Kentucky Supreme Court Clarifies Question On Timing Of Perfection Of Motor Vehicle Liens

The Supreme Court of Kentucky recently held that under Kentucky law, a security interest in a motor vehicle is not deemed perfected unless and until physical notation of the security interest is made on the certificate of title, pursuant to KRS 186A.190.

In Johnson v. Branch Banking & Trust Co.,¹ the debtor in bankruptcy purchased a motor vehicle on February 8, 2005, several months prior to filing for bankruptcy. To finance the purchase, the debtor executed an installment sales contract and security agreement, which granted a security interest in the vehicle to the defendant bank. The automobile dealership mailed a title lien statement, application for certificate of title, and the necessary fees to the County Clerk’s office on February 22, 2005. The Commonwealth of Kentucky issued a certificate of title for the vehicle on March 25, 2005, and noted March 7, 2005, as the filing date of the bank’s lien.

During the subsequent bankruptcy proceedings, the Trustee initiated an adversary case seeking to avoid the bank’s lien on the vehicle as being a preferential transfer as defined under 11 U.S.C. § 547(b). The bank responded that its lien fell within the safe-harbor exception contained in 11 U.S.C. § 547(c)(3), which protects liens perfected within 20 days of the debtor taking possession of the property. The issue in the case was when the bank’s lien became perfected. The Trustee argued that perfection of vehicle liens under Kentucky law is governed by KRS 186A.190, which provides that “the sole means of perfecting and discharging a security interest in property for which a certificate of title is required by this chapter is by notation on the property’s certificate of title.” Conversely, the bank argued that perfection was accomplished when the required paperwork and fees were submitted to the county clerk in accordance with KRS 186A.195(A).

The Court acknowledged that the two statutes seemingly contain conflicting language as to when a vehicle lien is perfected. But after careful examination, the Court concluded that KRS 186A.190 plainly and unambiguously establishes notation on a vehicle’s certificate of title as the “sole means” of perfecting a security interest in that vehicle. Accordingly, the Court held that the tendering of fees and submission of paperwork pursuant to KRS 186A.195(5) do not alone accomplish perfection. In so holding, the Court harmonized the language in the two statutes by explaining that KRS 186A.195(5) is merely a timing mechanism for establishing priority among creditors when the security interest has already been perfected vis-à-vis a notation on the certificate of title. But unlike KRS 186A.190, KRS 186A.195(5) does not define the acts necessary for perfecting a security interest in the vehicle in the first place.

Posted by: Ali Razzaghi

Categories: Kentucky, Liens