Vanderbilt Mortgage and Finance, Inc. et al v. Westenhoefer

Filing 8

MEMORANDUM OPINION & ORDER: the decision of the Bankruptcy Court, R. 1 , is AFFIRMED. Signed by Judge Amul R. Thapar on 9/19/2011. (RCB)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
PIKEVILLE
VANDERBILT MORTGAGE AND
FINANCE, INC.,

)
)
)
Appellant,
)
Civil Action No. 11-106-ART
)
v.
)
)
MEMORANDUM OPINION &
JAMES R. WESTENHOEFER,
)
ORDER
Trustee for the Estate of Tanya Epling, )
)
Appellee.
)
*** *** *** ***
“We do not inquire what the legislature meant; we ask only what the statute
means.” Oliver Wendell Holmes, Collected Legal Papers 207 (1920), quoted in
Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 397 (1951) (Jackson, J.,
concurring). But Appellant Vanderbilt Mortgage and Finance, Inc. claims otherwise.
Vanderbilt argues that the words of the Kentucky statute governing the perfection of
liens on mobile homes do not mean what they say. R. 1. And so, Vanderbilt asks this
Court to reverse the bankruptcy court. But Vanderbilt is wrong: the words do mean
what they say, and this Court does not have the liberty to change them. Therefore, the
bankruptcy court’s decision is affirmed.
BACKGROUND
Neither party disputes the material facts of this case. In April 2009, Tanya
Epling (the Debtor) borrowed $42,069.09 from Vanderbilt Mortgage to finance a
2009 Giles Classic mobile home. Epling lived in the mobile home at 1417 Cow

Creek Road, Salyersville, Kentucky, which is in Magoffin County. On April 20,
2009, Vanderbilt Mortgage filed its title lien statement in Bell County, Kentucky.
The Kentucky Department of Vehicle Registration issued a title for the home, listing
Vanderbilt’s lien on the certificate of title. Vanderbilt then filed the certificate of title
in Bell County.
On October 29, 2010, Epling filed for Chapter 7 bankruptcy, and
Westenhoefer was appointed as trustee for her estate. Westenhoefer then filed an
adversary proceeding on February 15, 2011, seeking to avoid Vanderbilt’s lien on the
property because, Westenhoefer claimed, Vanderbilt had not properly perfected its
lien. See 11 U.S.C. § 544. Section 186A.190 of the Kentucky Revised Statute
requires a creditor to file a title lien statement in the county in which the debtor
resides in order to perfect its security interest. Since Vanderbilt failed to do this, its
lien was not perfected. In making this finding, the bankruptcy court noted that
§ 186A.190 was “clear and unambiguous” that a creditor must file with the clerk of
the county in which the debtor resides in order to perfect its interest. R. 1-2 at 3. As
a result, the bankruptcy court ruled that Westenhoefer could avoid Vanderbilt’s lien.
Id.
DISCUSSION
I. Jurisdiction and Standard of Review
Under 28 U.S.C. § 158(a), this Court has the jurisdiction to hear this appeal.
The Court reviews a bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. In re Kennedy, 249 F.3d 576, 579 (6th Cir. 2001).

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II. Kentucky’s Statutory Requirements for Perfecting a Lien on a Mobile Home
The Kentucky Revised Statutes lay out a straightforward system for perfecting
security interests in motor vehicles, including mobile homes. A creditor can perfect
its security interest by making a notation on the vehicle’s certificate of title, Ky. Rev.
Stat. § 186A.190(1), and this notation must be “in accordance with this chapter.” Id.
The statute requires that the notation “be done in the office of the county clerk in
which the debtor resides.” Ky. Rev. Stat. § 186A.190(2). The debtor, Tanya Epling,
lived in Magoffin County, Kentucky, but Vanderbilt Mortgage filed its lien statement
with the clerk of Bell County, Kentucky.
In Kentucky, “the courts have a duty to accord statutory language its literal
meaning unless to do so would lead to an absurd or wholly unreasonable result.”
Holbrook v. Ky. Unemployment Ins. Comm’n, 290 S.W.3d 81, 86 (Ky. App. 2009)
(quoting Ky. Unemployment Ins. Comm’n v. Jones, 809 S.W.2d 715, 716 (Ky. App.
1991)). Moreover, Kentucky law requires courts to resolve any deficiency in the
process of perfection against the creditor, see PHH Mortgage Servs. v. Higgason, 345
B.R. 584, 586 (E.D. Ky. 2006). Because Vanderbilt did not conform with clear the
requirements of Kentucky Revised Statute § 186A.190, it did not properly perfect its
lien and is an unsecured creditor. Since the trustee, Westenhoefer, has the status of a
judicial lien creditor under 11 U.S.C. § 544(a), he has priority over Vanderbilt to
Epling’s one-half interest in the mobile home. 11 U.S.C. § 550.
III. Vanderbilt’s Interpretation of the Kentucky Statutes
Vanderbilt Mortgage is no stranger to a plain meaning interpretation of Ky.
Rev. Stat. § 186A.190, as Vanderbilt has fought and lost on this issue before. See
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Palmer v. Vanderbilt Mortgage and Finance, Inc. (In re Walling), No. 10-51619,
2010 WL 5421148 (Bankr. E.D. Ky. Dec. 20, 2010); See also Schlarman v. Fifth
Third Bank (In re Sands), No. 07-21155, 2008 WL 4290949 (Bankr. E.D. Ky. Sept.
16, 2008) (reaching same conclusion). Nevertheless, Vanderbilt attempts to wiggle
out of this straightforward reading of the statute. First, Vanderbilt argues that because
its lien is noted on the certificate of title, the lien has been perfected. R. 6 at 12; id. at
17-19. Kentucky courts have held notation of a lien on the title certificate constitutes
perfection, see, e.g., Johnson v. Branch Banking and Trust Co., 313 S.W.3d 557, 561
(Ky. 2010). But the problem for Vanderbilt is that § 186A.190(1) only makes a lien
effective when it is noted on a certificate “in accordance with this chapter.” The next
section of the chapter, § 186A.190(2), lays out the additional requirement that the
clerk of the county in which the debtor resides make that notation. Vanderbilt cites
Johnson, but that case holds that “perfection of a vehicle lien does not occur until
physical notation is made on the title pursuant to KRS 186A.190.” 313 S.W.3d at 561
(emphasis added). When a clerk in a county which the debtor does not reside makes
note of a lien on a certificate of title, the notation is not made “pursuant” to
§ 186A.190. That lien is therefore unperfected.
Other sections of chapter 186A do not change the plain meaning of
§ 186A.190. For instance, if a county clerk receives a title lien statement for a debtor
residing in a different county, § 186A.195(3) requires the clerk to enter the correct
county into the statewide motor vehicle registration system. Because the Bell County
Clerk issued a certificate of title with Vanderbilt’s lien on it, Vanderbilt argues that
the clerk must have believed it was proper to issue a certificate, and by extension, that
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it must have been correct for the clerk to do so. R. 6 at 13-14. But this too is
mistaken. To err is human, and Kentucky’s county clerks are no exception. A
creditor can only perfect a lien by complying with the requirements of § 186A.190,
and the failure of a county clerk to correct a lienholder’s mistake does not change
those requirements. Cf. General Motors Acceptance Corp. v. Hodge, 485 S.W.2d
894, 895 (Ky. App. 1972) (holding that a county clerk’s failure to note an automobile
finance company’s lien on a registration receipt rendered that lien unenforceable).
Similarly, other sections of the Kentucky code that protect the interests of
creditors do not alter the text of § 186A.190. Vanderbilt correctly notes that other
sections of chapters 186 and 186A protect the holders of security interests in
manufactured homes. See R. 6 at 14-15 (citing Ky. Rev. Stat. §§ 186.045(10);
186A.297; 186.045(7); 186A.190(3)). But even if it were clear that these provisions
were part of a larger legislative scheme to protect the interests of secured lenders, this
intent alone could not change the plain meaning of § 186A.190. Other portions of the
code can help to resolve ambiguities, but when the text is clear, this Court has an
obligation to “ascertain the intention of the legislature from the words used in
enacting the statute rather than surmising what may have been intended but was not
expressed.” Metzinger v. Ky. Retirement Sys., 299 S.W.3d 541, 546 (Ky. 2009)
(quoting Flying J Travel Plaza v. Commonwealth, 928 S.W.2d 344, 347 (Ky. 1996)).
Regardless of what the legislature may have intended, the text of § 186A.190 clearly
requires the clerk of the county in which the debtor resides to note a lien on the
certificate of title.

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Kentucky’s procedures for amending a certificate of title are likewise
inapplicable in this case.

Kentucky Revised Statute § 186A.240(1) requires the

Department of Vehicle Registration to amend a certificate of title when it is “issued in
error to a person not entitled to the certificate, or contains incorrect information or
information has been omitted from the certificates.” Vanderbilt contends that since
the Department of Vehicle Registration did not cancel Epling’s title, the title “remains
effective unless and until the State acts.” R. 6 at 21. This is true: Epling’s title
remains effective. But Vanderbilt has confused proof of ownership—that is, a valid
title—with the perfection of a lien. Under § 186A.240, the Department of Vehicle
Registration is only required to amend a title if the Department issues a title to the
wrong person, the title contains wrong information, or the title lacks necessary
information. None of those circumstances are present here. Epling’s title does not
contain wrong information; rather, Vanderbilt’s lien on that title was filed in the
wrong county. Incorrectly filed liens are not covered by § 186A.240, so there was no
reason for the Department of Vehicle Registration to issue a correction.
The decisions of other federal courts considering similar statutes in other states
are also inapplicable here. For instance, Vanderbilt cites In re Mitchell, 104 F. Supp.
969, 972 (N.D. Ohio 1952), which considered whether a lien remained valid on an
improperly issued certificate of title. Ohio law explicitly preserved the validity of
such liens, so the Mitchell court found “a clear legislative purpose to protect
lienholders whose liens are otherwise valid.” Mitchell, 104 F. Supp. at 972. But in
this case, it is the lien notation, not the certificate of title, that does not comply with
Kentucky’s statutory requirements. Mitchell further noted that “[t]he duty imposed
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upon the lienholder is that he present the instrument evidencing his lien to the clerk of
courts of the county where the certificate of title was issued.” Mitchell, 104 F. Supp.
at 972. The lienholder in Mitchell satisfied this requirement of Ohio law. Vanderbilt,
on the other hand, did not fulfill its obligation under Kentucky law to present its lien
to the clerk of the county in which the debtor resided.
The other case Vanderbilt cites, Loye v. Denver United States National Bank,
341 F.2d 402, 404 (10th Cir. 1965), is also unpersuasive. Loye held that a bank
perfected its lien on an automobile even when, contrary to Colorado’s titling statute,
the bank did not file its security interest in the county in which the debtor resided. As
a first matter, a decision by the Tenth Circuit is not binding in the Eastern District of
Kentucky. See Cross Mountain Coal, Inc. v. Ward, 93 F.2d 211, 217 (6th Cir. 1996).
Moreover, the Colorado law at stake in Loye demanded only that creditors
“substantially” comply with the statutory requirements to perfect their liens. See
Loye, 341 F.2d at 405. A creditor that filed its lien in the wrong county might
therefore still have been said to have “substantially complied” with the statute. By
contrast, Kentucky Revised Statute § 186A.190 does not allow a creditor to perfect a
lien through “substantial compliance” with the statutory requirements. It requires the
county clerk of the county in which the debtor resides to note the lien on the
certificate of title: no more and no less.
IV. Vanderbilt’s Constitutional Argument
Lastly, Vanderbilt argues that the bankruptcy court’s ruling violated the Tenth
Amendment to the U.S. Constitution because it encroached on Kentucky’s scheme for
registering and titling vehicles. But a federal court upholds, rather than disrupts,
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Kentucky’s statutory regime when it interprets a Kentucky law to mean what its
words say. Federal bankruptcy courts apply state law to determine if a creditor has
perfected a security interest, see, e.g., Stellwagen v. Clum, 263 U.S. 605, 613 (1918),
and that is what the bankruptcy court and this Court have done. Vanderbilt did not
perfect its security interest in Epling’s mobile home, so the bankruptcy court was
correct to rule that Westenhoefer has priority over Vanderbilt.
CONCLUSION
Accordingly, the decision of the Bankruptcy Court, R. 1, is AFFIRMED.
This the 19th day of September, 2011.

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