Sovereign Bank v. Hepner (In Re Roser)
72 U.C.C. Rep. Serv. 2d (West) 766, 613 F.3d 1240, 64 Collier Bankr. Cas. 2d 96 (2010)
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Rule of Law:
A purchase-money security interest in a motor vehicle, perfected under a state's certificate-of-title act within the 20-day grace period provided by the Uniform Commercial Code (UCC), has priority over the interest of a bankruptcy trustee, even if the debtor files for bankruptcy after receiving the vehicle but before the creditor perfects its interest. Such post-petition perfection is not a violation of the automatic bankruptcy stay.
Facts:
- On May 19, 2007, Sovereign Bank provided a secured loan to Robert James Roser for the purchase of a motor vehicle.
- Roser took possession of the vehicle on that same day, May 19, 2007.
- Twelve days later, on May 31, 2007, Roser filed a voluntary petition for Chapter 7 bankruptcy.
- Nineteen days after Roser took possession, on June 7, 2007, Sovereign Bank filed its lien on the vehicle in compliance with the Colorado Certificate of Title Act.
Procedural Posture:
- The bankruptcy trustee sought to avoid Sovereign Bank's lien in the U.S. Bankruptcy Court for the District of Colorado.
- The bankruptcy court held that the trustee could avoid the lien and that the Bank's post-petition perfection violated the automatic stay.
- Sovereign Bank, as appellant, appealed the decision to the U.S. District Court for the District of Colorado, with the trustee as appellee.
- The district court affirmed the bankruptcy court's judgment.
- Sovereign Bank, as appellant, then appealed to the U.S. Court of Appeals for the Tenth Circuit, where the bankruptcy trustee is the appellee.
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Issue:
Does the priority rule in the Colorado Uniform Commercial Code, which grants a 20-day grace period for perfecting a purchase-money security interest, apply to motor vehicle liens governed by the Colorado Certificate of Title Act, thereby giving a lender's lien priority over a bankruptcy trustee's interest when perfection occurs after the bankruptcy filing but within the grace period?
Opinions:
Majority - Hartz
Yes, the Colorado Uniform Commercial Code's priority rule applies. The court reasoned that the Colorado Certificate of Title Act (CCTA) supersedes the Colorado UCC only on procedural matters of 'filing, recording, releasing, renewal, and extension' of liens, not on the substantive issue of priority. The UCC provision, § 4-9-317(e), governs the priority of a lien and is not inconsistent with the CCTA, which dictates the method of perfection. Because the Bank perfected its purchase-money security interest within the UCC's 20-day grace period, its interest has priority over the trustee's interest, which is treated as arising at the time of the bankruptcy filing. Furthermore, the Bank's post-petition perfection did not violate the automatic stay under 11 U.S.C. § 362(a) because it falls within the exception of § 362(b)(3), which allows for perfection when a 'generally applicable law' like the UCC's grace-period rule makes the perfection effective against earlier-acquired rights.
Analysis:
This decision harmonizes the relationship between the general commercial rules of the UCC and specific state statutes governing motor vehicle titles. It clarifies that a specific statute for perfecting liens on certain collateral (like the CCTA) does not automatically displace the UCC's general rules on the priority and effect of that perfection. This provides critical certainty for lenders, confirming that the UCC's purchase-money security interest grace period protects them against intervening bankruptcy filings, thereby reducing the risk associated with financing vehicle purchases. The ruling reinforces the principle that a 'generally applicable law' providing for relation-back perfection is respected in bankruptcy proceedings.
