## Facts

- Several Chapter 13 cases involved debtors who financed vehicle purchases and granted lenders security interests in the vehicles.
- In each case, the lender’s lien was not noted on the vehicle’s Illinois certificate of title, leaving the security interest unperfected under state title law.
- The Chapter 13 trustee filed adversary proceedings invoking 11 U.S.C. § 544(a)(1) to avoid the unperfected liens.
- The consolidated opinion addressed not only avoidability but also the consequences of avoidance in Chapter 13 where the debtor retains the vehicle and no trustee liquidation occurs.
- Creditors argued equitable theories (including substantial compliance and “windfall” concerns) to preserve secured status or some continuing interest after avoidance.

## Issues

1. Whether a Chapter 13 trustee may avoid unperfected vehicle security interests under 11 U.S.C. § 544(a)(1) when the lien is not noted on the certificate of title.
2. After avoidance in a Chapter 13 case where the debtor retains the vehicle, whether the creditor retains any enforceable lien or other continuing interest in the vehicle or its value.
3. Whether perceived debtor “windfall” concerns limit the trustee’s ability to avoid the lien or require preservation of secured treatment.
4. Whether the Chapter 13 trustee has standing to bring § 544(a)(1) avoidance actions for the benefit of the estate and creditors.

## Decision

- The court held the trustee could avoid the unperfected vehicle liens under 11 U.S.C. § 544(a)(1).
- The court rejected creditors’ equitable and substantial-compliance arguments as insufficient to defeat the trustee’s strong-arm powers.
- The court held that, once avoided, the liens did not survive in any residual or equitable form against vehicles retained by the debtors.
- The creditors’ claims were treated as unsecured claims in the Chapter 13 cases.
- The court held that “windfall” concerns did not override the statutory consequences of nonperfection and lien avoidance.
- The court recognized the Chapter 13 trustee’s standing to pursue § 544(a)(1) avoidance to benefit the estate and creditors.

## Legal Principles

- Under 11 U.S.C. § 544(a)(1), a bankruptcy trustee has the status of a hypothetical judicial lien creditor as of the petition date and may avoid interests that would be subordinate to such a creditor under applicable state law.
- Under Illinois certificate-of-title rules, a vehicle security interest is generally perfected by notation of the lien on the certificate of title; failure to note the lien leaves the interest unperfected and avoidable in bankruptcy.
- Avoidance under § 544 eliminates the creditor’s security interest for bankruptcy purposes; absent another basis for secured status, the creditor’s claim is allowed only as unsecured.
- Equity does not supply a substitute perfection method or preserve a post-avoidance “equitable lien” that would defeat the Code’s priority and avoidance scheme.
- In Chapter 13, debtor retention of collateral does not, by itself, create a surviving lien after avoidance or require secured treatment to prevent perceived debtor benefit.

## Conclusion

The bankruptcy court held that a Chapter 13 trustee may use § 544(a)(1) to avoid unperfected vehicle liens not noted on Illinois certificates of title, and that after avoidance the creditors have no continuing lien against vehicles retained by the debtors and are limited to unsecured claim treatment, notwithstanding equitable or “windfall” arguments.


McRoberts v. Transouth Fin. (In re Bell), 194 B.R. 192 (Bankr. S.D. Ill. 1996)