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In re Taylor

March 22, 2010


Appeal from the Ninth Circuit Bankruptcy Appellate Panel Montali, Markell, and Dunn, Bankruptcy Judges, Presiding BAP No. WW-07-1313-MkMoD

The opinion of the court was delivered by: Bea, Circuit Judge


Argued and Submitted August 3, 2009-Seattle, Washington

Before: Harry Pregerson, John T. Noonan and Carlos T. Bea, Circuit Judges.


The opinion filed on February 26, 2010, is withdrawn. A replacement opinion will be filed concurrently with this order.


In 2005, David and Linda Taylor bought a Toyota Camry right before declaring bankruptcy. Their lender, USAA Federal Savings Bank ("USAA"), procured from the Taylors a security interest in the car as collateral for the loan. USAA perfected its security interest 21 days after the Taylors purchased their car; USAA's perfection was timely under Idaho law, but one day late under federal bankruptcy provisions.*fn1

The Taylors' conveyance of a security interest to USAA was then avoidable by the Taylors' bankruptcy trustee, as a preferential transfer.*fn2 The trustee moved the bankruptcy court to avoid the transfer and the court granted the motion.

We address a recurring question in many bankruptcies: What should be the remedy when a court holds that a security interest is avoidable as a preferential transfer? When a bankruptcy court avoids a preferential transfer, it may award the bankrupt estate either the actual transferred property or the value of the transferred property. 11 U.S.C. § 550(a). Here, the bankruptcy court declined to award the estate the transferred property: the security interest. If it had done so, then the bankruptcy trustee could simply have canceled the security interest, thus converting the auto loan into an unsecured debt owed to USAA. Instead, the bankruptcy court opted to award the estate the "value" of the security interest. Hence, because the bankruptcy court left the original transaction untouched, USAA kept its valid, enforceable secured interest in the Camry. But, the bankruptcy court also awarded the Taylors' bankruptcy estate something more. It was that decision-to award the estate the value of the security interest by means of a new forced loan-that led the bankruptcy court down the proverbial rabbit hole.

Once the bankruptcy court decided to award the value of the security interest, it faced the question: What is the value of a security interest, once the security interest is separated from its underlying loan? The bankruptcy court determined that the value of the security interest was the full value of the initial loan. Therefore, the bankruptcy court ordered USAA to loan the estate $18,020 plus interest; this amount was in addition to the $18,020 USAA initially loaned the Taylors when they purchased the Camry. Upon payment of the additional $18,020, USAA became entitled to file a non-priority unse-cured claim for the additional amount of $18,020 plus interest, which was loaned under the bankruptcy court's order. The bankruptcy court's determination of the value of the security interest was clearly erroneous. We agree that the security interest may have had some value greater than zero; there is, however, no evidence in this record to support the bankruptcy court's finding that the value of the security interest equaled the amount of the original $18,020 loan at the time USAA perfected its security interest.

Furthermore, because the value of USAA's security interest is not readily ascertainable, the bankruptcy court erred when it awarded the estate an estimate of that value instead of the transferred property-the security interest. Therefore, we reverse the bankruptcy court's decision and remand with instructions for the bankruptcy court to declare USAA's security interest void. The ownership of the Camry will not be subject to the lien created by the security interest. USAA will retain an unsecured claim against the estate for $18,020, the value of the loan. For reasons discussed below, we also remand to the bankruptcy court to determine whether USAA must return the payments it received from the Taylors, and if so, to whom.

I. Factual Background

A. The Purchase

On August 30, 2005, David and Linda Taylor, a married couple, purchased and took possession of a 2006 Toyota Camry from Gresham Toyota, Inc. ("Gresham"), a dealership in Portland, Oregon. The Taylors purchased the car for $19,500.

USAA loaned the Taylors $18,020; the Taylors in turn paid the $18,020 to Gresham. The amount of the loan was equal to the purchase price of the car less the agreed trade-in value of the Taylors' 1992 Lincoln Town Car, which the Taylors sold to Gresham as part of the purchase of the Camry. In September 2005, the Taylors began to make monthly payments on their loan to USAA.*fn3

The Taylors, as part of the loan agreement, granted USAA a "purchase money security interest" in the car.*fn4 Under the Bankruptcy Code, a security interest is a lien created by an agreement (as opposed to by statute). 11 U.S.C. § 101(51).*fn5 A "lien . . . means [a] charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(37).

To satisfy pre-existing debts, a trustee can avoid transfers that take place within the 90 days before bankruptcy is filed.

11 U.S.C. § 547(b). There is an exception to this rule, however, for creditors who perfect a security interest within 20 days after a transfer for new value. 11 U.S.C. § 547(c)(3). A security interest is perfected when the creditor has satisfied the requirements of perfection under state law. Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211, 214 (1998). Thus, USAA had to satisfy all the requirements set out in Idaho Code Sections 28-9-310 through 28-9-316 within 20 days after the Taylors took possession of the Camry. Idaho Code 29-9-308(a); 11 U.S.C. § 547(c). USAA, however, made the crucial mistake of being one day late in perfecting its security interest. Accordingly, USAA failed to exempt the transfer from being avoidable under the Bankruptcy Code.

USAA failed to perfect the security interest within 20 days because it filed its initial application for title without a signed affidavit of inspection, as required under Idaho law. See Idaho Code Ann. § 49-510. On September 20, 2005, an inspection officer from the Idaho Transportation Department inspected the car and signed an affidavit of inspection. The same day, an Application for Certificate of Title and the affidavit of inspection were filed with the Idaho Transportation Department. USAA's security interest was thus perfected under Idaho law only on September 20, 2005-21 days after the Taylors took possession of the car on August 30, 2005. Despite the fact that USAA's security interest was perfected under state law, the bankruptcy trustee could still avoid the transfer of the security interest because USAA failed to meet the federal 20-day perfection requirement under § 547(c)(3).*fn6

B. The Bankruptcy

On September 28, 2005, the Taylors filed a voluntary petition in bankruptcy under Chapter 7. A Chapter 7 bankruptcy filing transfers title to the debtors' nonexempt assets to a court-appointed trustee, who endeavors to manage the assets in a manner that will satisfy the creditors' claims. 11 U.S.C. §§ 701, 704. The bankruptcy court appointed Don Thacker as the Taylors' bankruptcy trustee.

On February 23, 2007, Thacker filed suit against USAA to avoid the transfer of the security interest under 11 U.S.C. ยง 547(b). Thacker moved for summary ...

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