Banks may need to begin implementing new administrative procedures to ensure all liens are immediately recorded according to a recent decision by the Kentucky Supreme Court.

On June 17, 2010, the Supreme Court of Kentucky ruled that a security interest on a titled motor vehicle is not perfected until the lien is actually notated on the title even if all of the proper filings have been made with the respective County Clerk. Johnson v. Branch Banking & Trust Co., __ S.W.3d __, 2010 WL 2470849 (Ky. June 17, 2010). In that case the Debtor purchased and took possession of a car financed by a purchase money lender on February 8, 2005. Within 9 days after the loan was made by the Bank, the Bank sent in the title documents and fee to the County Clerk to note the lien on the title certificate. The County Clerk received the mailed documents and fee 5 days later on February 22, 2005. However, the County Clerk did not note the lien on the title until March 7, 2005, almost 2 weeks later. Less than 90 days later, on May 11, 2005, the Debtor filed for chapter 7 Bankruptcy. The chapter 7 Trustee sought to avoid the lien as a preferential transfer. The Bank argued that perfection occurred when it sent all of the necessary title documents to the County Clerk for recordation, which would have put the Bank within the 20-day window under the loan enabling exception to preferential transfers. Brock v. Branch Banking & Trust (In re Johnson), 380 B.R. 455, 458-59 (B.A.P. 6th Cir. 2007). See 11 U.S.C. § 547(c)(3).

The bankruptcy Judge concluded that perfection occurred on February 22, 2005, when the County Clerk received the required paperwork and fee. However, the bankruptcy appellate court overturned this decision holding that perfection did not occur until March 7, 2005, when the security interest was actually noted on the certificate of title. The Bank appealed this decision.

The question regarding when perfection occurred went all the way to the Sixth Circuit. The Sixth Circuit ended up certifying this question as a state law question to the Kentucky Supreme Court. The Kentucky Supreme Court ruled as follows:

“Under Kentucky law, final perfection of a vehicle lien does not occur until physical notation is made on the title…, and accordingly, perfection is not accomplished as and when the required paperwork and fee are submitted to the County Clerk.” Johnson, at *1.

The Sixth Circuit rubber stamped the Kentucky Supreme Court decision and held in favor of the Trustee, affirming that because perfection did not occur within 20 days after Debtor received possession of the truck, the enabling loan exception did not protect the Bank’s interest from avoidance as a preferential transfer. Brock v. Branch Banking & Trust (In re Johnson), 611 F.3d 313 (6th Cir. 2010).

The Kentucky Bankers Association is looking into correcting this ruling during session. In the meantime, all banks may want to institute a policy that ensures that the County Clerk (or Kentucky Secretary of State, as applicable) records all security interests and liens immediately.