Proper perfection of a lien is critical because typically an
unperfected lien can be avoided in a bankruptcy using the strong
arm powers in Section 544 of the Bankruptcy Code. In Pierce a lender provided purchase money
financing for the debtor's acquisition of a manufactured
home in Kentucky. It submitted an application and
obtained a notation of its lien on the certificate of title for the
home. That should be sufficient –
right? Unfortunately for the lender, the answer was
The court noted that the Kentucky Supreme Court previously held
that a lien is not perfected until it is actually noted on the
certificate of title for the manufactured home. However,
the state court had not addressed the consequences of a procedural
deficiency in filing the application for the lien, nor had it
addressed the details of the required procedures.
As an initial matter, the court addressed the consequences of a
procedural deficiency in filing the lien application. The
applicable statute provides that the notation "shall be in
accordance with this chapter." According to the
Pierce court, a "plain reading" of this
provision means that if proper procedures are not followed then the
resulting notation is not sufficient to perfect the lien.
In this case the lender filed its application for a lien in the
county where the dealer's principal place of business was
located as opposed to the county where the purchaser
resided. It argued that this was proper because the
statute established a "two-track" system, pointing to the
statutory provision that allows the application for the first
certificate of registration or title to be made in either the
county where the purchaser resides or the county where the
dealer's principal place of business is located.
The lender argued that the option to file title or registration
outside of the purchaser's county of residence also applied
to notation of a lien on title.
The court rejected that argument. It noted that the
section authorizing filing in alternate counties only addressed
applications for certificate of title or registration.
"In stark contrast, [the statute] is silent as to
whether title lien statements may be filed outside the county of
the debtor's residence." The court asserted
that if the state legislature had intended to allow filing in an
alternate county, "it would have made that point
In determining the meaning of the statute the court also
examined the following sentences from the statute:
When purchaser of a vehicle upon which a lien is to be recorded
is a resident of a county other than that of the dealer, the
application for registration or title may be made to the county
clerk in either county. The lien must be recorded in the
county of the purchaser's residence.
The lender argued that there was a difference between the proper
place for recording a lien and a permissible place for
filing an application for the lien, so that the second
sentence did not resolve where the application could be
filed. However, the court disagreed and concluded that
"the juxtaposition of these two sentences signals the Kentucky
General Assembly's intention that title lien statements be
filed in the county of the debtor's residence even if the
initial application for certificate of title or registration is
filed in another county under KRS 186A.120(2)(a)."
The net result of the court's parsing of the statute was
that even though the lien was noted on the certificate of title for
the manufactured home, the lien was deemed to be
unperfected because the application was filed in the wrong county
and thus the lien could be avoided.
This case underlines the fact that issues that may appear to be
merely minor technicalities can have significant consequences,
particularly in the context of a bankruptcy. The
Pierce case is but one more example that the failure to
follow precisely the procedures required to properly perfect a lien
can result in the lien being avoided.
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