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A Trustee Avoids Defendant’s Lien on Property as a Preferential Transfer – Time Requirement Under § 547(e)(2) Bars a Defendant From Asserting a Defense Under § 547(c)

December 21, 2017, Ohio — Debtor Richard Asheford purchased a 2011 vehicle from a person named Carite Cleveland. To complete the sale, he signed a bill of sale with the condition that the contract will not be effective unless financing is obtained. He also signed a retail installment contract and security agreement on that same day. Carite Cleveland then assigned its rights in and to the retail installment contract and security agreement to

Defendant Landmark on that same day. Both parties acknowledged that the Debtor took physical possession of the motor vehicle on July 22, 2016.  On August 23, 2016, thirty-two days after the Debtor purchased and took possession of the vehicle; an original Ohio certificate of title was issued concerning the vehicle noting the Debtor as the owner and a lien in favor of Landmark. The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on September 26, 2016; sixty-six days after the Debtor purchased and took possession of the vehicle and thirty-four days after issuance of the Ohio Certificate of Title.

The Trustee sought to avoid the security interest in a motor vehicle as a preference. Landmark asserted that the condition precedent placed on the sale delayed the transfer of any interest in the vehicle to the Debtor, making the Defendant’s perfection timely. Alternatively, Landmark argued that the Trustee cannot avoid the security interest because the transfer was substantially contemporaneous with the Debtor’s acquisition of an interest in the motor vehicle.

The Court held that the Trustee satisfied all the elements for a §547(b) action. Further, the Debtor received possession of the vehicle more than 30 days before the creditor perfected its security interest on the certificate of title. The requirement of § 547(c)(3)(B) is expressly tied to the time when the Debtor receives possession of the property, not when the Debtor received a title.

The Court determined that the plain meaning of § 547(c)(3) is clear. The security interest must be perfected on or before 30 days after a debtor receives possession of such property. The Court followed the holding in Arnett and found that the time required under § 547(e)(2) barred the creditor from asserting a § 547(c)(1) defense. Thus, the Court ruled that in the case at bar, the Trustee could avoid the security interest as a preferential transfer and preserve it for the benefit of the bankruptcy estate under §§ 547, 551.

Brown v. Landmark Acceptance Corp. (In re Asheford), Nos. 16-15276, 17-1004, 2017 Bankr. LEXIS 4356 (Bankr. N.D. Ohio Dec. 21, 2017)