Keven R. McCarthy, Trustee, v. BMW Bank of North America
This case provides an example of imperfect legislation and an apparently "dawdling DMV" that caused delayed perfection of a lien, giving a bankruptcy trustee the perfect opportunity to take advantage of an avoidable transfer.
A BMW was purchased and the District of Columbia (DC) certificate of title annotated with the security interest was not issued until more than two months later. One of the purchasers/debtors filed for bankruptcy protection under Chapter 7 less than 90 days after the vehicle was bought. The Trustee in Bankruptcy sought to avoid the transfer of the bankrupt's interest to BMW. BMW argued that DC common law provided for perfection under a "first in time, first in right" theory, and that the common law had not been superseded. That would mean that perfection was completed within the 20-day period then allowed under the Bankruptcy Code as an exception to to the 90-day avoidable transfer rule. BMW's arguments persuaded first the Bankruptcy Court and then the U.S. District Court.
The U.S. Court of Appeals for the District of Columbia Circuit disagreed in its ruling handed down on November 23, 2007. The D.C. UCC and its motor vehicle title statute provide that perfection of a motor vehicle lien occurs only when the lien is noted on the vehicle's certificate of title (superseding common law). The Permanent Editorial Board Commentary for the UCC pointed out to state (and the DC) legislatures, in Official Comment 5 to UCC § 9-311, that such a requirement could put a lender at the mercy of a "dawdling Department of Motor Vehicles," because it leaves the lender exposed to intervening liens during any delay in issuing the certificate of title. The Comment goes on to suggest that jurisdictions could adopt amendments to their title laws to provide for perfection 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." The Council of the District of Columbia failed to take that step, and therefore left lenders like BMW exposed. McCarthy, as Trustee, was entitled to avoid the debtor's transfer of interest in the vehicle.
Note: The 20-day perfection "window" in effect when the security interest was given has since been expanded by Congress to 30 days.