## Facts

- Ajax Integrated, LLC (Ajax) entered Chapter 11 after creditors filed an involuntary petition on March 24, 2014.
- Mary Lannon Fangio was appointed Chapter 11 trustee and brought an adversary proceeding against DivLend Equipment Leasing, LLC (DivLend) to avoid DivLend’s claimed security interest in Ajax’s equipment and vehicles.
- The parties resolved the dispute as to all collateral except 30 motor vehicles subject to New York’s certificate-of-title rules.
- In May 2013, DivLend advanced about $1.1 million to Ajax under an agreement styled as an equipment lease with monthly payments and provisions typical of secured financing.
- The agreement contemplated that Ajax would sign financing statements and other documents needed to evidence and protect DivLend’s security interest.
- The agreement defined events of default to include, among other things, nonpayment, the filing of a bankruptcy petition, and failure to perform required obligations within 30 days after notice; upon default, DivLend could accelerate, repossess, or sue.
- Under New York law, a security interest in a titled motor vehicle is perfected by submitting the existing title, a borrower-signed notice-of-lien form, and the required fee to the motor vehicle commissioner so the lien can be noted on the title.
- After the agreement, DivLend sent Ajax notice-of-lien forms for signature and return so DivLend could complete the title-filing process; Ajax never returned executed forms.
- DivLend claimed it made follow-up calls and sent emails seeking the executed lien forms; Ajax disputed the extent of any requests beyond a mailed request dated July 2, 2013.
- As of the bankruptcy petition date, DivLend had not obtained lien notation on the titles for the 30 vehicles.
- The trustee sought summary judgment that DivLend’s interest was avoidable under 11 U.S.C. § 544(a); DivLend cross-moved for summary judgment, conceding it was unperfected but asking for an equitable lien or constructive trust because Ajax’s lack of cooperation prevented perfection.

## Issues

1. Whether the trustee, using 11 U.S.C. § 544(a), could avoid DivLend’s conceded unperfected security interest in the 30 New York titled vehicles.
2. Whether the court should impose an equitable lien or constructive trust in DivLend’s favor based on Ajax’s failure to sign and return title-lien documents, thereby defeating or limiting the trustee’s § 544(a) rights.

## Decision

- The court granted summary judgment for the trustee as to the 30 titled vehicles.
- The court held DivLend’s interest in the vehicles was unperfected on the petition date under New York’s title-certificate method and was avoidable under § 544(a).
- The court denied DivLend’s request for an equitable lien.
- The court denied DivLend’s request for a constructive trust.

## Legal Principles

- For motor vehicles covered by New York’s certificate-of-title statute, perfection generally requires lien notation through the statutory title process; without completion of that process, a creditor’s interest is unperfected as against lien creditors.
- Under 11 U.S.C. § 544(a), a bankruptcy trustee has the rights of a hypothetical judicial lien creditor (and other specified hypothetical parties) as of the petition date and may avoid unperfected security interests.
- Bankruptcy courts may not use equitable remedies to rewrite the Bankruptcy Code’s distribution and priority rules or to override the trustee’s statutory avoidance powers.
- Equitable liens and constructive trusts are generally disfavored in bankruptcy when they would give one creditor priority over others based on prepetition dealings not reflected in public perfection records.
- A creditor that conditions its secured status on paperwork and filings bears the risk of nonperfection; debtor noncooperation may support contract remedies against the debtor, but it does not automatically justify an equitable remedy that defeats § 544(a).

## Conclusion

In the trustee’s avoidance action against DivLend, the court held that DivLend’s failure to obtain New York title lien notation left its interest in 30 vehicles unperfected on the petition date, so the trustee could avoid it under § 544(a). The court also declined to impose an equitable lien or constructive trust based on Ajax’s failure to return signed lien forms, because such relief would conflict with the Code’s statutory scheme and the public-notice purpose of the title-perfection system.


In re Ajax Integrated, LLC, 2016 WL 1178350 (2016)