FIDELITY FINANCIAL SERVICES, INC. v. FINK
After purchasing a car, Diane Beasley gave Fidelity Financial Services, Inc. a promissory note for the purchase price. The car secured the note. 21 days later, Fidelity mailed Beasley the application to perfect its security interest under Missouri law. After Beasley filed for bankruptcy, Richard V. Fink, the trustee of Beasley's bankruptcy estate, moved to set aside Fidelity's security interest on the ground that the lien was a voidable preference under federal law. 11 USC section 547(c)(3)(B) prohibits the avoidance of a security interest for a loan used to acquire property if, among other things, the security interest is "perfected on or before 20 days after the debtor receives possession of such property." Fink argued that this "enabling loan" exception was inapposite because Fidelity had not perfected its interest within the 20-day period. Affirming the Bankruptcy Court and the District Court, the Court of Appeals held a transfer to be perfected when the transferee takes the last step required by state law to perfect its security interest.
May a creditor invoke 11 USC section 547(c)(3)(B)'s "enabling loan" exception if it performs the acts necessary to perfect its security interest more than 20 days after the debtor receives the property, but within a grace period provided by the otherwise applicable state law?
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
No. In a unanimous opinion delivered by Justice David H. Souter, the Court held that a transfer of a security interest is perfected under section 547(c)(3)(B) on the date that the secured party has completed the steps necessary to perfect its interest, so that a creditor may invoke the enabling loan exception only by satisfying state law perfection requirements within the 20-day period provided by the federal statute. The Court turned to the text, structure, and history of the preference provisions to determine that the federal enabling loan exception of twenty-days controlled over otherwise applicable state law.
Argument of Michael P. Gaughan
Chief Justice Rehnquist: We'll hear argument now in Number 96-11370, Fidelity Financial Services, Inc. v. Fink.
Is that the correct pronunciation of your name?
Mr. Gaughan: Yes, Mr. Chief Justice--
Chief Justice Rehnquist: Please proceed.
Mr. Gaughan: --and may it please the Court:
This case involves an interpretation of the preference provisions of the Bankruptcy Code, found at 11 U.S.C. section 547.
That is on pages 1 through 5 of petitioner's brief.
The issue in a nutshell is whether or not the petitioner, Fidelity Financial Services, timely perfected its lien so as to qualify for the enabling loan exception provided in 547(c)(3).
It is undisputed that Fidelity satisfied all the requirements of 11 U.S.C. section 547 (c)(3), subsection (A).
The only other requirement is set forth in subsection (B).
That states that the security interest must be perfected on or before 20 days after the debtor receives possession of such property, meaning the financed property.
When a transfer is perfected is defined by the Bankruptcy Code at section 547(e)(1)(B).
That states that a transfer of an interest in property other than real property is perfected when a creditor on a simple contract cannot obtain a judicial lien which is superior to the interest of the transferee.
That determination must in turn be made by reference to State law, in this case Missouri State law.
Missouri has a statute... it's been on the books since 1965.
It's found at 301.600 Revised Statutes of Missouri.
It states that a lien on a motor vehicle or a trailer is perfected as of the time of its creation if certain steps are taken within 30 days.
It is undisputed that Fidelity satisfied all of the requirements of this State statute within 21 days at the earliest, 26 days at the latest.
Unknown Speaker: So it satisfied the requirement of Missouri law, as you said, but it did not do it within 20 days.
Mr. Gaughan: The physical act of perfecting the lien occurred outside of the 20-day grace period established in 547(c)(3).
However, under Missouri State law... that is correct.
Under Missouri State law, if the lien is perfected within 30 days it is deemed perfected as of the time of its creation.
Therefore, under those circumstances there would be no transfer for or on account of an antecedent debt under section 547(b)(2), or, alternatively, the creditor could raise the enabling loan shield under 547(c)(3).
Unknown Speaker: Well, it certainly is possible that Congress intended that its provision, the 20-day provision after receiving possession of the property is what governs.
Mr. Gaughan: Of course, Congress also included the 547(e)(1)(B) section, which incorporates State law, in defining when a transfer is perfected, and for preference purposes, of course, when a transfer occurs is when it is perfected, when it's made, and that incorporates State law, so State law is implicit in that consideration.
Unknown Speaker: Then we have to accept the possibility that in place of the 30 days here it could be the 60 days in West Virginia, I think it is, it could be a year in some State, if some State wanted to take that position... in effect, there would be no guaranteed end point on your position.
Mr. Gaughan: I agree that in effect there would not necessarily be an end point.
However, up to this point, to my knowledge only 60 days is the longest limit that has been established, in West Virginia and I think in New Mexico for recreational vehicles.
Unknown Speaker: What happens in a State like Massachusetts, as I understand it, that has a shorter limit?
The period becomes whatever is the longer period?
Mr. Gaughan: Justice--
Unknown Speaker: The State, or the Federal?
Mr. Gaughan: --Justice Ginsburg, I'm sorry, but I'm not aware of that provision in the Massachusetts law.
Unknown Speaker: Well, let's just imagine a State... your State has a 30-day provision.
Let's say another one says you've got to do it within 10 days or it doesn't relate back.
Mr. Gaughan: Correct.
Unknown Speaker: So what happens under such a statute?
Mr. Gaughan: Well, under the current interpretations of the code, if the lien is perfected within 20 days the Federal law controls.
Unknown Speaker: So it's the longer... it's whichever gives you more time, the State or the Feds.
That's your position, essentially.
Mr. Gaughan: That is the position that we take.
Unknown Speaker: Then I don't--
--But you can't perfect it within 20 days.
You can't perfect it under State law between 11 and 20 days, so the shorter period would de facto govern, wouldn't it?
Mr. Gaughan: Well--
Unknown Speaker: It has to be perfected within 20 days, but in Massachusetts on the hypothesis it cannot be perfected after the tenth day.
Mr. Gaughan: --Of course, we're referring to the Missouri statute, which includes a provision that deems the perfection to relate back to day 1.
Unknown Speaker: No, but--
Mr. Gaughan: It back-dates the perfection.
Unknown Speaker: --I understand that, but this is an important point, and it's a point that helps you, by the way, because if it is correct that the Massachusetts 10-day provision would supersede the 20-day, you have available the argument that this statute cannot possibly provide a uniform period anyway because it's conceded that State law can shorten it, and we're only arguing about whether State law can lengthen it.
Mr. Gaughan: True.
Unknown Speaker: Then that's right, isn't it?
I mean, isn't just what Justice Scalia said right?
I mean, if it isn't right, I'm not understanding this whole--
--I think it's right.
Mr. Gaughan: Well, if Justice Scalia says it's right, it must be right.
Unknown Speaker: No--
I don't necessarily accept that argument, but the... I mean, do we understand this correctly?
Mr. Gaughan: Well, my understanding of the current court interpretations are that if the State's provision is less than 10 days, they still allow the 20-day grace period.
We will take the position that State law controls.
Whatever State law says--
Unknown Speaker: And is that because of the definition of perfected?
Mr. Gaughan: --That is correct.
Unknown Speaker: In other words, assuming Justice Ginsburg's State with 10 days, if it's 15 days, it simply can't be perfected under State law.
Mr. Gaughan: What the State statutes at issue--
Unknown Speaker: I mean, is that the argument?
Mr. Gaughan: --Well, the argument, Justice Kennedy, I believe is that under State law there is a period of time within which a creditor can perfect its lien, and if it performs the required, stated requirements, then the lien is deemed perfected as of day 1, the date that the loan was--
Unknown Speaker: And if it doesn't do that, then it's not perfected within the meaning of the Federal statute.
Mr. Gaughan: --Correct.
Unknown Speaker: But it could still be--
--No, but it is perfected.
It just doesn't relate back.
You can perfect between 11 and 20, but the--
Mr. Gaughan: Certainly, Justice Scalia--
Unknown Speaker: --Under State law we're talking now.
Mr. Gaughan: --Certainly, Justice Scalia--
Unknown Speaker: I see.
Mr. Gaughan: --if we go beyond... if it could be perfected 3 months down the road--
Unknown Speaker: You're right.
Mr. Gaughan: --it's perfected 3 months down the road.
Unknown Speaker: Okay.
So you don't have that argument.
May I ask, Mr. Gaughan, is the provision... see, this is Missouri, isn't it.
Mr. Gaughan: Yes.
Unknown Speaker: In Missouri, that deems the lien perfected as of the date of the initial transaction, is that typical of State laws?
Mr. Gaughan: Justice Stevens, to my knowledge, there are at least 20 States that have that provision in their State statutes.
Unknown Speaker: In all of those States, the 20-day Federal period has no meaning?
Mr. Gaughan: Well, in seven of those States the perfection-back period is more than 20 days.
It's either 21 days, 30 days, 60 days.
There are seven States that have those provisions.
Unknown Speaker: Why would Congress need the 20-day provision at all under your reading?
Mr. Gaughan: Well, of course, a vehicle loan is a different animal than a regular secured transaction.
In a regular, secured transaction the security agreement, the note, the financing statement is all executed at the same time.
Therefore, there is no delay.
It's signed upon consummation of the loan transaction.
On a vehicle loan, particularly with this type of transaction that involves dealer paper, where the buyer goes to the dealership, they don't ask who's going to make the loan.
They just ask to buy the car, and the dealer arranges the financing, and the package is sent on to a lender, so there is inherent delay built into that system from the outset.
So the 20-day might make sense, I suppose, in a commercial transaction or a regular consumer goods-type transaction, where you have a financing statement that might need to be filed, but--
Unknown Speaker: Oh, I don't understand your answer, because you're saying there's one category of transactions which typically are performed immediately.
Mr. Gaughan: --Correct.
Unknown Speaker: So there's really no delay.
There's a second category of transactions, because of the delay you need a relation-back period.
Mr. Gaughan: That's correct.
Unknown Speaker: It seems to me in that category, if the State law always controls, the 20-day Federal period doesn't serve any function at all.
Mr. Gaughan: Well, the 20-day period, of course, establishes when the security interest must be perfected.
Then in the same section the statute says it's perfected when State law says it's perfected, so if it's perfected within State law, within that 20-day period, it's perfected under the statute.
Unknown Speaker: So you say the 20-day requirement has no independent significance.
Mr. Gaughan: I would say that the 20-day requirement established by Congress simply requires that the security interest be perfected within 20 days.
If State law in turn says that the transaction is deemed perfected as of day 1, it's still perfected within that 20-day period.
It's just on day 1 of the period.
Unknown Speaker: No, but nothing is gained that would not be gained by having the general 10-day period.
As long as State law says it relates back to day 1, or sometime within the first 10 days, then nothing was accomplished.
No change in the law of any practicallity that I can see was accomplished by providing the second 20-day period for these kinds of loans.
Mr. Gaughan: And I would concede that.
Unknown Speaker: Why did Congress do it?
Well... then I don't understand this.
I read an amicus brief... it's quite possible I don't, by the way.
In an amicus brief it said there are 23 States that have no relation-back, so I thought that those States, those 23 States, I don't know what their perfection laws provide, but some of those 23 States could say that a secured interest is perfected at the time of filing, and that filing takes place up to 20 days later, and under the earlier law, that would not have worked, because you had to do it within 10 days.
So I thought the point of this 20-day period was in respect to those 23 States, to make certain that their perfection laws applied and that a secured interest that corresponded to and was consistent within those 23 States would trump the trustee's effort to get the property back.
Is that right?
Mr. Gaughan: Well, of course, the congressional statement I think was that it was amended to bring the--
Unknown Speaker: Do you have an additional argument in your... is what I said right?
Mr. Gaughan: --Correct.
Unknown Speaker: It is correct.
Mr. Gaughan: Correct.
Unknown Speaker: All right.
Then that gives meaning to this.
Now, your point is that whether you win or you lose it has meaning, as I take it.
Now, you're making an additional point that if a State which has a statute that says it is perfected beyond the 20-day period, of which there are only seven--
Mr. Gaughan: Correct.
Unknown Speaker: --that that State also says, by the way, you are to consider it as having been perfected much earlier, on day 1, then it is for purposes of the Federal statute perfected earlier, within the 20-day period.
Mr. Gaughan: Correct.
Unknown Speaker: That's your argument.
Mr. Gaughan: Correct.
Unknown Speaker: All right, then... go ahead.
Mr. Gaughan: And, of course, under the Missouri scheme, then, if the lien is perfected within the 30-day period, the lien relates back to day 1.
If that is the case, there is no transfer on account of an antecedent debt, or the enabling loan provision would certainly apply.
Two circuit courts of appeal have followed this line of reasoning, In re Hesser out of the Tenth Circuit, In re Busenlehner out of the Eleventh Circuit.
Unknown Speaker: May I ask you to amplify on your answer to Justice Breyer, because it was my understanding that Congress was responding to what the majority of the States were doing.
That is, they had a period longer than 10 days.
They had a 20-day period, and it related back.
Now, Justice Breyer recited something from a friend of the court brief that apparently said that most States don't have a relation-back, or over 20 States don't have any relation-back.
Mr. Gaughan: Well, I think it all began under the old act.
Of course, back then the trustee had to prove that the creditor had reasonable cause to believe that the debtor was insolvent, and we didn't have the 90-day presumption period.
Unknown Speaker: Well, let's just... is it true or not that some 20-odd States have no relation-back period?
Mr. Gaughan: The 20-odd States, it's true that they don't have a specific relation-back period that says it's back-dated to day 1.
However, there's a grace period under the Uniform Commercial Code in that State that would apply, under for purchase money security--
Unknown Speaker: Which means that the creditor would prevail over any intervening creditor who tried to levy on the property.
Mr. Gaughan: --That is correct, Justice Ginsburg.
Unknown Speaker: Well--
--So that is in effect a relation-back.
Is there a difference in your view, Mr. Gaughan, between what you describe as the grace period in the Uniform Commercial Code and a provision specifically saying there's a relation-back?
Mr. Gaughan: It's a very minute difference, of course, because one simply says that there is a grace period within which if certain steps are taken the lien is perfected.
The other one says that if certain steps are taken the perfection is back-dated to day 1.
They certainly accomplish the same objective.
Unknown Speaker: There are no... in function, they're identical.
That is, they stop any other creditor from getting in front.
Mr. Gaughan: That is correct.
They would stop any intervening lead creditor from taking priority.
Unknown Speaker: So--
--My understanding of the old Bankruptcy Act was that the shorter time... it was that the State law could shorten the Federal period but never extend it, and now you're arguing that it works just in reverse, that the State law can extend it but not shorten it, if that's--
Mr. Gaughan: And I would agree, under section 60, I believe it was, of the old act a creditor had 21 days within which to perfect its lien unless the short... or the State period was shorter.
However, in 1978, when the Bankruptcy Code was overhauled, I believe it was recommended by the National Bankruptcy Commission that that 21-day period be left intact without regard to whether or not it was purchase money or not, without regard to whether or not States had longer or shorter periods, and Congress without comment simply changed it to 10 days.
Of course, they also put in the 90-day presumption of solvency, et cetera, so there was an overhaul of the preference provisions, but without comment Congress said, at least in 1978, that the security interest had to be perfected within 10 days of attachment, and then in the '84 amendments they stated that it had to be perfected within 10 days of the debtor receiving possession of the property.
Then, finally, in the 1994 amendments Congress stated that the lien had to be perfected within 20 days of the debtor receiving possession of the property, so it's hard to tell by looking at the old act what significance that had on the current statute.
Unknown Speaker: --How long is the U.C.C. period, grace period?
Mr. Gaughan: Well, I believe that the Uniform Commercial Code model is still 10 days, although I understand that's being revised.
Most States have adopted, I believe, a 20-day period of time, but I think the model... it was the 1972 model was what was used when Congress revamped the Bankruptcy Code in '78.
Unknown Speaker: And if I think that what the U.C.C. does is indistinguishable from a relation-back provision, then the number of States that have such a relation-back provision is not just seven, but 49, I assume, is that right?
Mr. Gaughan: Correct, but the seven was the number of States that had a period of time beyond 20 days, greater than the 20-day period, so we have one with 21 days, I think there's four with 30--
Unknown Speaker: Oh, beyond... I see.
So even if I consider all the U.C.C. States to be relation-back States, you're saying all of those except seven have a 20-day grace period.
Mr. Gaughan: --That--
Unknown Speaker: 20 days or less.
Mr. Gaughan: --I would assume that is correct.
Unknown Speaker: No, no, no, they have... a lot of them, under the U.C.C. they have 10 days, all right, so there are a number of States apparently that give you 20 days, is that right, and a large number of States that give you 10 days.
Some give you 10 days with the U.C.C., some give you 20 days.
Is that right?
Mr. Gaughan: I think certainly when the statute was reenacted in '78--
Unknown Speaker: Yeah.
Mr. Gaughan: --it was 10 days.
I think most have gone to 20 days now, but I would not... I don't know the number of States that have done so.
Unknown Speaker: Well, in States, when a State comes to adopt a Uniform Commercial Code, at least this was the experience in Arizona, it isn't adopted just verbatim from the U.C.C. draft.
There are changes, so that there might be change... different grace periods among States, all of which have adopted the Uniform Commercial Code.
Isn't that true?
Mr. Gaughan: That is true, but of course, back when the code was reenacted in '78, States all utilized the '72 model, which was 10 days, so it's certainly arguable that Congress intended to make the 10-day period harmonious with State law.
It was at that time, at least.
Unknown Speaker: May I ask you one other, just informative question... before we granted cert, you pointed out there was a conflict, with two courts that joined your view of the reading.
They had decided when the 10-day provision was in effect, as I remember.
Mr. Gaughan: That's correct.
Unknown Speaker: Hesser and the other case.
Have there been any cases since the amendment that have adopted your view?
Mr. Gaughan: The amendment, of course... the '94 amendment, is that what you're referring to?
Unknown Speaker: Yeah.
Mr. Gaughan: There have been none that I'm aware of, Your Honor.
Unknown Speaker: Thank you.
Mr. Gaughan: In--
Unknown Speaker: So if the language is somewhat ambiguous, allows it, and everything seems fairly mixed up State after State, why shouldn't we just say, well, a uniform rule is probably what they intended in order to avoid the kind of confusion that our questions suggest might arise?
Mr. Gaughan: --Well, the two courts of appeals that we relied on and are cited in our briefs, the Eleventh and Tenth Circuit opinions, note that in '78 the code was overhauled and the intention with respect to the preference provisions was to bring them more into conformity with commercial law and commercial practices.
Presumably, then, State law practices were to be adopted, at least under that general statement.
The fact that Congress then changed it to 10 days from possession in '84 without comment doesn't tell us anything.
The only snippet, of course, is in the '94 amendments, where they state that they wanted to bring it more into conformity with most States' practices by increasing it to 20 days.
Unknown Speaker: Well then, why... why would Congress have made that expansion from 10 to 20 if Congress didn't think that they needed to do that in order to have the States that had the 20-day period, to have that effected?
Congress must have thought that otherwise it was going to be, for Bankruptcy Code purposes, only 10 days.
Mr. Gaughan: Justice Ginsburg, I would concede that.
Of course, vehicle perfection loans are not routine loans They would be outside the normal considerations for this kind of transaction, because in a normal loan... and in fact I think Collier on Bankruptcy noted that after the 1994 amendments, that's the end of the issue.
If you file your financing statement within 20 days, you're perfected.
If not, you're not.
But we're not talking about filing financing statements.
Under the Uniform Commercial Code, perfection of liens on motor vehicles is handled under separate State vehicle perfection statutes.
Each State has its own requirements.
In the Eleventh Circuit decision of Busenlehner, it had a statute much like the Missouri statute, the one we refer to as a relation-back statute, and that was a Georgia State law that allowed the lien to be deemed perfected as of the day of creation if certain steps were taken within 20 days.
In that case, the loan was obtained on March 31 of 1988, the physical act of perfecting the lien occurred on March... or April 13 of 1988, and a bankruptcy was filed on April 26.
The court found, of course, that although it was beyond the 10-day period established in 547(c)(3) subsection (B), the... (e)(1)(B) of the Bankruptcy Code incorporates State law, and under Georgia State law the lien was perfected as of the day of its creation.
Therefore, there was no... actually, they ruled that therefore they were entitled to the enabling loan exception, 547(c)(3).
The other case, the Hesser case, came out of Oklahoma.
They had a 15-day period of time within which to perfect, and in that case I believe the loan originated on April 16 of 1990 and the physical act of perfection occurred on Ap... or May 1, 1990, and then 18 days later the debtor filed bankruptcy.
That was beyond the 10-day grace period, but nonetheless, by interpreting Oklahoma law, the court noted that under State law it was perfected as of day 1.
Therefore, that court held there was no transfer for or on account of an antecedent debt under 547(b)(2), and that they could claim the enabling loan exception under 547(c)(3).
If we were to adopt further reasoning in this case, we could also say the transfer occurred outside the preference period under 547(b)(4), because it would have been 93 days before the case was filed.
Both of those circuit court opinions, as I previously indicated, quoted the legislative history, and the intention was to bring the preference provisions more into conformity with commercial practices in the Uniform Commercial Code, and therefore creditors were encouraged to look to State law in order to perfect their liens.
There wasn't a lot of discussion in either of those cases.
The language was accepted on its face.
You perfect under (e)(1)(B) by utilizing State law.
In both cases, the lien was perfected within State law ramifications.
Therefore it related back to day 1.
It was perfected under the Bankruptcy Code then under 547(c)(3) subsection (B).
Unknown Speaker: May I ask you one other question I don't--
Mr. Gaughan: Yes, Justice Breyer.
Unknown Speaker: --Let me do it with an example.
Imagine a State... this is something I don't understand.
Imagine a State has a statute.
State 1 says, you have to perfect by sending the paper in to the Secretary of State within 30 days, or sending the paper wherever you're supposed to send it.
Mr. Gaughan: Right.
Unknown Speaker: State 2 says the same thing, but adds the words, and perfection relates back to day 1.
What I'm trying to figure out, what's the difference?
Imagine that on day 20 in either State a simple judgment creditor files a piece of paper and says, I'm entitled to the car.
Isn't it true that in both States, if the right piece of paper is filed before day 30, between day 20 and day 30, that the secured creditor will prevail over the simple contract creditor?
Mr. Gaughan: That is correct.
Unknown Speaker: All right.
So if in both States they would prevail, then adding the words, and it relates back to day 1, does nothing.
Mr. Gaughan: It accomplishes the same objective.
That is correct.
Unknown Speaker: Well, if it does nothing, well then our question becomes one of whether Congress intended, by using the words 20 days, suddenly to permit any State, irrespective of whether it says relates back or not, that has 30 days or 60 days to perfect, to fall within the meaning of the 20 days.
That's pretty hard to see.
Mr. Gaughan: I would agree with that.
Unknown Speaker: But that's your... that's what we have to... for you to win we have to agree with that.
Mr. Gaughan: Well, absolutely, but under State law, of course, whether it's 20 days or 30 days--
Unknown Speaker: --And even if it doesn't say, since we have a definition of what perfection means, even if a State says 60 days and says nothing about relating back, on your argument that State rule would still prevail.
Mr. Gaughan: --Vis-a-vis an inter-liening--
Unknown Speaker: Yes.
Mr. Gaughan: --A lien creditor on a--
Unknown Speaker: Yes, or the trustee in bankruptcy.
Mr. Gaughan: --Correct.
That is correct.
Unknown Speaker: Well then, I don't want to hammer the point too hard, but I take it you are conceding that nothing of any practical significance was accomplished when Congress amended the law to add the 20-day period.
Mr. Gaughan: Well, that's true.
Of course, the old act was amended five or six times, section 60, and there was amendment upon amendment that didn't accomplish any objective either.
When the code was amended in 1984 to make it 10 days from date of possession, there was simply no comment on why Congress did it.
The only... the 20-day legislative history comment simply states that it was done in order to bring the preference provisions more into conformity with most States' practices.
If there are no further questions, I would like to reserve some time for rebuttal.
Unknown Speaker: Very well, Mr. Gaughan.
Mr. Fink, we'll hear from you.
Argument of Richard V. Fink
Mr. Fink: Mr. Chief Justice, and may it please the Court:
Section 547(c)(3) establishes a defense for enabling loans.
However, such loans are only perfected, or only protected if perfected on or before 20 days after the debtor receives possession of the property.
the meaning of section 547(c) is clear: 20 days is 20 days is 20 days.
The 1994 amendment--
Unknown Speaker: What's your authority for that, Gertrude Stein?
Anyway, I think the issue in the case is whether perfected is perfected is perfected, not--
Mr. Fink: --Well, I would agree that the definition is what... what the court or the Congress was looking at in section 547 was the act of perfection, not the status of being perfected, and in order to have the... to be perfected under the statute, you must take that last step within 20 days of the transaction.
The Congress back in 1994 recognized that several States had adopted enabling loan grace periods longer than the 10-day period allowed under the 1978 Bankruptcy Code.
Rather than incorporate the varying State law periods, the Congress instead expanded the 20-day period to a nationally uniform 20 days.
Unknown Speaker: --Before you leave the language, what you do with the language of the definition of when it's perfected?
It says it is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.
So if we have a State that says it's perfected, you have 60 days in which to file, once you file on those 60 days, a simple contract debtor that filed on day 15, or on day 20, or on day 30, or on day 40 cannot prevail and, therefore, under the language, they say it was the case, given their statute, that from day 1, provided that later filing took place, a simple contract creditor could not prevail.
Mr. Fink: Justice Breyer, that's an excellent point, but the statute doesn't say could not prevail, it says cannot prevail.
That requires looking forward prospectively, not looking backwards retroactively to what actually happened.
If Congress had intended that you look back, the actual happenstance, they would have said, could not have perfected, but Congress didn't say that.
Congress specifically said cannot.
Unknown Speaker: Could not have prevailed.
Mr. Fink: Could not have prevailed, yes, sir.
Unknown Speaker: As I understand it, you... your position is that that section, 547(e)(1)(B), means simply, has... have all the steps been taken to perfect the lien, so it tells us, yes, the lien has been perfected, but is uninformative on relation-back.
That's the uniform 20-day period.
Is that, in essence, your position?
Mr. Fink: My position is that that defines the steps necessary, and you can look at State law to see what those steps would be to perfect, but as to whether you were actually perfected within the time frame that Congress envisioned, which was a uniform 20 days, you would look to Federal law, not the State.
Unknown Speaker: And so in a State like Massachusetts, that has a shorter period, as long as all the necessary steps to perfect were taken within 20 days under your reading of the code, the security interest would be permissible.
Mr. Fink: Justice Ginsburg, it's my interpretation of the code and it's the congressional intent that there be a uniform 20-day period.
Under the Bankruptcy Act, section 60(a)(7) said you have 21 days, but if a State provides for a shorter period, you're stuck with the State law.
If the State provides for a longer period, you're... you get to use the Federal statute.
The Congress looked at that, the Gilmore commission, which was trying to conform the U.C.C. and the Bankruptcy Act, told Congress in its report, lose the State law period.
It recommended 21 days not because there was any logic to it, but because that's what people were used to.
The Congress chose to adopt the Gilmore committee recommendation with the exception of the 21-day period.
It chose the 10-day period, which was then the prevailing U.C.C. period.
The plain meaning--
Unknown Speaker: So under your theory the Massachusetts hypothesis, where the period is shorter than 20 days, that person would have the... be able to take advantage of the Federal 20-day period, so you have... you'd have a uniform period throughout.
Mr. Fink: --Yes, sir.
The... if the creditor had the misfortune of having their client file a bankruptcy, they would be better off as far as perfection is concerned than they would have been absent that bankruptcy, the intervening bankruptcy.
Prior to 1994, there was a problem.
The problem was cases such as In re Burnette, that recognized the congressional intent of a uniform national time period, but instead chose a perceived public policy of favoring that one creditor who had done everything right under State law but had failed to perfect within the time frame allowed by the Bankruptcy Code.
One purpose of preference law is to avoid the pitfalls of secret liens.
Any creditor who fails to disclose their lien in a timely and proper manner loses their ability to enforce that lien against the world.
If they take the proper steps to attach their security interest as between the debtor and themselves, they have some protection, but if they fail to take the steps in the time frame prescribed by the statute, whether it be State law if you're in the State realm or bankruptcy law, if you happen to be in a bankruptcy setting, because it's a uniform Federal policy, then they lose their ability to enforce that lien against the bankruptcy estate in the Chapter 7 or Chapter 13 or Chapter 11 if there's a preference proceeding filed.
The petitioner argues that its interpretation follows the plain language of the post 1994 amendment to the statute.
I don't understand, if it's so plain, why every recorded case, all the commentators, all the scholars reject their position.
There's no support for their position that the 1994 amendment to section 547 makes State law relation-back periods apply in a bankruptcy setting.
Unknown Speaker: May I ask, Mr. Fink, has this issue arisen in any case in the Ninth or Tenth Circuit since the amendment?
Mr. Fink: At the circuit level?
Unknown Speaker: Well, just in the circuit.
Do those circuits continue to follow the same rule, contrary to your position, that they followed before the 1994--
Mr. Fink: I don't know, Justice Stevens.
Unknown Speaker: --You don't know... no cases you know of?
Mr. Fink: I don't know if there are any.
I'm just not familiar with that.
Unknown Speaker: But the circuit hasn't had a chance to reconsider since the enlargement of the period from 10 days to 20 days.
Mr. Fink: I'm not familiar with any circuit court opinions in the Ninth and Tenth that have reconsidered that issue, Justice Ginsburg.
The circuits that have recon... that have ruled on that issue since the '94 would be the Fifth, the Eighth, and the... now it's escaped me.
The Eleventh, I believe.
Unknown Speaker: What about the--
Mr. Fink: I might have those twisted around.
Unknown Speaker: --What about the colloquy in the legislative history?
I... in the Bankruptcy Act, unlike a lot of other acts, these colloquys were pretty carefully worked out by all the different parties who were involved in the legislation, so I might be tempted to pay more attention to Senators Sasser and Heflin in this kind of context than in a lot of others.
How did that come about?
Normally what happens with these colloquys is the bankruptcy bar and all the different people interested go and write what they're supposed to say in order to clarify for the courts what they meant.
There's quite a definite colloquy there.
Mr. Fink: I may... Justice Breyer--
Unknown Speaker: How did that come about?
Mr. Fink: --That was an act that wasn't even... that didn't even get passed, although the language is similar to the act that eventually--
Unknown Speaker: Yeah... right.
Mr. Fink: --It was amended in '94.
I think it shows that there is... at best, it shows that they didn't understand each other's position.
Unknown Speaker: No, no, there would be somebody who would have written that.
They didn't sit and write it themselves.
You don't really think that they... that either one of them was that familiar with the particular little tiny--
--piece of this statute that was at issue.
But that's how the legislative process works.
People who are interested go and write colloquys.
Mr. Fink: Just--
Unknown Speaker: It's done intentionally.
So I want to know what the history of that was.
Do you know it?
Mr. Fink: --The history of that I can't speak to, but I know that the committee report would have more bearing than their colloquy, and the hist... and the committee report on the 1994 amendment states that they were going for a uniform 20 days.
Unknown Speaker: Well, the colloquy may be a weak read to go on, but it didn't seem to me to be ambiguous.
You suggested it was ambiguous.
I thought those two Senators said flat out that they meant to adopt the Tenth and Eleventh Circuit position.
Now, nobody voted on that colloquy, but in what way is it ambiguous?
Maybe we could ask the law firm that drafted it.
Mr. Fink: Can't speak to that, Your Honor.
Unknown Speaker: Why don't you answer Justice Ginsburg's question?
You said in your brief that the colloquy was ambiguous, and I understood the argument that it shouldn't count for much, but I didn't understand in what way it was ambiguous.
How could they have been clearer than to say, we think this confirms the Tenth and Eleventh Circuit position?
Mr. Fink: Oh, I don't think that that's what Mr. Heflin said, Senator Heflin.
I think... if I can find it here.
I think Senator Heflin, on page 27 of the brief it is quoted that he clarifies Senator Sasser's point and asserts that State law relation-back statutes do not affect the time of transfer pursuant to section 547, to which Senator Sasser replied, and I quote, Federal uniformity is key to the date on which the debtor receives possession of such property, which then activates the running of the 20-day period under section 547.
I don't see that he was disagreeing.
Unknown Speaker: Wasn't there a statement... maybe I'm wrong about this, but I remembered a statement in which--
--Sasser says... Sasser cites the two cases, and say I would note for the chairman that In re Busenlehner, In re Hesser, and In re Howard came to these conclusions, and my purpose in this discussion is to establish that these court decisions are consistent with the Federal bankruptcy laws, and the chairman, Mr. Heflin, says, I would say to my colleague that it is appropriate at this time for the Senate to state its intent to confirm the interpretations of these circuits.
Unless you think he was inviting the Senate to adopt such a... an intent, which it did not do.
Mr. Fink: Well, that's the only explanation I can ascribe to that, Justice Scalia.
Unknown Speaker: All right.
Mr. Fink: Congress certainly knows how to incorporate State law when it wants to do so.
Section 546(b) provides that certain trustees' avoiding powers are subject to any general applicable law which would include State law.
Noticeably absent from that section is section 547.
They exclude... they make general applicable law applicable to the strong arm powers under section 544, the statutory lien powers under section 545, and the post-petition liens under section 549, but they exclude section 547.
I think that supports the intent, that they intended that there be a uniform 20 days, and that 20 days meant 20 days.
If Congress had wanted to make State law applicable, as Fidelity asserts, then it should have simply inserted in section 546(b) section 547.
They didn't do that.
Unknown Speaker: Would you go through that again?
Mr. Fink: --Sure.
Unknown Speaker: How could they have adopted it?
How could they have--
Mr. Fink: The simplest way to adopt applicable State law, in section 546(b)(1) there's a statement that says, general applicable law applies in these statutes, 544, 545, and 549.
It doesn't say anything about section 547, and it's my understanding that the exclusion of one means that the other... it means that they intended to exclude it.
I had a fancy Latin phrase for that, and now it's escaping my memory.
Unknown Speaker: --Res ipsa loquitur.
Mr. Fink: That wasn't it.
Fidelity has argued that automobile lenders need additional time, that they're special.
There's nothing in section 547 that says anything about motor vehicle lenders being special.
The only differentiation is between the general rule for 10 days to perfect and have the grace period apply, or for enabling loans, the 20-day period, so it's the type of the loan, not the type of collateral that's critical.
Unknown Speaker: A quick question about perfection.
Mr. Fink: Yes, sir.
Unknown Speaker: Imagine in a State that has a 60-day period, or a 30-day period--
Mr. Fink: Yes, sir.
Unknown Speaker: --you take out a loan, but you don't perfect for a year.
Mr. Fink: Yes, sir.
Unknown Speaker: Am I correct in thinking the person who didn't perfect for a year, the secured creditor, still has perfected his interest, but only in respect to the future, not in respect to the past?
Mr. Fink: That's correct, sir.
Unknown Speaker: Thank you.
Mr. Fink: Which brings up--
Unknown Speaker: If we adopt your position, are there going to be problems in some States where the motor vehicles registration period is just slow because of the way the State officials work?
I mean, are there some States where you just can't do this within 20 days?
Mr. Fink: --I don't know.
In Missouri, it's a simple form you fill out.
You mail it in with the certificate of title attached.
If you don't have the certificate of title, it's my reading of the State statute that it would be an illegal transaction to--
Unknown Speaker: No, but if you do everything right, are there not some States where they take longer than 20 days to validate the lien?
Mr. Fink: --Yes, sir, and under State law that certainly could happen.
Unknown Speaker: And the creditor, generally the seller in these cases, what remedy does he have, simply not to transfer possession of the property until the paperwork is completed?
Mr. Fink: I don't believe that that would be the appropriate manner of transferring title to a vehicle.
I believe you have to transfer possession at the same time that you--
Unknown Speaker: So they don't have any protection, then.
Mr. Fink: --I think they're just going to be out of luck, and I think Congress looked at that and was trying to balance the State interests versus the Federal interest.
Unknown Speaker: If they're out of luck, it's because of State law and not Federal law, isn't it... because if you send in the papers the day after you transfer possession, you've complied with the Federal law--
Mr. Fink: Yes, sir.
Unknown Speaker: --have you not?
Mr. Fink: Yes, sir.
Unknown Speaker: And so if the State can't process it within 30 days, the problem is with the State law.
Mr. Fink: I misunderstood the... I wasn't thinking clearly on the question.
It's not an issue of when the State processes the paperwork.
The issue is when the paperwork gets to the State, so that should have no impact on the hypothetical that you described, Justice Kennedy.
Unknown Speaker: So as long as the date stamp at the office that you send it to, that's what's going to prevail, whether it gets indexed properly or not.
Mr. Fink: I'm not familiar with all the motor vehicle statutes--
Unknown Speaker: But isn't--
Mr. Fink: --in the 50 States, but in Missouri--
Unknown Speaker: --That... that's what you--
Mr. Fink: --that would be the critical date.
Unknown Speaker: --Well, it depends on State law.
I mean, I'm not sure the stamping date is the date of perfection.
Is the stamping date when it's received the date of perfection?
I don't know.
Mr. Fink: I believe in this case the bankruptcy judge ruled that the date that it was received was the effective date of transfer, and at worst... that was 21 days out.
At worst it was 26 days out.
But the problem in this case--
Unknown Speaker: --I thought most State laws would make the date of perfection at least the date when there's some public ability to know of the existence of the lien.
I... at least it works that way under the U.C.C., and just because the relevant agency... well, I don't know.
It seems strange to me.
May I go back for a minute, Mr. Fink, to the legislative history that's quoted at pages 24 and 25 of the blue brief.
Was Senator Heflin the chairman of the committee that... and also was he the floor manager of the bill, just out of curio... do you know?
Mr. Fink: --I don't know.
Unknown Speaker: I think, isn't it... that's what I've looked up on this, that these were amendments attached to a crime bill, and Senator Heflin was the floor manager of the crime bill, and then therefore he had to answer whatever question came up.
But it is significant to me what that situation was, because if these two were primary movers of the whole thing, then of course it doesn't reflect their views as much as it reflects an entire community of people trying to enact a comprehensive code.
If, on the other hand, it's a particular Senator who happens to have a constituent, et cetera, that's quite different.
But you don't know the answer to that.
Mr. Fink: No, sir.
Fidelity has argued that there's a serious conflict between our interpretation of section 547 and State commercial law, especially as it relates to motor vehicles.
That simply isn't true.
Our interpretation affects only a handful of States.
There are seven with grace periods longer than 20 days, and even in those States, the longer grace periods typically apply only to motor vehicles, so how do we read the plain language of section 547?
Congress expanded the section 547(c)(3)(B) period from 10 days to 20 days.
It also added an express cross-reference to the general timing rule of section 547(e)(2)(A) to the new 20-day rule.
Thus, all secured creditors have a 10-day grace period to perfect their security interest and have the date of the transfer be deemed the date of perfection.
Congress realized there was a problem, that sometimes there could be a delay with enabling loan creditors, so it gave them an extra 10 days, for a total of 20, and said, you know, in every circumstance this may not be enough, but this is the balance we're going to strike between the State interest and the Federal uniform interest in a uniform bankruptcy law and said, 20 days.
And it may be true that a 1-day delay in this case doesn't seriously threaten the antisecret lien policy.
Even if you use the 30-day relation-back period in Missouri, maybe that doesn't seriously cause any serious harm.
However, it's the interpretation that you must adopt in order to reach that result, which is dangerous.
There's nothing in Fidelity's argument to limit its theory.
You could have a State that says you could have a year.
You could have a State that says you don't even have to do it for an enabling loan.
Unknown Speaker: But practically isn't that unlikely?
I mean, most States have come to the 20-day period.
We just have how many with 30 days, and one with 60, so most of them... Congress tried to do what most States did, right--
Mr. Fink: Yes, ma'am.
Unknown Speaker: --in setting the 20-day period.
Mr. Fink: Yes, ma'am.
Unknown Speaker: So why couldn't one look at that as Congress trying to stay in line with the States and say, in case of a State that doesn't say anything, we'll pick the State that most States... the time that most States allow, 20 days, but we're not ruling out States that have a longer period.
What... why isn't that a proper interpretation?
Mr. Fink: Oh, I don't think that's what they said, and they don't need to harmonize with the State law, because it's Federal bankruptcy law that's at issue.
Unknown Speaker: They don't need to, but why can't one read these... the statute putting the relation-back provision together with the provision about the lienholder's interest being perfected and come up with, well, Congress meant at least 20 days but more if a State allowed it?
Mr. Fink: Well, Congress certainly could have done that.
It's within their power to do that.
But they didn't do that.
They said, 20 days.
They didn't make an exception in 546(b) to apply general applicable law to section 547.
They said, 20 days.
So we're not here today to determine what Congress could have done.
We're here to determine or interpret what Congress did do, and Congress established a uniform 20-day period to take that last step necessary to perfect your security interest.
If you don't do it, you're just out of luck.
That happens every day in preference actions in bankruptcy.
People... preferences aren't about evil intent, or whether something bad or good happened.
It's... the transactions take place in the normal course of commercial practice, and if you're outside that time limit that Congress drew, and somebody's filed a bankruptcy, you're just going to be out of luck, whether it's 20 days, or 21... I'm sorry, if it's 21 days or a year.
And the position they're arguing doesn't accommodate Federal law to the State law.
They're asking Congress, or this Court to interpret that statute to advocate to State law, because there would be nothing to prevent a State... even though none of them have done it yet, there's nothing to prevent them from coming in and saying, you've got a year to perfect.
Idaho changed their statute precisely to try and defeat a bankruptcy trustee to say it impacted on not just enabling loans on motor vehicles, but nonenabling loans as well, so once you start down that slope, there's no stopping it.
It's just a snowball that just keeps getting bigger and bigger.
Unknown Speaker: What's... is an enabling loan... is... that can mean the same thing as a purchase money mortgage?
Mr. Fink: That's similar, and in a motor vehicles... in a non-U.
C.C. setting that would be what you would call a purchase money security interest.
Unknown Speaker: Mr. Fink--
Mr. Fink: Yes.
Unknown Speaker: --may I just ask one question?
I'm just kind of curious.
The vehicle here is worth about 14,000 dollars, is it?
Mr. Fink: Yes, sir.
Unknown Speaker: And the lien was--
Mr. Fink: Well--
Unknown Speaker: --about [dollars] 3,000?
Mr. Fink: --Well, actually the vehicle I think was worth around 10,000, the debt was around 14.
Unknown Speaker: I see, and that's what's at issue.
The question is whether the creditors get that money or the secured credit... the general creditors or the secured creditors?
Mr. Fink: Yes, sir, because the lien didn't go away.
They don't have the lien.
I now have the lien on behalf of the bankruptcy estate under section 551, and Ms. Beasley is paying that value out to all the creditors, including Fidelity, who are general unsecured--
Unknown Speaker: May I ask... it's really not relevant.
I'm just curious.
How big is the estate?
Mr. Fink: --It's a... since it's a Chapter 13, you basically have two tests that have to be met for the general unsecured creditors.
Disposable income, which is section 1325(b), that means that during the life of her plan all her disposable income, which is the income that's not necessary for support, has to be paid into the plan, and also that the liquidation test is met, which is 1325(a)(4).
So she's basically... she doesn't make a lot of money, so she's basically paying out the value of that vehicle to the general unsecured creditors, and that's going to take her more than 3 years with all her disposable income, and I don't recall off the top of my head what the total percentage to the general unsecured will be, but Fidelity is the largest unsecured creditor, so you're probably looking at less than a 50-percent distribution, but I don't know that.
Unknown Speaker: I see, and that's the estate that's financing this litigation, of course.
Mr. Fink: Well, actually, all the Chapter 13 debtors in the Western District of Missouri are financing this--
--side of it, because--
Unknown Speaker: I'm a little worried about your posture here, frankly.
Mr. Fink: --But a chapter--
Unknown Speaker: Kind of a test case, in other words.
Mr. Fink: --A... yes, sir.
A Chapter... this actually started as a Chapter 7, where the trustee said, give me the car, they're not perfected, and Ms. Beasley decided to convert to Chapter 13.
Are there any further questions from the Court?
If not, I'll just summarize, and I would ask that the... respectfully request that you affirm the opinion of the Eighth Circuit Court of Appeals, because it's the only interpretation that gets force through the plain language of the statute.
It's the only interpretation which advances the antisecret lien policy of the Congress.
It's the only interpretation that's in accord with the legislative history of both the '78 code, the '94 amendment, and with the pre-code bankruptcy law, and thank you for your time.
Unknown Speaker: Thank you, Mr. Fink.
Mr. Gaughan, you have 4 minutes remaining.
Rebuttal of Michael P. Gaughan
Mr. Gaughan: Thank you, Mr. Chief Justice.
I just wanted to clarify a few points.
The facts in this particular case, the loan was obtained on August 17, 1994, and the loan was in the amount of 14,300 dollars, I believe.
The debtor took possession of the car in this case the same day, but it is not unusual for a debtor to take a test drive, for instance, at a dealership, to take a car home, so the possession could start before the loan is even consummated.
In this case, it occurred on the same day.
The paperwork was mailed to the Missouri Department of Revenue on September 7.
However, the Department of Revenue's record showed that it wasn't validated until September 23, which was more than 30 days after the transaction.
We undertook discovery, and--
Unknown Speaker: We don't ordinarily sit to review facts, Mr. Gaughan.
Mr. Gaughan: --I understand.
Unknown Speaker: We've been presented with a set of facts that said that it was either 21 days or 26 days afterwards.
I think we accept those.
Mr. Gaughan: I was just trying to point out that there is an inherent delay built into vehicle perfections.
It's not like signing a financing statement.
With the financing statement there is no notice to the world until it's recorded.
You could file a financing statement three different times on the same collateral, but with a car there is a title that actually follows that particular item of collateral, so it's very difficult to pledge that three or four times over.
The notice, there's no problem with notice to the world because you can't falsify that information.
That's all I have.
If there's any other questions--
Chief Justice Rehnquist: Thank you, Mr Gaughan.
The case is submitted.