Bank Loses Lien When Perfected After Bankruptcy Filing
A recent Nebraska bankruptcy case [Matter of Mattes, 642 B.R. 1 (Bkrtcy. D. Neb. 2022)] provides insights into the importance of timely perfection of a purchase money security interest in a motor vehicle. In this case, the bank lost its lien, and, as a result, its collateral. The bank funded the purchase of the vehicle and obtained a purchase money security interest. However, the lien was not recorded on the title until nearly one month after the debtor’s bankruptcy petition was filed. The court found that since the bank did not perfect its lien until after the bankruptcy petition was filed, this constituted an unauthorized post-petition transfer, and the bank’s lien was extinguished. According to the court, the bank interpreted a state statute incorrectly and failed to follow the proper procedure to perfect their security interest. The bank relied on a Nebraska statute that it interpreted as stating that a purchase money security interest in a vehicle was perfected upon attachment of the security interest, without the requirement of the lien noted on the title. The court disagreed. Since the lien was not perfected at the time that the bankruptcy was filed, the bank’s later perfection of that lien by noting the lien on the vehicle title constituted an impermissible transfer of property under the Bankruptcy code. As a result, the Bankruptcy court avoided the bank’s lien.
In order for banks to avoid a similar fate in bankruptcy court, bankers should be careful to understand and follow, not only the Uniform Commercial Code, but also all applicable state laws. Much like Nebraska, in Indiana, a security interest in a vehicle that is not inventory is perfected only when the lien is noted on the title. Ind. Code § 9-17-5-5. When a bank has a purchase money security interest in a vehicle, it should be quick to get the lien noted within 20 days of the debtor gaining possession to ensure the perfection date relates back to the attachment date. It is also important to remember that once a bankruptcy petition is filed, it is definitely too late to perfect.
The author thanks Summer Legal Clerk Audrey Crites for her helpful research and drafting assistance.