In re Taylor

About one month before filing for Chapter 7 bankruptcy, David and Linda Taylor (debtors) purchased a car using $18,020 borrowed from USAA Federal Savings Bank (USAA) (creditor). The Taylors gave USAA a security interest in the car. USAA perfected its security interest 21 days after the Taylors’ car purchase, which was timely under state law. However, under the Bankruptcy Code, creditors were required to perfect their security interests within 20 days. Because USAA had perfected outside the 20-day period and the Taylors had declared bankruptcy within 90 days of the transfer, the bankruptcy trustee sought to avoid the transfer of the security interest as a preferential transfer under 11 U.S.C. § 547(b). The bankruptcy court held that the transfer was avoidable. In deciding the appropriate remedy, the bankruptcy court concluded that cancelling the security interest or transferring the security interest to the trustee would be insufficient. Instead, the court decided to award the bankruptcy estate the value of the security interest, which the court determined to be the initial loan amount of $18,020. The bankruptcy court reasoned that if USAA’s security interest was invalid, the Taylors could have obtained another $18,020 loan from another lender in exchange for transferring the security interest in the car to that lender. The bankruptcy court thus ordered USAA to pay the estate $18,020, plus interest, but gave USAA the right to file an unsecured claim against the estate for the same amount. The bankruptcy appellate panel affirmed, and USAA appealed to the Ninth Circuit, challenging the remedy awarded by the bankruptcy court.