“Missed it by thaaat much . . .”

That phrase always brings to mind the inimitable Don Adams and his bumbling but well-intentioned television character, Maxwell Smart. Max always meant well and tried really hard, but never got it quite right the first time.

I thought about Max when I read a recent case in which a creditor filed its application to note its lien on a certificate of title, one day after the 20-day grace period provided for in the U.S. Bankruptcy Code. That one day made a big difference. Most of you know this, but may not be focused on how much a difference a day can make.

Federal Law Supercedes State

David and Linda Taylor financed $18,020 of the purchase price of their car through USAA Federal Savings Bank. To perfect its security interest in the vehicle, USAA filed an initial application for a certificate of title with the Idaho Department of Transportation. The application requested that the certificate of title, when issued, note USAA’s security interest.

Under Idaho law at that time, applications for certificates of title had to be accompanied by an affidavit that attested to an inspection confirming the car’s vehicle identification number (VIN). USAA failed to provide this affidavit and refiled a new application for title with the required affidavit 21 days after the Taylors bought the car. USAA’s security interest became perfected on that twenty-first day.

A week later, the Taylors filed for bankruptcy. Then, 17 months after that, the Taylors’ trustee filed a preference action against USAA under Section 547 of the Bankruptcy Code. If successful, the trustee would be able to void USAA’s security interest because USAA filed its lien a day late. The trustee sought a judgment for the value of USAA’s security interest in the car as of the date of the Taylors’ bankruptcy filing. Because of USAA’s tardiness, the trustee won. USAA appealed.

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit agreed with the bankruptcy court’s judgment. It found that USAA failed to perfect its security interest within the 20-day requirement of Section 547 of the Bankruptcy Code and that the trial court properly awarded monetary damages. The appellate panel determined that federal law, not state law, controls the filing period for perfection of a creditor’s security interest for purposes of avoidance under Section 547.

While USAA perfected its security interest within Idaho’s filing period, it was too late for the purposes of Section 547. Therefore the bankruptcy court properly determined that USAA’s perfection of its security interest in the Taylors’ car was a preferential transfer.

Never Too Early to File

So, bad news for USAA. But what should you take from it? Make sure you properly file all applications for certificate of title within 20 days after you sell a vehicle, even if your state provides a longer period of time. In many cases, not doing so is not a fatal error. After all, how many customers file bankruptcy within 90 days after buying a car? OK, probably more than you care to admit, but you get the point.

Had the Taylors entered into an installment sale contract with the selling dealer, the outcome would have been the same, but with one significant difference. USAA would have made the dealer buy back the worthless contract.

You’ll find that most of your agreements with finance companies require you to file the lien within 20 days. And one day can make a boatload of difference.

Michael Benoit is a partner in the Washington, D.C. office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at [email protected]. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.