## Facts

- Before March 7, 1997, Matt Psalto, an Idaho resident, purchased a 1995 Polaris snowmobile in Wyoming.
- No certificate of title was issued for the snowmobile at the time of purchase, and no certificate of title was issued later.
- On March 7, 1997, Psalto borrowed money from American General Finance, Inc. (AGF) and granted AGF a security interest in the snowmobile to secure the loan.
- AGF did not obtain an Idaho certificate of title for the snowmobile and did not have its lien noted on any certificate of title.
- Instead, AGF filed a UCC financing statement with the Idaho Secretary of State.
- Psalto later filed a Chapter 7 bankruptcy case in the United States Bankruptcy Court for the District of Idaho.
- Fitzgerald, the Chapter 7 trustee, brought an adversary proceeding seeking to avoid AGF’s security interest under 11 U.S.C. § 544(a), arguing AGF’s interest was unperfected under Idaho law.

## Issues

1. Under Idaho law, could AGF perfect a security interest in a snowmobile by filing a UCC financing statement when no certificate of title had ever been issued, or was perfection governed by Idaho’s certificate-of-title statutes requiring lien notation on a title?
2. If AGF’s security interest was unperfected as of the bankruptcy petition date, could the Chapter 7 trustee avoid it under 11 U.S.C. § 544(a) as a hypothetical lien creditor?

## Decision

- The court held that Idaho’s certificate-of-title scheme governed perfection of a security interest in the snowmobile and displaced Article 9 filing for that collateral.
- Because AGF did not perfect through the title system (and had no lien noted on a certificate of title), AGF’s security interest was unperfected despite its UCC filing.
- As of the petition date, the trustee had the status of a hypothetical lien creditor under § 544(a) and had priority over AGF’s unperfected security interest.
- The trustee was entitled to avoid AGF’s security interest in the snowmobile under § 544(a), leaving the estate free of AGF’s lien.

## Legal Principles

- When state certificate-of-title statutes apply to a class of vehicles, perfection of a security interest is accomplished through the method specified in those statutes (commonly lien notation on the certificate of title), not by a UCC financing statement.
- A debtor’s failure to obtain a certificate of title does not make UCC filing an alternative method of perfection when the title statutes govern the collateral; the secured creditor must take the steps needed to perfect through the title process.
- Under 11 U.S.C. § 544(a), a bankruptcy trustee is treated as a hypothetical judicial lien creditor as of the commencement of the case and may avoid a security interest that is unperfected under applicable nonbankruptcy law on that date.

## Conclusion

In Fitzgerald v. American General Finance, Inc. (In re PSALTO), the bankruptcy court ruled that Idaho’s certificate-of-title statutes controlled perfection of a security interest in the debtor’s snowmobile, so AGF’s UCC financing statement did not perfect its lien; because the interest remained unperfected on the petition date, the Chapter 7 trustee could avoid it under § 544(a).


Fitzgerald v. American General Finance, Inc. (In re PSALTO), 225 B.R. 753 (1998)