D.N.Y. 2010) (chapter 7 debtors do not have the general right to avoid liens). Instead, they are limited to avoidance remedies under 11 U.S.C. §§522(f)(1), (g) and (h).
Michigan law also defines a "lien creditor" as a trustee in bankruptcy. Mich. Comp. Laws § 440.9102(1)(yy).
11 U.S.C. § 522(f)(1) allows a debtor to avoid an interest that impairs an exemption resulting from a judicial lien, or a nonpossessory, nonpurchase-money security interest. "There was no judicial lien involved here. The lien was a purchase money security interest in a motor vehicle. Thus, [Debtors] may not avoid the lien under [section 522](f)." Evingham v. Trucking Affiliates of Cent. New York Credit Union (In re Evingham), 27 B.R. 128, 129 (Bankr. W.D.N.Y. 1983); see also Akers v. CitiMortgage, Inc., 427 B.R. 408, 411 (W.D. Ky. 2010) ("Debtors cannot rely on 11 U.S.C. § 522(f) to avoid CitiMortgage's lien. The lien was consensual and is not a judicial lien or a non-possessory, non-purchase money security interest. Therefore, it does not all within the parameters of § 522(f).").
2. 11 U.S.C. §§522(g) and (h)
11 U.S.C. § 522(h) allows Debtors to avoid a lien if: (1) they could have exempted the property under 11 U.S.C. § 522(g)(1); and (2) the trustee does not attempt to avoid the lien.
Debtors may exempt the car under section 522(g) if: (1) they did not voluntarily transfer their interest, and did not conceal the car; or (2) they could have avoided the lien under section 522(f)(1).
Sections 522(g) and (h) do not apply because Neville voluntarily executed the security agreement. In re Lewis, 212 B.R. 827, 830 (Bankr. E.D. Va. 1997). In addition, as discussed above, Debtors cannot avoid the lien under section 522(f)(1).
C. Exemptions do not have Priority over Liens
The fact that Debtors exempted the car on their amended Schedule C does not change the analysis. Exemptions do not have priority over liens. See Mut. Loan & Sav. Co. v. Warren (In re Davis), 12 B.R. 15, 17 (Bankr. S.D. Ohio 1981):
only the unencumbered portion of the property is to be counted in computing the "value" of the property for the purposes of exemption. . . . The remaining value of the property will be dealt with in the bankruptcy case as is any interest in property that is subject to a lien.
Debtors' bankruptcy discharge will not prevent enforcement of valid liens; Metro Shores has a valid - though unperfected - lien that is not effected by Debtors' amended exemptions.
D. The Stay is Automatically Lifted under 11 U.S.C. § 362(h)
On November 11, 2014, Debtors filed a statement of intention indicating they would retain the car and reaffirm the debt. The meeting of creditors occurred on December 17, 2014. 11 U.S.C. § 521(a)(2)(B) provides that Neville had 30 days from the first date set for the meeting of creditors - or until January 16, 2015 - to sign a reaffirmation agreement with Metro Shores. This was not done. Therefore, the stay is automatically lifted under 11 U.S.C. § 362(h)(1): if Debtors fail to timely perform their stated intention, the automatic stay is terminated and the car is no longer property of the estate.
11 U.S.C. § 521(a)(6) suggests that Neville had 45 days from the meeting of creditors to sign a reaffirmation agreement before having to relinquish possession of the car. Forty-five days have also passed without a signed reaffirmation agreement or surrender of the car.
In the alternative, the stay is lifted "for cause" under 11 U.S.C. § 362(d)(1) because this is a no-asset Chapter 7 bankruptcy case and the car payments are delinquent.
IV. CONCLUSION
Because Neville's grant of the lien to Metro Shores was a voluntary transfer under 11 U.S.C. § 522(g)(1) and the lien is a purchase money security interest under 11 U.S.C. § 522(f)(1), Debtors cannot avoid Metro Shores' unperfected lien. The Court GRANTS Metro Shores' motion to lift the automatic stay and DENIES AS MOOT its objection to Debtors' amended schedules. Irrespective of Debtors' amended schedules, Metro Shores is a secured creditor - its lien survives the bankruptcy.
However, the Court declines to waive the stay provision of Rule 4001(a)(3). This Order is not effective until 14 days after its entry.
Neville may reaffirm the debt during these 14 days. See In re Collins, 2013 WL 752480, at *3 (Bankr. E.D. Ky. Feb. 27, 2013) (finding that neither debtors' failure to timely redeem the car nor the stay termination prevents them from performing their stated intention).
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IT IS ORDERED. Signed on March 11, 2015
/s/ Mark A. Randon
Mark A. Randon
United States Bankruptcy Judge