David Taylor v. Usaa Federal Savings Bank ( 2010 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: DAVID DOUGLAS TAYLOR; 
LINDA SUE TAYLOR,
Debtors, No. 08-60033
BAP No.
USAA FEDERAL SAVINGS BANK,  WW-07-1313-
Appellant, MkMoD
v. OPINION
DON THACKER, Trustee,
Appellee.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Montali, Markell, and Dunn, Bankruptcy Judges, Presiding
Argued and Submitted
August 3, 2009—Seattle, Washington
Filed February 26, 2010
Before: Harry Pregerson, John T. Noonan and Carlos T. Bea,
Circuit Judges.
Opinion by Judge Bea
3095
3098 IN RE TAYLOR
COUNSEL
Lawrence Gary Reinhold, Weinstein & Riley, P.S., Akron,
Ohio, for the defendant-appellant.
Thomas W. Stilley, Sussman Shank LLP, Portland, Oregon,
for the plaintiff-appellee.
OPINION
BEA, Circuit Judge:
In 2005, David and Linda Taylor bought a Toyota Camry
right before declaring bankruptcy. Their lender, USAA Fed-
eral Savings Bank (“USAA”), procured from the Taylors a
security interest in the car as collateral for the loan. USAA
perfected its security interest 21 days after the Taylors pur-
chased their car; USAA’s perfection was timely under Idaho
law, but one day late under federal bankruptcy provisions.1
1
When a debtor declares bankruptcy before paying off his debt, the
creditor must “perfect” a security interest to enforce his interest and to pre-
IN RE TAYLOR 3099
The Taylors’ conveyance of a security interest to USAA was
then avoidable by the Taylors’ bankruptcy trustee, as a prefer-
ential transfer.2 The trustee moved the bankruptcy court to
avoid the transfer and the court granted the motion.
We address a recurring question in many bankruptcies:
What should be the remedy when a court holds that a security
interest is avoidable as a preferential transfer? When a bank-
ruptcy court avoids a preferential transfer, it may award the
bankrupt estate either the actual transferred property or the
serve the priority of his claim. Perfection usually requires the creditor file
documents with a State to prove when the creditor received the security
interest. Under Idaho law, a creditor perfects a security interest in a vehi-
cle by filing a “properly completed title application and all required sup-
porting documents with the department [of transportation] or an agent of
the department.” Idaho Code § 49-510(1). The application for certificate
of title includes “a full description of the vehicle, including whether the
vehicle is new or used, together with a statement of the applicant’s title
and of any liens or encumbrances upon the vehicle, and the name and
address of the person to whom the certificate of title shall be delivered,
and any other information as the department may require.” Idaho Code
§ 49-504(1). Perfected security interests shall “take priority according to
the order in which the same are noted upon the certificate of title or
entered into the electronic records of the department.” Idaho Code § 49-
510(3). Under the federal Bankruptcy Code, a security interest is perfected
when the creditor has satisfied the requirements of perfection under state
law. See 11 U.S.C. § 547(c)(3)(B), Fidelity Financial Services, Inc. v.
Fink, 522 U.S. 211, 214 (1998) (holding a security interest is perfected for
federal bankruptcy purposes if the creditor satisfies the requirements for
perfection under state law).
Under Idaho law, a creditor must file the title application and all sup-
porting documents within 30 days after the delivery of the vehicle. Idaho
Code § 49-504. At the time the Taylors purchased their vehicle, the federal
Bankruptcy Code required creditors to perfect their security interests
within 20 days. 11 U.S.C. § 547(c) (discussed infra note 6).
2
Preferential transfers are usually transfers of a debtor’s interest in prop-
erty to a creditor on the eve of the debtor’s bankruptcy. These transfers are
preferential because the insolvent debtor chooses which creditor to repay
instead of following the order of priority established by the relevant bank-
ruptcy laws. See 11 U.S.C. § 547.
3100 IN RE TAYLOR
value of the transferred property. 11 U.S.C. § 550(a). Here,
the bankruptcy court declined to award the estate the trans-
ferred property: the security interest. If it had done so, then
the bankruptcy trustee could simply have canceled the secur-
ity interest, thus converting the auto loan into an unsecured
debt owed to USAA. Instead, the bankruptcy court opted to
award the estate the “value” of the security interest. Hence,
because the bankruptcy court left the original transaction
untouched, USAA kept its valid, enforceable secured interest
in the Camry. But, the bankruptcy court also awarded the
Taylors’ bankruptcy estate something more. It was that
decision—to award the estate the value of the security interest
by means of a new forced loan—that led the bankruptcy court
down the proverbial rabbit hole.
Once the bankruptcy court decided to award the value of
the security interest, it faced the question: What is the value
of a security interest, once the security interest is separated
from its underlying loan? The bankruptcy court determined
that the value of the security interest was the full value of the
initial loan. Therefore, the district court ordered USAA to
loan the estate $18,020 plus interest; this amount was in addi-
tion to the $18,020 USAA initially loaned the Taylors when
they purchased the Camry. Upon payment of the additional
$18,020, USAA became entitled to file a non-priority unse-
cured claim for the additional amount of $18,020 plus inter-
est, which was loaned under the bankruptcy court’s order. The
bankruptcy court’s determination of the value of the security
interest was clearly erroneous. We agree that the security
interest may have had some value greater than zero; there is,
however, no evidence in this record to support the district
court’s finding that the value of the security interest equaled
the amount of the original $18,020 loan at the time USAA
perfected its security interest.
Furthermore, because the value of USAA’s security interest
is not readily ascertainable, the bankruptcy court erred when
it awarded the estate an estimate of that value instead of the
IN RE TAYLOR 3101
transferred property—the security interest. Therefore, we
reverse the bankruptcy court’s decision and remand with
instructions for the bankruptcy court to declare USAA’s
security interest void. The ownership of the Camry will not be
subject to the lien created by the security interest. USAA will
retain an unsecured claim against the estate for $18,020, the
value of the loan. For reasons discussed below, we also
remand to the district court to determine whether USAA must
return the payments it received from the Taylors, and if so, to
whom.
I. Factual Background
A. The Purchase
On August 30, 2005, David and Linda Taylor, a married
couple, purchased and took possession of a 2006 Toyota
Camry from Gresham Toyota, Inc. (“Gresham”), a dealership
in Portland, Oregon. The Taylors purchased the car for
$19,500.
USAA loaned the Taylors $18,020; the Taylors in turn paid
the $18,020 to Gresham. The amount of the loan was equal
to the purchase price of the car less the agreed trade-in value
of the Taylors’ 1992 Lincoln Town Car, which the Taylors
sold to Gresham as part of the purchase of the Camry. In Sep-
tember 2005, the Taylors began to make monthly payments
on their loan to USAA.3
The Taylors, as part of the loan agreement, granted USAA
a “purchase money security interest” in the car.4 Under the
3
The record does not show the amount of the monthly payment. Follow-
ing the Taylors’s petition in bankruptcy, they arranged to continue to pay
the loan from their post-petition income that was not part of the estate;
therefore, they did not default. It is not clear on the record before us if any
payments came from the estate itself.
4
A purchase-money security interest is: “A security interest that is cre-
ated when a buyer uses the lender’s money to make the purchase and
3102 IN RE TAYLOR
Bankruptcy Code, a security interest is a lien created by an
agreement (as opposed to by statute). 11 U.S.C. § 101(51).5 A
“lien . . . means [a] charge against or interest in property to
secure payment of a debt or performance of an obligation.” 11
U.S.C. § 101(37).
To satisfy pre-existing debts, a trustee can avoid transfers
that take place within the 90 days before bankruptcy is filed.
11 U.S.C. § 547(b). There is an exception to this rule, how-
ever, for creditors who perfect a security interest within 20
days after a transfer for new value. 11 U.S.C. § 547(c)(3). A
security interest is perfected when the creditor has satisfied
the requirements of perfection under state law. Fidelity Finan-
cial Services, Inc. v. Fink, 522 U.S. 211, 214 (1998). Thus,
USAA had to satisfy all the requirements set out in Idaho
Code Sections 28-9-310 through 28-9-316 within 20 days
after the Taylors took possession of the Camry. Idaho Code
29-9-308(a); 11 U.S.C. 547 (c). USAA, however, made the
crucial mistake of being one day late in perfecting its security
interest. Accordingly, USAA failed to exempt the transfer
from being avoidable under the Bankruptcy Code.
USAA failed to perfect the security interest within 20 days
because it filed its initial application for title without a signed
affidavit of inspection, as required under Idaho law. See Idaho
Code Ann. § 49-510. On September 20, 2005, an inspection
officer from the Idaho Transportation Department inspected
immediately gives the lender security by using the purchased property as
collateral (UCC § 9-103); a security interest that is either (1) taken or
retained by the seller of the collateral to secure all or part of its price or
(2) taken by a person who by making advances or incurring an obligation
gives value to enable the debtor to acquire rights in or the use of collateral
if that value is in fact so used. If a buyer’s purchase of a boat, for example,
is financed by a bank that loans the amount of the purchase price, the
bank’s security interest in the boat that secures the loan is a purchase-
money security interest.” BLACK’S LAW DICTIONARY (9th ed. 2009).
5
All future references to “Section” or “§ “ are to the Bankruptcy Code,
11 U.S.C. § 101, et seq., unless otherwise noted.
IN RE TAYLOR 3103
the car and signed an affidavit of inspection. The same day,
an Application for Certificate of Title and the affidavit of
inspection were filed with the Idaho Transportation Depart-
ment. USAA’s security interest was thus perfected under
Idaho law only on September 20, 2005—21 days after the
Taylors took possession of the car on August 30, 2005.
Despite the fact that USAA’s security interest was perfected
under state law, the bankruptcy trustee could still avoid the
transfer of the security interest because USAA failed to meet
the federal 20-day perfection requirement under § 547(c)(3).6
B. The Bankruptcy
On September 28, 2005, the Taylors filed a voluntary peti-
tion in bankruptcy under Chapter 7. A Chapter 7 bankruptcy
filing transfers title to the debtors’ nonexempt assets to a
court-appointed trustee, who endeavors to manage the assets
in a manner that will satisfy the creditors’ claims. 11 U.S.C.
§§ 701, 704. The bankruptcy court appointed Don Thacker as
the Taylors’ bankruptcy trustee.
On February 23, 2007, Thacker filed suit against USAA to
avoid the transfer of the security interest under 11 U.S.C.
§ 547(b). Thacker moved for summary judgment, which the
bankruptcy court granted.7
6
Before the bankruptcy court, USAA contended it perfected its security
interest when it filed its application with the Idaho Transportation Depart-
ment on September 15, 2005 because Idaho permitted it a grace period of
an additional 20 days. See Idaho Code 49-510. The bankruptcy court held
the state law grace period did not apply to federal bankruptcy proceedings
regarding avoidance of a preferential transfer under § 547. See Fidelity
Financial Services, 522 U.S. at 221. The BAP affirmed. USAA’s briefs no
longer claim its security interest was perfected on September 15, 2005;
hence, USAA has waived that argument on appeal.
7
There does not seem to be any explanation for the seventeen month
delay between the date when the Taylors filed for bankruptcy and the date
when Thacker sued USAA. USAA has not raised any legal contention
based on this fact.
3104 IN RE TAYLOR
On August 10, 2007, the bankruptcy court held the transfer
was avoidable. The bankruptcy court concluded that cancel-
ling the security interest or transferring it to the trustee was
an insufficient remedy. Rather, the court concluded it must
award the estate the value of the security interest at the time
of the August 30, 2005 purchase of the car—the date the Tay-
lors transferred the security interest in the car to USAA. To
that end, the bankruptcy court issued judgment against USAA
for $ 18,020, plus interest—a new $18,020 additional to the
$18,020 which USAA had already loaned the Taylors—and
graciously allowed USAA to file an unsecured debtor’s claim
for this second $18,020 loan plus interest, once USAA paid
that new loan’s proceeds to the estate.8 The net result was that
(1) the bankruptcy estate was allowed to keep the car and the
original loan obligation of $18,020 used to purchase the car;
(2) USAA was allowed to keep its valid lien, or security inter-
est, in the car; (3) USAA was ordered to loan the bankruptcy
estate another $18,020; and (4) USAA received an unsecured
claim against the estate for the fresh loan of $18,020. At the
end of the day, USAA was both a secured creditor (against
all, including the bankruptcy estate) for one loan of $18,020
(less the payments the Taylors had made) and an unsecured
creditor for another, new debt of $18,020.
During proceedings before the bankruptcy court, USAA
contended that the correct remedy was simply to cancel the
security interest, i.e., to return the transferred property to the
estate. The bankruptcy court held that canceling the security
interest would not return the estate to the same position it
would have been in if the Taylors had not made the transfer
to USAA. The value of the security interest had diminished
8
The court ordered USAA to pay interest on the $18,020 from Novem-
ber 21, 2005 through the date of entry of the judgment at 4.30% per
annum, and at the rate of 4.82% per annum after the date of entry of judg-
ment until the judgment was paid. See Acequipa, Inc. v. Clinton (In re
Acequipa, Inc.), 34 F.3d 800, 818-19 (9th Cir. 1994) (holding pre-
judgment interest was available on the value of property ordered paid by
a creditor to a bankruptcy estate).
IN RE TAYLOR 3105
because, first, the Taylors had made monthly payments on the
auto loan and, second, the car had depreciated in value
between the date of the purchase and the date of summary judg-
ment.9 The bankruptcy court rejected USAA’s proposed rem-
edy of simply avoiding the security interest because that
remedy would leave USAA with a windfall in the amount of
the payments the Taylors had made since purchasing the car.
In granting judgment for the trustee, the bankruptcy court
found the value of the security interest at the time of the trans-
fer was the full value of the secured loan. The bankruptcy
court authorized the following remedy:
JUDGMENT is entered in favor of plaintiff Don
Thacker and against defendant USAA Federal Sav-
ings Bank for the principal sum of $18,020.00,
together with interest thereon from November 21,
2005 through the date of entry of this judgment at
the rate of 4.30% per annum, and after the date of
entry of judgment at the rate of 4.82% per annum,
until paid, and execution shall issue therefor.
Thacker v. USAA Federal Savings Bank (In re Taylors) No.
07-04025-PBS (Bankr. W.D. Wash. Aug. 10, 2007). USAA
was also entitled under the judgment to file an unsecured
claim against the estate for the amount of judgment. USAA
does not dispute the calculation of interest payments on the
principal sum. The Bankruptcy Appellate Panel (“BAP”)
affirmed. USAA Federal Savings Bank v. Thacker (In re Tay-
lors), 390 B.R. 654 (B.A.P. 9th Cir. 2008).
II. Standard of Review
This court reviews the decision of the BAP de novo. Aalfs
v. Wirum (In re Straightline Invs., Inc.), 525 F.3d 870, 876
9
On July 2, 2007, the Kelly Blue Book value of the car was between
$14,240 (trade-in) and $15,895 (private party). As of the date of Thacker’s
Motion for Summary Judgment, the Taylors still possessed the car.
3106 IN RE TAYLOR
(9th Cir. 2008). We review the bankruptcy court’s decision
for abuse of discretion: “The bankruptcy court’s conclusions
of law are reviewed de novo, and its findings of fact are
reviewed for clear error.” Id. In applying our abuse of discre-
tion test, we first “determine de novo whether the [bank-
ruptcy] court identified the correct legal rule to apply to the
relief requested.” United States v. Hinkson, 585 F.3d 1247,
1262 (9th Cir. 2009). If the bankruptcy court identified the
correct legal rule, we then determine whether its “application
of the correct legal standard [to the facts] was (1) illogical, (2)
implausible, or (3) without support in inferences that may be
drawn from the facts in the record.” Id. (internal quotation
marks omitted). If the bankruptcy court did not identify the
correct legal rule, or its application of the correct legal stan-
dard to the facts was illogical, implausible, or without support
in inferences that may be drawn from the facts in the record,
then the bankruptcy court has abused its discretion. Id.
III. Legal Analysis
A. Avoidance of the Lien
The bankruptcy court correctly held Thacker could avoid
the transfer of the security interest under 11 U.S.C. § 547(b).10
That section is designed to prohibit insolvent debtors, on the
eve of filing for bankruptcy, from paying off their debts held
by “preferred” creditors—those creditors whom the soon-to-
be bankrupts wish to favor. Indeed, on appeal, USAA does
not dispute the security interest was properly avoided as a
preferential transfer under § 547. Nevertheless, it is useful to
understand why the bankruptcy court found the transfer of the
security interest (hereinafter “the transfer”) was avoidable.
Pursuant to 11 U.S.C. § 547(b):
10
This case was filed before the October 17, 2005 effective date of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
IN RE TAYLOR 3107
The trustee may avoid any transfer of an interest of
the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by
the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the fil-
ing of the petition; or
(B) between ninety days and one year before the
date of the filing of the petition, if such creditor at
the time of such transfer was an insider; and
(5) that enables such creditor to receive more than
such creditor would receive if—
(A) the case were a case under chapter 7 of this
title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to
the extent provided by the provisions of this title.
[1] The trustee proved the transfer met all the requirements
necessary for the bankruptcy court to avoid the preferential
transfer. The Taylors transferred the security interest to
USAA. See § 547(b)(1). The transfer was in exchange for the
$18,020 loan USAA made to the Taylors on August 30, 2005.
See § 547(b)(2). Under section 547(f), debtors are presumed
insolvent for the 90 days prior to filing for bankruptcy. See
§ 547(b)(3). The date of the transfer is the date the security
3108 IN RE TAYLOR
interest was perfected, September 20, 2005, only 8 days
before the Taylors filed for bankruptcy on September 28,
2005. See § 547(b)(4).
[2] As a result of the transfer, USAA received more than
it would have received had the transfer not been made. See
§ 547(b)(5). When the transfer was made, USAA’s loan
became secured by the car. When the Taylors declared bank-
ruptcy, USAA was entitled to repossess the car if the Taylors
defaulted on the loan. The car was valued at $19,500 at pur-
chase and between $14,240 and $15,895 when Thacker filed
the adversary action on behalf of the estate.
[3] If the transfer had not occurred, and the Taylors had
defaulted on the loan when they filed for bankruptcy, then
USAA would be entitled only to file a claim for the value of
the unpaid principal on the loan as an unsecured creditor. In
that situation, the debtors would be less likely to make their
monthly payments to USAA because unlike a lender with a
perfected security interest who usually has the legal right to
repossess the encumbered property upon default of the loan
payments, an unsecured creditor must simply hope for repay-
ment from the bankrupt estate. Because the transfer met all
the requirements of § 547(b), the bankruptcy court correctly
held the transfer avoidable.
B. The Transfer of the Security Interest, not the Loan,
was Avoidable under § 547
[4] When a creditor perfects a security interest for new
value after the 20-day period provided for in § 547(c) and the
debtors declare bankruptcy within 90 days, the trustee may
avoid the transfer of the security interest, but not the underly-
ing loan. For the purpose of bankruptcy law, courts treat the
perfection of the security interest after twenty days as a new
transfer that does not fall within any of the exceptions to 11
U.S.C. § 547.
IN RE TAYLOR 3109
[5] The Supreme Court has affirmed this approach. In
Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211 (1998),
aff’g In re Beasley, 183 B.R. 857, 862 (Bankr. W.D. Mo.
1995), the debtor agreed to a purchase-money security interest
with a creditor to purchase a car. There, as here, the lender
perfected the security interest 21 days after the debtor took
possession of the car and raised the enabling loan defense in
response to the trustee’s adversarial action to avoid the trans-
fer. Id. at 213. The Court held state law grace periods for
creditors to perfect security interests were inapplicable in the
bankruptcy context. Id. at 216-17. The creditor could not
invoke the enabling loan defense when it perfected its security
interest more than 20 days after the debtor took possession,
even if state law created a grace period for the perfection of
a security interest. Id. As relevant here, the Court affirmed the
bankruptcy court’s order setting aside the lien only. See In re
Beasley, 183 B.R. at 862. Despite avoiding the transfer of the
security interest, that bankruptcy court did not set aside the
underlying loan for the purchase of the car. Accord Rodriguez
v. Drive Financial Services, LP (In re Bremer), 408 B.R. 355,
359 (10th Cir. BAP 2009).
[6] This approach seems well accepted by district courts.
For example, in Kelley v. General Motors Acceptance Corp.
(In re Farmer), 209 B.R. 1022 (Bankr. M.D. Ga. 1997), the
debtors executed a purchase-money security interest to pur-
chase a Pontiac Grand Am. The creditor did not perfect its
lien within 20 days of the debtors taking possession of the car.
On appeal, the parties agreed the security interest was avoid-
able as a preference, but disputed the correct remedy. See 209
B.R. at 1024. The court noted: “The ‘transfer’ at issue in this
case was a lien, not the vehicle.” Id. The court ordered the
security interest declared void and for the creditor to return
the amount of the payments it received from the debtors. Id.
at 1026. That is what should have happened here.
3110 IN RE TAYLOR
C. However, the bankruptcy court did not abuse its
discretion in holding it could award the value of the
security interest
[7] Section 550(a) gives a trustee two remedy options
when the court avoids a preferential transfer. That section
states:
[T]o the extent that a transfer is avoided under sec-
tion . . . 547 . . . of this title, the trustee may recover,
for the benefit of the estate, the property transferred,
or, if the court so orders, the value of such property,
from — (1) the initial transferee of such transfer or
the entity for whose benefit such transfer was made;
or (2) any immediate or mediate transferee of such
initial transferee.
Thus, the bankruptcy court may award the trustee (1) the
actual property, or (2) the value of the property. The statute
does not explain when a court should award the trustee recov-
ery of the actual property and when it should, in the alterna-
tive, award the trustee recovery of the value of the property.
The statute states only that a court must issue a “single satis-
faction.” 11 U.S.C. § 550(d). Bankruptcy courts have discre-
tion whether to award recovery under § 550, even when the
transferred property is a lien. E.g., Rodriguez v. Drive Finan-
cial Services, LP (In re Bremer), 408 B.R. 355, 359 (B.A.P.
10th Cir. 2009). If a bankruptcy court permits the trustee
recovery, the court has discretion whether to award the trustee
recovery of the property transferred or the value of the prop-
erty transferred. Id.
USAA contends the language “to the extent a transfer is
avoided,” in § 550 limits the bankruptcy court’s choice of
remedy to simply canceling the security interest. Ordinarily,
when a trustee successfully brings an adverse action against
a creditor, 11 U.S.C. § 551 provides the default remedy. That
section states:
IN RE TAYLOR 3111
Any transfer avoided under section 522, 544, 545,
547, 548, 549, or 724(a) of this title, or any lien void
under section 506(d) of this title, is preserved for the
benefit of the estate but only with respect to property
of the estate.
A trustee, however, has the discretion to seek an alternative
remedy under § 550 (“the trustee may recover . . .”) (emphasis
added). See In re Bremer, 408 B.R. at 358-59 (“Preservation
is automatic, while recovery is not. Recovery is necessary
only when the remedy of avoidance, and therefore of preser-
vation, is inadequate.”). USAA’s interpretation of the statute
would render the majority of § 550 meaningless surplusage in
the context of a non-possessory lien or security interest. We
therefore reject USAA’s contention that, because the security
interest was void ab initio, the bankruptcy court lacked discre-
tion to award recovery under § 550. The security interest was
not void ab initio once the bankruptcy court authorized the
estate to recover the value of the security interest under § 550.
[8] The next question is whether the bankruptcy court
abused its discretion when it decided to award the estate the
value of the security interest, instead of the security interest
(the property transferred) itself. We hold it did not. The pur-
pose of § 550(a) is “to restore the estate to the financial condi-
tion it would have enjoyed if the transfer had not occurred.”
E.g., Aalfs v. Wirum (In re Straightline Invs., Inc.), 525 F.3d
870, 883 (9th Cir. 2008) (internal citations omitted). A bank-
ruptcy court ordinarily determines the value of the property to
be the value at the time of the transfer, but has discretion on
how to value the property so as to put the estate in its pre-
transfer position. Joseph v. Madray (In re Brun), 360 B.R.
669, 674 (Bankr. C.D. Cal. 2007) (“Typically, courts equate
‘value’ with the fair market value of the subject property at
the time of the transfer.”). In this case, the bankruptcy court
held correctly that awarding the estate the value of the secur-
ity interest would more closely restore the estate to its pre-
transfer position than simply avoiding the transfer.
3112 IN RE TAYLOR
Addressing this exact issue, the BAP held a bankruptcy
court had discretion to award the property or the value of the
property in order to avoid a lien. In re Bremer, 408 B.R. at
358-59. In re Bremer involved two consolidated cases whose
facts were indistinguishable from the present case. The debt-
ors loaned auto buyers the purchase price of their cars through
purchase-money security interests from the purchasers. The
security interests were avoidable under § 547 and the trustee
brought adversarial actions to avoid the transfers of the secur-
ities interests. Id. at 358. The bankruptcy court avoided the
transfers but held that the correct remedy was to return the
property—the security interest—to the estate. Id.
The BAP affirmed on the ground that the bankruptcy
courts’ remedy, to return the security interest, was not an
abuse of the courts’ discretion. Id. at 361. The BAP did not
hold the only available remedy was to avoid the security inter-
est. Id. at 360 (“[W]e decline to hold that § 550(a) relief is
unavailable in every lien avoidance case.”). Instead, the BAP
noted, “there are circumstances in which avoiding and pre-
serving a lien under § 551 may not suffice to put the estate
back to its pre-petition position . . . and awarding the trustee
the value of the vehicle was the proper § 550 remedy.” Id.
The BAP went on to identify two possible situations where
avoiding a lien is an insufficient remedy and recovery of the
value of the security interest is necessary to restore the estate
to its pre-transfer position. First, “[w]here the property is
unrecoverable or its value diminished by conversion or depre-
ciation, courts will permit the recovery of value.” Id. And sec-
ond, “when the value is readily determinable and a monetary
award would work a savings for the estate.” Id. In contrast,
“[w]hen the record is devoid of evidence on the property’s
market value or when conflicting evidence exists on the value
of the transferred property, courts have ordered the property
to be returned.” Id.
Here, the bankruptcy court held the value of the security
interest was diminished by depreciation and payments the
IN RE TAYLOR 3113
Taylors had made by the time the court acted on the trustee’s
motion to avoid the security interest. Hence, the bankruptcy
court awarded the value of the security interest to restore the
estate to the position in which it would have been had the
transfer of the security interest to USAA not been made. The
bankruptcy court was attempting to correct for the difference
between the value of the security interest at the time of the
transfer (September 20, 2005) and the value of the security
interest at the time of judgment (August 10, 2007). We agree
that the value of a security interest is determined in part by the
value of the secured asset, in this case the value of the Tay-
lors’ car. Hence, the depreciation of the value of the car low-
ered the value of the security interest. Furthermore, the value
of the security interest is determined in part by the outstand-
ing balance of the Taylors’ debt. As the Taylors made pay-
ments to reduce their debt, the value of the security interest
diminished.
[9] The error here stems from the bankruptcy court’s deter-
mination of the value of the security interest. The bankruptcy
court attempted to make up for the diminution of the security
interest’s value—for payments made and depreciation in the
value of the car—in its remedy.
We understand the bankruptcy court’s reasoning to be as
follows: If USAA had not received a valid security interest in
the Camry when the Taylors purchased it, the Taylors could
have acquired another loan, e.g. from Bank X, for an amount
equal to the value of the original loan in exchange for trans-
ferring the security interest in the car to Bank X. Thus, when
the Taylors filed for bankruptcy, the estate would have had
the automobile, an unsecured debt of $18,020 owed to USAA,
and a secured debt of $18,020 owed to Bank X.11 The estate
11
This raises the question why the bankruptcy court thought the Taylors
could only get the value of the original loan, $18,020, and not the full pur-
chase price of the car, $19,500. There was no evidence whether market
conditions in 2005 would have provided for a fully-financed, no down
payment purchase. The bankruptcy court assumed the Bank X loan would
have allowed Bank X properly to perfect its security interest.
3114 IN RE TAYLOR
would have had the automobile, an unsecured debt of $18,020
owed to USAA, and a secured debt of $18,020 owed to Bank
X. The bankruptcy court tried to recreate this alternative sce-
nario through its judgment, except instead of USAA holding
the unsecured debt and another bank holding the secured debt,
USAA was to hold both.
The bankruptcy court’s premise, which the BAP seems to
have accepted without discussion, 390 B.R. at 665 n.13, that
upon the purchase of the Camry, the Taylors could get a loan
and that such a loan would be for $18,020, is not supported
by the evidence. There is no evidence in the record to support
the Trustee’s claim that the security interest was worth a loan
of $18,020, which would make it more likely than not that
Bank X would loan that amount on the Camry. Additionally,
there is no evidence that a second bank would have loaned the
Taylors $18,020 in exchange for a secured interest in the
Camry when any bank with access to honest financial docu-
ments would have seen that the Taylors had just incurred an
$18,020 debt to USAA. Furthermore, we question the estate’s
claims that the car was worth the full $18,020 when, 21 days
after the Taylors took possession, USAA perfected its security
interest. The estate’s motion does not contain any support or
explanation why the Camry’s value would not have started to
depreciate the moment the Taylors drove their vehicle off the
dealer’s lot.
[10] For these reasons, we hold the bankruptcy court
abused its discretion. The bankruptcy court’s finding that (1)
another bank would loan $18,020 collateralized by a security
interest, and (2) the value of the security interest was equal to
an unsecured loan of $18,020 was “without support in infer-
ences that may be drawn from the facts in the record.” Hink-
son, 585 F.3d at 1262 (quotation marks omitted).
Ordinarily, where a lower court bases its judgment on a
clearly erroneous finding of fact, we remand for further find-
ings consistent with our opinion. In this case, however, no
IN RE TAYLOR 3115
remand is necessary. It is well established that in deciding to
award an estate the value of property, a bankruptcy court must
decide “whether there is conflicting evidence as to the value
of the property and whether the value of the property is read-
ily determinable.” 5 Collier on Bankruptcy ¶ 550.02[3][a], at
550-9-10 (15th ed. re 2008).
Where the value of the property cannot be easily or readily
determined—as is the case here—the correct remedy is to
return the property, not award an estimate of the value of the
property. Id; accord In re Bremer, 408 B.R. at 360. For exam-
ple, in In re McLaughlin, 183 B.R. 171 (Bankr. W.D. Wis.
1995), the bankruptcy court avoided the transfer of a security
interest in a mobile home because the security interest was not
perfected within the time specified under § 547(c). The bank-
ruptcy court held the trustee could not recover the value of the
property because the value was not readily determined. 183
B.R. at 177 (“if the market value of the property can be read-
ily determined and would work a savings for the estate, the
trustee may recover value rather than the property.”). The
court held the value of the lien was related to the market price
of the mobile home, but did not specify how. Id. Nevertheless,
because the value of the mobile home one month after pur-
chase was not necessarily the same as the purchase price, the
bankruptcy court declined to award the trustee the value of the
property. Id. Here twenty-one days elapsed between the day
the Taylors took possession of the Camry and when they
transferred the security interest to USAA, but we see no rea-
son why a nine day difference would change the fact that the
value of the security interest was not readily ascertainable.
[11] We find the value of the security interest at the time
of the filing of the bankruptcy petition is not readily ascertain-
able from this record. Therefore, the only available remedy is
to return to the estate the property, i.e., the security interest,
and not the value of the property.12
12
We do not reach the question whether “value” as used in § 550 may
extend beyond a simple money judgment to include injunction-style reme-
dies such as loans.
3116 IN RE TAYLOR
The only remaining wrinkle is what to do with the pay-
ments made to USAA. The record does not include a clear
description of the schedule of payments to USAA. Some, pos-
sibly all, of the payments came from the Taylors’ post-
petition exempt income. We do not see any reason to return
those payments to the Taylors. The parties, however, have not
addressed this issue so we remand to the bankruptcy court to
address the payment issue in the first instance.
Some of the payments, however, may have been paid by
the estate, either following the Taylors’ declaration of bank-
ruptcy, or, by the Taylors during the 90 days preceding their
declaration. Any such payments must be returned by USAA
to the estate, either as postpetition transactions under 11
U.S.C. § 549, or, as a prepetition preferential transaction
under 11 U.S.C. § 547. We remand to the district court to
determine whether the estate made any pre- or post-petition
transfers to USAA in payment of the loan and, if so, whether
those payments should be returned to the estate.
We note in passing that Thacker’s objection to canceling
the security interest, on the grounds that if USAA returned the
monthly payments made by the Taylors and then had an unse-
cured claim for the original $18,020, the calculation of pre-
judgment interest on the monthly payments would prove diffi-
cult or complicated, lacks merit. The parties should have
records of the timing of each monthly payment, and they can
calculate the same 4.30% per year simple interest, as awarded
by the bankruptcy court in its first remedy, on each recover-
able monthly payment until USAA has satisfied the judgment.13
13
The bankruptcy court was correct to award prejudgment interest. See
Acequipa, Inc. v. Clinton (In re Acequipa, Inc.), 34 F.3d 800, 818-19 (9th
Cir. 1994). The same rate of 4.30% per year simple interest should be
used.
IN RE TAYLOR 3117
IV. Conclusion
[12] The Bankruptcy Appellate Panel’s decision was cor-
rect to the extent it held a bankruptcy court had discretion to
award a trustee the value of a security interest that was
avoided under § 547. The bankruptcy court, however, clearly
erred in determining the correct value of the security interest.
We reverse with instructions for the bankruptcy court to avoid
the security interest and to determine in the first instance how
to handle the recovery of the monthly payments.
REVERSED AND REMANDED.