Proper perfection of a lien is critical because typically an unperfected lien can be avoided in a bankruptcy using the strong arm powers in Section 544 of the Bankruptcy Code. In Pierce a lender provided purchase money financing for the debtor’s acquisition of a manufactured home in Kentucky. It submitted an application and obtained a notation of its lien on the certificate of title for the home. That should be sufficient – right? Unfortunately for the lender, the answer was no.
The court noted that the Kentucky Supreme Court previously held that a lien is not perfected until it is actually noted on the certificate of title for the manufactured home. However, the state court had not addressed the consequences of a procedural deficiency in filing the application for the lien, nor had it addressed the details of the required procedures.
As an initial matter, the court addressed the consequences of a procedural deficiency in filing the lien application. The applicable statute provides that the notation “shall be in accordance with this chapter.” According to the Pierce court, a “plain reading” of this provision means that if proper procedures are not followed then the resulting notation is not sufficient to perfect the lien.
In this case the lender filed its application for a lien in the county where the dealer’s principal place of business was located as opposed to the county where the purchaser resided. It argued that this was proper because the statute established a “two-track” system, pointing to the statutory provision that allows the application for the first certificate of registration or title to be made in either the county where the purchaser resides or the county where the dealer’s principal place of business is located. The lender argued that the option to file title or registration outside of the purchaser’s county of residence also applied to notation of a lien on title.
The court rejected that argument. It noted that the section authorizing filing in alternate counties only addressed applications for certificate of title or registration. “In stark contrast, [the statute] is silent as to whether title lien statements may be filed outside the county of the debtor’s residence.” The court asserted that if the state legislature had intended to allow filing in an alternate county, “it would have made that point explicit.”
In determining the meaning of the statute the court also examined the following sentences from the statute:
When purchaser of a vehicle upon which a lien is to be recorded is a resident of a county other than that of the dealer, the application for registration or title may be made to the county clerk in either county. The lien must be recorded in the county of the purchaser’s residence.
The lender argued that there was a difference between the proper place for recording a lien and a permissible place for filing an application for the lien, so that the second sentence did not resolve where the application could be filed. However, the court disagreed and concluded that “the juxtaposition of these two sentences signals the Kentucky General Assembly’s intention that title lien statements be filed in the county of the debtor’s residence even if the initial application for certificate of title or registration is filed in another county under KRS 186A.120(2)(a).”
The net result of the court’s parsing of the statute was that even though the lien was noted on the certificate of title for the manufactured home, the lien was deemed to be unperfected because the application was filed in the wrong county and thus the lien could be avoided.
This case underlines the fact that issues that may appear to be merely minor technicalities can have significant consequences, particularly in the context of a bankruptcy. The Pierce case is but one more example that the failure to follow precisely the procedures required to properly perfect a lien can result in the lien being avoided.