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Court opinion:
A person lives on a property that sits directly on top of the line between Trimble County and Carroll County in Kentucky. Most of the house is in Carroll County, but the driveway and part of the house are in Trimble County. The property's deed, and two mortgages on the property, are recorded with the Carroll County clerk, and the property tax is paid to Carroll County. However, the person's driver license states that he resides in Trimble County, and he has voted in Trimble County in the four most recent elections.
The person buys on credit, registers, and titles a semi-truck in Trimble County. Accordingly, the creditor files a lien on the truck with the Trimble County clerk. However, when the person files for bankruptcy, he argues in bankruptcy court: he actually resides in Carroll County; since the lien was not filed in his county of residence, it is invalid under state law; and, therefore, the lien must be "avoided" (deleted) in the federal bankruptcy.
The bankruptcy judge agrees with the debtor and avoids the lien. A slight majority of the property is in Carroll County, so the deed was recorded in Carroll County, and that is conclusive proof of the debtor's county of residence under state law. State law incorporates "a policy of certainty in the recording of mortgages on both real and personal property", and allowing a person to pick and choose which of two counties is his county of residence would frustrate that policy. The debtor cannot be faulted for giving the wrong county of residence in the credit application, as (1) the application was only attested, not sworn, before a notary, and (2), if the application was not sworn, then under state law it was the creditor's responsibility to check the county of residence before filing the lien.
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.
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.
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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