Credit Union Magazine - January 2009 - (Page 43)

BANKRUPTCY In bankruptcy cases, ‘trustee-proof ’ your security interests. As an experienced loan officer at Curl Up and Dye Federal Credit Union, a midsize institution serving the cosmetics, hair-care, and grooming industries, you take pride in your vehicle lending programs. This morning, however, you hold in shaking hands a letter from a bankruptcy trustee and are considering updating your résumé. A month ago, you booked a $50,000 loan secured by a new Lexus. Your member has filed bankruptcy, and the trustee is going to “avoid your lien.” You’re now the proud holder of a $50,000 unsecured loan. Your attorney informs you, “You’re toast, my friend.” What happened? Across the country, trustees are getting more aggressive in their attacks on motor vehicle security interests. The consequences of a lien avoidance action can be dire. The loan is recent and the balance considerable. You’ve lost the credit union’s collateral, and you’re reduced to sharing pro rata with other unsecured creditors. This befalls the credit union notwithstanding its best efforts to observe lending policies and procedures, and fundamental due diligence. Is this fair? Of course not. But in these cases, justice has little to do with the law. Here’s how the trustee’s attack works. When you and your member enter into a security agreement, your security interest “attaches.” Your security interest now is enforceable. But to trump third parties who might obtain an interest in Lean Times for CU Liens Charles Williams the vehicle (purchasers, other lenders, bankruptcy trustees), you must “perfect” your interest—usually by recording your lien on the title. Under the Bankruptcy Code, you must perfect within 30 days of the date the member takes possession. That’s the first of two key time periods here. If you perfect late, bad things can happen. Under the Bankruptcy Code, you must perfect within 30 days of the date the member takes possession. The second critical timeline begins on the 90th day before the member files bankruptcy. Under the Bankruptcy Code, if a creditor improves its position (tardily perfects its lien, for instance) within that 90-day period, a trustee can undo whatever action that creditor took. So, if you perfect outside of the 30-day period but inside the 90-day period, you’re vulnerable. The trustee files a complaint to avoid your lien. Your remedies are few. More on that in a minute. You’re vulnerable here even though you’re innocent of wrongdoing. You relied on the dealer to get your lien on that title, and he dragged his feet. The Bankruptcy Code is quite clear—and quite unfair. But it gets worse. Assume that on the sale date you took your title paperwork directly to the title processcuna.orgt JANUARY 2009t ing agent, paid your fees and taxes to get your lien filed, and received a receipt. Well done. But you still might be in jeopardy. If state law deems you perfected upon filing, with the act of perfection occurring only when the title is issued, courts tell us the target date is the issuance date, not the filing date. So you’re left at the mercy of a vacationing clerk in the state capitol to meet the 30-day deadline. Many state laws, on the other hand, provide that a security interest is perfected upon filing. In those states, just file it and you’re safe. Your attorney can tell you in which category your state falls. What to do? Preventive maintenance is your only shield: u Monitor loans intensively inhouse after closing; u Conduct dealer due diligence reviews including background investigations. Any prior problems? Communicate the importance of prompt title processing; u Make the dealer responsible and liable. Include restrictive endorsement language requiring perfection within 30 days (subject to allowable endorsement areas on the check); and u State specific perfection deadline requirements in your dealer agreements for indirect programs. If the dealer fails, it buys back the loans. Best of luck in this difficult area of bankruptcy, and continue to fight the good fight. CHARLES L. WILLIAMS is a partner in the law firm Blalack & Williams P.C., Dallas. Contact him at 214-630-1916 or at cwilliams@ blalack.com. CREDIT UNION MAGAZINE 43 http://www.cuna.org

Table of Contents Feed for the Digital Edition of Credit Union Magazine - January 2009

Credit Union Magazine - January 2009 Contents On My Way Leading Edge Spotlight President's Perspective Game Plan Washington Insider Wright Stuff Executive Suite Reverse Mortgages Come of Age Six Merger Myths Leading-Edge Lenders TwentyFour/Seven Bankruptcy Compliance Tools of the Trade Trendlines Rates & Ratios Council Corner Shoptalk System Scan Marketplace Branching Out Advertiser Index

Credit Union Magazine - January 2009

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.