Court Opinion

ID: 3042080
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:07:50.748992+00
Date Added: 2024-06-11T12:23:45.451137
License: Public Domain

United States Bankruptcy Appellate Panel
                        FOR THE EIGHTH CIRCUIT
                          _____________________

                                 No. 06-6059WD
                              ____________________

In re: Andy Lee & Kerri Lynn Sutton            *
       Debtors                                 *
                                               *
J. Kevin Checkett, Trustee                     *   Appeal from the United States
      Appellant                                *   Bankruptcy Court for the
                                               *   Western District of Missouri
                                               *
                                               *
            v.                                 *
                                               *
Andy Lee & Kerri Lynn Sutton,                  *
     Appellees                                 *

                             ______________________

                             Submitted: January 25, 2007
                               Filed: March 16, 2007
                             ______________________

KRESSEL, Chief Judge, MAHONEY and McDONALD, Bankruptcy Judges

McDONALD, Bankruptcy Judge

                                         -1-
       Chapter 7 Trustee, J. Kevin Checkett, appeals from the order of the
bankruptcy court1 overruling Trustee’s objection to Debtors’ claim of exemption of
the full market value of a 1999 Dodge Truck. We affirm.

                                          I.

      Debtors, Andy and Kerri Sutton, purchased a 1999 Dodge Truck (the
“Vehicle). Jimmy Richardson, the father of Kerri, loaned Debtors $7,000.00 to
finance Debtors’ purchase of the Vehicle. (the “Loan”). Debtors did not execute a
written promissory note in favor of Richardson outlining their obligation under the
Loan. In fact, there are no written documents memorializing the parties’ rights and
obligations with respect to the Loan. Additionally, Richardson testified at trial that
the parties never intended to create a lien in his favor to secure Debtors’
obligations under the Loan.

        The car dealer inquired of Debtors if someone had loaned them the cash to
purchase the Vehicle and Debtors informed the dealer of the Loan. The car dealer
then suggested that Debtors note Richardson as a lien holder on the application for
title on the Vehicle. (the “Application for Title”). Kerri testified at trial that she
agreed to note her dad as a lien holder on the Application for Title so that he
would have a “say so” if they ever wanted to sell the Vehicle.

       Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on
October 14, 2005. Debtors claimed the entire fair market value of the Vehicle,
$7,500.00, as exempt under Mo. Rev. Stat. §§513.430(5) & 513.440. Debtors also
listed Richardson as a secured creditor on their Schedule D with a claim of

      1
       The Honorable Arthur B. Federman, United States Bankruptcy Judge for
the Western District of Missouri.
                                          -2-
$6,800.00, which was the balance on the Loan. Sometime post-petition Debtors
sold the Vehicle and Richardson released whatever interest he may have had in the
Vehicle so that the sale could close.

      Trustee filed an action to avoid Richardson’s interest in the Vehicle under
Trustee’s strong-arm powers contained in 11 U.S.C. §544(a). Richardson did not
dispute the substantive allegations in Trustee’s complaint and conceded that he did
not have a security interest in the Vehicle.

       Trustee also filed an objection to Debtors’ claim of exemption of the entire
value of the Vehicle. Trustee argued in his objection that Debtors could not
exempt the Vehicle under 11 U.S.C. §522(g)(1), which prevents a debtor from
exempting property in which the debtor made a pre-petition voluntary transfer that
the trustee later avoids.

      The bankruptcy court entered judgment in favor of Trustee on his action
under §544(a), but overruled his objection to Debtors’ exemption of the Vehicle in
two separate orders dated July 21, 2006. In the order entering judgment in favor of
Trustee on his §544(a) action, the bankruptcy court found that because Debtors had
not authenticated a written security agreement in favor of Richardson as required
by Missouri’s version of Article 9, Mo. Rev. Stat. §400.9-203(b), Richardson did
not possess an interest in the Vehicle.

       The bankruptcy court held in its order overruling Trustee’s objection that
because Debtors did not execute a valid security agreement in favor of Richardson,
they did not make a pre-petition voluntary transfer of an interest in the Vehicle to
him. The bankruptcy court, therefore, found that §522(g)(1)(A) was inapplicable
and that Debtors could exempt the full market value of the Vehicle under Missouri
law and overruled Trustee’s objection.

                                         -3-
      Trustee then filed a motion with the bankruptcy court to amend or alter its
judgment overruling Trustee’s objection under Bankr. R. 9023. Trustee argued in
his motion to amend that Debtors authenticated a valid security agreement in favor
of Richardson when they noted him as the lien holder on the Application for Title.
Trustee asserted that because Debtors did transfer an interest in the Vehicle to
Richardson, §522(g)(1)(A) did apply to prevent Debtors from exempting the value
of Richardson’s putative interest in the Vehicle, which was $6,800.00.

       The bankruptcy court rejected Trustee’s argument, holding that a notation
that the creditor is a lien holder on an application for title is not a security
agreement under Missouri’s version of Article 9. The bankruptcy court, therefore,
reiterated its earlier finding that Debtors did not make a voluntary transfer of an
interest in the Vehicle to Richardson and that §522(g)(1)(A) was inapplicable and
denied Trustee’s motion to alter or amend its judgment in an order dated August
14, 2006.

       Trustee filed his notice of appeal on August 23, 2006. The notice of appeal
only identifies the bankruptcy court’s order denying Trustee’s objection to
Debtors’ claim of exemption and the subsequent order denying Trustee’s motion to
alter or amend the judgment. The bankruptcy court, however, expressly premised
its order overruling Trustee’s objection on its finding in the adversary proceeding
that Debtors did not convey an Article 9 security interest in the Vehicle to
Richardson. The notice of appeal, therefore, preserved both the exemption issue
and the Article 9 issue for appellate review. See Greer v. St. Louis Reg. Med. Ctr.,
258 F.3d 843, 846 (8th Cir. 2001).

                                        -4-
                                          II.

       We review the bankruptcy court’s findings of fact for clear error and its
conclusion of law de novo. Bankr. R. 8013; In re Neal, 461 F.3d 1048, 1052 (8th
Cir. 2006). The bankruptcy court’s finding that the Application for Title does not
meet the statutory definition of a security agreement under Missouri’s version of
Article 9 is a question of law that we review de novo. In re Shores, 332 B.R. 31,
34 (M.D. Fla. 2005). The bankruptcy court’s interpretation of §522(g)(1)(A) that
the statute only applies if the debtor made a voluntary transfer of an interest in the
property in question is also a question of law that we review de novo. Neal, 461
F.3d at 1052.

                                          III.

A. Introduction

      The issue before us is whether §522(g)(1) applies so that Debtors may not
exempt the entire value of the Vehicle. Section 522(g)(1) provides in relevant part
that:

               Notwithstanding sections 550 and 551 of this title, the
       debtor may exempt under subsection (b) of this section
       property that the trustee recovers under section 510(c)(2), 542,
       543, 550, 551, or 553 of this title, to the extent that the debtor
       could have exempted such property under subsection (b) of
       this section if such property had not been transferred, if--

       (1)(A) such transfer was not a voluntary transfer of such
       property by the debtor...

     Relevant to the issue in dispute here, §522(g)(1)(A) prohibits a debtor from
exempting property to the extent that the trustee recovers the debtor’s voluntary

                                          -5-
transfer of an interest in that property for the benefit of the estate. Kaler v.
Overboe (In re Arzt), 252 B.R. 138, 141-42 (B.A.P. 8th Cir. 2000). We find that
the bankruptcy court correctly held that Debtors did not voluntarily transfer an
interest in the Vehicle to Richardson so that §522(g)(1)(A) is inapplicable for the
following reasons.

B. Debtors did not transfer an interest in the Vehicle to Richardson under Article
9 of the Uniform Commercial Code.

      The question of whether Debtors transferred an interest in the Vehicle to
Richardson is governed by state law. Moon v. Anderson (In re Hixon), 387 F.3d
695, 700 (8th Cir. 2004). Therefore, we look to Missouri law to determine if
Debtors made a pre-petition transfer of an interest in the Vehicle to Richardson.

       Trustee first contends that Debtors granted a security interest in the Vehicle
to Richardson under Missouri’s version of Article 9 of the Uniform Commercial
Code by noting Richardson as the lien holder on the Application for Title. Under
Missouri’s version of Revised Article 9 a creditor’s security interest attaches to the
collateral if: (1) the creditor has given value; (2) the debtor has rights in the
collateral; and (3) the debtor has authenticated a security agreement that provides a
description of the collateral.2 Mo. Rev. Stat. §400.9-203(b)(1)-(3). Unless the
creditor’s interest has attached to the collateral, the creditor has no enforceable
interest in the collateral . Mo. Rev. Stat. §400.9-203(a); Gassaway v. Erwin (In re
Shelton), 472 F.2d 1118, 1121 (8th Cir. 1973).

      2
        The Missouri Legislature adopted the Revised Version of Article 9
effective July 1, 2001. Because all of the relevant transactions in dispute here
occurred after July 1,2001, the substantive provisions of Revised Article 9 apply.
Mo. Rev. Stat. §400.9-702(a).
                                          -6-
       There is no dispute that Richardson gave value and that Debtors had
obtained a right in the Vehicle. The only question, therefore, in determining
whether Richardson’s interest attached to the Vehicle is whether Debtors
authenticated a valid security agreement. Trustee maintains that the Application
for Title constitutes a valid security agreement under Missouri law. We disagree.
       A security agreement is simply defined as an agreement that creates a
security interest. Mo. Rev. Stat. §400.9-102(a)(72). A security agreement need
not be denominated as such or have any particular form. In re Smith, 167 B.R.
895, 897 (Bankr. E.D. Mo. 1994). All that is required under Article 9 for a
document to be a security agreement is an objective manifestation in the language
of the document of the debtor’s agreement to grant a security interest in the
collateral in favor of the creditor. United States v. Mo. Farmers Assoc., 580
F. Supp. 35, 37 (E.D. Mo. 1984) aff’d. 764 F.2d 488 (8th Cir. 1985) cert. denied
475 U.S. 1053 (1986); See also Mo. Rev. Stat. §400.9-102 cmt. 3.b.

       Although there is a split of authority on the issue, the Eighth Circuit has held
that under the prior version of Article 9, a notation on an application for title that a
creditor holds a lien on the vehicle does not meet the statutory definition of a
security agreement under Missouri law. Shelton, 472 F.2d at 1120. Rather, such a
notation is merely evidence of the creation of a security interest instead of the
agreement itself. Id. Thus, as we have previously held, an application for title
with the creditor denoted as a lien holder, by itself, is not a security agreement
under Article 9. Forker v. Duenow Manag. Co. (In re Calvert), 227 B.R. 153, 160-
61 (B.A.P. 8th Cir. 1998) (interpreting similar provision under Nebraska law).

       The only written document signed by Debtors with respect to Richardson’s
interest in the Vehicle was the Application for Title. As just discussed above, that
document standing alone does not meet the statutory definition of a security
agreement under Shelton and its progeny. Shelton, 472 F.2d at 1120; Forker, 227
B.R. at 161.

                                          -7-
       Trustee argues that despite Shelton, the Application for Title meets the
definition of a security agreement under §400.9-102(a)(72) for two reasons.
Trustee first maintains that Shelton is no longer valid under Revised Article 9.
Trustee specifically points to Comment 3.b to Revised §9-102 in support of his
position. Comment 3.b recites in relevant part that a court must utilize an objective
test of the text of the document, instead of the parties’ subjective intent, to
determine if that document is a security agreement.

       The statutory definition of a security agreement contained in Revised §9-
102(a)(72), however, is not a departure from the definition of a security agreement
under Prior Article 9. Under Missouri’s version of Prior Article 9, courts applied
an objective test to the document in question to determine if the document contains
sufficient language to evidence the debtor’s agreement to grant a security interest
in the collateral to the creditor . See e.g. Mo. Farmers Assoc., 580 F. Supp. at 37.
In fact, the Eighth Circuit noted in Shelton that although the evidence established
that the parties subjectively intended to create a security interest in favor of the
creditor, an objective examination of the relevant documents did not establish that
they ever reached such an agreement. Shelton, 472 F.2d at 1120-21. Thus, the
Shelton Court itself applied an objective test, consistent with Comment 3.b to
Revised §9-102, in determining whether the relevant documents constituted a
security agreement under Article 9.

       Trustee additionally contends that even if Revised Article 9 did not change
the substantive analysis of what constitutes a security agreement from Prior Article
9, Shelton still should not be followed because it erroneously interpreted Missouri
law. Trustee specifically argues that an opinion by the Missouri Court of Appeals,
Bradley v. K&E Investments, Inc., 847 S.W.2d 915 (Mo. Ct. App. 1993), supports
his argument that an application for title that denotes a creditor as a lien holder
meets the statutory definition of a security agreement under Mo. Rev. Stat. §400.9-
102(a)(72).

                                         -8-
       The court in Bradley held that the document in question was not a security
agreement because it did not contain any language normally associated with a
secured transaction such as the term “lien”. Id. at 921–22. But the Bradley court
also cited Shelton in holding that the document in question must actually contain
some language that evidences the debtor’s agreement to convey some interest to
the creditor in order for the document to be a security agreement. Id. at 922. Thus,
Bradley actually reinforces the holding in Shelton that under Missouri’s version of
Article 9, a document must contain some language that evidences the debtor’s
agreement to convey an interest in the collateral in order to be a security
agreement.

       There is nothing in the text or comments of Revised Article 9 that warrants a
rejection of the Eighth Circuit’s holding in Shelton that a notation on an
application for title that a creditor is a lien holder is not, by itself, a security
agreement. The Application for Title, therefore, is not a security agreement under
Mo. Rev. Stat. §400.9-102(a)(72). Thus, Debtors did not authenticate a security
agreement with respect to the Vehicle in favor of Richardson as required by Mo.
Rev. Stat. §400.9-203(b)(3) and the bankruptcy court correctly found that Debtors
did not transfer an interest in the Vehicle to Richardson under Article 9.

C. Debtors did not transfer an interest in the Vehicle to Richardson outside of
Article 9.

       Trustee next argues that §522(g)(1)(A) is applicable even if Debtors did not
transfer an interest in the Vehicle to Richardson under Article 9 because Debtors
transferred an interest under Missouri law outside of Article 9. Trustee points to
two sources of law that he contends gave Richardson an interest in the Vehicle.
First, Trustee contends that Mo. Rev. Stat. §301.215 gave Richardson standing to
bring a judicial foreclosure proceeding with respect to the Vehicle.

                                        -9-
       Section 301.215, however, only gives a creditor who has a security interest
in the vehicle the right to seek a new certificate of title after it has repossessed the
vehicle. Here, because Richardson did not have an enforceable security interest in
the Vehicle, §301.215 does not give him the ability to obtain a new certificate of
title. Thus, Debtors did not transfer an interest in the Vehicle to Richardson under
§301.215 by simply denoting him as a lien holder on the Application for Title.

       Trustee additionally maintains that Debtors gave Richardson an interest in
the Vehicle by denoting him as a lien holder because, as a practical matter, such a
notation gave Richardson some control over Debtors’ disposition of the Vehicle.
While it is true that a prudent buyer of a vehicle will require the consent of any
person denoted as lien holder before closing on the transaction, Missouri law
clearly provides that a creditor has no substantive rights in a vehicle unless the
creditor’s security interest attaches to the vehicle under Article 9. Bradley, 847
S.W.2d at 921. Thus, if a creditor does not have a security interest in a vehicle
under Article 9, the creditor does not have an enforceable property interest in the
vehicle. Id.; Forker, 227 B.R. at 161.

D. Section 522(g)(1) has no application where the debtor did not voluntarily
transfer an interest in the property in question.

        Trustee finally argues that because he took an affirmative step in filing his
action under §544(a) that resulted in the bankruptcy court’s finding that
Richardson did not have an interest in the Vehicle, the provisions of §522(g)(1)(A)
are still applicable. Trustee relies on In re Ulrich, 203 B.R. 691 (Bankr. C.D. Ill.
1997) in support of this argument.

       In Ulrich, the trustee filed an action to avoid a bank’s claimed security
interest in the vehicle in question. Like the instant case, the debtors did not
execute a written security agreement with respect to the car in dispute, but rather

                                          -10-
only denoted the creditor’s lien on the application for title. The court first found
that under Illinois law, a note on an application for title that a lien exists in favor of
the creditor is sufficient to create a valid security interest even in the absence of a
written security agreement. Id. at 693. The court then noted in dicta that even if
the creditor did not have a valid Article 9 security interest in the vehicle,
§522(g)(1)(A) would still apply to prevent the debtors from exempting the vehicle
because the trustee took an affirmative step to nullify the bank’s putative lien on
the vehicle. Id.

       While it is true that the above referenced dicta in Ulrich supports Trustee’s
position here, the Ulrich court’s interpretation of §522(g)(1)(A) is inconsistent
with the text of the statute. The plain language of §522(g)(1)(A) recites that the
section applies only with respect to property in which the debtor made a voluntary
transfer that the trustee recovers for the benefit of the estate. That analysis must
begin with the question of whether the debtor voluntarily transferred an interest in
the property. See Armstrong v. Harris (In re Harris), 886 F.2d 1011, 1015 (8th Cir.
1989); Arzt, 252 B.R. at 142-43. If the debtor did not make a voluntary transfer of
an interest in the property in question, §522(g)(1)(A) has no application.

       Because the dicta in Ulrich focuses only on the trustee’s action and not on
whether the debtor voluntarily transferred an interest in the property, we find that
the Ulrich court’s dicta is inconsistent with the text of §522(g)(1)(A). We,
therefore, decline to follow the dicta of the Ulrich court.

                                           IV.

      The Application for Title, by itself, is not a security agreement under Mo.
Rev. Stat. §400.9-102(a)(72). Debtors, therefore, did not authenticate a security
agreement in favor of Richardson with respect to the Vehicle under Mo. Rev. Stat.
§400.9-203(b)(3) and the bankruptcy court correctly determined that Debtors did

                                           -11-
not make a voluntary transfer of an interest in the Vehicle to Richardson.
Accordingly, §522(g)(1)(A) is inapplicable and Debtors could utilize the
applicable Missouri exemption to exempt the full value of the Vehicle. Thus, we
affirm the judgment of the bankruptcy court finding that Debtor may exempt the
full value of the Vehicle.

Kressel, Chief Judge, concurring.

       While I think the majority is correctly affirming the bankruptcy court’s order
overruling the trustee’s objection to the debtors’ exemption claim, the majority
opinion ranges outside the issues properly raised by the appeal of that order and I
think thereby exceeds our jurisdiction. As the majority opinion indicates, the trustee
was engaged in two related, but separate, proceedings. The trustee filed an adversary
proceeding against Kerri’s father, in which he sought to avoid a security interest that
he held in the debtors’ car. In its order and judgment, the bankruptcy court did not
grant the trustee the relief he sought, but rather, held, by way of declaratory judgment,
that Kerri’s father did not have a valid lien on the car. The trustee did not appeal from
that judgment.

       Going on at the same time was the trustee’s objection to the debtors’ claim of
exemption in their car. In his objection, the trustee relied on § 522(g) which allows
a debtor to exempt property recovered by the trustee under §§ 510(c)(2), 542, 543,
550, 551, or 553, but only to the extent the transfer of the property recovered was not
voluntary and the debtor did not conceal it. In an order dated the same day as the
judgment in the adversary proceeding, the bankruptcy court correctly pointed out that
it had held in the adversary proceeding that Kerri’s father held no lien in the car and
therefore the trustee did not avoid any lien nor recover the car or its value under any
of the denominated sections. As a result, the debtors were entitled to claim the car
exempt. It is from that order that the trustee appealed.

                                          -12-
       In its opinion, the majority does a thorough job of discussing and deciding the
issues raised in the adversary proceeding. While I do not necessarily disagree with
any of the majority’s analysis, because the bankruptcy court’s judgment in the
adversary proceeding was not appealed, I think that it is unnecessary and outside the
proper scope of our review. “[W]hen a court decides upon a rule of law, that decision
should continue to govern the same issues in subsequent stages in the same case.”
First Union Nat’l Bank v. Pictet Overseas Trust Corp., Ltd., No. 05-2932, 2007 WL
136043, at *2 (8th Cir. Jan. 22, 2007) (quoting Morris v. American Nat’l Can Corp.,
988 F.2d 50, 52 (8th Cir. 1993)). “The doctrine applies to appellate decisions.” Id.
“The law of the case doctrine prevents the relitigation of a settled issue in a case and
requires courts to adhere to decisions made in earlier proceedings in order to ensure
uniformity of decisions, protect the expectations of the parties, and promote judicial
economy.” United States v. Bartsh, 69 F.3d 864, 866 (8th Cir. 1995). In short, the
bankruptcy court was required to adhere to its decision in the adversary proceeding
when it faced the same issue in the exemption litigation. While the bankruptcy court
did discuss the issue somewhat again as part of its decision in the exemption litigation,
it did not purport to relitigate or redecide an issue that it had already decided in the
adversary proceeding. Thus, it should have been a simple matter in this appeal for us
to refer to the judgment in the adversary proceeding, which indicated that Kerri’s
father had no lien, which meant there was no avoidance or recovery and therefore §
522(g) has no applicability. In this respect, the majority’s discussion about the law
of creation and perfection of security interest, although excellent, is dictum at best.

       In the same vein, since the trustee was a party to the adversary proceeding,
principles of collateral estoppel would prevent him from relitigating those same issues
in the exemption litigation or as part of this appeal.

      I therefore join the majority, but for somewhat different reasons.

                                          -13-