Summary of a Recent
Judicial Development in
Secured Transactions

Bankruptcy Appellate Panel Affirms Decision to
Avoid Improperly Perfected Lien

Kaleb K. Hennigh
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Gaylord Grain LLC, 306 B.R. 624, (B.A.P. 8th Cir. 2004), the United States Bankruptcy Appellate Panel for the Eight Circuit affirmed a bankruptcy court decision to declare a lender's interest in collateral avoidable and upheld the sale of secured property by the bankruptcy trustee free of the lender's lien.

Background

On August 12, 1999, Gaylord Grain LLC (hereinafter debtor) obtained financing through a commercial security agreement with Union Planters Bank (hereinafter lender). See id. at 626. The lender listed the collateral covered by the security agreement as consisting of "all equipment, farm products, livestock and farm equipment." Id. On August 16, 1999, the lender filed UCC Form No. 1 with the appropriate recorder of deeds listing the same covered collateral, and on August 20, 1999, the lender filed a similar UCC Form No. 1 with the Missouri Secretary of State. See id.

On August 21, 2002, the debtor a filed petition seeking Chapter 7 relief. See id. On May 7, 2003, the trustee filed a motion with the court to sell the debtor's personal property "free and clear" of existing liens on property, which included a 1984 Mack Tractor and a 1986 Timpte Trailer. See id. The bankruptcy court granted the trustee's motion allowing the sale. See id. The lender appealed the court's decision and claimed an interest in the proceeds of the tractor and trailer. See id.

Under Mo. Stat. § 301.600(2), "[a] lien or encumbrance on a motor vehicle or trailer is perfected by the delivery to the director of revenue of the existing certificate of ownership . . . an application for a certificate of ownership containing the name and address of the lienholder and the date of his security agreement . . . ." Id. Under § 301.650(2), "[t]he method provided in sections 301.600 to 301.660 of perfecting and giving notice of liens and encumbrances subject to sections 301.600 to 301.660 is exclusive." Id. The tractor and trailer were classified as motor vehicles by the bankruptcy court. See id. at 628. The bankruptcy court held that the lender's perfected security interest did not secure the tractor or trailer. See id. The lender appealed the bankruptcy court's decision to the Eight Circuit Bankruptcy Appellate Panel. See id.

Arguments

The lender argued that it had a perfected security interest in the tractor and trailer because the tractor and trailer could also be classified as equipment. See id. Therefore, the lender asserted it had the option to perfect its security interest by either filing a certificate of ownership, or by filing financing statements with the secretary of state's office and the appropriate recorder of deeds. See id.

Analysis and Holdings

The appellate panel disagreed with the lender and stated that Mo. Stat. § 301.650(2) contained the exclusive method of perfecting motor vehicles, and that "[t]he filing provisions of the Missouri Uniform Commercial Code ha[d] no application to motor vehicles and perfection of liens therein." Id.

In making its final determination that the trustee was "entitled to sell the property free of the lien," the BAP addressed issues regarding the trustee's ability to initially sell the property. See id. The appellate panel reviewed the language of 11 U.S.C. § 363(f)(4) that provides: "[t]he trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if . . . (4) such interest is in bona fide dispute." Id. at 627. The BAP held that because the trustee provided an "objective basis for avoiding the liens," a bona fide dispute was present in the underlying action which properly allowed the trustee to sell the tractor and trailer in accordance with 11 U.S.C. § 363(f)(4). See id.

The appellate panel held that the lender failed to properly perfect the property, and the lender's lien on the truck and trailer were avoidable. See id. at 630. The BAP ruled that because the lien was avoidable and because a bona fide dispute was present, "[t]he trustee was entitled to sell the property free of the lien." Id. The appellate court further declared the appeal by the lender to be frivolous and ordered sanctions. See id.

The case was decided on March 9, 2004; this summary was posted Nov. 9, 2004.