KSB

Judge Somers

08-05284 Parks v. Herrman et al (Doc. # 46)

Parks v. Herrman et al, 08-05284 (Bankr. D. Kan. Oct. 26, 2009) Doc. # 46

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SO ORDERED.
SIGNED this 23 day of October, 2009.


________________________________________
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Opinion designated for print publication and on-line use.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:
IVAN M. HERRMAN and
ELNORA S. HERRMAN,
DEBTORS.

LINDA S. PARKS, Trustee,

PLAINTIFF,

v.
CATHOLIC FAMILY FEDERAL

CREDIT UNION,
IVAN M. HERRMAN, and
ELNORA S. HERRMAN,

DEFENDANTS.

CASE NO. 8-11781
CHAPTER 7

ADV. NO. 08-5284

MEMORANDUM OPINION AND ORDER
DENYING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AND
GRANTING DEFENDANT CATHOLIC FEDERAL CREDIT UNION'S
MOTION FOR SUMMARY JUDGMENT


Case 08-05284 Doc# 46 Filed 10/26/09 Page 1 of 10


This is an adversary proceeding brought by the Chapter 7 Trustee to avoid the lien of
defendant Catholic Family Federal Credit Union (“Credit Union”) in Debtor's 1999 GMC
Suburban pursuant to 11 U.S.C. § 544 and to preserve the lien for the benefit of the estate
pursuant to 11 U.S.C. § 550. Under advisement are the cross motions for summary judgment
filed by the plaintiff Trustee, who appears by Scott M. Hill and Rachel E. Avey of Hite, Fanning
& Honeyman L.L.P., and by defendant Credit Union, represented by Eric D. Bruce, Bruce,
Bruce & Lehman, L.L.C. There are no other appearances. The Court has jurisdiction.1
UNCONTROVERTED FACTS.

On December 30, 1988, Debtors entered into a credit agreement and truth-in-lending
disclosure, called a Loanliner Agreement, with Credit Union. On February 9, 1999, Debtors
requested an advance under the 1988 Loanliner Agreement by signing an Advance Request
Voucher and Security Agreement for a loan of $36,522.90 for the purchase of a 1999 GMC
Suburban, which was offered as security for the loan. The loan, which provides for monthly
payments of $738.00,2 was approved, and the vehicle was purchased. The original certificate of
title issued on March 17, 1999 shows the lien of the Credit Union. The 1988 Loanliner
Agreement provides: "Property given as security under this Plan or for any other loan may
secure all amounts you owe the credit union now and in the future," and the 1999 Advance

1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of
Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K). There is no objection to
venue or jurisdiction over the parties.

2 There is no evidence as to when this loan would be fully amortized and no evidence of when it
was paid in full.

2

Case 08-05284 Doc# 46 Filed 10/26/09 Page 2 of 10


Request Voucher and Security Agreement provides that the security interest granted in the 1999
GMC "also secures any other advances you have now or receive in the future under the
LOANLINER Credit Agreement and any other amounts you owe the credit union for any reason
now or in the future." There is no evidence of the loan balance or payment history of this loan.

On August 6, 2003, Debtors entered into a new Loanliner credit agreement, called a
Loanliner Open-End Agreement, with Credit Union. They also executed an Open-End Voucher
for a loan of $19,659.50 and signed a security agreement pledging the GMC Suburban as
collateral.3 No actions were taken in 2003 to perfect the lien in the Suburban. The payment
terms provided for monthly payments of $338, with the due date of September 6, 2003. There is
no evidence as to the loan balance or payment history on this loan.

Debtors filed for relief under Chapter 7 on July 22, 2008. On Schedule D they listed the
Credit Union as having a claim of $4,296.25, secured by the GMC Suburban. The records of the
Department of Revenue reflect that as of July 22, 2008, the Credit Union had a perfected lien in
the GMC Suburban.

On November 14, 2008, the Trustee filed her complaint alleging that the Credit Union's
lien in the GMC Suburban may be avoided because it was not perfected on the date of filing. The
basis for her contention is the uncontroverted fact that at sometime after being perfected in
March 1999, the Credit Union executed the lien release on the front of the certificate of title for
the Suburban. The certificate of title was retained in the Credit Union's files and was never
delivered to the Debtors or submitted to the Department of Revenue.

3 There is no evidence as to the purpose of this loan or how, if at all, it relates to the 1999 loan for
purchase of the Suburban.

3

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The Trustee submits that the release was executed on September 8, 2000. This position
is based upon the Credit Union's admission on April 8, 2009 of the following statement in
requests for admissions submitted to it by the Trustee: "REQUEST NO. 4: Admit that on
September 8, 2000, Credit Union executed a lien release in the space provided on the certificate
of title." However, on June 18, 2009, the Credit Union served on the Trustee a supplemental
answer to the Trustee's requests for admissions in which it admitted as follows: "REQUEST NO.

4: Admit that on September 8, 2004, Credit Union executed a lien release in the space provided
on the certificate of title." The Court has examined a copy of the certificate of title and has
concluded that date of the release is very difficult to read.4 As the Trustee notes, the Credit
Union's supplement to its response to the request for admission was not submitted in accord
with the procedure provided by Fed. Rule of Bankr. P. 7036(b), since leave of court was not
requested. Nevertheless, the Court finds that Credit Union should not be bound by its original
admission.5 Rule 36(b) authorizes the withdrawal or amendment of an admission when it would
promote the presentation of the merits of the action and the court is not persuaded that it would
prejudice the opposing party in maintaining the action on the merits. This Court finds those
conditions satisfied and the failure to seek Court approval not a sufficient basis to deny
amendment. When a supplemental response to admissions has been served, discovery rules
should not be applied to require the Court to treat as uncontroverted a date which is
demonstrably difficult to determine. The Court therefore finds that date the lien release on the
front of the certificate of title was executed is controverted.
4 The certificate of title is notarized. It states that the commission expires in 2004, on a day which
is difficult to read, but could be after the date which the Trustee contends the lien release was executed.
5 See Reyes v. Vantage S.S. Co., Inc., 672 F.2d 556, 557-58 (5th Cir.1982).
4

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ANALYSIS.

The determinative question in this case is whether a secured creditor's execution of the
release of lien form on a paper certificate of title terminates perfection when, after the execution
of the release, the certificate of title is maintained by the creditor and not delivered to the debtor
or sent to the division of motor vehicles. The date the lien release was executed is not material
to this issue.

In Kansas, a lien on a motor vehicle may be perfected only through compliance with the
motor vehicle certificate of title statutes.6 Generally, the perfection, duration, and renewal of a
security interest in such property is determined by compliance with such statutes, but in other
respects that security interest is subject to article nine of the Uniform Commercial Code.7 When
the Credit Union was granted a security interest in the GMC Suburban in 1999, certificates of
title were paper documents and liens were perfected by the Department of Revenue through the
Division of Motor Vehicles issuing a paper certificate of title showing the name of the secured
party on the face of the certificate.8 The certificate of title included a space for the release of
lien.9 The parties agree that the Credit Union properly perfected its security interest in 1999, as
evidenced by the certificate of title in its possession and the records of the Division.

Termination of a motor vehicle lien and release of perfection of a lien in a vehicle are

6 In re Hicks, 491 F.3d 1136 (10th Cir. 2007); see K.S.A. 2008 Supp. 84-9-303; K.S.A. 2008
Supp. 84-9-311; K.S.A. 2008 Supp. 8-135.

7 K.S.A. 84-9-302 (Furse 1996); K.S.A. 2003 Supp. 84-9-311.

8 K.S.A. 1999 Supp. 8-135.

9 Id.

5

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also governed by the certificate of title statutes.10 Effective January 1, 2003, Kansas shifted from

paper certificates of title to electronic certificates of title for the purpose of lien notation.11

However as to vehicles, such as the GMC Suburban in this case, for which certificates of title

were issued prior to such date that indicated a lien or encumbrance was on such vehicle, the

paper certificate of title continued to be effective.12 There is therefore no need to consider the

procedures for release of liens under the electronic title system.

The Kansas motor vehicle title statute provides little detail concerning the procedure for

releasing liens. It is primarily concerned with when a lien release must be provided, a matter

which is not at issue in this case. In both 2000 and 2003 it provided as follows:

. . . When a prior lienholder’s name is removed from the
title, there must be satisfactory evidence presented to the division
that the lien or encumbrance has been paid. When the
indebtedness to a lienholder, whose name is on the title, is paid in
full, such lienholder within 10 days after written demand by
restricted mail, shall furnish to the holder of the title a release of
lien or execute such a release in the space provided on the title.
For failure to comply with such a demand the lienholder shall be
liable to the holder of the title for $100 and also shall be liable for
any loss caused to the holder by such failure. When the
indebtedness to a lienholder, whose name is shown on the title, is
collected in full, such lienholder, within 30 days, shall furnish
notice to the holder of title that such indebtedness has been paid in
full and such title may be presented to the lienholder at any time
for release of lien.13

10 See K.S.A. 84-9-302 (Furse 1996); K.S.A. 2003 Supp. 84-9-311.
11 K.S.A. 2003 Supp. 8-135d.
12 K.S.A. 2003 Supp. 8-135(c)(1) - (14).
13 K.S.A. 2000 Supp. 8-135; K.S.A. 2003 Supp. 8-135.


6

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As to the procedure for releasing a lien, the foregoing establishes that first a release of lien
document or the title with the release space executed is to be furnished to the holder of the title.
Second, the holder of the title may then submit the title and the release to the Division, which
upon proof of satisfactory evidence that the lien has been paid in full, will remove the
lienholder’s name from the title. In this case, although the lien release on the title was executed,
the title was not delivered to either the Debtors or the Division, and the Credit Union’s lien
remained of record in the Division of Motor Vehicles.

The Trustee’s position is that the lien was terminated not withstanding the fact that the
Credit Union retained the title after executing the release. An unpublished decision of this
Court, In re Haberman,14 is cited for support. In Haberman, a bank’s lien had been noted on the
certificate of title of a 1980 Pontiac. In 1996, a bank officer signed the lien release notation on
the title and delivered it to the debtors, who did not submit it to the Department of Revenue. In
2001 debtors gave the bank a new security interest in the Pontiac to secure a new debt and gave
the title to the bank, which put it in a collateral box. In a lien avoidance action brought by the
trustee, the Court held that the lien was unperfected, even though the records of the Department
of Revenue for the Pontiac showed the bank as the secured party. The Court stated:

 At first glance, it might seem incongruous to hold that the
Bank’s lien is unperfected in this case. The records of the Division
show that the Bank has a lien, and the Bank has the certificate of
title that shows its lien release in a box under its control.
However, in Kansas, taking possession of a title does not perfect a
lien on a vehicle. The Court is not required to answer the question
whether the Bank would have a perfected lien if it had never
executed the lien release on the title before it made the new loan

14 Morris v. St. John Nat’l Bank (In re Haberman), 2004 WL 2035341 (Bankr. D. Kan., Somers,
J., April 14, 2004), aff’d 347 B.R. 411 (10th Cir. BAP 2006), aff’d 516 F.3d 1207 (10th Cir. 2008).

7


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and the Debtors gave it a new security interest in the car. In this
case, the Bank did execute the lien release. By doing that, the
Bank left open a way for the Debtors to obtain a lien-free title.
The Title Statute includes a provision indicating that a lienholder’s
name will be removed from a title when the owner presents
“satisfactory evidence . . . to the division that the lien or
encumbrance has been paid.” Although they gave the original to
the Bank, the Debtors might have kept a copy of the certificate
showing the lien release. If they did, they could have taken it to
the Division (maybe along with other evidence showing they had
paid off the old lien), and have convinced the Division they were
entitled to a certificate of title with no lien notation simply by
failing to mention the new lien they had given the Bank. On the
other hand, if the Bank had followed the requirements of the Title
Statute for its new lien, the Debtors would not have had the chance
to get a lien-free title because the Division’s records would have
shown that the new lien was created after the lien release was
added to the old certificate of title, and that any other poof of
payment the Debtors had was for the old lien.15

This case is clearly distinguishable from Haberman, since in this case the title was not delivered

to the Debtors after the lien release was executed. The return of the title in Haberman was a

clear indication that both the creditor and the debtor intended to terminate the perfected security

interest and that a new security agreement and perfection would be obtained if the vehicle in

question was to secure a new advancement or loan. In this case no such indication arises since

the title was retained by the Credit Union. The rationale of Haberman, that the bank’s actions

would have made it possible for the debtors to obtain a clean title after they executed a second

security agreement,16 does not apply here. Since the Credit Union retained the title certificate

and never delivered it to the Debtors after the lien release was executed, the Debtors could not

have obtained a clean title while indebtedness was outstanding.

15 Id., 2004 WL 2035341 at *4.
16 The Court notes that Kansas has shifted from paper to electronic certificate of titles. The issues
presented by this case and by Haberman are not likely to arise in the future.
8

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The ruling that a lien release is not effective when the secured party retains the certificate
of title on which the release is executed is consistent with the provisions of Article 9 concerning
the termination of security interests perfected through filing. Article 9 defines a termination
statement as “an amendment to a financing statement” which identifies the financing statement
to which it refers and “indicates either that it is a termination statement or that the identified
financing statement is no longer effective.”17 It further provides that upon “filing of a
termination statement with the filing office, the financing statement to which the termination
statement relates ceases to be effective.”18 Filing of the termination statement is required; the
execution of a release which is held by the secured party is not effective to terminate perfection.

The Court therefore holds that the Credit Union’s lien in the GMC Suburban was
perfected on the date of filing. The lien was perfected in 1999 through compliance with the
procedures established by Kansas law for perfection of liens in property subject to the Kansas
certificate of title statute. The lien was reflected in the records of the Division. The release
executed by the Credit Union was not effective to terminate perfection because it was held by the
Credit Union and not delivered to the Debtors or submitted to the Division. Perfection therefore
continued from 1999 through the date of filing. When executing a new loan in 2005 and taking a
new security agreement, the Credit Union was not required to comply with the certificate of title
statute procedures for perfection through delivering the certificate of title, an application, and a
fee to the Division. The Credit Union already had a perfected security interest in the GMC
Suburban.

17 K.S.A. 2008 Supp. 84-9-102(79).
18 K.S.A. 2008 Supp. 84-9-513(d).
9


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For the foregoing reasons, the Court grants the Credit Union’s motion for summary
judgment finding that the Trustee may not avoid the Credit Union’s lien in the 1999 GMC
Suburban on the grounds that it was unperfected on the date of filing.

The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of
the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the Federal Rules of
Civil Procedure applicable to this matter. A judgment based upon this ruling will be entered on a
separate document as required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule
of Civil Procedure 58.

IT IS SO ORDERED.
###


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