For a secured lender, a future advance clause in the loan agreement is worth its weight in gold, if a trustee tries to avoid a potentially unperfected lien. A trustee must avoid a lien, even if a debtor might benefit from allowing an auto lien to remain in place, according to Bankruptcy Judge Craig A. Gargotta of San Antonio.
A chapter 13 debtor had purchased a car with a $19,000 loan. Under Texas law, the loan was properly perfected because the lien was noted on the certificate of title and the lender retained possession of the title.
Four years later, the debtor took out a $14,000 loan from the same lender, secured by the same collateral. Part of the second loan was used to pay off the remainder of the first loan. The debtor retained the remainder of the second loan proceeds for her own use.
The lender retained the title but did not obtain a replacement title, noting the date of the second loan. Consequently, the title bore the date of the first loan, but not the date of the second loan, although the first loan had been repaid in full.
Utilizing avoiding powers under Section 544, the chapter 13 trustee initiated an adversary proceeding to declare that the second loan was unsecured. Relying on the so-called future advance clause in the first loan agreement, Judge Gargotta ruled in his Oct. 11 opinion that the second loan was validly secured by a perfected security interest in the car.
To have a perfected security interest in an auto in Texas, state law requires listing the name and address of the lienholder and the date of the lien on the certificate of title.
The trustee argued that the original security interest was extinguished when the first loan was paid off with proceeds from the second loan. Because the certificate of title did not bear the date of the second loan, the trustee argued that the lien securing the second loan was not perfected.
Judge Gargotta quoted from the future advance clause in the original security agreement, which said that the car would stand as collateral for repayment of the first loan “as well as any other amounts you now owe or will owe [the lender] in the future.”
Relying on In re Conte, 206 F.3d 536 (5th Cir. 2000), Judge Gargotta said the second loan was a future advance and found no gap in perfection, because the first loan was repaid with proceeds from the second. Analyzing the purposes of Texas law, he said there was “no remaining purpose for requiring a creditor to retitle upon the issuance of a future advance.”
To the extent that courts in other states have found second loans to be unperfected, Judge Gargotta attributed the result to differences in the laws of those states. In states with laws similar to Texas, he said that courts have found that “the second loan is treated as a future advance and the lien remains perfected.”
The lender made an inventive argument in case the second loan was found unperfected. The lender contended that the trustee should refrain from avoiding the lien, to help the debtor.
If the lien were not avoided, the loan would be paid off soon. If the debtor were to default on the plan later, the debtor would retain the car because the lien would have been paid. On the other hand, the lender said, if the lien were avoided and the debtor defaulted, the lender could repossess the car.
Judge Gargotta rejected the novel argument. He said the court does not weigh a trustee’s avoidance action against “its potential impact on the debtor.” To the contrary, he said, “a trustee’s primary duty is to maximize the value of the estate, not to serve as additional debtor’s counsel.” Judge Gargotta calculated that avoiding the lien would increase the creditors’ recovery by almost 40%.