While a new law, like revised UCC Article 9, raises a host of brand new legal issues, it also provides an opportunity to re-argue many previously settled issues—even issues that the drafters had no intention of changing. One such issue is the apparently innocuous provision of new §9-619 that permits a repossessing secured creditor to obtain a repossession title so that it can more easily transfer record legal title as part of its disposition of the collateral.

Although it seems clear from the comments to the provision that the drafters intended nothing more than to provide a simple mechanism for obtaining record title to supplement existing mechanisms under non-UCC certificate of title statutes, federal registry rules and other similar laws, lawyers for automobile lenders in several parts of the country have argued that the provision terminates the debtor's "title" and thus alters the §542 turnover analysis to deprive the debtor of the right to require turnover of repossessed collateral.

Transfer Statement

Where collateral is covered by a certificate of title or other title registration system, it may be difficult for the secured creditor to deliver a title acceptable to the foreclosure sale purchaser if the debtor's cooperation is needed to obtain a new certificate of title or to reflect the transfer of title in the official title records. In the case of certificates of title, most states had addressed this problem prior to the Article 9 revision by including provisions in the certificate-of-title statutes that allowed the repossessing secured creditor to obtain a repossession title without the debtor's cooperation or consent.

New §9-619 is a similar provision that applies to all types of record title systems. Under §9-619, the secured party merely prepares a "transfer statement" stating that the debtor is in default of the obligation secured by the collateral, that the secured party has exercised its post-default remedies, that, by reason of that exercise, it has acquired the rights of the debtor in the collateral,² and listing the names of the debtor, secured party and transferee. The transfer statement entitles the transferee to the issuance of a new certificate-of-title in its name and to a "transfer of record of all rights of the debtor in collateral" in the official records. UCC §9-619(b). This procedure does not replace existing mechanisms in certificate-of-title laws or similar laws, but rather provides an additional title clearing method. UCC §9-619, cmt. 3.

What is the legal effect of the secured party using a transfer statement to acquire a certificate of title in its name, or using it to amend the official title records to reflect it as record title holder? Both the text of §9-619 and the comments reject the view that the change in record title has any effect on the debtor's interest in the collateral. Subsection 9-619(c) states that a transfer of record title under either §9-619 or otherwise (e.g., under the certificate of title statute) "is not of itself a disposition of collateral under [Article 9] and does not of itself relieve the secured party of its duties under [Article 9]." UCC §9-619(c). The Official Comment states: "[A] transfer of record or legal title...to a secured party prior to the exercise of [disposition or acceptance] merely puts the secured party in a position to pass legal or record title to a transferee at foreclosure. A secured party who has obtained record or legal title retains its duties with respect to enforcement of its security interest, and the debtor retains its rights as well." UCC §9-619, cmt. 2.

Thus, the debtor retains the right to redeem collateral and the secured party must utilize the acceptance (§9-620) or disposition (§9-610) options if it wishes to foreclose. The mechanism provided by §9-619 is nothing more than a procedure that puts the secured party into a position to transfer record title to the transferee when it ultimately disposes of the collateral.

Turnover and Repossession Titles

The basis for requiring turnover of repossessed collateral is the Supreme Court's interpretation of §542 of the Bankruptcy Code in United States v. Whiting Pools Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). In this case, the Court relied on the broad scope of "property of the estate" under §541 and read §542 to require the IRS to turn over property that had been seized pre-petition to enforce a tax lien. The secured creditors' novel argument under new §9-619 is based on the Court's statement that §542 turnover may not apply if a seizure transfers ownership of the seized property to the creditor. Id., 462 U.S. at 209.

The first reported decision addressing that argument was Judge Jackson's well-reasoned opinion in In re Robinson, 285 B.R. 732 (Bankr. W.D. Okla. 2002). Here, the Court rejected the argument that the transfer of the debtor's "legal" title under §9-619(b) takes an Article 9 repossession out of the scope of Whiting Pools.

Focusing on the issue of "ownership," the Court noted that while the nature and existence of the debtor's interest in property is determined under state law, the determination of whether that interest is "property of the estate" under §541 is a matter of federal law. Id. at 735. Relying on the general principle that "title" is immaterial under Article 9 (§9-202) and the §9-619(c) text and comments to the effect that the transfer of legal title does not alter the debtor's rights, the Court analyzed the rights retained by the debtor during the post-repossession, pre-disposition period. Since the debtor's right to notice of disposition, surplus sale proceeds and redemption were the very rights possessed by the debtor in Whiting Pools, the Court held that the debtor could redeem the collateral. Id. at 738.

Two other reported opinions directly address the secured creditors' §9-619 argument. Both follow Robinson and rely on similar reasoning to reject the view that repossession divests the debtor of its ownership interest for the purposes of turnover.

In the case of In re Sanders, 291 B.R. 97 (Bankr. E.D. Mich. 2003), Judge Rhodes expands on the Robinson analysis by reviewing numerous Article 9 post-default remedy provisions to show that they would be unnecessary or inappropriate if repossession alone deprived the debtor of ownership of the collateral. Id. at 100 (reviewing §§9-623, 9-611(2), 9-610(1), 9-615(4)(a), 9-610(3), 9-617, 9-620(1), 9-621, 9-622, 9-202 and 9-625). In addition, Sanders turns the §9-619 argument around and uses the new provision to reject the secured creditor's parallel argument that the provisions of the state certificate of title statute operate to deprive the debtor of ownership upon repossession. Since subsection 9-619(c) provides that the debtor's rights are not altered by the transfer of legal or record title "under subsection (b) or otherwise" [emphasis added], the title clearing provisions of the non-UCC certificate of title statute cannot alter the debtor's ownership rights. Id. at 101.

Judge Mitchell's decision in In re Moffett, 288 B.R. 721 (Bankr. E.D. Va. 2002), aff'd., 2004 WL 103233 (4th Cir. 01/23/04), also follows Robinson and adopts its rationale. However, the Moffett opinion also addresses a more refined variation of the "no ownership" argument—a related argument that is not based on §9-619, but rather is based on two stray decisions of the Eleventh Circuit.

Redemption as a Distinct Property Right

The argument raised in Moffett, and in the more recent case of Sanders, is that the debtor's §9-623 right of redemption is not a property right in the collateral, but merely an intangible right, like a choice of action, that is separate and distinct from the collateral itself. Following this logic, the repossession operates to terminate the debtor's ownership rights in the collateral since redemption is the debtor's only remaining property right following repossession. Thus, under §541, the only right that becomes property of the estate is the redemption right. The repossessed collateral is not property of the estate, and therefore the collateral is not subject to turnover under §542. Further, the debtor must pay the entire secured obligation in a lump sum if it wishes to recover the collateral because that was the extent of its state law redemption right, and bankruptcy law generally does not enlarge existing rights.

This reasoning was adopted by the Eleventh Circuit in the case of In re Lewis, 137 F.3d 1280 (11th Cir. 1998). Until recently, Lewis could be distinguished as merely an interpretation of Alabama state law. However, in 2002 the Eleventh Circuit followed Lewis in a case arising under Florida law. See In re Kalter, 292 F.2d 1350 (11th Cir. 2002). Although both cases have been criticized as getting both the state law³ and federal bankruptcy law⁴ issues wrong, this line of authority is now a serious threat to debtors' ability to obtain turnover of repossessed collateral.

The Kalter view was applied strictly in the recent Florida case of In re Menasche, 301 B.R. 757 (Bankr. S.D. Fla. 2003). In this case, the court applied the binding precedent of Kalter to hold that under Florida law the debtors had no remaining property interest in a repossessed motor vehicle. As a result, the UCC right to redemption was the debtors' only interest and could be exercised only in accordance with non-bankruptcy state law, which required a lump-sum payment. Thus, since the debtors no longer had title to the motor vehicle, the §1322 powers to modify rights and cure defaults did not apply, and the debtors could not redeem the car, even though they proposed to pay the debt in full through their chapter 13 plan. Id. at 762. Menasche distinguishes cases like Robinson on the basis that the relevant state law in those cases did not result in the debtor's loss of ownership rights upon repossession. Note that both Kalter and Lewis were decided under former Article 9 and that the addition of new subsection 9-619(c) arguably overrides the title-clearing provisions of the motor vehicle statutes relied upon in those cases.

Unfortunately, the Kalter analysis may have been given additional credibility by the Fourth Circuit's affirmance of Moffett. Rather than simply affirming the bankruptcy court's view that the debtor retained an ownership interest in the collateral following repossession,⁵ the appeals court cites Lewis and Kalter for the proposition that the right of redemption becomes property of the estate. The court then sidesteps the question of who has legal ownership of collateral following repossession. The court finds it unnecessary to reach that issue because the debtor's redemption right unquestionably became part of the estate, and turnover was proper because the chapter 13 plan proposed full payment of the creditor's claim.

Unlike the Menasche court, the Fourth Circuit holds that the §1322(b)(2) power to modify the rights of holders of secured claims and the §1322(b)(3) power to cure defaults permit a chapter 13 debtor to de-accelerate the debt and redeem the collateral by paying the redemption amount in full through the plan. Id. at *4. While this approach preserves the debtor's ability to obtain turnover of repossessed collateral,⁶ the court failed to realize that it needed to first resolve the "ownership" question before it could apply §1322(b)(2). Under §506(a), a claim is a secured claim only if the creditor's lien is on "property in which the estate has an interest." If repossession replaced the debtor's property interest in the collateral with a mere intangible right, then §1322(b)(2) would not apply.

Although these cases arise in a consumer context, the principles they espouse should apply equally well in a commercial context. After Menasche, we are left with a very confusing split in authority that threatens to undermine the debtor's ability to recover repossessed collateral. No doubt, more cases will appear in the near future as these arguments are asserted in new jurisdictions. This issue can be avoided, however, if bankruptcy is filed before the repossession, rather than as a response to it.

Footnotes

¹ The views expressed herein are Prof. Warner's and do not necessarily reflect the views of St. John's University or the law firm of Greenberg Traurig LLP. Return to article

² It is not clear that the secured party can make the representation that it has acquired the debtor's rights in the collateral merely because of a repossession since a disposition or acceptance (strict foreclosure) is needed to terminate the debtor's redemption rights. See UCC §9-623. Nonetheless, the statute appears to contemplate that the secured party might utilize a transfer statement prior to its exercise of those remedies. See §9-619(3) (transfer statement not a disposition) and cmt. 2 ("Subsection (b) contemplates a transfer of record or legal title...to the secured party prior to the secured party's exercise of [the] remedies [of disposition or acceptance]."). Return to article

³ For example, the Kalter reasoning is so stretched that the court actually argues that the secured creditor becomes a "debtor" upon repossession so that it can avoid the obvious conflict between its "no ownership" view and provisions like former UCC §9-504(4) that provide that the foreclosure sale transfers the rights of the "debtor" to the foreclosure sale purchaser. Return to article

⁴ For a good critique of the decisions, see "Turnover Rights Revisited (Or Repudiated Sub Silencio?): Who "Owns" Collateral Repossessed by a Secured Creditor?," Bankr. L. Letter, 2002 WL 1786081 (Aug. 2002). Return to article

⁵ The bankruptcy court criticized Kalter for confusing the concepts of a post-sale redemption with the UCC §9-623 pre-sale redemption. In the post-sale redemption context (typical in the real estate mortgage context, but not available under Article 9), the debtor has no remaining ownership interest in the property and holds only an intangible right of redemption. In contrast, under Article 9 the debtor's ownership rights have not been terminated prior to disposition, and the right of "redemption" provided by §9-623 is not a new right that comes into existence only upon default, but rather "is the right, inherent in any secured transaction, to release of the lien upon payment of the amount secured." Moffett, 288 B.R. at 728. Return to article

⁶ Note that this view would not permit the debtor to use the cramdown power to reduce the lien to the value of the collateral under §1325(a)(5) and may not permit redemption under §722. Return to article