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Sixth Circuit Rules Creditor Has Perfected Security Interest in Bankruptcy Debtors Vehicle - In re Rice

December 19, 2011

At Howard Law, P.C., our San Bernardino consumer bankruptcy attorneys frequently represent clients who are fighting to hold on to their cars. Here in southern California, a car is an important tool for making a living and meeting other basic obligations. Bankruptcy law recognizes this somewhat and often makes allowances for filers who want to hold on to their cars, but those allowances have limits. The limits were on display in the decision in In re Rice, by the Bankruptcy Appellate Panel of the Sixth U.S. Circuit Court of Appeals. Megan Lynn Rice of Ohio filed for Chapter 7 bankruptcy shortly after Wells Fargo Bank repossessed her car. WFB moved for relief from the automatic stay, but the bankruptcy court found that it was not entitled to so move because the title of the car had not been properly assigned. The BAP disagreed, finding Ohio law does not require assignments to be noted on titles.

Rice bought the 2003 Chevy Trailblazer in 2008 and financed it. The security interest was assigned by the dealer to Wells Fargo Auto Finance, and from there to WFB. About two years later, Rice defaulted on the payments. The car was repossessed on Jan. 4, 2011, and Rice filed for bankruptcy on Jan. 28, 2011. On Feb. 9, WFB moved for relief from the automatic stay, including a copy of the assignment from WFAF to WFB and a copy of the title. After a disagreement arose between WFB and the court as to whether the assignment was valid, it gave the parties 30 days to brief the issue. It ultimately decided WFB had no right to ask for relief from the stay because the assignment was not valid, saying the assignment must be noted on the title under Ohio law. It rejected arguments that the security interest was perfected, saying the issue was that WFAF appeared to hold the lien while WFB had the note. WFB appealed.

The BAP started its analysis by saying the question here is who is the "party in interest" entitled to file for relief from stay under bankruptcy law. Construing caselaw from around the United States, the BAP found that a party may seek relief from the automatic stay if it can show that it has an interest in the relevant note, and has been injured by the debtor's default or other injurious conduct. An assignee may seek relief if the assignment is valid. State law governs these determinations, the BAP said. In this case, the dispute is only over whether Ohio law requires the assignment must have been noted on the vehicle's title to make WFB a party in interest. The BAP with approval an earlier case, In re Fields, which had strikingly similar facts but a different underlying dispute. Notwithstanding that difference, the panel said, Fields is controlling. If an assignee is not required by Ohio law to note the assignment on the title of the vehicle, the panel said, "surely its perfected status" gives it standing to seek relief from stay. Thus, it reversed the bankruptcy court's decision.

As Yorba Linda personal bankruptcy lawyers, we wonder whether this case will be appealed to the Sixth Circuit. After all, the lower court expressly held that perfection of the interest was irrelevant. Our lead partner, Vincent Howard, sees problems with the chain of title much more often in Howard Law, P.C.'s work with mortgage holders. However, with the rise of buying and selling loans as investments, it's likely that few borrowers are immune to this problem. While this can create headaches like the kind experienced by Rice, it can also create opportunities for experienced Los Angeles individual bankruptcy attorneys to fight a repossession or foreclosure attempt by an entity that cannot prove ownership. We do not believe courts should drop their standards for proof of ownership, especially when a large investment like a home or a vehicle is at stake.

Howard Law, P.C., represents clients across California who are considering bankruptcy as a way to handle debt they're worried is spiraling out of control. To tell us about your situation and discuss your options, call us today for a consultation at 1-800-872-5925 or send us a message online.

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