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#2176 entered 10-24-95

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

HENRY F. LINNEMAN, TREVA M. LINNEMAN,

DEBTORS

NO. 93-41112-7

CHAPTER 7

MEMORANDUM OF DECISION

This matter has been presented to the Court on stipulations and briefs. The trustee is represented by Joseph I. Wittman of Topeka, Kansas. Ford Motor Credit Company (FMCC) is represented by John H. Stauffer of Goodell, Stratton, Edmonds & Palmer, L.L.P., of Topeka, Kansas. FMCC had moved for stay relief so it could proceed to enforce a security interest it claimed to have in a car the debtors owned when they filed for bankruptcy, and the trustee objected that FMCC did not have a valid security interest. The question to be resolved is whether the trustee or FMCC has a superior interest in the car.

FACTS

The parties have stipulated to the following facts. On January 12, 1990, the debtors entered into an installment sales contract to buy a 1989 Ford Crown Victoria having Vehicle Identification Number (VIN) 2FABP74FOKX147781. In the contract, the VIN was mistakenly entered as "ZFABP74FOKY147780"; in the underlined positions, the letter "Z" had replaced the number "2," the letter "Y" had replaced the letter "X," and the number "0" had replaced the number "1." Nevertheless, on March 30, 1990, the Kansas Department of Revenue Titles and Registration Bureau issued to the debtors a title for the vehicle which used the correct VIN and listed FMCC as the holder of a lien on it. Apparently in July 1993, the debtors obtained a title in Wisconsin which did not list FMCC as a lienholder, but this omission was remedied about a month later. The trustee concedes the vehicle identified by the titles is the one the debtors owned when they filed for bankruptcy. However, he contends the errors in the VIN that was listed on the installment contract prevented FMCC from obtaining a valid security interest in the vehicle. The vehicle has been sold for $3,400 and the trustee is holding the proceeds pending the Court's resolution of the parties' dispute.

DISCUSSION AND CONCLUSIONS

The issue presented is whether the errors in the VIN entered in the sales contract destroy FMCC's claimed security interest, even though the title, as issued, accurately listed the VIN and listed FMCC as a secured creditor. Absent the security interest, the vehicle would be an unencumbered asset of the debtors' bankruptcy estate. The trustee argues that the three errors in the VIN are sufficiently misleading to vitiate the security interest. Even though he recognizes the case is no longer the law in Kansas, the trustee seems to rely largely on Trapani v. Universal Credit Co., 151 Kan. 715, 720-21 (1940), in which the Kansas Supreme Court held that a conditional-sales contract for a vehicle which had been filed in the appropriate government office but contained the wrong VIN did not give notice of the seller's security interest to a third party who bought the vehicle from the buyer. Since the titles to the debtors' car had the correct VIN and listed FMCC's lien, thus giving third parties notice of the lien, this case would not really support the trustee's position even if it were still Kansas law. Instead, the reasoning in Transport Acceptance Corp. v. Fothergill (In re Key Truck Leasing), 9 B.R. 837, 841 (Bankr.D.Kan. 1981), would be applicable, "The security agreement . . . became perfected when the plaintiff, who had been assigned all of [the seller's] rights in the contract, noted its lien on the certificates of title for the vehicles. Under the Kansas U.C.C. notice system of filing, this perfection was all the notice that the trustee, as a hypothetical lien creditor, was entitled to."

Even if some question remained, however, the propriety of the trustee's reliance on Trapani is completely refuted by the decisions in Dick Hatfield Chevrolet v. Bob Watson Motors, 10 Kan.App.2d 350, rev'd 238 Kan. 41 (1985). That case involved a security agreement on which a seventeen-character VIN was recorded with an extra digit added. 10 Kan.App.2d at 352. The court of appeals indicated in its decision that the adoption of the Uniform Commercial Code in Kansas had changed the law so that the trial court's reliance on Trapani was "unwarranted." 10 Kan.App.2d at 353. Although it reversed on other grounds, the supreme court agreed that reliance on Trapani was "inappropriate." 238 Kan. at 44. Thus, the Kansas courts have made clear that they will no longer follow Trapini and its "serial number" test.

Despite relying largely on Trapani, which involved the question of the adequacy of notice to third parties, the trustee seems to recognize at least implicitly that since the incorrect VIN appears only on the installment contract, his hope of defeating FMCC's security interest lies K.S.A. 1994 Supp. 84-9-203(1)(a), which establishes prerequisites for a security interest to be enforceable against the debtor and third parties. Under that provision, when the debtor has possession of the collateral, a security interest is not enforceable unless, among other things, "the debtor has signed a security agreement which contains a description of the collateral." K.S.A. 84-9-110 provides in pertinent part: "for purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described." The trustee suggests that the VIN is the only information on the installment contract which distinguishes the debtors' 1989 Crown Victoria from another one. He also suggests that the three errors in the VIN are somehow more serious than the transposition of digits involved in Trapani. No evidence has been presented to show that any vehicle, a 1989 Crown Victoria or any other, was assigned the VIN written into the contract. The debtors, having only one 1989 Crown Victoria, of course knew which vehicle the contract was intended to apply to, and the Court assumes any third party having some reason to investigate the matter would be aware (or would quickly learn) that the debtors had a 1989 Crown Victoria which had FMCC's lien noted on the title and a VIN that matched fourteen of the seventeen letters and numbers written on the contract. Thus, as a factual matter, the trustee's position is much weaker than might at first appear. More importantly, though, the Court believes the Kansas Supreme Court already indicated in Dick Hatfield how it would rule on this question. The court of appeals had concluded the mistaken addition of an extra digit to the VIN listed in the security agreement was not fatal to the claimed security interest. 10 Kan.App.2d at 353-55. Although it reversed the court of appeals on other grounds, the supreme court agreed that the description of the collateral was sufficient for the creditor's security interest to attach. 238 Kan. at 44. The Court concludes the errors in the VIN entered in the installment contract were not sufficient to prevent FMCC's security interest from attaching to the debtors' car and being enforceable against them and third parties.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of October, 1995.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS



In Re: )

)

HENRY F. LINNEMAN, ) NO. 93-41112-7

TREVA M. LINNEMAN, ) CHAPTER 7

)

DEBTORS. )



JUDGMENT ON DECISION

This matter was presented to the Court on stipulations and briefs. The trustee was represented by Joseph I. Wittman of Topeka, Kansas. Ford Motor Credit Company (FMCC) was represented by John H. Stauffer of Goodell, Stratton, Edmonds & Palmer, L.L.P., of Topeka, Kansas. The Court considered the relevant materials and has now issued its Memorandum of Decision resolving the parties' dispute.

For the reasons stated in the Memorandum of Decision, judgment is hereby entered denying the trustee's objection to FMCC's claim to have an enforceable security interest in the debtors' 1989 Crown Victoria. The trustee shall distribute the proceeds of the sale of the car accordingly.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of October, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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