McCarthy v. BMW Bank of North America

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 14, 2007 Decided November 23, 2007

No. 06-7155

KEVIN R. MCCARTHY, TRUSTEE,

APPELLANT

v.

BMW BANK OF NORTH AMERICA,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 05cv01409)

Kevin R. McCarthy, appearing pro se, argued the cause

and filed the briefs for appellant.

Ronald G. DeWald argued the cause and filed the brief

for appellee.

Before: HENDERSON, RANDOLPH and BROWN, Circuit

Judges.

RANDOLPH, Circuit Judge: This appeal from the

judgment of the district court affirming the decision of the

bankruptcy judge presents a single issue: whether in the

District of Columbia, a security interest in an automobile may

2

be perfected under the common law before it has been

perfected pursuant to statute by being entered on the

certificate of title.

Kevin R. McCarthy is the trustee of Philip W. Dorton’s

estate under Chapter 7 of the Bankruptcy Code (11 U.S.C.).

The estate’s only asset is a 2000 BMW 328i. Dorton and

another individual jointly purchased the car on October 13,

2003. In financing their car, the co-owners granted a security

interest to the dealer, who immediately transferred it to BMW

Bank of North America. For reasons that are not clear, the

Department of Motor Vehicles (“DMV”) did not issue a

certificate of title until December 24, 2003. The certificate of

title contained a notation of BMW’s security interest. Dorton

filed for Chapter 7 bankruptcy on January 30, 2004, listing the

car as the bankruptcy estate’s only asset. Allowed proofs of

claim against the estate totaled approximately $20,000.

The trustee brought an adversary proceeding and moved

for summary judgment, invoking 11 U.S.C. § 547. This

provides that the trustee may “avoid any transfer of an interest

of the debtor in property . . . made . . . on or within 90 days

before the date of the filing” of the bankruptcy petition, 11

U.S.C. § 547(b)(4)(A), unless the transfer created “a security

interest in property acquired by the debtor . . . that is perfected

on or before 20 days after the debtor receives possession of

such property,” Id. § 547(c)(3)(B) (2000).1 Whether BMW

perfected its security interest outside the 90 day window when

Dorton took possession of the car, or only later when the

1

Congress amended Subsection (c)(3)(B) in 2005 to strike “20”

and insert “30.” See Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, Pub. L. No. 109-8, § 1222, 119 Stat. 23, 196.

This case deals only with the 20 day rule in effect at the time of the

transaction.

3

certificate of title issued, turns on the law of the District of

Columbia. Fid. Fin. Servs., Inc. v. Fink, 522 U.S. 211, 213

n.1 (1998). The bankruptcy judge, disagreeing with his

opinion in In re Johnson, 230 B.R. 466, 470 (Bankr. D.D.C.

1999), held that BMW had perfected its security interest

outside the 90 day period because, under D.C. common law,

“‘a prior lien gives a prior legal right (“first in time, first in

right”), except where statute varies the common law rule.’”

In re Dorton, 327 B.R. 14, 17 (Bankr. D.D.C. 2005)

(emphasis omitted) (quoting District of Columbia v. Franklin

Inv. Co., 404 A.2d 536, 540 (D.C. 1979)). On review of the

decision, the district judge agreed. District statutes had not

displaced District common law, both judges ruled. It

followed that BMW had perfected a common law lien at the

time of the sale, that the perfected lien remained in effect until

the certificate of title issued several months later, and that the

trustee could not avoid BMW’s security interest.

The correctness of those rulings depends upon Article 9

of the Uniform Commercial Code (UCC), D.C. Code §§ 28:9-

301 to -322, and upon the District’s provisions dealing with

liens on automobiles (title statute), D.C. Code §§ 50-1201 to -

1217. D.C. Code § 28:9-308(a) provides: “Except as

otherwise provided in this section and § 28:9-309, a security

interest is perfected if it has attached and all of the applicable

requirements for perfection in §§ 28:9-310 through 28:9-316

have been satisfied.” D.C. Code § 28:9-308(a). All agree that

none of the exceptions to which § 28:9-308(a) refers is

applicable here. Section 28:9-311(b) – one of the provisions

mentioned in § 28:9-308(a) – states in relevant part that “a

security interest in property subject to [§ 50-1201 et seq.] may

be perfected only by compliance with those requirements.”

Section 50-1202, one of the statutes mentioned in § 28:9-311,

provides as follows: “During the time a certificate is

outstanding for any motor vehicle or trailer, no lien against

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such motor vehicle or trailer . . . shall be valid except as

between the parties and as to other persons having actual

notice, unless and until entered on such certificate as

hereinafter set forth.”2 D.C. Code § 50-1202.

In holding that the common law “first in time, first in

right” rule perfected the security interest during the period

between the purchaser’s taking possession of the car and the

issuance of certificate of title, the district court reasoned that

§ 50-1202 operated only “[d]uring the time a certificate is

outstanding,” thus leaving a gap before then, a gap the

common law could fill. In re Dorton, 346 B.R. 271, 275

(D.D.C. 2006). This interpretation is not cogent. It reads out

the portion of § 28:9-311(b) stating in the clearest possible

terms that a security interest in a motor vehicle may be

perfected in one way, and one way “only” – by complying

with the requirements of the title statute. Among those

requirements are that the lien holder must pay a fee for

recording the lien on a certificate, § 50-1212, and that the lien

must be entered on the certificate by the recorder, § 50-1203.

It is no answer to say that because the “first in time, first in

right” rule perfects a lien against an automobile only until

issuance of a certificate of title noting the lien, the common

law does not conflict with the UCC or the title statute. Such a

bifurcated system raises the prospect that a lien could be

perfected for the initial period and then later become

“unperfected” when, for instance, the title certificate omits the

lien. It also flies in the face of one of the principal purposes

2

“Certificate” is defined as “a certificate of title for a motor

vehicle or trailer issued by” the “Director of Vehicles and Traffic of

the District of Columbia, including assistants or agents duly

designated by the Mayor of the District of Columbia.” D.C. Code

§ 50-1201(b), (d).

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of UCC Article 9: to “enforce the policy against secret liens”

by demanding strict compliance with “filing or recording

requirements.” Permanent Editorial Board Commentary for

the Uniform Commercial Code, Final Report, No. 6, § 9-

301(1) (March 10, 1990). It upsets the settled understanding

that “[n]ormally, under the law of the relevant jurisdiction, the

perfection step would consist of compliance with that

jurisdiction’s certificate-of-title statute and a resulting

notation of the security interest on the certificate of title.”

U.C.C. § 9-303 cmt. 3.3 And it does not account for cases in

which no one even bothers to apply for a certificate of title

before bankruptcy. E.g., In re Johnson, 230 B.R. at 470. In

such cases, the district court’s ruling would render

noncompliance with the UCC and the title statute superfluous.

Yet as we have said, compliance with Article 9 is designed to

ensure public notice of security interests.

We recognize that a lender might be at the mercy of a

dawdling DMV. The longer the delay in issuing the title

certificate, the longer the lender is exposed. There is a

solution to this problem, but it is legislative, not judicial. The

Official Comment 5 to UCC § 9-311 recognizes that in

jurisdictions in which a security interest is perfected by

notation on the certificate of title, there will be a gap between

the debtor’s taking possession of the automobile and the

issuance of the title. The solution proposed in the Official

Comment is not application of the common law but an

amendment to the title statute so that it would provide as

3

In interpreting the UCC, this court and other courts have found

the Official Comments to the UCC persuasive. See Goldstein v.

Madison Nat. Bank of Wash., D.C., 807 F.2d 1070, 1074 (D.C. Cir.

1986); see also Guardian Life Ins. Co. of Am. v. Weisman, 223 F.3d

229, 231 (3d Cir. 2000); JOM, Inc. v. Adell Plastics, Inc., 193 F.3d 47,

57 n.6 (1st Cir. 1999) (per curiam).

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follows: “perfection occurs upon receipt by the appropriate

State official of a properly tendered application for a

certificate of title on which the security interest is to be

indicated.”4 Some states have taken this course. See In re

Horner, 248 B.R. 516, 518 (Bankr. N.D. W. Va. 2000). The

District of Columbia has not. BMW therefore did not perfect

its security interest within the time required, and under 11

U.S.C. § 547(b) the trustee was entitled to avoid any transfer

of interest in the automobile to BMW.

Reversed and remanded.

4

The Official Comment states:

[S]tatutes under which perfection does not occur

until a certificate of title is issued will create a gap

between the time that the goods are covered by the

certificate under Section 9-303 and the time of

perfection. If the gap is long enough, it may result in

turning some unobjectionable transactions into

avoidable preferences under Bankruptcy Code

Section 547. (The preference risk arises if more than

10 days (or 20 days, in the case of a purchase-money

security interest) passes between the time a security

interest attaches (or the debtor receives possession of

the collateral, in the case of a purchase-money

security interest) and the time it is perfected.)

Accordingly, the Legislative Note to this section

instructs the legislature to amend the applicable

certificate-of-title statute to provide that perfection

occurs upon receipt by the appropriate State official

of a properly tendered application for a certificate of

title on which the security interest is to be indicated.

U.C.C. § 9-311 cmt. 5.