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James A. Overcash, Chap. 7 Trustee v. Hidalgo Motors, LLC (In re Pedro Paulo Garcia Wilson), Ch. 7, BK20-40420-BSK, A20-4018-BSK (Jan. 29, 2021)

The court granted summary judgment to the Chapter 7 trustee and avoided a preferential transfer. The debtor and a non-debtor jointly purchased a vehicle on an installment contract prior to filing bankruptcy and are both listed as owners on the title. The non-debtor is in possession of the vehicle and makes the payments on it. The seller noted its lien on the certificate of title within 90 days prior to the petition date, which led the trustee to file this adversary proceeding to avoid the lien under § 547(b).

The only contested element was § 547(b)(5) – whether the transfer enabled the defendant to recover more than it would have in a Chapter 7 liquidation. The court ruled in the trustee’s favor, finding that if the transfer was avoided, the defendant would hold a partially unsecured claim and be paid pro rata with other unsecured creditors in an amount less than its fully secured claim.

The defendant argued that it could recover the full amount of its claim from the non-debtor co-owner even if the lien against the debtor’s interest were avoided. The court explained that it cannot consider potential recoveries from third parties and must only evaluate a hypothetical recovery from the debtor’s bankruptcy estate.

The defendant, relying on the Nebraska Motor Vehicle Certificate of Title Act, also argued that the lien could not be avoided because the debtor’s undivided one-half interest in the vehicle cannot be transferred without the co-owner’s consent. The court rejected this argument, citing Nebraska case law holding that “[the Act] is the exclusive method of transferring title to a vehicle, but it is not conclusive of ownership.” The court also pointed out that the trustee may sell the vehicle pursuant to § 363(h) even if it is partially owned by a non-debtor.

Finally, the court declined to accept the defendant’s equitable argument that the co-owner would lose the vehicle while the defendant continued to collect the debt from her. The court observed that equitable defenses are generally not recognized in preference actions, and the co-owner may raise the issue of detriment in response to a motion to sell, if one is filed.

Friday, January 29, 2021
Judge Brian S. Kruse