## Facts

- Roger Dale Hurst and Sandra Jean Hurst operated Hurst Auto Sales, a used-car dealership.
- First Financial Bank financed the debtors’ floor-plan inventory through multiple promissory notes and security agreements, some executed before and some after Ohio’s July 1, 2001 Article 9 revisions.
- First Financial claimed the debtors owed about $67,100 on the petition date and asserted perfected liens in certain vehicles held by the dealership.
- First Financial filed only some UCC financing statements and filed no continuation statements; the filed financing statements had lapsed by approximately September 24, 2002.
- The debtors filed a Chapter 7 petition on December 6, 2002.
- First Financial sought relief from the automatic stay to pursue the vehicles; the Chapter 7 trustee objected, disputing perfection, and the bank later withdrew its stay-relief motion.
- The court authorized the trustee to sell the vehicles free and clear, with any asserted liens to attach to proceeds pending further order; the trustee sold the vehicles at auction and held net proceeds of about $22,785.
- The trustee asserted priority to the proceeds under the strong-arm power as a hypothetical lien creditor under 11 U.S.C. § 544(a)(1).

## Issues

1. Under Ohio Article 9 (former and revised), how must a secured party perfect a security interest in motor vehicles held as inventory by a dealer: by UCC filing, by certificate-of-title notation, or otherwise?
2. If First Financial’s financing statements lapsed and no continuation statements were filed, were its security interests unperfected on the petition date, making them subordinate to the Chapter 7 trustee’s rights under 11 U.S.C. § 544(a)(1) and Ohio priority rules?

## Decision

- The court held First Financial did not have perfected security interests in the vehicles (and therefore not in the proceeds) as of the petition date.
- For motor vehicles held as a dealer’s inventory, Ohio law required perfection by filing an appropriate financing statement; reliance on title-based perfection was insufficient in this context.
- Because First Financial’s financing statements had lapsed and it filed no continuation statements, its interests were unperfected when the bankruptcy case commenced.
- The Chapter 7 trustee, as a hypothetical lien creditor under § 544(a)(1), had superior rights to the net sale proceeds, which became property of the estate.

## Legal Principles

- Under 11 U.S.C. § 544(a)(1), a Chapter 7 trustee has, as of the petition date, the rights of a hypothetical judicial lien creditor and may defeat unperfected security interests.
- Under Ohio Article 9, a lien creditor has priority over an unperfected security interest.
- For motor vehicles held as inventory by a dealer, perfection is accomplished by filing a UCC financing statement (and maintaining effectiveness through timely continuation statements), not by certificate-of-title lien notation.
- A lapsed financing statement renders the related security interest unperfected against lien creditors, including a bankruptcy trustee exercising § 544(a)(1).

## Conclusion

Because First Financial failed to maintain continuous perfection of its inventory vehicle liens through effective UCC filings, its interests were unperfected on the petition date and the Chapter 7 trustee held priority to the net proceeds from the vehicles’ court-approved sale.


In re Hurst, 308 B.R. 298 (Bankr. S.D. Ohio 2004)