Keith L. Phillips, United States Bankruptcy Judge.
Defendant Vehicle Acceptance Corporation ("VAC") has moved, pursuant to Federal Rule of Civil Procedure 12(b)(6), Fed. R. Civ. P. 12(b)(6),
The Trustee argues that VAC's asserted security interests are invalid because VAC entered into an unlawful financing agreement with the Debtor. That agreement required the Debtor to give VAC physical possession of titles to cars the Debtor had purchased for resale. The Trustee's allegation that VAC violated the automatic stay stems from VAC's alleged postpetition collection of funds from the Debtor by illegally refusing to turn over vehicle titles in order to coerce the Debtor into making payments. VAC takes the position that its agreement with the Debtor gave it a valid and enforceable security interest in the Debtor's property and that the Amended Complaint fails to state a claim upon which relief may be granted because each count relies on the erroneous assumption that its floor planning agreement was unlawful and unenforceable.
On January 24, 2017, the Debtor filed its voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The Trustee was appointed to administer the Debtor's bankruptcy estate.
On October 18, 2017, the Trustee filed
On November 22, 2017, VAC filed its motion to dismiss the Amended Complaint for failure to state a claim (the "Motion"). The Trustee filed his response to the Motion on December 6, 2017 (the "Response"). A hearing on the Motion was held on December 13, 2017.
This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157 (b)(2)(A),(E),(F) and (O). The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334, and venue in this Court is proper under 28 U.S.C. § 1409.
A motion to dismiss under Rule 12(b)(6) challenges the legal sufficiency of a complaint. Birmingham v. PNC Bank, N.A. (In re Birmingham), 846 F.3d 88, 92 (4th Cir. 2017). When ruling on a motion to dismiss, the Court must assume that the facts alleged in the complaint are true. Eastern Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir. 2000); Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009). All reasonable inferences must be made in the plaintiff's favor. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir. 2009).
The United States Supreme Court has stated that "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Under this plausibility standard, a plaintiff must demonstrate more than a "sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. Thus, a plaintiff must articulate facts that, when accepted as true, state a claim upon which relief can be granted and cannot rely upon "labels and conclusions, and a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Determining whether a complaint states a plausible claim for relief is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Francis v. Giacomelli, 588 F.3d at 193. "[A] plaintiff is not required to plead facts that constitute a prima facie case in order to survive a motion to dismiss" but allegations must be sufficient "enough to raise a right to relief above the speculative level." Coleman v. Md. Court of Appeals, 626 F.3d 187, 190 (4th Cir. 2010) (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
The following facts are alleged by the Trustee. On July 16, 2015, the Debtor, a used automobile dealer, and VAC entered
Appended to the Agreement is a one-page document signed by VAC and the Debtor entitled "Basic Vehicle Acceptance Corporation Guidelines" (the "Guidelines"). The Guidelines list "basic rules you should be aware of regarding your Vehicle Acceptance Corporation Floor plan account." One of the rules included in the Guidelines and confirmed by the Debtor's signature states the following in bold print: "All original vehicle title documents will be held by Vehicle Acceptance Corporation." The Amended Complaint alleges that the arrangement with VAC required the Debtor to give VAC physical possession of the titles to vehicles purchased by the Debtor, even though VAC was not listed as a lienholder on the title.
During the ninety days prior to the January 24, 2017, petition date, the Debtor made payments to VAC in the total amount of $135,769.93. Between January 26, 2017, and February 16, 2017, the Debtor made postpetition payments to VAC totaling $56,701.90. The payments were made so that VAC would release the titles to vehicles the Debtor had sold and were made without the knowledge or consent of the Trustee.
After the bankruptcy filing, VAC retained possession of titles to several vehicles that had been purchased by the Debtor for resale. The Trustee repeatedly demanded that VAC turn over the titles to those vehicles. The Trustee also demanded that VAC return the postpetition payments it had received from the Debtor. VAC rejected these demands.
Counsel for Honor Financial, an entity that had purchased the retail installment sales contracts for some of the vehicles sold by the Debtor, contacted the Trustee because the titles held by VAC had not been delivered to the purchasers at the time of sale and, as a result, the Division of Motor Vehicles could not process title documents in the new owners' names and could not record Honor Financial as lienholder. Honor Financial demanded that the Trustee resolve this problem. After the
Although VAC knew, or should have known, that the Debtor had filed bankruptcy, it did not seek relief from the automatic stay and continued to operate as if no order for relief had been entered. VAC collected funds from the Debtor by holding vehicle titles in order to force the Debtor to continue to make payments and as a result, the Trustee and bankruptcy estate incurred damages, including attorneys' fees.
In the Amended Complaint, the Trustee asserts that Virginia law prohibits any creditor from taking possession of a title to a vehicle unless the creditor is listed as the lienholder on the title and that VAC's practice of taking physical possession of the titles as a form of security for its loan was illegal. The Trustee does not contend that the Agreement fails to grant VAC a security interest in the Debtor's inventory. Nor does the Trustee assert that VAC's security interest in the Debtor's inventory is avoidable because VAC failed to perfect its lien properly by filing a UCC financing statement pursuant to Va. Code Ann. § 8.9A-301.
Virginia's motor vehicle laws are contained in Title 46.2 of the Virginia Code. Chapter 15 of Title 46.2, Va. Code Ann. §§ 46.2-1500-46.2-1582, is devoted exclusively to laws affecting motor vehicle dealers. As a motor vehicle dealer operating in Virginia, the Debtor is subject to and governed by the provisions of this Chapter.
One provision included in Chapter 15, Va. Code Ann. § 46.2-1542,
The District Court for the Eastern District of Virginia has acknowledged on more than one occasion that under Virginia law a dealer may effectuate a sale without having possession of the certificate of title at the time the vehicle is delivered to the customer. See Tripp v. Charlie Falk Auto, No. CIV. 3:00CV512, 2001 WL 1105132, at *4-5 (E.D. Va. Aug. 22, 2001) ("[T]his Court could conclude that ownership in this transaction was passed upon the signing of the Re-assignment of Title form, which is recognized as a legitimate means of transferring title and therefore would effectuate a valid transfer of ownership."), aff'd sub nom. Tripp v. Charlie Falk's Auto Wholesale Inc., 290 Fed.Appx. 622 (4th Cir. 2008); Nigh v. Koons Buick Pontiac GMC, Inc., 143 F.Supp.2d 535 (E.D. Va. 2001) (Automobile dealer's failure to order new license plate for truck did not violate its statutory duty to transfer title on truck in timely manner, where
In arguing that VAC's practice of holding certificates of title constitutes a crime, the Trustee cites Va. Code Ann. § 46.2-618.
It is true that one of the fundamental purposes of Virginia's motor vehicle registration laws "is to prevent the sale of stolen or other unregistered vehicles in this State." U.S. Fid. & Guar. Co. v. Trussell, 208 F.Supp. 154, 158-59 (W.D. Va. 1962). In that same vein, "[t]he motor vehicle titling statutes ... were enacted to protect the public by providing for the issuance of certificates of title as evidence of ownership of motor vehicles and to provide potential buyers and creditors with a single place where information about the status of motor vehicles could be found." Toyota Motor Credit Corp. v. C.L. Hyman Auto Wholesale, Inc., 256 Va. 243, 506 S.E.2d 14, 15 (1998). Nevertheless, it is evident that § 46.2-618 and similar statutes
The Trustee has cited no statute that specifically prohibits a floor plan lender from retaining possession of certificates of
The Office of the Comptroller of the Currency (OCC) publishes a Handbook to guide OCC examiners in their oversight and supervision of the lending practices of national banks and federal savings associations. The Handbook is composed of various booklets, among them one entitled "Floor Plan Lending," housed in the section of the Handbook titled "Safety and Soundness."
The OCC's Handbook states that in a typical floor plan arrangement, the dealer executes a loan agreement granting the bank a continuing security interest in the dealer's inventory, receipts and accounts receivable, and the bank perfects its security interest pursuant to article 9 of the Uniform Commercial Code. Id. at 3. When discussing the risks associated with floor plan lending, the OCC emphasizes the need for the bank to maintain an effective risk management system, since a lender who is unable to exercise full control over the inventory may find itself in a "sold-out-of-trust position." Id. at 9. The OCC offers a comprehensive list of steps a lender should take to protect itself from a loss, including monitoring the dealer's inventory and conducting regular inspections. "[F]loor plan lenders should regularly inspect and verify the inventory, take control of title documents, and, if necessary, take physical control of the inventory...." Id. at 18 (emphasis added).
As previously observed, Virginia's motor vehicle titling laws, including those cited by the Trustee, were enacted to protect innocent parties. Allowing a floor plan lender to hold certificates of titles does not thwart this legislative intent. While a floor plan lender may potentially reduce its risk of loss by controlling title documents, the practice does not eliminate the possibility that its collateral may be subject to the superior claim of a dealer's customer or the customer's lender.
A case decided by a district court in the Southern District of Texas, involving a factual scenario similar to the case before this Court, found that a "buyer in the ordinary course of business" has superior rights over the floor plan lender, despite the lender's having retained possession of the certificate of title, when the proceeds of sale were not passed on by the dealer to the lender. Lundy v. First Nat'l Bank of El Campo (In re Dota), 288 B.R. 448 (S.D. Tex. 2003) (buyer in the ordinary course of business took title to vehicle free of floor plan lender's security interest in dealer's inventory even though sale was not accompanied by transfer of certificate of title);
Whether intentional or not, the Trustee has obscured the distinction between motor vehicle dealers and non-dealer sellers in order to construct an argument that a secured floor plan lender's practice of holding titles to vehicles held for resale by a dealer is unlawful. The Trustee has not cited, nor has the Court found, any statute or regulation prohibiting the practice. Accordingly, the Court rejects the Trustee's contention that the practice violates Virginia's motor vehicle titling laws. Therefore, the Court need not address the Trustee's further argument that the Agreement constitutes an unlawful, unenforceable contract. For these reasons, the Court will dismiss the Trustee's declaratory judgment and avoidance counts (Counts I, II and IV) for failure to state a claim upon which relief may be granted.
Count III of the Amended Complaint seeks relief for VAC's violation of the automatic stay. The automatic stay created by 11 U.S.C. § 362(a) became effective upon the Debtor's bankruptcy filing. The Trustee claims that VAC knew or should have known that the Debtor was in bankruptcy, yet "continued to operate as if no order for relief had been entered" and "attempted to, and in fact did, collect funds from the Debtor after the Petition Date by illegally holding vehicle titles to coerce the Debtor to continue to make improper and unnecessary payments." (Amended Complaint at 7-8.) The Trustee alleges that VAC's actions, "in addition to others, constitute an attempt by VAC to obtain property of the estate, which attempt was successful." Id. The Trustee further alleges that VAC's stay violations caused him and
A party seeking damages for violation of 11 U.S.C. § 362(a) must establish three elements: (1) that a violation occurred; (2) that the violation was committed willfully; and, (3) that the violation caused actual damages. Skillforce, Inc. v. Hafer, 509 B.R. 523, 529 (E.D. Va. 2014). The Trustee has alleged facts that, if proven, would satisfy these elements. For that reason, the Court will deny VAC's motion to dismiss Count III of the Amended Complaint.
A separate order consistent with this Memorandum Opinion will issue.
Va. Code Ann. § 46.2-1542.
In Dota, a floor plan lender argued that the buyer's failure to comply with the provision in COTA requiring a transfer of a vehicle's certificate of title at the time of sale (similar to what the Trustee contends is required under Virginia law) negated his "buyer in the ordinary course" assertion. The court rejected this argument, noting the intent of the Texas legislature to exclude motor vehicle dealers from this requirement. "[T]he Bank's assertion that [the buyer] should have received the certificate of title to the Silverado at the time of sale misstates the COTA's requirements for transfer of a certificate of title pursuant to a subsequent sale by a licensed Texas dealer...." Id. at 461. Likewise, the Trustee's reliance on certain Virginia statutes for his argument that a dealer is required to deliver the certificate of title to the buyer simultaneously with the delivery of the vehicle is misplaced.
It is worth noting that while the specific issue was not raised, the court in Dota did not question the validity of the floor plan lender's loan agreement that required the dealer to arrange for the release of the original title from the Bank for each vehicle sold. As in the present case, the lender was not shown as lienholder on the title. In Dota, the dealer failed to apply the proceeds of the sale to the loan and failed to request or arrange for the Bank to release the title before filing bankruptcy. Having determined that the buyer was "a buyer in the ordinary course of business," the court refused to order him to deliver the vehicle to the Bank.
