No Free Car: Bankruptcy court protects bank's security interest in vehicle
Posted on 09/24/2013 at 01:07 PM by John Lande
In a short opinion on Monday, September 23, 2013, the United States Bankruptcy Appellate Panel for the Eighth Circuit (BAP) found in favor of a bank in a case where a debtor tried to claim an exemption for a vehicle pledged as collateral. The case, In re Mirella S. Goben, originated from a transaction between Corydon State Bank in Corydon, Iowa, and Mirella S. Goben. Prior to bankruptcy, the bank made personal loans to Ms. Goben secured by an interest in a 2000 Hyundai Tiburon (the vehicle). While the record in the case is less than clear, it appears that the loans were used to purchase the vehicle. The bank's lien was noted on the title of the vehicle. Ms. Goben then filed bankruptcy under Chapter 7, and attempted to claim an exemption for the vehicle. Under Iowa and federal bankruptcy law, a debtor can protect from collection one vehicle with a value less than $7,000. Ms. Goben valued the vehicle at $1,000. Ms. Goben was indebted to the bank for over $4,000. Nevertheless, Ms. Goben tried to argue that her interest in the vehicle was exempt from collection. The bankruptcy court, sitting in Des Moines, and the BAP disagreed. Both courts concluded that while the vehicle was within the value range allowed under Iowa and federal law, Ms. Goben did not have an 'exempt interest' in the vehicle. The bank was undersecured, so Ms. Goben did not have any equity in the vehicle. Therefore, the vehicle would not be exempt from liquidation in the bankruptcy proceeding. This case should give some comfort to banks with purchase money security interests undersecured by personal property. However, one critical piece of both courts' reasoning was that the Corydon State Bank had perfected its lien on the vehicle. There may have been a different outcome if the bank had not been diligent about protecting its interest. This case should serve as a reminder that a bank that is diligent about protecting its collateral will generally have its interests protected by the courts.
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- John Lande
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