Vanderbilt Mortgage & Finance, Inc. v. Westenhoefer

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0150p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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VANDERBILT MORTGAGE AND FINANCE, INC., X
Defendant-Appellant, -
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No. 11-6216
v.
,
>
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JAMES R. WESTENHOEFER, Trustee for the

Plaintiff-Appellee. N-
Bankruptcy Estate of Tanya Epling,

Appeal from the United States District Court
for the Eastern District of Kentucky at Pikeville.
No. 7:11-cv-106—Amul R. Thapar, District Judge.
Argued: March 8, 2013
Decided and Filed: May 28, 2013
Before: MOORE, SUTTON, and DONALD, Circuit Judges.

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COUNSEL
ARGUED: John P. Brice, WYATT, TARRANT & COMBS, Lexington, Kentucky, for
Appellant. John M. Simms, ATKINSON, SIMMS & KERMODE PLLC, Lexington,
Kentucky, for Appellee. ON BRIEF: John P. Brice, WYATT, TARRANT & COMBS,
Lexington, Kentucky, for Appellant. John M. Simms, ATKINSON, SIMMS &
KERMODE PLLC, Lexington, Kentucky, for Appellee.
_________________

OPINION
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BERNICE B. DONALD, Circuit Judge. James R. Westenhoefer, a Chapter 7
Trustee, brought a strong-arm proceeding against Appellant Vanderbilt Mortgage and
Finance, Inc. (Vanderbilt) to avoid a lien claimed by Vanderbilt against Tanya Epling’s
manufactured home. Westenhoefer argued that Vanderbilt’s lien was not properly
perfected under Kentucky law. The bankruptcy court entered judgment in favor of

1
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 2

Westenhoefer, and Vanderbilt appealed to the district court. The district court affirmed,
and Vanderbilt timely appealed. We AFFIRM.

I.

In April 2009, Tanya Epling purchased a manufactured home, borrowing the
funds from Vanderbilt secured by a security interest in her manufactured home. Epling
resided in Magoffin County, Kentucky during all of the time relevant to this action.
Vanderbilt filed an application for first title and an application for a title lien statement
in Bell County, Kentucky. Thereafter, Vanderbilt filed the Certificate of Title for the
manufactured home, which listed Vanderbilt’s lien, in Bell County.

On October 29, 2010, Epling filed a voluntary Chapter 7 bankruptcy petition.
Westenhoefer was appointed Chapter 7 Trustee and, on February 15, 2011, initiated the
adversary proceeding that is the subject of this appeal. The strong-arm proceeding
sought to avoid Vanderbilt’s lien on the manufactured home, under 11 U.S.C. § 544,
because the lien was not properly perfected under the Kentucky Revised Statutes.

The bankruptcy court granted Westenhoefer’s motion for summary judgment,
concluding that Vanderbilt had failed to perfect its lien against the manufactured home
because it had filed the required title lien statement in its county of residence, rather than
in Magoffin County–Epling’s county of residence. Vanderbilt timely appealed the
bankruptcy court’s decision to the district court. The district court affirmed on the same
grounds. Vanderbilt timely appealed the district court’s decision.

II.

“In a case which comes to us from the bankruptcy court by way of an appeal
from a decision of a district court, we review directly the decision of the bankruptcy
court.” In re Kenneth Allen Knight Trust, 303 F.3d 671, 676 (6th Cir. 2002). “We
accord no deference to the district court’s decision; we apply the clearly erroneous
standard to the bankruptcy court’s findings of fact, and we review de novo the
bankruptcy court’s conclusions of law.” Id. (citing Stevenson v. J.C. Bradford & Co.
(In re Cannon), 277 F.3d 838, 849 (6th Cir. 2002)).
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 3

At the outset, we acknowledge that this is not Vanderbilt’s first trip to the rodeo.
Vanderbilt has made these same arguments before other courts. While experience is
life’s greatest teacher, Vanderbilt’s experience yielded the same factual scenario,
arguments, and case citations. As such, our analysis and reasoning is similar to that of
prior courts, which Vanderbilt has asked to analyze this issue because we were dealt the
same cards and our independent analysis has only revealed one way to play that hand.
See Vanderbilt Mortg. & Fin., Inc. v. Higgason (In re Pierce), 471 B.R. 876 (B.A.P. 6th
Cir. 2012); Palmer v. Vanderbilt Mortg. & Fin., Inc. (In re Walling), No. 10-51619,
2010 WL 5421148 (Bankr. E.D. Ky. Dec. 20, 2010); Schlarman v. Fifth Third Bank (In
re Sands), No. 07-21155, 2008 WL 4290949 (Bankr. E.D. Ky. Sept. 16, 2008).

The Kentucky Supreme Court has held that the notation of a lien on the
property’s Certificate of Title is the sole means of perfecting a security interest in
property requiring a Certificate of Title. See Johnson v. Branch Banking and Trust Co.,
313 S.W.3d 557, 560 (Ky. 2010). Westenhoefer asserts that, despite notation of
Vanderbilt’s lien on the certificate of title, Vanderbilt’s security interest in the
manufactured home was not perfected at the time of Epling’s petition because the title
lien statement was filed in Bell County, rather than Magoffin County, the county of
Epling’s residence, in contravention of Chapter 186A of the Kentucky Revised Statutes.
Vanderbilt asserts that its lien was perfected when the lien was noted on the Certificate
of Title even if Vanderbilt did not follow proper procedure to obtain the notation.

Because the Kentucky Supreme Court has not directly addressed this issue, we
must determine how the Kentucky Supreme Court would rule if it were faced with
deciding whether perfection is achieved where the notation was obtained despite a filing
deficiency. See Vanderbilt Mortg. & Fin., Inc. v. Higgason (In re Pierce), 471 B.R. 876,
882 (B.A.P. 6th Cir. 2012) (citing Johnson, 313 S.W.3d at 560). To guide our analysis,
we “may use the decisional law of the state’s lower courts, other federal courts
construing state law, restatements of law, law review commentaries, and other
jurisdictions on the ‘majority’ rule in making this determination.” Id. at 880 (citing
Grantham & Mann v. Am. Safety Prods. 831 F.2d 596, 608 (6th Cir. 1987).
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 4

Section 186A.190 of the Kentucky Revised Statutes, which governs the
perfection of security interests in motor vehicles and manufactured homes, states in
pertinent part:

(1) [T]he perfection and discharge of a security interest in any property
for which has been issued a Kentucky certificate of title shall be by
notation on the certificate of title. The notation of the security interest
on the certificate of title shall be in accordance with this chapter and
shall remain effective from the date on which the security interest is
noted on the certificate of title for a period of seven (7) years, or, in the
case of a manufactured home, for a period of thirty (30) years, or until
discharged under this chapter and KRS Chapter 186. The filing of a
continuation statement within the six (6) months preceding the expiration
of the initial period of a notation's effectiveness extends the expiration
date for seven (7) additional years.
(2) [T]he notation of security interests relating to property required to
be titled in Kentucky through the county clerk shall be done in the office
of the county clerk of the county in which the debtor resides.
(6) In noting a security interest upon a certificate of title, the county clerk
shall ensure that the certificate of title bears the lienholder's name,
mailing address and zip code, the date the lien was noted, the notation
number, and the county in which the security interest was noted. The
clerk shall obtain the information required by this subsection for
notation upon the certificate of title from the title lien statement
described in KRS 186A.195 to be provided to the county clerk by the
secured party.

(emphasis added).

Section 186A.195 of the Kentucky Revised Statutes states in pertinent part:

(1) As used in this chapter, a title lien statement is a document to be
submitted by the secured party to the county clerk. . . .
(3) If a title lien statement and the required fees are not received at the
time of application for first title of any property in the name of the owner
due to owner's residency in another county, or if the form prescribed by
KRS16A.060 indicates a pending lien but the title lien statement does not
accompany the application for title, the county clerk shall enter into the
Automated Vehicle Information System (AVIS) the name and address of
the lienholder and the county where the lien is to be noted or that a lien
is pending. The clerk shall indicate a title is not to be issued until the lien
has been noted and fees, according to KRS 186A.190, paid in the county
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 5

of the owner's residence or in thirty (30) days. The county clerk shall
then issue the registration. The county clerk in the county of the owner's
residence shall, after receiving the title lien statement and fees contained
in KRS 186A.190, enter into the Automated Vehicle Information System
(AVIS) the date of lien notation and the notation number, thus enabling
the system to produce the title in Frankfort.
(5) The security interest noted on the certificate of title shall be deemed
perfected at the time the security interest attaches (KRS 355.9-203) if the
secured party tenders the required fees and submits a properly completed
title lien statement and application for first title or, in the case of
property previously titled in the name of its debtor, the certificate of title
to the appropriate county clerk within twenty (20) days of attachment.
Otherwise, the security interest shall be deemed perfected at the time that
such fees are tendered and such documents are submitted to the
appropriate county clerk.

(emphasis added).

Vanderbilt relies on the Kentucky Supreme Court case Johnson v. Branch
Banking and Trust Co., 313 S.W.3d 557 (Ky. 2010) to support its position that by simply
noting its interest on the certificate of title, the lien is perfected pursuant to Section
186A.190 of the Kentucky Revised Statues. Vanderbilt’s reliance is misplaced because
Johnson held that “perfection of a vehicle lien does not occur until physical notation is
made on the title pursuant to KRS 186A.190.” In re Pierce, 471 B.R. 876, 882 (B.A.P.
6th Cir. 2012) (citing Johnson, 313 S.W.3d at 561) (emphasis in original). In actuality,
Johnson focused on when perfection occurred rather than whether perfection occurred.
Id. Nevertheless, Section 186A.190(1) of the Kentucky Revised Statues only makes a
lien effective when it is noted on the certificate “in accordance with this chapter,” and
Section 186A.190(2) of the Kentucky Revised Statues requires that “the notation of
security interests. . . shall be done in the office of the county clerk of the county in which
the debtor resides.” The plain meaning of this statutory language suggests that only a
clerk in the debtor’s county may note the creditor’s lien on the certificate of
title–rendering the lien in question perfected. Moreover, Johnson’s holding is consistent
with our reading of Section186A.190 of the Kentucky Revised Statutes.
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 6

Vanderbilt also relies on several provisions of Section 186A of the Kentucky
Revised Statutes to support its position that a clerk of court from any county can note a
creditor’s interests on a certificate of title and render the lien in question perfected. Our
reading of these provisions suggests that a secured creditor must apply for a title lien
notation by filing a “title lien statement” with the clerk of the debtor’s county of
residence and that only that county clerk may enter that information in AVIS. In re
Pierce, 471 B.R. 876, 882 (B.A.P. 6th Cir. 2012). This reinforces Westenhoefer’s
argument that, if the secured creditor fails to meet Kentucky’s requirements for
perfection, the creditor’s lien is unperfected. See generally id. (citing Ky. Rev. Stat.
§ 186A.195(5)). “Otherwise, the security interest shall be deemed perfected at the time
that such fees are tendered and such documents are submitted to the appropriate county
clerk.” Id. (citing Ky. Rev. Stat. § 186A.195(5)).

Vanderbilt’s strained reading of other Kentucky case law and superfluous
citations fails to support its position. For example, Vanderbilt cites cases in which the
Kentucky appellate courts considered which statutory provision governed the perfection
of a mobile home if it is permanently affixed to real estate and the conversion of an
automobile, respectively. See Hiers v. Bank One, 946 S.W.2d 196 (Ky. App. 1996);
State Auto Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626 (Ky. App. 1990).
Vanderbilt also cites cases where the court clerk failed to note the creditor’s lien, but
these cases do not aid our analysis because the issue was whether the clerk’s alleged
negligence or the deputy’s forgery affected perfection, respectively. See Gen. Motors
Acceptance Corp. v. Hodge, 485 S.W.2d 895 (Ky. 1972); Ky. Fin. Co. v. Spradlin,
717 S.W.2d 843 (Ky. App. 1986). Vanderbilt’s reliance upon Lincoln Bank & Trust Co.
v. Queenan, 344 S.W.2d 383 (Ky. 1961), is mistaken because the Kentucky Supreme
Court construed a prior version of the statute in question here and considered the
potential interplay of the recording requirements of the Uniform Commercial Code and
certain recording requirements in the Kentucky Revised Statutes. For these reasons none
of these cases aid our analysis.
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 7

Vanderbilt alternatively asserts that by filing its title lien statement with the Bell
County Clerk it actually had followed proper procedure. Vanderbilt relies on the
following provisions of Section 186A.120 of the Kentucky Revised Statutes, which
covers applications for initial title and registration for new property:

(1) Application for a first certificate of registration or title and plate, shall
be made by the owner to the county clerk of the county in which he
resides, except that, if a vehicle is purchased from a dealer other than in
the county in which the purchaser for use resides, the purchaser, or the
dealer on behalf of the purchaser, may make application for registration
to the county clerk in either the county in which the purchaser resides, or
in the county in which the dealer's principal place of business is located.
(2) (a) When purchaser of a vehicle upon which a lien is to be recorded
is a resident of a county other than that of the dealer, the application for
registration or title may be made to the county clerk in either county. The
lien must be recorded in the county of the purchaser's residence.

(b) If vehicle application for registration or title is presented to the
county clerk of dealer's location rather than purchaser's residence, the
clerk shall process documents in a manner similar to that of any
application, with the exception that the AVIS system shall be
programmed in a manner that the title shall not be issued from Frankfort
until the lien information has been entered by the county clerk of the
purchaser's residence.

Vanderbilt argues, without support, that Section 186A.120’s allowance for
application for initial “title or registration” outside a debtor’s county of residence creates
leave to apply for a title lien notation in the seller’s county of residence. Vanderbilt’s
strained reading of Chapter 186A of the Kentucky Revised Statutes is unpersuasive.
Only one provision in that chapter expressly addresses applications for certificates of
title or registration, and this provision only allows applications to be made in a county
other than that of the property owner’s residence. K.R.S. §186A.120(2)(a).
Unsurprisingly, this provision is silent as to whether title lien statements may be filed
outside of the debtor’s county of residence. See In re Pierce, 471 B.R. 876, 883 (B.A.P.
6th Cir. 2012). We find no reason to infer that the Kentucky General Assembly
intended for title lien statements to be filed outside of the county of the debtor’s
residence; in fact, we believe the opposite intention is made quite clear. See K.R.S.
No. 11-6216 Vanderbilt Mort. & Fin. v. Westenhoefer Page 8

§186A.120(2)(a) (“The lien must be recorded in the county of the purchaser’s
residence.”).

III.

Alas, the third time was not the charm and the fourth time will undoubtedly
suffer the same abysmal fate for the reasons previously discussed. See Vanderbilt
Mortg. & Fin., Inc. v. Higgason (In re Pierce), 471 B.R. 876 (B.A.P. 6th Cir. 2012);
Palmer v. Vanderbilt Mortg. & Fin., Inc. (In re Walling), No. 10-51619, 2010 WL
5421148 (Bankr. E.D. Ky. 2010); Schlarman v. Fifth Third Bank (In re Sands), No. 07-
21155, 2008 WL 4290949 (Bankr. E.D. Ky. Sept. 16, 2008). The district court’s
judgment is AFFIRMED.