In In re: Taylor, — F.3d —-, 2010 WL 669248 (9th Cir. 2010), the Court of Appeals for the Ninth Circuit addressed a “recurring question in many bankruptcies: What should be the remedy when a court holds that a security interest [in an automobile] is avoidable as a preferential transfer?” The Court of Appeals framed the question and its ultimate holding as follows:
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.¶ . . . The Taylors’ conveyance of a security interest to USAA was then avoidable by the Taylors’ bankruptcy trustee, as a preferential transfer. 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 district 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 unsecured 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 district 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 district court to determine whether USAA must return the payments it received from the Taylors, and if so, to whom.