IN RE: MICHAEL W. JOHNSON DEBTOR, ET AL. V. BRANCH BANKING AND TRUST SIXTH CIRCUIT COMPANY
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2009-SC-000319-CL
IN RE :
MICHAEL W. JOHNSON, DEBTOR, AND
ROBIN BROWNING BROCK, TRUSTEE
V.
UP
DAT
THE UNITED STATES
COURT OF APPEALS FOR THE SIXTH CIRCUIT
NO. 08-5088
BRANCH BANKING AND TRUST COMPANY
OPINION OF THE COURT BY JUSTICE VENTERS
CERTIFYING THE LAW
Pursuant to CR 76 .37(1), this Court granted the certification request of
the Sixth Circuit Court of Appeals to answer the following question of Kentucky
law:
In order to perfect a security interest on a motor vehicle in
Kentucky, does the KRS require physical notation on the actual
certificate of title as ultimately issued by the county clerk, or is
perfection accomplished as and when the required paperwork and
fee are submitted to the county clerk? In other words, does K.R.S .
(sic) 186A.195(5), like § 186A.190, define the acts necessary for
perfecting a security interest in a motor vehicle, or is § 186A.195(5)
designed to operate only as a timing provision for purposes of
determining priority among creditors?
For the reasons stated below, we conclude that under Kentucky law, final
perfection of a vehicle lien does not occur until physical notation is made on
the title pursuant to KRS 186A.190, and, accordingly, perfection is not
accomplished as and when the required paperwork and fee are submitted to
the county clerk. KRS 186A.195(5), on the other hand, while it does address
initiation of the perfection process, is designed primarily as a timing
mechanism for establishing priority among creditors . Compliance alone with
the acts set forth therein does not accomplish perfection.
FACTUAL AND PROCEDURAL BACKGROUND
On February 8, 2005, Michael W. Johnson purchased and took
possession of a 2005 Dodge Ram pickup truck from Jeep
8v
Suzuki Auto World
of Big Stone Gap, Virginia . To finance this purchase Johnson executed an
installment sales contract and security agreement, which was assigned to
Branch Banking and Trust Company (BB&T) . Auto World mailed a title lien
statement, application for certificate of title, and requisite fees by certified mail
to the Letcher County Clerk's office, which was received on February 22, 2005.
For unknown reasons, the clerk's office did not stamp the documents as
received or upload the data into the Automated Vehicle Identification System
(AVIS) database for recordation until March 7, 2005 . The Commonwealth of
Kentucky Transportation Cabinet issued a certificate of title for the truck on
March 25, 2005. The title notates March 7, 2005, as the filing date for BB&T's
lien.
On May 11, 2005, Johnson filed a Chapter 7 bankruptcy petition in the
United States Bankruptcy Court for the Eastern District of Kentucky, Pikeville
Division. Subsequently, Robin Browning Brock, as Trustee in Johnson's
bankruptcy proceeding, initiated an adversary case in the Bankruptcy Court
seeking to avoid BB&T's lien on the pickup truck as being a preferential
transfer as defined under 11 U .S .C . § 547(b) . BB8,T responded that its lien fell
within the safe-harbor exception to a preferential transfer claim as contained in
11 U .S.C. § 547(c)(3), which protects a lien perfected within twenty days of the
debtor taking possession of the property.
The Bankruptcy Court found in favor of BB&T, but the United States
Bankruptcy Appellate Panel for the Sixth Circuit reversed. See In re Johnson,
380 B.R . 455 (B .A .P. 6th Cir. 2007) . Appeal was then taken by BB&T to the
Sixth Circuit Court of Appeals . In light of the conflicting statutory provisions
addressing perfection of a vehicle lien contained in KRS Chapter 186A, the
Sixth Circuit certified the question of law, as stated above, to this Court.
DISCUSSION
Restated, the question we are asked to address is: "when does a vehicle
lien become perfected under the provisions of KRS Chapter 186A?"
KRS Chapter 186A does not contain a definition for "perfection ."' Nor
does KRS Chapter 355, which codifies the Commonwealth's version of the
Uniform Commercial Code . See KRS 355.09-102 (definitions relating to
secured transactions) ; KRS 355.01-201 (general definitions) . Where no specific
definition is provided for terms contained in a statute, Kentucky law instructs
that "words of a statute shall be construed according to their common and
approved usage . . . . In addition, the courts have a duty to accord statutory
1 While we are directed by the parties to the definition of "perfection" as relevant to
federal bankruptcy proceedings, we are asked to answer the certified question under
state law - not to answer the question by reference to the Bankruptcy Code . We
accordingly do not rely upon the Code's specialized definition of perfection .
language its literal meaning unless to do so would lead to an absurd or wholly
unreasonable result." Holbrook v. Kentucky Unemployment Ins. Com'n, 290
S .W .3d 81, 86 (Ky. App . 2009) (quoting Kentucky Unemployment Ins. Com'n v.
Jones, 809 S .W. 2d 715, 716 (Ky. App. 1991); KRS 446.080(4) .
The noun "perfection" is defined as "[v]alidation of a security interest as
against other creditors, us[ually] by filing a statement with some public office
or by taking possession of the collateral ." Black's Law Dictionary 1173 (8th ed.
2004) . The verb "to perfect" is defined as "[t]o take all legal steps needed to
complete, secure, or record (a claim, right, or interest) ; to provide necessary
public notice in final conformity with the law." Id.
As further discussed below, KRS 186A.190 and KRS 186A.195(5) contain
what may reasonably be construed as contradictory language concerning when
a vehicle lien is perfected . In light of the conflicting statutory provisions, our
duty is to construe the statutes so as to ascertain and give effect to the intent
of the General Assembly . In determining legislative intent, we must refer to the
language of the statute and are not at liberty to add or subtract from the
legislative enactment or interpret it at variance from the language used.
Stogner v. Commonwealth, 35 S .W.3d 831, 834 (Ky. App . 2000) . "When the
words of a statute `are clear and unambiguous and express legislative intent,
there is no room for construction or interpretation and the statute must be
given effect as written .' White v. Check Holders, Inc., 996 S .W .2d 496, 497 (Ky.
1999) (quoting McCracken County Fiscal Court v. Graves, 885 S.W.2d 307, 309
(Ky. 1994) .
With the foregoing principles in mind, we now turn to the language of
KRS 186A.190 and KRS 186A .195(5) . We first consider KRS 186A .190. KRS
186A.190 provides, in relevant part, as follows:
(1) Except as provided in subsection (4) of this section and in KRS
355 .9-311(4), the perfection and discharge of a security interest in
any property for which has been issued a Kentucky certificate of title
shall be by notation on the certificate of title. The notation of the
security interest on the certificate of title shall be in accordance
with this chapter and shall remain effective from the date on which
the security interest is noted on the certificate of title for a period
of seven (7) years . . . .
(2) . . . the notation of security interests relating to property
required to be titled in Kentucky through the county clerk shall be
done in the office of the county clerk of the county in which the
debtor resides . . . .
Notwithstanding the existence of any filed financing statement
under the provisions of KRS Chapter 355 relating to any property
registered or titled in Kentucky, the sole means of perfecting and
discharging a security interest in property for which a certificate of
title is required by this chapter is by notation on the property's
certificate of title under the provisions of this chapter . . . . In other
respects the security interest is governed by the provisions of KRS
Chapter 355 .
(emphasis added) .
The plain language of KRS 186A.190 unambiguously establishes that the
"sole means" of perfecting a security interest in a vehicle in Kentucky is by
notation of the lien on the vehicle's certificate of title. Constrained by the
obligation to interpret the language as written, we conclude that perfection
does not occur until the lien is noted on the title certificate . If notation on the
certificate of title is the sole means of perfection, it follows that the tendering of
fees and submission of paperwork under the procedures of KRS 186A .195(5) do
not alone accomplish perfection .
Our interpretation of KRS 186A .190 is strengthened because it
harmonizes with the language of KRS 186A .195(5) . KRS 186A.195(5), provides
as follows:
The security interest noted on the certificate of title shall be deemed
perfected at the time the security interest attaches (KRS 355.9203) if the secured party tenders the required fees and submits a
properly completed title lien statement and application for first title
. . . to the appropriate county clerk within twenty (20) days of
attachment . Otherwise, the security interest shall be deemed
perfected at the time that such fees are tendered and such
documents are submitted to the appropriate county clerk.
(emphasis added) .
The interpretation of the KRS 186A.195(5) urged upon us by BB8sT (that
KRS 186A . 195A provides the time of perfection) fails to give effect to the
statutory language limiting its effect to "[t]he security interest noted on the
certificate of title["
Under the language contained in the first sentence of KRS 186A .195(5), it
is the security interest noted on the certificate of title that is deemed perfected
as of the date the security interest attached2 if the required paperwork and fees
were filed within twenty days of attachment . By the statute's plain language,
2 "A security interest attaches to collateral when it becomes enforceable against the
debtor with respect to the collateral . . . ... KRS 355 .9-203(l) .
this requires that there be notation on the title before the retroactivity
provisions become operative . As such, perfection cannot be said to occur until
notation, though when notation does occur, the perfection may then be deemed
to have occurred at an earlier date. 3 In this vein, if the title is never issued, or
if the title is erroneously issued without notation, perfection does not occur,
which is a further reason why our interpretation is compelled .
It should be noted that our construction of KRS 186A.190 and KRS
186A.195 (5) produces a result consistent with prior law addressing the
e
perfection of a security interest in
a vehicle .
See General Motors Acceptance
Corp . v. Hodge, 485 S .W.2d 894 (Ky. 1972) (Failure of county court clerk to
note automobile finance company's lien on registration receipt issued to person
who sold automobile to defendant rendered the lien unenforceable against
defendant who purchased the automobile without notice of the lien) ; Kentucky
Finance Co. v. Spradlin, 717 S .W .2d 843 (Ky . App. 1986) (Secured creditor who
relied upon debtor's certificate of title, without knowledge debtor had forged
county clerk's name in order to deceive creditor as to existence of prior lien,
was entitled to rely upon certificate for perfection and priority) . Moreover, our
interpretation is consistent with the result previously reached by the Court of
Appeals under current law in Hiers v. Bank One, 946 S .W.2d 196, 198 (Ky.
3 Similarly, while the second sentence of KRS 186A.195(5) refers simply to "the
security interest," in context, it must, like the first sentence, be read to mean "the
security interest noted on the certificate of title." Thus, for filings with the clerk
more than twenty days after attachment, as previously explained, perfection of the
lien does not occur until title notation, at which time perfection would be deemed
retroactive to the time of the submission of the paperwork and tendering of fees
with the county court clerk.
App . 1996) (KRS 186A.190(2) and KRS 355 .9-302(3) clearly and
unambiguously provide that, as to any property for which a certificate of title is
required by KRS Chapter 186A, a security interest in that property may be
perfected or discharged only by a notation in that vein on the certificate of
title.)
In summary, under Kentucky law, perfection of a vehicle lien does not
occur until physical notation is made on the title pursuant to KRS 186A .190,
and, accordingly, perfection is not accomplished as and when the required
paperwork and fee are submitted to the county clerk. KRS 186A.195(5), while
it does address initiation of the perfection process, is designed primarily as a
timing mechanism for establishing priority among creditors under which
perfection may be deemed to have occurred prior to notation on the title .
The law is hereby certified to the Sixth Circuit Court of Appeals.
Minton, C.J., Abramson, Schroder and Scott, JJ., concur . Noble, J.,
dissents by separate opinion in which Cunningham, J ., joins.
NOBLE, J., DISSENTING : Respectfully, I dissent .
I believe the majority view misreads the statutes at issue in this
certification of law question from the Sixth Circuit. First, it is not clear on
which date perfection would occur, either by operation of law or fact, under the
majority's view, though I think the statutes are clear as to when perfection, as
a matter of law, occurs. I also do not agree that KRS 186A.195 was enacted
primarily to deal with priorities among multiple liens, but I believe it is instead
a general timing statute, applicable to any question about timing of perfection
in titled vehicles, including the question presented in this case.
Chapter 186A is named the "Automated Motor Vehicle Registration
System ." Because Kentucky has chosen to use an efficient, automated method
of requesting and issuing vehicle titles (the Automated Vehicle Identification
System, commonly called AVIS, certain timing issues inherent in the use of an
automated system require the legislature to draft accordingly, and outside the
Uniform Commercial Code, Chapter 355 of the Kentucky Revised Statutes.
Using the automated title system creates a timing problem that the
legislature recognized would impact vehicle sales under the Uniform
Commercial Code. This problem manifests itself through the necessity of
having a clerk log the requisite documents into AVIS, and the inability to fine
tune input into AVIS that adequately covers the nuances of commercial sales
law. To harmonize with the commercial code, the legislature enacted KRS
186A.195 to allow perfection to occur as it normally would, but for the timing
problems inherent in using an automated system such as AVIS .
KRS 186A.190 establishes how "the perfection and discharge of a
security interest" in titled property must be established: "by notation on the
certificate of title," which "shall be in accordance with this chapter ." The latter
language, however, is a flag to indicate that other provisions in the chapter
come into play. This statute standing alone does not say anything about when
a security interest is perfected. That is left to KRS 186A .195 .
KRS 186A.195 is not specifically about priorities . By its heading, it
purports to govern "perfection of a security interest ." At subsection (5), the
statute deals with time, and states that the security interest noted on the title
"shall be deemed perfected at the time the security interest attaches,"
(emphasis added), as defined by KRS 355 .9-203 . That statute says the security
interest attaches when it is enforceable against the debtor : when value is
given, the debtor has rights in the collateral or the power to transfer rights in
the collateral to a secured party, and the debtor has authenticated a security
agreement that provides a description of the collateral . See KRS 355.9-203(2) .
Ordinarily, this occurs upon the debtor's entry into a valid contract for
purchase of the vehicle and taking possession of the vehicle .
However, KRS 186A.195(5) also adds the requirement that the secured
party must have tendered the required fees and submitted a properly completed
title lien statement and application for first title if the vehicle is new, or the
certificate of title if it is used, before the date of attachment can be deemed to
be the date of perfection. Thus, when the perfection occurs is determined in
part based on completion of the elements listed in KRS 186A.195(5) . That
certainly will be a date earlier than the date on which the Department of
Transportation actually makes a notation on the title . These steps listed in
this statute all precede the submission of a request for title through AVIS by
the county clerk.
-
Usually, the county clerk submits the title request to AVIS the day the
above documents are filed by the lienholder, and that is the date shown on the
title for perfection . But when the clerk delays, as happened here, the date on
the title will come back from AVIS showing the date the clerk logged the
documents into AVIS, which will be different than when the security interest
attached . This is where the operation of KRS 186A .195(5) comes into play.
If everything has been tendered to the clerk within 20 days of
attachment, by operation of law perfection will be deemed to have occurred as
of the date of attachment. This date is readily ascertainable from -the
documents tendered.
If the title lien statement and application for first title or title are filed
and the appropriate fees are paid after 20 days, then perfection will be deemed
to have occurred "at the time" all three have been tendered to the county clerk.
It is notable that the legislature did not state that the operative date was when
the clerk filed the documents into AVIS, but rather when the materials were
actually given to the clerk .
Thus there is no conflict between KRS 186A .190 and KRS 186A.195(5) .
Indeed, the latter statute complements the first, and establishes the date of
perfection (when) as the date of attachment when all necessary items are
tendered to the clerk. However, I agree with the majority that before a proper
time of perfection can be established, there must be a notation of perfection on
the title itself. That is because notation of perfection will not occur until the
fees have been paid, and the lien statement and application for title, or title if
the vehicle is used, have been tendered to the clerk, because the clerk will not
input anything into AVIS until then . The date used in the notation of title will
be an adequate notation that there actually is perfection.
Consequently, the notation of perfection date on the title will be the date
the clerk enters the necessary documents into the AVIS system . However, the
legal date of perfection will be deemed to be either the date of attachment if
documents are tendered within 20 days of attachment or the date all
documents are actually tendered if after 20 days of the date of attachment .
Thus while the date noted on the title will probably not be the legal date of
perfection, it is necessary that it be done so that the legal date of perfection can
be fixed.
In situations such as this one, KRS 186A.195(5) determines the legal
date of perfection . Naturally, it would also answer questions of priority
regarding titled vehicles, as it fixes the time of perfection, but that is not an
issue in this case.
Cunningham, J., joins.
COUNSEL FOR ROBIN BROWNING-BROCK, TRUSTEE:
Carole M. Friend
Friend and Associates, PSC
130 N . Hamilton Street
Suite 203
Georgetown, KY 40324
COUNSEL FOR BRANCH BANKING AND TRUST COMPANY:
Christopher A . Conley
James H. Moore, III
Campbell, Woods, PLLC
1608 Carter Avenue
P O Box 1862
Ashland, KY 41105-1862
CLERK FOR THE SIXTH CIRCUIT:
Leonard Green
Clerk for the Sixth Circuit
United States Court of Appeals
532 Potter Stewart U.S . Courthouse Building
100 E. Fifth Street
Cincinnati, OH 45202-3988
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