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This is the sort of rules-lawyering I'm never in favor of, even when it helps out "the common man". IMO the creditor "deserves" to take the truck, morally. The man falsely declared his county of residence, and checking his license (which I assume is the main way a dealer would confirm that information) would have backed that up. They should be allowed to re-file the lien in the proper county if it's that big a deal and reclaim the truck.
I think you're misunderstanding the situation here, to the extent that you think that the creditor wants to take the truck and that the man somehow benefits by declaring the incorrect county. The second idea can be dismissed quickly; this isn't a repossession, but a bankruptcy case in which the trustee is challenging the lien. The trustee's job is to sell property for the benefit of creditors. The trustee winning the action means the truck is going to get sold and the proceeds distributed among all the creditors named in the bankruptcy; the man doesn't get to keep the truck.
The other point is a bit more complicated, in that the creditor winning this action actually increases the chances that the man gets to keep the truck. If the creditor has a security interest in the truck, and there isn't enough equity for it to be worth it for the trustee to sell it, then the creditor has four options:
He can ask the debtor to reaffirm the debt. The bankruptcy won't extinguish the creditor's security interest, but it will extinguish the debtor's personal obligation to pay. It's fairly common for bankrupts to have auto loans well in excess of the vehicle's value. After a reaffirmation the loan survives the bankruptcy, and the debtor continues to be personally liable for it, meaning that if they don't make the payments it could continue to affect their credit score and the creditor can continue to take collection actions (phone calls, letters, etc.). They can still repossess the car, and continue to hold the debtor for accountable for any shortage. They can go after the debtor's other assets to the extent that state law allows. This is almost always what auto creditors want you to do. When I did bankruptcy, debtors would occasionally ask about this because they needed a car and were pessimistic on their ability to get an auto loan after discharge. I told them up front that if they insisted on this they'd need to find another attorney, because I wouldn't do it, and trustees, who have to act in the best interests of the debtor as well as the creditors, have to approve and they're increasingly reluctant to allow these agreements outside of the rare cases when they make sense.
The creditor can repossess the truck. This happens fairly often, but not as often as you'd might think. Again, a lot of car loans are underwater, so getting the car is a consolation prize. Furthermore, the creditor has no idea what kind of condition the vehicle is in, mileage, etc. And repossession isn't free. They have to hire a tow truck to pick up the car. They then have to find somewhere to store it, assuming the bank manager's house isn't an option. It's probably going to be sold at a dealer auction, where it won't fetch anywhere near it's market value. The fact that the truck in this case is a commercial vehicle complicates things even further, as the incidental costs are larger, the market is smaller, and things like DOT safety standards make it third-party purchase riskier. Again, it's a consolation prize.
The creditor can redeem the truck. This is only available in the event that the loan is underwater. Say he owes $50,000 and the truck is only worth $30,000. If he can come up with $30,000 cash he can have the truck for that amount. This is a better deal for the creditor than repossession, since it avoids all of the incidental expenses and risk of selling below market. The downside is that it requires the debtor to come up with a lot of cash at a time when they, almost by definition, aren't doing well financially. It makes the most sense when the vehicle is only worth, like, a few thousand dollars that the debtor can save up while the bankruptcy is pending. There are also companies that offer redemption loans, but these almost always have ridiculously high interest rates, though they may be worth it if the car is worth keeping.
The final option is called a "ride through". This was technically eliminated by the 2005 bankruptcy reforms, but it's made a comeback in the form of the "back door ride through" and the realities of the situation. It used to be that the bankruptcy code prohibited a creditor from seizing collateral after discharge, so long as the loan was current. What this meant was that, if the loan was current at the time of filing, you could just continue making payments and keep the car. Since there was no formal affirmation, if you couldn't afford the payments or just wanted a new car, you could stop paying at any time without detriment to your own financial position. While the bankruptcy code no longer affords debtors this protection, a number of state laws still prohibit creditors from seizing collateral when payments are current. Furthermore, remember that repossession isn't free. The banks pushed for this reform because they thought it would lead to more affirmations. It actually led to more repossessions.
Unfortunately for them, this push was based on what they thought they wanted, but after several years it became clear that the economics didn't make sense. It costs the banks about $500 per reaffirmation in legal costs and filing fees. So 100 affirmations costs them $50,000. If the default rate is 10%, then it's costing them $50,000 to pursue ten delinquencies. And what do they actually get for that? Well, they already had the right of repossession, so all they're really getting is the right to sue people who filed bankruptcy in the past few years. Tack on more legal fees, and add into it the fact that most of these people aren't going to have many recoverable assets, and it doesn't look too good. Even in the best case scenario, where they can collect every judgment in full and there are no additional legal fees, it's unlikely that the total value of the suits is going to add up to what they paid—they could be paying $50,000 for the right to collect $30,000. And since reaffirmation is such a bad deal for the debtor, they're now forced to repossess on a lot of loans where they might have otherwise been paid in full.
So in addition to your attorney warning against it and the trustee skeptical at best, we now have the situation where reaffirmation might not even be an option. I know that Ford Motor Credit still follows the letter of the law and insists on reaffirmation, and local credit unions often do because of complicated cross-collateralization agreements and the fact that they seem to take things personally. But otherwise, most debtors who aren't behind on payments end up keeping the car.
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Agreed that the creditor should be able to refile. I don’t know the terminology well enough to say if that is true.
But that doesn’t mean this was an unjust verdict! He lives in a weird edge case where the codified law says one thing and the title paperwork say another. He shouldn’t be held responsible for a mistake on the county’s forms.
Just to be clear, the creditor can't refile. Once the debtor files for bankruptcy, any collection actions for existing debts are automatically stayed, barring a court order to lift the stay. These orders are usually only granted if there is a secured debt, e.g. a mortgage or car loan. A judge is never going to lift the stay to allow an unsecured creditor to file a lien against the debtor. Doing this would completely subvert the intention of the bankruptcy code, since bankruptcy, with certain rare exceptions, can't remove any liens that exist at the time of filing. If they were allowed to do this then every unsecured creditor would sue the debtor and get a judgment against them, converting the unsecured debt to a secured debt, making discharge impossible. As I explained below, the debtor gains nothing from the banks error, and possibly even suffers a bit himself. The bank is supposed to be the sophisticated party here but they fucked up because they didn't comply with the relatively straightforward safe harbor provisions. I don't have much sympathy for them.
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I think that this moves beyond a simple mistake in government forms, and goes into wilful fraud. He claimed to be living in county A, votes in county A, presented a license from county A. But then, when it advantages him, he claims to live in county B. He seems to have known the whole time that he technically lived in county B, and took advantage of the government confusion so that he could dodge his obligation.
Based on the facts, I think it is safe to assume that the borrower didn’t knowingly mislead the creditor here. The plaintiff is the trustee for the bankrupt borrower, meaning the debtor is not directing the action. The trustee’s job is to find every avenue of relief permissible under the law. Given that the borrower is a truck driver in rural Kentucky, living in a trailer home, I’m going to go out on a limb and say that he is probably not a sophisticated borrower who knew the nuances of title registration law when negotiating with the bank.
This is likely an instance of the trustee’s attorney finding a technical argument on behalf of the bankrupt estate with no bad faith involved in the creation of the loan.
Notably, the creditor here does not lose the debt claim, they just move from secured to unsecured creditor status and can recover from the general assets of the bankrupt party along with other unsecured creditors. The borrower doesn’t get a free truck here, and the bank is only left out in the lurch to the extent that the other unsecured creditors share in the assets.
Gotcha, I didn't catch that detail. I thought that this was a case where the borrower himself was claiming his residence was different once he was in bankruptcy court.
I would also clarify that the upshot here isn't that the debtor gets to keep the truck. For the sake of argument, let's assume that sale of the truck will recover $50,000 after fees, which amount is exactly the same as the lien Creditor A claims against it. This is the only property of the estate available for distribution. Let's also assume that the debtor has $100,000 in total debt, and that the other $50,000 is from an unsecured loan from Creditor B. This is a straight Chapter 7 liquidation. If Creditor A's lien is valid, then Creditor a gets the full $50,000 proceeds and Creditor B gets nothing. Since the court ruled the lien was invalid, there's now $50,000 to be split between two unsecured creditors, and each would get $25,000.
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As I wrote above, his driver's license was in the wrong county as well. Only his house's deed and mortgages were in the correct county.
Yes, that's what I mean - if they verified his address by checking his license (which I would assume the standard would be), it would back up his statement that he's from Trimble, not Carroll. If someone says they're from Trimble, their license says they're from Trimble, and the car they're buying from you is registered and titled in Trimble, I don't think the dealer should be culpable for the lien being placed in Trimble.
Under Kentucky, law, they aren't; that's the purpose of the safe harbor provision. The problem is that they didn't comply with the safe harbor provision by only getting an attestation rather than a sworn declaration. To be clear, all an attestation is is a verification by the notary that the person whose signature is on the document is the person who signed it. The change would have been trivial to make at the time of signing, and the bank shouldn't be exempt from the consequences of not following the law.
I thought one of the main purposes of property registration regimes - including car titles - was certainty around liens. If the car is titled in Trimble, a lien against it in Trimble should be valid regardless of where the owner lives. Anything else leads to an absurdity, as the instant case demonstrates.
I'm not going to defend Kentucky's system of vehicle registration, because it's dumb. In PA and Ohio at least, liens are recorded in the county where the vehicle is registered, period. In PA it isn't even recorded at the courthouse, just with the DOT, which makes sense since the records aren't public anyway due to Federal law. The legislature had a chance to change it but they put a safe harbor provision in instead. That being said, the court can't just ignore the system that exists because they'd prefer a better system. The bank is the sophisticated party here, and they should know, understand, and follow the law as it exists, at peril of their lien not being recognized. I have no sympathy for them.
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According to the opinion, Kentucky's policy has held otherwise since 1914 (Burbank & Burbank v. Robek) at the latest.
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