What should be the remedy when a bankruptcy court holds that a security interest is avoidable as a preferential transfer, but the value of the security interest is not readily ascertainable? The Ninth Circuit recently addressed this issue in USAA Federal Savings Bank v. Thacker (In re: Taylors), 2010 U.S. App. LEXIS 5793 (9th Cir. 2010). The Court held that, since the value of the security interest was not readily ascertainable, the only available remedy is for the bankruptcy court to return the security interest itself, not its value, to the bankruptcy estate.
In In re: Taylors, the Taylors purchased a Toyota Camry on August 30, 2005 for $19,500. They borrowed $18,020 from USAA Federal Savings Bank (“USAA”) and used that money, as well as their trade-in vehicle, to purchase the Camry. The Taylors granted USAA a purchase money security interest in the Camry. USAA perfected this security interest 21 days later, which was valid under Idaho law. See Idaho Code § 49-504 (creditor must file title application and all supporting documents within 30 days after the delivery of the vehicle).
Then, just four weeks later, the Taylors filed for bankruptcy. In February 2007, Thacker, the bankruptcy trustee, filed suit against USAA seeking to avoid the transfer of the security interest under 11 U.S.C. § 547(b). Thacker argued that the perfection was invalid because it did not occur within 20 days, as required by 11 U.S.C. § 547(c). The following August, the bankruptcy court granted the motion, holding that the value of the security interest was the full value of the loan. The bankruptcy court cancelled the security interest, entered judgment against USAA for $18,020 plus interest, and ordered USAA to pay an additional $18,020 into the bankruptcy estate. The bankruptcy court then allowed USAA to file an unsecured debtor’s claim for the second $18,020 loan, plus interest. The end result, then, was that “(1) the bankruptcy estate was allowed to keep the car and the original loan obligation of $18,020 used to purchase the car; (2) USAA was allowed to keep its valid lien, or security interest, in the car; (3) USAA was ordered to loan the bankruptcy estate another $18,020; and (4) USAA received an unsecured claim against the estate for the fresh loan of $18,020.” In re: Taylors, 2010 U.S. App. LEXIS 5793, at *11. The Bankruptcy Appellate Panel affirmed.
On appeal, the Ninth Circuit held that the bankruptcy court erred in determining that the value of the security interest was readily ascertainable; i.e., the security interest was not worth the amount of the loan. Id. at *30. The Ninth Circuit explained that the bankruptcy court was “attempting to correct for the difference between the value of the security interest at the time of the transfer (September 20, 2005) and the value of the security interest at the time of judgment (August 10, 2007).” Id. at *25. The Ninth Circuit agreed that the value of the security interest was related to the value of the secured asset and that both had depreciated over time. Likewise, the value of the security interest declined as the Taylors continued to make payments on the loan. Id.
The Ninth Circuit did not agree that the security interest was worth the full value of the loan. Instead, the Ninth Circuit opined that the value of the Camry, and therefore, the security interest, began to decline the moment the Taylors drove the Camry off the lot. Id. at 28. Thus, the Court held that the value of the security interest was not readily ascertainable at the time of the bankruptcy filing and the only available remedy was to return the security interest to the bankruptcy estate. Id. at 30 (citing Rodriguez v. Daimlerchrysler Financial Services, LLC (In re Bremer), 408 B.R. 355, 359 (10th Cir. BAP 2009) (where the value of the property is not readily ascertainable, proper remedy is to return the security interest to the estate, not award an estimate of the value of the property)). The Ninth Circuit also held that USAA was entitled to the return of the second loan amount it was ordered to pay into the bankruptcy estate. In re: Taylors, 2010 U.S. App. LEXIS 5793, at *26. The Ninth Circuit then remanded to the bankruptcy court the issue of whether the Taylors’ payments made after they filed bankruptcy should be returned to the bankruptcy estate. Id. at *31.