                  ELECTRONIC CITATION: 2012 FED App. 0006P (6th Cir.)
                               File Name: 12b0006p.06

           BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT


In re: WILLIAM W. PIERCE, JR.,                  )
                                                )
            Debtor.                             )
______________________________________          )
                                                )
VANDERBILT MORTGAGE AND                         )
FINANCE, INC.,                                  )
                                                )           No. 11-8065
             Appellant,                         )
                                                )
             v.                                 )
                                                )
MAXIE E. HIGGASON, JR.,                         )
CHAPTER 7 TRUSTEE,                              )
                                                )
            Appellee.                           )
______________________________________          )
                                                )

                       Appeal from the United States Bankruptcy Court
                            for the Eastern District of Kentucky
                               Bankruptcy Case No. 10-61119
                            Adversary Proceeding No. 11-6008

                                   Argued April 23, 2012

                              Decided and Filed: June 1, 2012

       Before: FULTON, HARRIS, and PRESTON, Bankruptcy Appellate Panel Judges.

                                  ____________________

                                        COUNSEL

ARGUED: John P. Brice, Lexington, Kentucky, for Appellant. Michael B. Baker, THE BAKER
FIRM, PLLC, Florence, Kentucky, for Appellee. ON BRIEF: John P. Brice, Lexington, Kentucky,
for Appellant. Michael B. Baker, THE BAKER FIRM, PLLC, Florence, Kentucky, for Appellee.
                                        ____________________

                                              OPINION
                                        ____________________



       THOMAS H. FULTON, Bankruptcy Appellate Panel Judge. Vanderbilt Mortgage and
Finance, Inc. (“Appellant”) appeals the grant of summary judgment by the U.S. Bankruptcy Court
for the Eastern District of Kentucky (the “Bankruptcy Court”) to Maxie E. Higgason, Jr., Chapter
7 Trustee (“Appellee”) for Debtor William W. Pierce, Jr. (“Debtor”), which avoids Appellant’s lien
on Debtor’s manufactured home under 11 U.S.C. § 544.


                                         ISSUES ON APPEAL


       Although Appellant ostensibly raises five issues on appeal, those issues essentially boil down
to one question: Under the Kentucky Revised Statutes, is a security interest in a manufactured home
perfected where the secured party obtained notation of its lien on the certificate of title by filing a
title lien statement in a county other than that of the debtor’s residence?1


       1
           Appellant states that the issues are as follows:

                            1.      Whether the Bankruptcy Court erroneously decided
                  that a security interest noted on a certificate of title is not validly
                  perfected under Kentucky law?
                            2.     Whether the filing of a title lien statement in a county
                  other than the debtor’s principal residence invalidates the perfection
                  of a security interest noted on a certificate of title?
                            3.       Whether a security interest noted on a certificate of
                  title is perfected under Kentucky law regardless of any defect in the
                  filing of the title lien statement?
                            4.      Whether the Commonwealth of Kentucky is entitled
                  to establish and enforce the procedures by which security interests are
                  perfected in manufactured homes?
                            5.         Whether the Bankruptcy Court’s utilization of 11
                  U.S.C. § 544 to void a security interest noted on a certificate of title
                  violates the Tenth Amendment to the Constitution of the United

                                                    -2-
                      JURISDICTION AND STANDARD OF REVIEW


       The Bankruptcy Appellate Panel of the Sixth Circuit (the “BAP”) has jurisdiction to decide
this appeal. The United States District Court for the Eastern District of Kentucky has authorized
appeals to the BAP.


       For purposes of appeal, an order is final if it “‘ends the litigation on the merits and leaves
nothing for the court to do but execute the judgment.’” Midland Asphalt Corp. v. United States,
489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). A grant of summary judgment
constitutes a final and appealable order. Palmer v. Washington Mut. Bank (In re Ritchie), 416 B.R.
638 (B.A.P. 6th Cir. 2009).


       The issue raised in this appeal is an issue of law and, therefore, is to be reviewed de novo.
See Deutsche Bank Nat. Trust Co. v. Tucker, 621 F.3d 460 (6th Cir. 2010) (statutory interpretation
and application reviewed de novo). “Under a de novo standard of review, the reviewing court
decides an issue independently of, and without deference to, the trial court’s determination.”
Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (B.A.P. 6th Cir. 2007).
Essentially, the reviewing court decides the issue “as if it had not been heard before.” Mktg. &
Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In re Mktg. & Creative Solutions, Inc.),




               States of America?

These questions in different ways all ask the Panel to determine whether the Bankruptcy Court
correctly applied the provisions of the Kentucky Revised Statutes governing perfection of security
interests in manufactured homes. Appellant’s Tenth Amendment argument, in particular, begs the
question as to whether the Bankruptcy Court properly interpreted Kentucky state law. “[A] federal
court upholds, rather than disrupts, Kentucky’s statutory regime when it interprets a Kentucky law
to mean what its words say. Federal bankruptcy courts apply state law to determine if a creditor has
perfected a security interest....” Westenhoefer v. Vanderbilt Mortg. & Fin., Inc. (In re Epling),
2011 WL 4356358 (E.D. Ky. 2011) at *4 (citing Stellwagen v. Clum, 245 U.S. 605, 613 (1918)).

                                                -3-
338 B.R. 300, 302 (B.A.P. 6th Cir. 2006) (citation omitted). “No deference is given to the trial
court’s conclusions of law.” Id. (citations omitted).


                                               FACTS


       The facts are not in dispute. In April of 2007, Debtor purchased a manufactured home (the
“Manufactured Home”) from Clayton Homes of Corbin, Kentucky (“Clayton Homes”), borrowing
the funds from Appellant. To secure repayment of the loan, Debtor granted a security interest in the
Manufactured Home to Appellant.


       Appellant filed an application for first title and a title lien statement with the Whitley County,
Kentucky, County Clerk. Clayton Homes is located in Whitley County. Debtor resided at the time
in Laurel County, Kentucky.


       At some point thereafter,2 the Commonwealth of Kentucky Transportation Cabinet issued
a Certificate of Title for the Manufactured Home, which identified Appellant as “First Lienholder”
and described the “First Lien” as follows:


               Notation No.                    County
               7001811                         WHIT

               Filing Date     04-30-07


       On July 15, 2010, Debtor filed his voluntary Chapter 7 bankruptcy petition. Appellee was
appointed Chapter 7 Trustee and, on February 28, 2011, initiated the adversary proceeding that is



       2
         Only a duplicate Certificate of Title issued on February 16, 2011, has been placed into the
record. Although the Bankruptcy Court cited Appellant’s failure to submit the original Certificate
of Title as an independent ground for avoiding Appellant’s lien–i.e., failure to provide basic proof
of perfection of its lien prior to Debtor’s petition–the parties do not dispute that the original
Certificate of Title identified Appellant as a lienholder.

                                                  -4-
the subject of this appeal (the “Adversary Proceeding”). The Adversary Proceeding sought to,
among other things, avoid Appellant’s lien on the Manufactured Home under 11 U.S.C. § 544.


       Appellant and Appellee filed cross-motions for summary judgment in the Adversary
Proceeding, and on September 20, 2011, the Bankruptcy Court granted Appellee summary judgment,
concluding that Appellant had failed to perfect its lien against the Manufactured Home because it
had filed the required title lien statement in Whitley County rather than Laurel County. Appellant
timely appealed the Bankruptcy Court’s decision.


                                           DISCUSSION


       The parties agree that the sole means for perfecting a security interest in property requiring
a certificate of title “is by notation of the lien on the [property’s] certificate of title.” Johnson v.
Branch Banking and Trust Co., 313 S.W.3d 557, 560 (Ky. 2010). The Bankruptcy Court concluded,
and Appellee asserts here, that Appellant’s security interest in the Manufactured Home was
unperfected at the time of Debtor’s petition despite notation of Appellant’s lien on the certificate of
title because the proper procedure had not been followed in obtaining that notation. In other words,
the notation was not “in accordance with this chapter” (i.e., KRS Ch. 186A) because the notation had
been made following submission of a title lien statement to the Whitley County Clerk rather than the
clerk of the county of Debtor’s residence, Laurel County.


       Appellant asserts that its lien was perfected when noted on the certificate of title even if
Appellant did not follow proper procedure to obtain the notation–i.e., even if the Whitley County
Clerk mistakenly caused the notation to be placed on the certificate. Appellant alternatively asserts
that it in fact followed proper procedure in obtaining the notation because Kentucky has a two-track
system for obtaining notation, one for new property for which a certificate of title has never been
issued and a separate one for property for which a certificate of title has previously been issued.




                                                  -5-
        Although the Kentucky Supreme Court has considered the issue of when a lien is perfected
under KRS Ch. 186A, concluding that perfection is not complete until the lien is noted on the
certificate of title, it has not directly addressed whether perfection is achieved where the notation was
obtained despite a filing deficiency. See Johnson, 313 S.W.3d at 560 (including citations to prior
cases where liens either were not noted or were incorrectly noted as released). It has also not
addressed whether KRS Ch. 186A in fact creates a two-track notation system as asserted by
Appellant. To decide the merits of this appeal, then, the Panel must determine “how that court
would rule if it were faced with the issue.” Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178, 1181
(6th Cir. 1999). In doing so, the Panel “may use the decisional law of the state’s lower courts, other
federal courts construing state law, restatements of law, law review commentaries, and other
jurisdictions on the ‘majority’ rule in making its determination.” Id. (citing Grantham & Mann v.
American Safety Prods., 831 F.2d 596, 608 (6th Cir. 1987)).


        KRS 186A.190 governs the perfection of security interests in “certificate of title” property
such as motor vehicles and manufactured homes. It states in pertinent part as follows:


                (1)     ....the perfection and discharge of a security interest in any
                        property for which has been issued a Kentucky certificate of
                        title shall be by notation on the certificate of title. The
                        notation of the security interest on the certificate of title shall
                        be in accordance with this chapter and shall remain effective
                        from the date on which the security interest is noted on the
                        certificate of title....

                (2)     ....the notation of security interests relating to property
                        required to be titled in Kentucky through the county clerk
                        shall be done in the office of the county clerk of the county in
                        which the debtor resides....

                ....

                (6)     In noting the security interest upon a certificate of title, the
                        county clerk shall ensure that the certificate of title bears the
                        lienholder’s name, mailing address and zip code, the date the
                        lien was noted, the notation number, and the county in which


                                                   -6-
                    the security interest was noted. The clerk shall obtain the
                    information required by this subsection for notation upon the
                    certificate of title from the title lien statement described in
                    KRS 186A.195 to be provided to the county clerk by the
                    secured party.

             ....

(Emphasis added.)


      KRS 186A.195 states as follows:


             (1)    As used in this chapter, a title lien statement is a document to
                    be submitted by the secured party to the county clerk. Upon
                    submission of the title lien statement, the county clerk shall
                    use the information contained therein to note the security
                    interest on the certificate of title....

             (2)    If a title lien statement and the required fees accompany the
                    application for first title of any property in the name of an
                    owner, the county clerk shall enter the information required
                    by KRS 186A.190(6) into the automated system so as to
                    produce a certificate of title in Frankfort bearing in addition
                    to any other required information, the information designated
                    by KRS 186A.190(6). The clerk shall thereby produce, in
                    accordance with design of the automated system, a certificate
                    of registration, if required.

             (3)    If a title lien statement and the required fees are not received
                    at the time of application for first title of any property in the
                    name of the owner due to the owner’s residency in another
                    county, or if the form prescribed by KRS 186A.060 indicates
                    a pending lien but the title lien statement does not accompany
                    the application for title, the county clerk shall enter into the
                    Automated Vehicle Information System (AVIS) the name and
                    address of the lienholder and the county where the lien is to
                    be noted or that a lien is pending. The clerk shall indicate a
                    title is not to be issued until the lien has been noted and fees,
                    according to KRS 186A.190, paid in the county of the owner’s
                    residence or in thirty (30) days. The county shall then issue
                    the registration. The county clerk in the county of the owner’s


                                              -7-
                     residence shall, after receiving the title lien statement and
                     fees contained in KRS 186A.190, enter into the Automated
                     Vehicle Information System (AVIS) the date of lien notation
                     and the notation number, thus enabling the system to produce
                     the title in Frankfort.

             ....

             (5)     The security interest noted on the certificate of title shall be
                     deemed perfected at the time the security interest attaches
                     (KRS 355.9-203) if the secured party tenders the required fees
                     and submits a properly completed title lien statement and
                     application for first title or, in the case of property previously
                     titled in the name of its debtor, the certificate of title to the
                     appropriate county clerk within twenty (20) days of
                     attachment. Otherwise, the security interest shall be deemed
                     perfected at the time that such fees are tendered and such
                     documents are submitted to the appropriate county clerk.

(Emphasis added.)


      Appellant’s argument is based in large part upon the following provisions of KRS 186A.120:


             (1)     Application for a first certificate of registration or title and
                     plate, shall be made by the owner to the county clerk of the
                     county in which he resides, except that, if a vehicle is
                     purchased from a dealer other than in the county in which the
                     purchaser for use resides, the purchaser, or the dealer on
                     behalf of the purchaser, may make application for registration
                     to the county clerk in either the county in which the purchaser
                     resides, or in the county in which the dealer’s principal place
                     of business is located.

             (2)     (a)     When purchaser of a vehicle upon which a lien is to
                             be recorded is a resident of a county other than that of
                             the dealer, the application for registration or title may
                             be made to the county clerk in either county. The lien
                             must be recorded in the county of the purchaser’s
                             residence.




                                                -8-
                          (b)    If the vehicle application for registration or title is
                                 presented to the county clerk of dealer’s location
                                 rather than purchaser’s residence, the clerk shall
                                 process documents in a manner to that of any
                                 application, with the exception that the AVIS system
                                 shall be programmed in a manner that the title shall
                                 not be issued from Frankfort until the lien information
                                 has been entered by the county clerk of the
                                 purchaser’s residence.

                  ....

(Emphasis added.)


       The U.S. District Court for the Eastern District of Kentucky and the Bankruptcy Court have
previously interpreted KRS Ch. 186A under substantially similar facts and rejected the basic position
taken by Appellant here.3 See Epling, 2011 WL 4356358, and Palmer v. Vanderbilt Mortg. & Fin.,
Inc. (In re Walling), 2010 WL 5421148 (Bankr. E.D. Ky. 2010). The Panel finds both decisions
well-reasoned and persuasive. The relevant statutory provisions are unambiguous, and a plain
reading of the same leads to the conclusion that Appellant’s lien is unperfected under Kentucky law.
While the Panel believes that it would be unnecessarily duplicative to restate entirely the courts’
analyses in Epling and Walling, a few points may be emphasized without treading too far down an
already well-worn path.4


       First, as noted in Epling,5 the Kentucky Supreme Court in Johnson concluded that “perfection
of a vehicle lien does not occur until physical notation is made on the title pursuant to KRS
186A.190.” Johnson, 313 S.W.3d at 561 (emphasis added). While to some extent dicta–the court
in Johnson was focusing on when perfection occurred rather than if perfection occurred–this is


       3
        Appellant’s argument here alleging a “two-track” lien notation system does not appear to
have been addressed by the courts in Epling and Walling.
       4
           Appellant is extremely familiar with this path as the losing party in both Epling and Walling.
       5
           2011 WL 4356358 at *2.

                                                    -9-
consistent with a plain reading of the second sentence of KRS 186A.190(1)6 and supports Appellee’s
position that obtaining title notation other than in the manner prescribed (i.e., other than “in
accordance with this chapter”) renders that title notation insufficient to perfect the lien in question.


        Second, setting aside Appellant’s “two-track” argument for the moment, several provisions
of KRS Ch. 186A, when read together, clearly contemplate that a secured creditor will apply for title
lien notation by filing a “title lien statement” with the clerk of the debtor’s county of residence and
that only that county clerk will enter the information into the AVIS. See KRS 186A.190(2), (6);
KRS 186A.195(1), (3); KRS 186A.120(2)(a), (b). Moreover, KRS 186A.195(5) supports Appellee’s
argument that, if the secured creditor fails to follow the correct procedure, the creditor’s lien would
be deemed unperfected until the creditor does so. “Otherwise, the security interest shall be deemed
perfected at the time that such fees are tendered and such documents are submitted to the
appropriate county clerk.” KRS 186A.195(5) (emphasis added).


        Third, Appellant overstates the applicability of prior Kentucky decisions in asserting that
Epling and Walling are inconsistent with “settled” Kentucky law. Appellant cites cases in which the
courts in question simply did not have to consider whether proper procedure had been followed in
notation of liens on titles. See State Auto. Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626
(Ky. App. 1990), and Hiers v. Bank One, 946 S.W.2d 196 (Ky. App. 1996). Appellant also cites
cases where the titles in question contained no lien notations and, therefore, the issue was whether
the liens could be deemed perfected despite the lack of notation, not whether proper procedure had
been followed in obtaining the notations. See General Motors Acceptance Corp. v. Hodge,
485 S.W.2d 894 (Ky. 1972), and Kentucky Fin. Co. v. Spradlin, 717 S.W.2d 843 (Ky. App. 1986)
(title contained no lien notation because it had been mistakenly released by the county clerk upon
receipt of a forged lien release). Appellant also mistakenly relies upon Lincoln Bank & Trust Co.
v. Queenan, 344 S.W.2d 383 (Ky. 1961), which not only construed a prior version of the statute in



        6
        “The notation of the security interest on the certificate of title shall be in accordance with
this chapter....” KRS 186A.190(1) (emphasis added).

                                                 -10-
question here, but was primarily concerned with perfection of security interests in dealer inventory.


       Appellant asserts alternatively that it in fact followed proper procedure in filing its title lien
statement with the clerk of a county other than Debtor’s county of residence. Appellant bases its
argument on KRS 186A.120, which covers applications for initial title and registration for new
property. KRS 186A.120(1) and (2) provide that, where the property is purchased by an end user
who resides in a county other than the county of the seller’s principal place of business, application
for registration or title may be made in either the purchaser’s county or the seller’s county. Appellant
essentially argues that this permission to apply for initial “title or registration” outside a debtor’s
county of residence amounts to permission also to apply for title lien notation in the seller’s county.


       In making the argument for a “two-track” system, Appellant also looks to the phrase “for
which has been issued a Kentucky certificate of title” in the first sentence of KRS 186A.190(1) to
distinguish circumstances where a certificate of title has already been obtained (e.g., liens against
older “used” property) from circumstances where the initial certificate of title has not been obtained
(e.g., purchase money liens against “new” property, as here). To bolster its argument for a two-track
system further, Appellant also reads the phrase “if the secured party tenders the required fees and
submits a properly completed title lien statement and application for first title” in KRS 186A.195(5)
as if it is not modified by the phrase “to the appropriate county clerk” later in the same sentence.7


       The Panel is not persuaded by Appellant’s strained reading of KRS Ch. 186A. KRS
186A.120 only expressly addresses applications for certificates of title or registration, allowing them
to be made in a county other than that of the property owner’s residence. KRS 186A.120(2)(a). In
stark contrast, it is silent as to whether title lien statements may be filed outside the county of the


       7
         Thus, Appellant would have the provision read as if it said something like the following with
respect to initial title applications: “The security interest noted on the certificate of title shall be
deemed perfected at the time the security interest attaches if the secured party tenders the required
fees and submits a properly completed lien statement and application for first title.” As Appellant
concedes, however, this is not how the Kentucky Supreme Court read that provision in Johnson. See
Johnson, 313 S.W.3d at 560.

                                                 -11-
debtor’s residence. Had the Kentucky General Assembly intended for title lien statements to be filed
outside the county of the debtor’s residence, it would have made that point explicit here. Indeed, the
very next sentence states, “The lien must be recorded in the county of the purchaser’s residence.”
Id. Appellant argues that recording a lien and submitting a lien to be recorded are two different
things. The Panel believes, however, that the juxtaposition of these two sentences signals the
Kentucky General Assembly’s intention that title lien statements be filed in the county of the
debtor’s residence even if the initial application for certificate of title or registration is filed in
another county under KRS 186A.120(2)(a).


                                          CONCLUSION


       For the foregoing reasons, the Panel AFFIRMS the grant of summary judgment in favor of
Appellee by the Bankruptcy Court.




                                                 -12-
