Bankruptcy Court (Cal.) Properly Distinguishes Between Creation of a Security Interest and Perfection of a Security Interest in a Vehicle in Deciding that Auto Finance Company Did Not Violate the Automatic Stay

In In re Perry, 2015 WL 7188369, at *7-8 (Bkrtcy.C.D.Cal., 2015), Judge Mund granted summary judgment in an adversary proceeding for an auto finance company who failed to turn over a vehicle post-petition and then sold it.  The facts were complicated and particular to the case, but the main point is that the Court got it right in distinguishing between the instrument that creates the security interest and perfection of it.

Perry has argued repeatedly that Chase does not have an enforceable lien in the Vehicle, and thus the Court’s relief from stay was based on Chase’s “bogus” title to the Vehicle. In particular, Perry argues that Chase sent him the paper certificate of title, and thereby lost its title to the Vehicle. Chase argues that the paper title certificate merely released Chase Auto’s ownership interest in the Vehicle. (Perry has submitted a copy of this paper title to the Court, but has not shown that he holds the original. What appears to be the back of this paper certificate of title does not have Chase, as the new lienholder, noted.) Thus, Perry argues this Court should reconsider the merits of the relief from stay order. While Perry is correct that Chase would not have been entitled to relief from the automatic stay if it did not have a valid lien on the Vehicle [see, e.g., In re Ducommun, 159 B.R. 919 (Bankr.D.Idaho 1993) ], his argument fails for a number of reasons. Perry never raised the argument in opposition to Chase’s motion for relief from stay. [BK dkt. 14, 19.] (He did cite the DMV Account View print out from February 13, 2009, but used it to argue that Chase had violated the stay by ordering paper title.) By failing to raise this title argument at the time the relief from stay was litigated, Perry lost his opportunity to do so. Even if Perry had made this argument in opposition to Chase’s relief from stay motion, he would have lost. Chase undeniably had a lien on the Vehicle: Perry had granted a lien on the Vehicle to Chase under the Contract. That lien was enforceable against Perry irrespective of perfection.  An unperfected security interest is binding between the parties. The lack of perfection creates a problem only when an intervening third party obtains a perfected security interest that trumps the unperfected interest.  Simon v. Chrysler Credit Corp. (In re Babaeian Transp. Co.), 206 B.R. 536, 540 (Bankr.C.D.Cal.1997).  The title certificate and “Electronic Title Request” affect perfection of Chase’s lien in the Vehicle. California law provides that a security interest in a vehicle is perfected by deposit (either physically or electronically) of certificate of title endorsed to show the secured party as legal owner of the vehicle. Cal. Veh.Code § 6300, § 6301.  It is not clear from the record before this Court whether Chase perfected its security interest in the Vehicle. If a properly endorsed certificate of title showing Chase as the legal owner was deposited with the DMV, then Chase’s security interest was perfected. Chase has not put a record of depositing such a certificate into evidence. The DMV electronic record that has been submitted suggests that Chase deposited such an endorsed certificate, but that record has not been authenticated and thus is not evidence.  However, the issue of perfection is ultimately irrelevant. Had it not been perfected prior to bankruptcy, then Chase’s lien could have been avoided by the Trustee pursuant to § 544(a). Babaeian Transp., 206 B.R. at 540 (“the trustee enjoys the status of a lien creditor, and thus his interest has priority over an unperfected security interest”). But the Trustee did not seek avoidance of Chase’s lien under § 544(a). And this avoidance power is exercisable only by the Trustee, not by Perry. See Houston v. Eiler (In re Cohen), 305 B.R. 886 (9th Cir. BAP2004); In re Britt, 385 B.R. 800 at *7 (Table) (B.A.P. 9th Cir.2007). In any event, the § 546(a) limitations period for bringing an avoidance action expired two years after the petition date.  In sum, all that is necessary for this Court to conclude that Chase had a valid lien in the Vehicle is the Contract itself. That Contract granted Chase a security interest in the Vehicle enforceable against Perry. If Chase had failed to perfect that security interest, then the Trustee could have sought to avoid the lien, but the Trustee did not do so (and Perry cannot do so). In the absence of avoidance, any lack of perfection is irrelevant and the lien remained enforceable as to Perry.