The following is a case update written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., analyzing a recent decision of interest:
In re Clinkingbeard, 2020 WL 1517932 (Bankr. D. Kan. Mar. 30, 2020) navigates the crossroad between Article 9 of the Uniform Commercial Code and a state law governing the perfection of a security interest in a motor vehicle. In this case, a discrepancy between the owner shown on the security agreement and the owner shown on an electronic certificate of title left the lender unsecured in a bankruptcy proceeding. To read the opinion, click here.
On August 21, 2019, Mr. Clinkingbeard filed a personal chapter 11 petition in the District of Kansas. He concurrently filed a chapter 11 petition on behalf of ROJO Property Solutions, his single member LLC. A little over a year earlier, Clinkingbeard had taken out a $25,000 loan from Heartland Tri-State Bank. The loan documents consisted of a promissory note and a consumer security agreement describing the truck as collateral, both signed by “Chad Clinkingbeard” with no reference to ROJO. Nevertheless, the electronic certificate of title issued by the Kansas Department of Revenue Division of Vehicles (the “DOV”) showed ROJO as the owner of the truck, with the Bank as lienholder. The bankruptcy schedules indicated that Clinkingbeard was the owner of the truck.
The Bank repossessed the truck before the bankruptcy petitions were filed. The Bank did not return the truck and filed a motion for relief from the automatic stay, to allow the filing of a form “Affidavit of Correction” with the DOV to correct the owner’s name on the electronic certificate of title. Adding to the Bank’s troubles, the electronic certificate of title listed a VIN that was one digit off.
Bankruptcy Judge Robert Nugent denied the Bank’s motion, holding that the Bank had not acquired a prepetition security interest in the truck. Judge Nugent expressly declined to reach the issue of perfection.
The Court decided the case based solely on the requirements of UCC Article 9 governing the creation and attachment of a security interest. UCC section 9-203(a) provides that a “security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral. . . .” To paraphrase, section 203(b) provides in relevant part that a security interest is enforceable if: (1) value has been given; (2) the debtor has rights in the collateral; and (3) the debtor has signed a security agreement describing the collateral.
The Court cited the Kansas version of the Revised Uniform Limited Liability Company Act and related cases, concluding that members have no direct interest in LLC assets and that even with respect to a single member LLC, that member “cannot act to bind the company without indicating he or she is acting in a representative capacity.” The opinion sums up by stating that “Clinkingbeard had not yet acquired rights in the collateral and ROJO did not authenticate the security agreement. On the petition date, ROJO was the record owner of the truck. This renders Clinkingbeard’s security agreement unenforceable.”
The record was sparse as to facts which might have been critical in this author’s opinion. The court assumed, but admittedly was not certain, that this was a purchase money loan. No facts were available as to why ROJO was named as the owner on the electronic certificate of title. The critical statement which concludes the opinion, that “Clinkingbeard had not yet acquired rights in the collateral” when he executed the loan documents, is therefore suspect. For example, Clinkingbeard could have purchased the truck and then transferred it to the LLC as a capital contribution. Alternatively, Clinkingbeard could always have considered the truck to be his property notwithstanding the name on the certificate of title. The opinion notes that the record did not “contain a copy of the Bank’s application for secured title.” Was the Bank responsible for a (perhaps) inaccurate listing of ROJO as the owner of the truck? If Clinkingbeard was “really” the owner of the truck at some point, then the Bank’s security interest would have attached. A basic flaw in the opinion may be an assumption that the name on the electronic certificate of title established an irrebuttable presumption of ownership.
If Clinkingbeard was in some sense the “true owner” of the truck, then the inaccurate certificate of ownership was perhaps a defect in perfection, an issue not considered by the Court. In Kansas, perfection is to a degree governed by endorsement on an electronic record. How many ways may that record be searched at the DOV? By VIN (remember, that number was one digit off)? By license number? Notwithstanding the obvious advantages in convenience and administration inherent in an electronic system, the Bank may have been chagrined in this case to note that in other states physical possession of the “pink slip” might have sufficed to perfect.
Lenders taking security interests in vehicles sometimes focus on the requirement of perfection, i.e., the “pink slip,” and less on the requisites of the UCC to create a security interest in the first place. UCC section 9-109 does not exclude motor vehicles from coverage under Article 9. It says that Article 9 “does not apply to the extent” that another statute “expressly governs the creation, perfection, priority or enforcement of a security interest . . .” Standing at the crossroads of the UCC and motor vehicle title statutes, it is possible for lenders (and courts) to take a wrong turn.
These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.