Morris v. Hicks (In Re Hicks) , 491 F.3d 1136 ( 2007 )

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
June 25, 2007
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
In re:
JON A. HICK S;
AM Y E. HICK S,
No. 06-3243
Debtors.
J. M ICHAEL M ORRIS, Trustee,
Plaintiff-Appellant,
v.
JON A. HICK S;
AM Y E. HICK S,
Defendants,
and
B OEIN G WIC HITA CR ED IT UNION,
Defendant-Third-Party-
Plaintiff-Appellee,
v.
STA TE O F KANSAS,
DEPARTM ENT O F REVEN UE,
DIVISION OF VEH ICLES,
Third-Party-Defendant-
Appellee.
A PPE AL FR OM T HE UNITED STATES DISTRICT COURT
FOR T HE DISTRICT OF KANSAS
(D.C. No. 05-CV-1370-M LB)
Submitted on the briefs: *
J. M ichael M orris, Klenda, M itchell, Austerman & Zuercher, L.L.C., W ichita,
Kansas, for Plaintiff-Appellant.
Eric D. Bruce, Bruce, Bruce & Lehman, L.L.C., W ichita, Kansas, for
Defendant-Third-Party-Plaintiff-Appellee Boeing W ichita Credit Union.
Jay D. Befort, Robert W . Challquist, Kansas Department of Revenue, Topeka,
Kansas, for Third-Party-Defendant-Appellee Kansas Department of Revenue.
Before M cCO NNELL, PO RFILIO, and BALDOCK , Circuit Judges.
PO RFILIO, Circuit Judge.
J. M ichael M orris, trustee in bankruptcy (trustee), appeals from an order of
the district court reversing a decision of the bankruptcy court that granted his
complaint for lien avoidance. W e conclude that the bankruptcy court correctly
determined that the lien the trustee sought to avoid was not perfected as of the
date the debtors filed for bankruptcy. The trustee should therefore have been
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
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permitted to avoid the unperfected lien. This being the case, we reverse the
decision of the district court and remand for further proceedings.
FACTS
The lien in question arose when the debtors, Jon Anthony Hicks and Amy
Elizabeth Hicks, borrowed funds from Boeing W ichita Credit Union (BW CU) to
buy a Ford Expedition automobile. The debtors granted BW CU a purchase
money security interest in the vehicle. The parties have stipulated to the
following facts concerning this transaction and the subsequent history of BW CU’s
security interest:
1. On September 2, 2003, debtors purchased a 1999 Ford
Expedition with the VIN of 1FM PU 18L5XLC09309 (hereinafter
“vehicle”) from Innovative Auto Sales. The Credit Union was
granted a purchase money security interest in the vehicle.
2. On September 2, 2003, Amy Hicks signed a Notice of
Security Interest (NOSI) in favor of the Credit Union on the
vehicle[.]
3. The Credit Union mailed a check in the amount of $52.50
for recording fees to the Kansas D epartment of Revenue with
twenty-one NOSI forms, including the one on the Hick’s [sic]
vehicle. The check was deposited on September 10, 2003.
4. KDOR [Kansas Department of Revenue] acknowledges
receiving the NOSI dated September 2, 2003, from the Credit Union
on September 8, 2003[.] 1
1
Although this fact is not part of the stipulation, the record contains a letter
from KDOR’s attorney to BW CU’s attorney indicating that the NOSI relating to
the Hicks transaction became stuck to another document and was put into storage
without being entered into KDOR’s computer as it should have been. Aplt. App.
at 69.
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5. On October 22, 2003, the debtors made a submission to the
Kansas D epartment of Revenue in applying for title on the vehicle
pursuant to K.S.A. 8-135(b)[.] This submission by the debtors failed
to note the lien of the [Credit] Union.
6. A paper document denominated “title” was subsequently
printed by the Kansas Department of Revenue, indicating its “issued
date” to be December 1, 2003. This document did not list the Credit
Union or anyone else as a lienholder. This document was mailed to
the debtors and it was in their possession on the date of the
bankruptcy[.]
7. From at least December 1, 2003, through M ay 26, 2004, the
digital records of the Kansas Department of Revenue showed the
debtors to be the owners of the vehicle, with no lien[.]
8. On December 8, 2003, debtors filed for Chapter 7
bankruptcy protection.
9. On or about December 18, 2003, the debtors made
submission of documents to the K ansas D epartment of Revenue[.]
This submission of the Debtors listed the lien of the Credit U nion.
The debtors surrendered the December 1, 2003 title to the Kansas
Department of Revenue as part of this submission.
10. On M ay 26, 2004, the Credit Union’s lien began to appear
on the digital records of the Department of Revenue, by virtue of the
second documents submission of the debtors of December 18, 2003.
11. On M ay 7, 2004, debtors received their discharge.
Aplt. App. at 65-66.
On M arch 10, 2004, the trustee filed this adversary proceeding, contending
that he was entitled to avoid BW CU’s lien. 2 The bankruptcy court concluded that
2
The adversary proceeding was resolved as to the debtors when they agreed
that if the trustee were successful in avoiding the lien, they would pay the trustee
the remainder of their obligations to BW CU under the pre-petition notes. See
Aplt. App. at 84-85.
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the filing of a NOSI only perfects a security interest until a certificate of title has
been issued. BW CU lost its temporary perfection once a title was issued that
failed to denote its lien, the court reasoned, and was therefore unperfected at the
time the debtors filed for bankruptcy. The bankruptcy court therefore entered a
memorandum decision granting the trustee’s complaint for lien avoidance.
BW CU appealed to the district court. The district court concluded that the
lien the NOSI created continued in effect even though KDOR had issued an
“inappropriate” title certificate to the debtors. It reasoned that the title certificate,
which did not identify the lien specified in the NOSI, could not make the
previously-issued NOSI ineffective. The trustee therefore could not avoid
BW CU’s lien. Accordingly, the district court reversed and remanded the case to
the bankruptcy court.
ANALYSIS
1. Jurisdiction
In response to the trustee’s complaint in this action, BW CU filed a third
party complaint against KDOR. BW CU sought to hold KDOR liable for
improperly issuing a title certificate that omitted BW CU’s lien. After the
bankruptcy court ruled in favor of the trustee, in order to facilitate an immediate
appeal from its decision granting the trustee’s complaint for lien avoidance
notwithstanding the unresolved third party complaint, it entered a certification
and judgment under Fed. R. Civ. P. 54(b).
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W e ordered the parties to brief whether, in light of the district court’s order
remanding the case to the bankruptcy court, and given BW CU’s unresolved third
party complaint, the district court’s order was a “final decision” that could be
appealed to this court. See 28 U.S.C. §§ 158(d), 1291. W e now conclude that the
order was final and appealable. As the parties acknowledge, the bankruptcy
court’s only task on remand would have been to dismiss the trustee’s complaint,
and to dismiss the third-party complaint as moot. These ministerial actions w ould
not have involved significant further proceedings on remand. A district court
order that leaves the bankruptcy court with “no significant further proceedings to
conduct” on remand is final and may be appealed to this court. Office of Thrift
Supervision v. Overland Park Fin. Corp. (In re Overland Park Fin. Corp.),
236 F.3d 1246, 1251 (10th Cir. 2001) (quotation omitted). W e therefore have
jurisdiction to consider this appeal.
2. Standard of Review
Our review of the bankruptcy court’s decision is governed by
the same standards of review that govern the district court’s review
of the bankruptcy court. Accordingly we review the bankruptcy
court’s legal determinations de novo and its factual findings under
the clearly erroneous standard.
Connelly v. Harris Trust Co. (In re M iniscribe Corp.), 309 F.3d 1234, 1240
(10th Cir. 2002) (quotation omitted). Here, the facts are stipulated. This case
therefore presents us with a single legal issue that we review de novo: was
BW CU’s security interest perfected at the time the debtors filed for bankruptcy?
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3. G overning Law
a. Trustee’s Status as Lien Creditor
The so-called “strong arm” powers of 11 U.S.C. § 544(a)(1) grant the
trustee the status of a hypothetical lien creditor once the bankruptcy petition has
been filed. See LM S Holding Co. v. Core-M ark M id-Continent, Inc., 50 F.3d
1520, 1523 (10th Cir. 1995) (discussing lien creditor status assumed by
debtor-in-possession). The rights of such a lien creditor are determined under
state law. Id. Kansas law subordinates an unperfected security interest to the
rights of a person who became a lien creditor prior to perfection. Kan. Stat. Ann.
§ 84-9-317(a) (2006 Cum. Supp.). Thus, if BW CU’s security interest was
unperfected under state law at the time the debtors filed for bankruptcy, the
trustee may exercise his power to avoid BW CU’s lien.
b. Perfection by Notation on Certificate of Title
Under Kansas law, a security interest in a vehicle may be perfected only by
compliance with that state’s certificate-of-title laws. See id. §§ 84-9-311(a), (2)
(b) (2006 Cum. Supp.). The K ansas certificate-of-title statute provides that “[a]n
application for certificate of title shall be made by the owner or the owner’s
agent upon a form furnished by the division and shall state all liens or
encumbrances thereon, and such other information as the division may require.”
Id. § 8-135(c)(1) (2006 Cum. Supp.). Once the application is received, “[t]he
county treasurer shall use reasonable diligence in ascertaining whether the facts
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stated in such application are true, and if satisfied that the applicant is the lawful
owner of such vehicle, or otherwise entitled to have the same registered in such
applicant’s name, shall so notify the division, who shall issue an appropriate
certificate of title.” Id. The certificate thus issued “shall be in a form approved
by the division, and shall contain a statement of any liens or encumbrances which
the application shows, and such other information as the division determines.” Id.
Here, the certificate of title that had been issued at the time the debtors filed for
bankruptcy did not reflect BW CU’s lien.
c. Perfection by Filing of a NO SI
The Kansas Official UCC Commentary notes that the interplay of
§ 84-9-311 with certain certificate-of-title statutes may create a “gap” period
between the time a certificate of title is applied for and when it is issued, during
which a security interest is technically unperfected. See § 84-9-311, cmt. 5.
Kansas has ameliorated this problem in the case of a purchase money security
interest by providing for the filing of a NOSI. See Mid American Credit Union v.
Bd. of County Com m’rs, 806 P.2d 479, 484 (Kan. Ct. App. 1991) (stating
legislature created NOSI procedure “to cover the period between the sale and the
purchaser’s obtaining a certificate of title.”). The applicable statute provides:
[U]pon sale and delivery to the purchaser of every vehicle subject to
a purchase money security interest as provided in article 9 of chapter
84 of the Kansas Statutes Annotated, and amendments thereto, the
dealer or secured party may complete a notice of security interest and
when so completed, the purchaser shall execute the notice, in a form
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prescribed by the division, describing the vehicle and showing the
name and address of the secured party and of the debtor and other
information the division requires. The dealer or secured party, within
30 days of the sale and delivery, may mail or deliver the notice of
security interest, together with a fee of $2.50, to the division. The
notice of security interest shall be retained by the division until it
receives an application for a certificate of title to the vehicle and a
certificate of title is issued. The certificate of title shall indicate any
security interest in the vehicle. Upon issuance of the certificate of
title, the division shall mail or deliver confirmation of the receipt of
the notice of security interest, the date the certificate of title is issued
and the security interest indicated, to the secured party at the address
shown on the notice of security interest. The proper completion and
timely mailing or delivery of a notice of security interest by a dealer
or secured party shall perfect a security interest in the vehicle
described on the date of such mailing or delivery.
Kan. Stat. Ann. § 8-135(c)(5). 3
d. Interplay Betw een § 84-9-311 and § 8-135
It cannot be disputed that BW CU’s filing of a NOSI perfected its security
interest in the debtors’ vehicle. The question is whether this perfection outlasted
the subsequent issuance of a title certificate that failed to reflect BW CU’s lien.
M ore specifically, does the N OSI procedure provide a permanent, parallel record
of perfection, or does it merely afford temporary perfection protection that
dissolves upon issuance of a title certificate?
In M id American, the Kansas Court of Appeals addressed this question and
reached the latter conclusion. M id American Credit Union, the holder of a
3
The Kansas legislature has recently amended § 8-135. See 2007 Kan. Sess.
L. Ch. 60, 135. These amendments, however, did not take effect until after the
events in question and are therefore not pertinent to the issues on appeal.
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purchase money security interest, filed a N OSI with K DOR. After thirty days,
when no one had applied for a certificate of title, KDOR removed the NOSI from
its files. M id American repossessed the vehicle for non-payment, but
subsequently re-sold it to the same purchaser, without filing a new NOSI. The
purchaser then submitted an application for title that did not reflect the credit
union’s lien. After that, the vehicle was re-sold a number of times. The lien was
never listed on the subsequent titles issued in connection with these sales. The
original purchaser defaulted on the loan and disappeared. The lien holder
thereafter sued the county treasurer, county commissioners, and KDO R,
contending that its lien had been impaired by their failure to insure that its lien
was noted on the certificate of title. The Kansas Court of Appeals determined
that the lien holder had lost its perfected status and its right to recover from
bona fide purchasers of the vehicle.
In reaching this conclusion, the court explained that a “lien must be noted
on the certificate of title to be perfected. Allowing perfection without such a
notation would endanger the reliability of sales of vehicles by assignment of
title.” M id American, 806 P.2d at 484. Notwithstanding M id American’s original
filing of a NOSI, its security interest was now unperfected because it was not
listed on the certificate of title. Id. The court further noted that
[w] hile notifying the KDR of a security interest is a method of
perfecting a lien on a vehicle, it is only m eant to perfect the lien until
the certificate of title is issued. Beneficial Finance [v. Schroeder,]
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737 P.2d 52 [, 53 (Kan. Ct. App. 1987)]. Allowing it to be a method
of perfection beyond this period would again diminish the reliability
of a certificate of title.
Id. (emphasis added).
W e find the rationale of M id American persuasive on the issue here. 4 If a
NOSI were allowed to contradict a certificate of title, certificates of title w ould
lose their reliability as a method of determining whether a vehicle is encumbered
by a lien.
In addition, we find the plain language of § 8-135(c)(5) compelling. That
statute only requires the KDOR to keep the NOSI on file “until it receives an
application for a certificate of title to the vehicle and a certificate of title is
issued.” Id. Application for a certificate of title, w hich supersedes the NOSI, is
not an optional procedure. Under § 8-135(c)(6), “[i]t shall be unlawful for any
person to operate in this state a vehicle required to be registered under this act, or
to transfer the title to any such vehicle to any person or dealer, unless a certificate
of title has been issued as herein provided.” The language of § 8-135(c)(5)
suggests that once a lien holder avails itself of the “permanent” method of
perfection by notation on the certificate of title, the temporary perfection created
4
In M orris v. CIT Group/Equipm ent Financing, Inc. (In re Charles),
323 F.3d 841 (10th Cir. 2003), we described notation on a certificate of title and
filing a NOSI as “two alternative ways that a secured creditor on a motor vehicle
can perfect its security interest.” Id. at 843 (quotation omitted; emphasis added).
That statement, however, was dictum in light of the issues at stake in Charles,
and in any event did not purport to address the durational limitations of a NOSI.
This dictum in Charles is therefore not binding on us here.
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by a NOSI disappears. The lien holder is then protected by the further provision
in § 8-135(c)(5) that “[t]he certificate of title shall indicate any security interest
in the vehicle.”
The district court concluded that the title certificate issued to the debtors
did not supersede the NOSI because it was not an “appropriate” certificate of
title. W hile it is true that KDOR is charged with issuing an “appropriate
certificate of title” that “shall contain a statement of any liens or encumbrances,”
§ 8-135(c)(1), taken in context this statutory language refers only to K DOR’s
duties. There is no indication that it is intended to govern the rights of innocent
third-party purchasers when a lien has been omitted from the certificate of title.
If a purchaser were charged with ascertaining whether a facially valid certificate
of title “appropriately” listed all liens, the function of a certificate of title, to
provide a reliable means of determining the ownership and encumbrances of a
vehicle, would be defeated.
Nor do we accept KDOR’s argument that the debtors’ second application
for a certificate of title, which did reflect BW CU’s lien, related back to the filing
of the NOSI, thereby retroactively defeating the trustee’s rights as a lien creditor.
A trustee’s rights are established as of the date the bankruptcy is filed. See LM S
Holding Co., 50 F.3d at 1523. KDOR’s reliance on In re Ridley, 50 B.R. 51(Bankr. M .D. Tenn. 1985), is misplaced. In Ridley, prior to the filing date of the
debtor’s bankruptcy, the Tennessee M otor Vehicle Division had suspended a title
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that did not reflect the creditor’s lien, and had instructed the debtor to return the
faulty title. After the debtor filed bankruptcy, the Division re-issued the title,
correctly noting the lien. The facts of Ridley are thus distinguished from those of
this case and we have no reason to believe the Kansas courts would apply the
reasoning of that case to the circumstances present here.
Finally, both BW CU and KDOR argue that a K ansas statute enacted in
2003, permitting “electronic certificates of title” designed to reflect the NOSI
received by KDOR, Kan. Stat. Ann. § 8-135d (2006 Cum. Supp.), casts doubt on
the w hole matter of reliance on “paper” certificates of title. W e need not address
the impact of § 8-135d, however, because the electronic title record that the
trustee could have consulted at the time the debtors filed bankruptcy also failed to
reflect the existence of BW CU’s lien. The issue here is official notice of the lien,
and the trustee had none.
The judgment of the district court is therefore REVERSED and this case is
REM ANDED for further proceedings in accordance with this opinion.
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