Memorandum of Decision Re: Security Interest in Vehicles

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re DENNIS and JENNIE BRAZER,                                       No. 1-87-01023      Debtors. _________________________/ BISHOP-HANSEL FORD SALES, INC., dba HANSEL FORD,      Plaintiff,    v.                                                                                      A.P. No. 1-87-0198 DENNIS and JENNIE BRAZER and PAUL DeBRUCE WOLFF, Trustee,      Defendants. ___________________________/
Memorandum of Decision
     At the time they filed their bankruptcy petition, the debtors operated a used car wholesale business. A few weeks prior to the filing plaintiff Hansel Ford transferred possession of three used cars to the debtors, retaining the pink slips. The vehicles were part of the debtors' regular inventory of used cars when they filed their Chapter 13 petition. Hansel Ford did not file a UCC-1 financing statement.      By the instant adversary proceeding, Hansel Ford seeks to recover either the vehicles or their value as damages if its right to recovery has been cut off. While the complaint has little merit on its face, the matter gives the Court pause because this is a Chapter 13 case, where the trustee's avoiding powers are rarely exercised.      Preliminarily, the claim for damages is not only meritless but probably a violation of the automatic stay. To the extent that Hansel Ford has no valid security interest it is an ordinary unsecured creditor, and its only proper means of recovery is to file a proof of claim. Only the types of debt described in section 1328(a) of the Bankruptcy Code are excepted from Chapter 13 discharge; the claim of Hansel Ford hardly qualifies.      Under either Chapter 7 or Chapter 11, the interest of Hansel Ford is clearly avoidable. California Vehicle Code section 5907 provides that the validity and perfection of a security interest in a vehicle held in a dealer's inventory is governed exclusively by the Uniform Commercial Code. Section 9302(3)(b) of the Commercial Code requires that a financing statement be filed to perfect a security interest in a vehicle during any time in which it is inventory. Section 9301(1)(b) gives a subsequent lien creditor priority over the holder of an unperfected security interest. Bankruptcy Code section 544(a)(1) gives the trustee in bankruptcy the powers of a lien creditor. Therefore, the unperfected interest of Hansel Ford is avoidable by the trustee. The result is the same if Hansel Ford argues that it retained ownership and only consigned the vehicles to the debtors. Cal.Com.Code sec. 9114(2).      The Court is only really troubled here with whether section 544(a) of the Code is applicable in Chapter 13 cases and, if it is, whether the avoiding powers it grants are enforceable by the debtors. The Court elects to follow the majority of courts and answers both questions in the affirmative. In re Weaver (Bkrtcy.W.D.Ky.1987) 69 B.R. 554, 556; In re Einoder (Bkrtcy.N.D.Ill.1985) 55 B.R. 319, 322-23; In re Boyette (Bkrtcy.N.D.Tex.1983) 33 B.R. 10; In the Matter of Hall (Bkrtcy.N.D.Fla.1982) 26 B.R. 10. Cf. In re Carter (Bkrtcy.D.Colo. 1980) 2 B.R. 321; In re Saberman (Bkrtcy.N.D.Ill.1980) 3 B.R. 316; In re Chapman (Bkrtcy.Dist.Col.1985) 51 B.R. 663.      The effect of the Court's ruling is not necessarily to give the debtors a windfall. Since the debtors' profits may be significantly increased as a result of their ability to keep all of the proceeds of the sale of the vehicles, their plan is subject to modification pursuant to section 1329(a) of the Code to insure that the benefit of avoidance of Hansel Ford's interests goes to the creditors.      For the above reasons, the debtors' motion for summary judgment will be granted. Hansel Ford shall take nothing by its complaint, and the proceeding shall be dismissed with prejudice. Counsel for the debtors shall submit an appropriate form of judgment.
Dated: May 19, 1988                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy