Banking and Finance Law Daily Wrap Up, SECURED TRANSACTIONS—Kan. Sup. Ct.: Bank’s electronic title trumped clean paper title, (Jan 27, 2014)

By Lisa M. Goolik, J.D.

A creditor that sold an encumbered vehicle to satisfy a money judgment it had obtained against debtors was not entitled to the proceeds of the sale because the vehicle was subject to a bank’s prior perfected purchase money security interest. In a matter of first impression, the Kansas Supreme Court determined that the bank’s security interest was perfected at the time it electronically filed a notice of security interest (NOSI) with the Kansas Department of Revenue (KDOR), despite the fact that the KDOR later issued a paper certificate of title to the creditor that did not reflect the bank’s lien (Stanley Bank v. Parish, Jan. 24, 2014, Moritz, Justice).

Background. In January 2006, the bank, Stanley Bank, loaned $40,000 to the debtors to purchase a 2006 GMC Yukon. The debtors granted the bank a security interest in the Yukon, which the bank perfected by filing its NOSI using the KDOR's motor vehicle electronic lien filing system. In April 2006, the debtors applied for a title and registered the vehicle in their name. The KDOR issued a title and registration receipt to the debtors that reflected the bank's lien on the Yukon. The KDOR's electronic lien system also reflected the bank's perfected lien and the debtors' electronic title. The debtors later defaulted on the bank’s loan.

In June 2007, the creditor, Bazin Excavating, Inc., obtained a money judgment against the debtors in an action unrelated to the vehicle. To satisfy the judgment, the creditor obtained a court order authorizing the attachment of the debtors’ personal property, including the Yukon and a motor home. When the vehicle was seized, Robert Bazin, the owner of Bazin Excavating, saw a copy of the Yukon's title and registration receipt reflecting the bank's lien.

After the creditor obtained a court order authorizing the sale of the Yukon and the motor home, it filed a notice of sale with the district court indicating the vehicles would be sold at auction. The creditor also sent notice of the sale to the bank and published notice in the county paper. The creditor’s owner, Bazin, acting on behalf of the creditor, obtained a paper certificate of title for each vehicle from KDOR's motor vehicle office. The Yukon's paper title reflected an application and purchase date of Sept. 19, 2007, and a printed date of Sept. 20, 2007, and indicated that the creditor owned the Yukon and that it was not subject to any liens.

On Sept. 21, 2007, Bazin, acting on his own behalf, purchased the Yukon and the motor home at auction for $62,000, paying $23,000 for the Yukon.

After the creditor failed to respond to demand letters from the bank requesting that the creditor turn over the proceeds from the sale of the Yukon to the bank, the bank filed suit against the creditor and Bazin. The lower court awarded the bank the proceeds of the sale, finding it significant that Bazin had prior knowledge of the bank's lien and failed to provide that information to the KDOR when he obtained the "clean" title. The appellate court affirmed, and the creditor and Bazin appealed, arguing that the bank lacked a perfected security interest in the Yukon because Bazin received a paper title from the KDOR that did not reflect the bank's lien.

Titling provisions. A purchase money security interest in property that is subject to any certificate of title law in Kansas, including a vehicle, is perfected only by compliance with the Kansas certificate of title provisions. To perfect its interest, a secured party must file a NOSI with the KDOR. The law further provides that a security interest in the vehicle is perfected on the date of the NOSI’s mailing or delivery. The KDOR is required to retain the NOSI until a certificate of title is issued. The certificate of title must indicate any security interest in the vehicle. In 2003, Kansas implemented electronic titling, providing that the Kansas certificate of title provisions of apply to electronic certificates of title unless the provisions are inconsistent or inapplicable.

The Kansas Supreme Court concluded the bank's properly perfected purchase money security interest had priority over any interests of the creditor or Bazin. First, in accordance with Article 9 of the Kansas Uniform Commercial Code, the bank obtained a purchase money security interest in the Yukon when the debtors signed a security agreement with the bank. Second, the bank properly perfected its purchase money security interest in January 2006 by delivering a NOSI to the KDOR through the KDOR's electronic lien system.

Because the bank perfected its lien in January 2006, and the creditor did not obtain its judgment against the debtors until June 2007, the court concluded the bank's perfected security interest had priority over any interest held by the creditor.

Buyer of consumer goods. Bazin also argued that, as a buyer of consumer goods, he qualified for an exception that would allow him to avoid a prior perfected purchase money security interest in that vehicle. Article 9 provides that a buyer of consumer goods "takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods.”

Although Bazin argued that factual issues remained as to whether he had knowledge of the bank’s lien, the court ultimately concluded that Bazin did not qualify for the exception because he failed to satisfy the fourth requirement—he did not purchase the vehicle before the bank perfected its security interest. Bazin purchased the Yukon at auction in September 2007, well after the bank perfected its security interest in January 2006 when it filed its NOSI with the KDOR.

The case number is No. 104,316.

Attorneys: Michael A. Millett (Law Offices Of Michael A. Millett, P.A.) for Johnny R. Parish, Bazin Excavating, Inc., and Robert A. Bazin. R. Scott Beeler (Lathrop & Gage LLP, of Overland Park) for Stanley Bank.

Companies: Bazin Excavating, Inc.; Stanley Bank

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