Security Interest Substantial Compliance Doctrine Does Not Apply to Failure to File Correct Document and Fee

Security Interest Substantial Compliance Doctrine Does Not Apply to Failure to File Correct Document and Fee

A secured creditor’s filing of an inapplicable document and payment of an incorrect fee amount when seeking to perfect its security interest in a refinanced vehicle meant that the lien was unperfected, according to the U.S. Bankruptcy Court for the District of Kansas, applying Kansas law.

The debtor refinanced her vehicle’s original loan with the bank. Kansas law provides different procedures (and different paperwork and fees) for the perfection of liens on newly purchased vehicles in comparison to the perfection of liens involving a refinancing.

Although the bank provided the refinancing, it submitted the documents and paid the fee applicable to newly purchased vehicles, not to a refinancing as it was supposed to.

After the debtor filed for bankruptcy, the Chapter 7 Trustee filed an adversary proceeding against the bank, seeking to avoid the bank’s lien and preserve it for the benefit of the estate.

The bank moved for summary judgment, arguing that although it filed the incorrect application and paid the incorrect fee, its security interest should be considered perfected because it substantially complied with the applicable title statutes.

In denying the bank’s motion, the bankruptcy court noted that the substantial compliance doctrine has only been applied to situations where a creditor files the correct application or document, but such document contains an error.

In contrast, it noted that where a creditor fails to file the correct document and fee at all—what it deemed as “filing errors”—the substantial compliance doctrine does not apply.

Of note to practitioners in the First Circuit, the court supported this last point—that the substantial compliance doctrine does not excuse filing errors—with a citation to Yamaha Motor Corp., USA v. Perry Hollow Mgmt. Co., Inc. (In re Perry Hollow Mgmt.

Co., Inc.), 297 F.3d 34, 40 (1st Cir. 2002), where the First Circuit held that failure to file a UCC-1 financing statement with the clerk of the town where debtor conducted business was not excusable under the doctrine of substantial compliance, since it was an error in the filing process.