Article courtesy of Michael Robson (Greenberg Traurig)
In re Alexander, No. 22 10612, 2024 WL 2096171 (D. Kan. 2024)
On March 10, 2020, an Illinois certificate of title was issued to Hertz Vehicles LLC on a 2020 Mitsubishi Outlander (the “Vehicle”). BNY Mellon Trust Co. (“Trustee”) was noted as the first lienholder on the Illinois title. On May 26, 2022, Hertz sold the Vehicle and assigned the title to the Vehicle to Kansas dealer Orr Nissan of Wichita. The Trustee released its lien on the Vehicle on May 25, 2022 on the face of the Illinois title. On June 13, 2022, Andrew Alexander (“Debtor”) purchased the Vehicle under an Illinois certificate of title from Orr Nissan pursuant to a retail installment sales contract (the “Contract”) and granted Orr Nissan a security interest in the Vehicle. On the same date, Orr Nissan assigned its rights and security interest in the Contract to Santander Consumer USA Inc. (“Santander”) and executed the “Dealer’s Assignment” on the back of the Illinois certificate of title to the Vehicle listing the Debtor as the purchaser and Santander as the lienholder. On June 30, 2022. Santander delivered a Notice of Security Interest with the Kansas Department of Revenue (“KDOR”) indicating Santander’s security interest in the Vehicle and Debtor as the owner. No party submitted anything in Illinois after the sale to the Debtor. On July 7, 2022, Debtor and his spouse filed a Chapter 13 bankruptcy in U.S. District Court of Kansas (the “Court”), which was converted to a Chapter 7 case. On the date of filing of the bankruptcy, Debtor possessed the vehicle and the Illinois title but had not yet applied for a Kansas title with the KDOR and therefore no certificate of title for the Vehicle had been issued. On November 8, 2022, Debtor submitted an application and KDOR issued a Kansas certificate of title that lists Debtor as the owner and Santander’s security interest in the Vehicle. On August 16, 2023, Santander filed a motion for relief from stay with respect to the Vehicle (on which date the Vehicle was covered by the November 2022 Kansas certificate of title). The Chapter 7 trustee objected to Santander’s motion for reliance from the automatic stay contending that Santander’s security interest was unperfected on the date of the petition and therefore avoidable by the trustee as a hypothetical lien creditor.
Santander claimed Kansas certificate of title law controls because Debtor resided in Kansas, purchased the Vehicle in Kansas from a Kansas dealer and applied for a Kansas title, and Santander properly perfected its security interest under Kansas law by delivering a Notice of Security Interest to KDOR. The trustee disagreed and asserted that Santander’s attempt to perfect in Kansas were without effect because the Vehicle was subject to an Illinois title until the Debtor applied for a Kansas title. The Trustee argued that Debtor’s application for a Kansas title does not relate back and perfect Santander’s security interest because the Vehicle was still subject to the Illinois title when the bankruptcy petition was filed. The trustee contended Santander’s interest would not be perfected because no body took any other steps to perfect the lien in Illinois.
The Court noted that both parties agreed that Kansas choice-of-law rules would govern, but they disagreed about the conclusion reached in applying such choice-of-law. With respect thereto, the Court noted that Kansas Revised UCC § 84 9 303(b) (2022 Supp.) provides that (i) goods become covered by a certificate of title when a valid application for the certificate of title and the applicable fee are delivered to the appropriate authority and (ii) good cease to be covered by a certificate of title at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time the goods become covered subsequently by a certificate of title issued by another jurisdiction. The Court further noted that Kansas Revised UCC § 84 9 303(b) (2022 Supp.) provides the local law of the jurisdiction under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title. According to the Court, the plain language of the statute makes clear that the applicable state law is the law of the jurisdiction that issues the certificate of title covering the Vehicle. With respect thereto, however, two certificates of title covered the Vehicle at varying times. Accordingly, the Court must determine which applicable state law will apply. The Court then noted that, under UCC §84 9 303(b), the Vehicle ceased to be covered by the Illinois certificate of title when the Vehicle became covered by the certificate of title issued by Kansas. Addressing the trustee’s argument that since her rights as a hypothetical lien creditor arose before the application for title was made in Kansas, Illinois law should govern perfection and priority, the Court noted that the timing of when the Vehicle became covered by the Kansas title is not relevant under UCC § 84 9 303. The Court noted that, even if timing were relevant, the statute would still dictate that Kansas law applies. A “certificate of title” is defined in UCC § 84 9 102(a)(10) to mean a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certification as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral. The term includes another record maintained as an alternative to a certificate of title by the governmental unit that issues certificate of title if a statute permits the security interest in question to be indicated on the record as a condition or result of the security interest’s obtaining priority over the rights of alien creditor with respect to the collateral. Official UCC Comment 11 to UCC § 9 102(a)(10) states that the definition of “certificate of title” applies to certificates where a security interest is indicated on the certificate as a condition of perfection and certificates that result in the indication of the security interest on the certificate, such as where delivery of designated documents achieves perfection. Further, the definition of certificate of title includes paper certificate of title, electronic certificates of title maintained by the issuing agency, and a combination of tangible and electronic records. An electronic record so maintained as an alternative to the issuance of a paper certificate of title is a “certificate of title” regardless of whether the certificate of title statute provides that the electronic record is a certificate of title. Kansas provides for perfection under the delivery of designated documents to the KDOR that results in the indication of the security interest on the electronic certificate of title.
The Court concluded that the Notice of Security Interest delivered by Santander acted as a certificate of title under Kansas law, thus the Illinois title ceased to cover the Vehicle. Since this occurred prior to the date of the bankruptcy petition, even if the timing of the bankruptcy could affect the choice of law question, the Notice of Security negated the trustee’s claim that the Vehicle was covered by an Illinois certificate of title on the date of the bankruptcy petition. Because Kansas certificate of title law and Kansas Revised UCC Article 9 applied to the issue of perfection and Santander properly perfected its security interest prior to the Debtor’s bankruptcy filing. Santander’s security interest is therefore superior to the rights of the trustee as a hypothetical lien creditor.
