Wednesday, August 10, 2011

Recent Decisions regarding bankruptcy and foreclosure issues in the First Circuit

Trustee’s objection to exemption comes too late;
Court urges all trustees to carefully review any exemptions listed as “100% FMV” :

In re: DAMON MASSEY, Debtors, 2011 Bankr. LEXIS 2877 (Bankr. D. Mass. 7/25/11)(Melvin
S. Hoffman, Bankruptcy Judge)
OVERVIEW: The Chapter 13 trustee has objected to confirmation of the debtors' plan. The trustee claims the plan fails the liquidation test of Section 1325(a)(4) because the debtors improperly claimed exemptions of "100% of FMV" for their home and automobile in Schedule C of the Schedules of Assets and Liabilities filed with their bankruptcy petition on March 21, 2011. The liquidation analysis in the debtors' plan values the equity in these assets with specific dollar amounts – ($44,482.85) for the home and $1,455.00 for the automobile, and ascribes a specific dollar amount to the exemption claimed in each –$0.00 for the home and $1,455.00 for the automobile. I find the liquidation analysis to be exceptionally thorough and exceedingly clear and based on that analysis find that unsecured creditors, who will be paid under the debtors' pot plan approximately 10% of their allowed claims, will receive no less and indeed significantly more than they would receive in a Chapter 7 liquidation.

The Chapter 13 trustee's objection to confirmation is really a disguised objection to the exemptions claimed by the debtors in Schedule C in their home and car after the deadline for objections under Fed. R. Bankr. P. 4003(b)(1) has expired and the exemption is deemed correct whether or not there is a colorable statutory basis for the exemptions. Having missed the objection deadline, the trustee cannot now revive it by camouflaging her objection within a plan objection.

Had the trustee timely objected to the debtors' attempt to exempt their home and automobile in the amount of "100% of FMV", the objection would certainly have merited serious consideration. The expression "100% of FMV" was coined by the United States Supreme Court in
Schwab v. Reilly,     U.S.    , 130 S.Ct. 2652, 177 L.Ed.2d. 234 (2010), as shorthand for "full fair market value". Id. at 2668 and n. 19.

Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as "full fair market value (FMV)" or "100% of FMV." Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits. If the trustee fails to object, or if the trustee objects and the objection is overruled, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption. See Fed. Rule Bkrtcy. Proc. 1009(a). Either result will facilitate the expeditious and final disposition of assets, and thus enable the debtor (and the debtor's creditors) to achieve a fresh start free of the finality and clouded-title concerns Reilly describes.

The term "100% of FMV" on a debtor's Schedule C should be like catnip to a trustee. It should grab the trustee's attention and warrant an analysis to determine whether the asset in question could conceivably be worth more than the statutory exemption ceiling. If the trustee determines there is potential value in the asset beyond the exemption ceiling he must object to the exemption within the time allowed by Rule 4003 or lose the right to sell the asset later or, in the case of a Chapter 13 plan, lose the right to object to the plan based on Schedule C.
OUTCOME:  The Chapter 13 trustee's objection to plan confirmation is overruled and she is to submit a proposed confirmation order to the Court within 14 days of the date of this Order.

Where TILA pre-empts state regulation on predatory lending and disclosures:

(In re: HOLLINGWORTH)(HOLLINGWORTH v. BENEFICIAL MASSACHUSETTS, INC. and HSBC MORTGAGE CORPORATION (USA), 2011 Bankr. LEXIS 2829 (Bankr. D. Mass. 7/27/11)(Melvin S. Hoffman, Bankruptcy Judge)
OVERVIEW: Defendants moved for summary judgment. Debtors/Plaintiffs commenced this adversary proceeding against HSBC Mortgage Corporation (USA) and Beneficial Massachusetts, Inc. by a complaint alleging that their loan is a high-cost home loan and that their original lender failed to obtain certification that the debtors received counseling on the advisability of the mortgage loan prior to the closing, as required by the Massachusetts Predatory Home Loan Practices Act. Plaintiffs seek a judgment that the loan is unenforceable because of the Chapter 183C violation (Count I) and that the mortgage is invalid as a result (Count II). Defendants moved for summary judgment arguing that because the originator of the plaintiffs' mortgage was a national bank, the loan it originated is subject only to the federal Truth in Lending Act, and not subject to state laws, such as Chapter 183C.
High-cost home mortgage loans are defined as loans in which the points and fees exceed 5% of the total financed amount. In the absence of certification the loan is unenforceable. Because Debtors never received such certification, the plaintiffs assert the mortgage on their home is unenforceable and must be discharged. Defendants argue that TILA, and not Chapter 183C, applies to the plaintiffs' loan. TILA establishes an 8% threshold before a loan qualifies as a high-cost home loan rather than the 5% threshold established by Chapter 183C. Defendants argue that TILA preempts Chapter 183C and, therefore, the 8% threshold applies. Because plaintiffs allege that the points and fees associated with their loan total 6.6%, if TILA applies to this loan, summary judgment must be granted.

On August 5, 2003, the OCC issued a Preemption Determination and Order concluding that the Georgia Fair Lending Act ("GAFLA") provisions affecting national bank real estate lending were preempted by TILA.  The OCC order preempted the GAFLA provision establishing 5% as the threshold for loans to be classified as high-cost loans. It is therefore clear that state laws defining high-cost loans in a manner inconsistent with TILA's 8% threshold are preempted by TILA.

Finally, plaintiffs argue that even if laws such as Chapter 183C are preempted, preemption does not apply in Massachusetts because the Federal Reserve has issued an order that exempts certain Massachusetts credit transactions from the requirements of TILA. The order provides:
[C]redit transactions that are subject to chapter 140D (Consumer Credit Costs Disclosures) of the General Laws of Massachusetts, established by chapter 733 of the Acts of 1981, and its implementing regulations are exempt from chapter 2 (credit transactions) and chapter 4 (credit billing) of the federal Truth in Lending Act. However, this exemption does not apply to transactions in which a federally chartered institution is a creditor, and the defendant is a national bank.
OUTCOME:  Summary Judgment granted i.e. Chapter 183C does not apply to the mortgage loan transaction at issue. As all counts of the plaintiffs' complaint are based on an alleged violation of Chapter 183C, judgment must enter on behalf of the defendants as a matter of law.

Motion to Abstain in discharge suit denied:

(In Re: HALLET) REICH v. HALLET, 2011 Bankr. LEXIS 2854 (Bankr. D. Mass. 7/20/11)(William C. Hillman, Bankruptcy Judge)
OVERVIEW:  Plaintiff seeks to have certain claims against Debtor held to be nondischargeable under several provisions of  Section 523(a) and Plaintiff asked that the bankruptcy court abstain "in order to permit the Florida Domestic Relations Court (the "Probate Court") to decide whether [her] entitlement to certain retirement funds in the name of Debtor/Defendant Hallet is a property interest or a domestic support obligation."
OUTCOME:  Motion to abstain denied.
Discussion:  First, Plaintiff obtained the relief she seeks in a prior motion in the main case when I granted, without opposition by Debtor, her "Former-Spouse's Emergency Motion for Relief from Stay, Motion to Recognize and Give Full Force and Effect to Florida's Divorce Judgment and Order, or in the Alternative Order that Relief is Not Necessary." The order entered on that motion provided that
1. The reopening of the Debtor's Chapter 7 case did not create a stay against [Plaintiff's] actions in attempting to exercise and enforce the DRO issued by the Circuit Court on January 12, 2004, the Consent Order dated October 7, 1998, and the Final Judgment issued on May 9, 2003, regarding [Plaintiff's] 1/2 interest, plus $98,192.45 plus interest in the Debtor's 1/2 interest in his contingent interest in the PGA Tour Deferred Compensation Player Retirement Plan.
2. [Plaintiff] is granted Relief from the Automatic Stay imposed pursuant to
11 USC 362(a) to exercise and enforce the DRO issued [as aforesaid].
3. The automatic stay presently in effect is hereby modified and/or lifted so that the Circuit Court in the divorce proceedings between the Debtor and [Plaintiff], may complete its adjudication of the matter, including without limit (sic) the transfer of the Debtor's contingent interest in the PGA Tour Deferred Compensation Player Retirement Plan to the extent it has not already been accomplished and for the enforcement of the transfer.
4. [Plaintiff's] actions in attempting to exercise and enforce the DRO issued by the Circuit Court on January 12, 2004, the Consent Order dated October 7, 1998, and the Final Judgment issued on May 9, 2003, was not in violation of the Debtor's discharge.
5. The claim that [Plaintiff] holds against the Debtor for $98,192.45 is a claim that is potentially non-dischargeable pursuant to
11 U.S.C. Sec. 523(a)(4), (6) and/or (15) (sic), and the Court issues [Plaintiff] a new deadline in which to object to the dischargeability of the debt owed by Debtor of May 21, 2010.
6. The fourteen day stay of relief, pursuant to
Federal Bankruptcy Rule 4001(a)(3), is waived.

Secondly, as pointed out in the Decision of Motions for Summary Judgment, entered earlier today, the answer to that question is irrelevant to the issues before the court.

Summary judgment in discharge complaint and counterclaims denied:

(In Re: HALLET) REICH v. HALLET, 2011 Bankr. LEXIS 2859 (Bankr. D. Mass. 7/20/11)(William C. Hillman, Bankruptcy Judge).
OVERVIEW:  Reich filed this adversary proceeding against the Debtor Hallet where she seeks to have certain claims against Debtor held to be nondischargeable under several provisions of Section 523(a) of the Bankruptcy Code. Debtor responded with an answer, affirmative defenses and counterclaims. Plaintiff answered the counterclaims, and subsequently moved for abstention with respect to the counterclaims, which was opposed by Debtor. That was followed by Debtor's own motion for summary judgment, which Plaintiff opposed.
OUTCOME:  After a hearing, the court denied both motions for summary judgment. The motion for abstention was dealt with in a separate decision (see above).
Debtor and Plaintiff are divorced spouses litigating over her alleged interest in two retirement accounts of his, and whether the wife’s interest was not discharged in through the chapter 7 case.

Motion to substitute denied where proper service not made:

(IN RE: C.R. STONE CONCRETE CONTRACTORS, INC.) BUTLER v. ANDERSON, et. al., 2011 Bankr. LEXIS 2911 (Bankr. D. Mass. 7/26/11)(William C. Hillman, Bankruptcy Judge).
OVERVIEW: The matter before the Court is the Plaintiff's Motion to Substitute filed by Joseph Butler, Chapter 7 trustee of the estate of C.R. Stone Concrete Contractors, Inc. opposed by certain defendants.
OUTCOME: Motion to Substitute, denied, without prejudice.
Discussion: Court found doubtful the staning of the defendants to object to the Motion to Substitute.  If a party dies and the claim is not extinguished, the court may order substitution of the proper party. A motion for substitution may be made by any party or by the decedent's successor or representative. If the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed. Proper service was not effected.  For this reason alone, the Motion to Substitute must be denied without prejudice. Therefore, I the court not reach the issues raised by the parties at this time.

Stay relief denied;
Court conducted an exhaustive analysis of the documents at issue which included an Allonge;
Argument pertaining to the “Dual Status” Rule, Massachusetts law on security agreements and perfection;
Commercial reasonableness of a foreclosure sale of the collateral;
Use of parole or extrinsic evidence; patent and latent contract ambiguities;
Stay relief hearing as a means to determine a “colorable” security claim.

In re INOFIN, INCORPORATED, 2011 Bankr. LEXIS 2833 (D. Mass. 7/27/11)(Joan N. Feeney, Bankruptcy Judge).
OVERVIEW:  Raymond C. Green, Inc. ("RCG") seeks a determination that the automatic stay does not apply to RCG's rights with respect to a portfolio of motor vehicle retail installment contracts, which were assigned to it by the Debtor purportedly to secure loans to the Debtor in excess of $8 million, or, in the alternative, relief from the automatic stay pursuant to 11 U.S.C. § 362(d) to obtain that portfolio which RCG contends was its collateral and the subject of valid, prepetition foreclosure sales. RCG seeks a finding that it is entitled to possession of the portfolio, including, without limitation, all of the proceeds of the portfolio and all documents, books and records in the possession of the Chapter 7 Trustee relating to the portfolio, by reason of two foreclosure sales conducted prior to the entry of the order for relief.
OUTCOME:  Court denied the Motion of Raymond C. Green, Inc. for Relief from the Automatic Stay and for Related Relief.
To the extent RCG, in effect, is seeking a determination of the validity and extent of its lien, it was required to commence an adversary proceeding. See Fed.R. Bankr. P. 7001(2). Due to the extensive briefing of the issues relating to the validity and extent of RCG's lien, the Court concludes that the parties consented to the determination of those issues in the context of RCG's Motion. The Chapter 7 Trustee flied an Objection to the Motion, and the Court conducted an evidentiary hearing. The issues presented include whether RCG has a valid security interest in the portfolio of retail installment contracts assigned to the Debtor by various automobile dealers, and whether its foreclosure sales divested the estate of an interest in the portfolio. Resolution of those issues in RCG's favor will determine whether it has established a colorable claim to relief under 11 U.S.C. § 362(d). See Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st Cir. 1994) ("The limited grounds set forth in the statutory language, read in the context of the overall scheme of § 362, and combined with the preliminary, summary nature of the relief from stay proceedings, have led most courts to find that such hearings do not involve a full adjudication on the merits of claims, defenses, or counterclaims, but simply a determination as to whether a creditor has a colorable claim to property of the estate.").

On February 9, 2011, approximately 38 creditors holding claims in the stated amount of $12,927,517.75 filed an involuntary petition against Inofin. In an Emergency Motion for the Appointment of an Interim Chapter 7 Trustee, they alleged that the Debtor was a licensed financial service company,  [*4] specializing in providing financing for used motor vehicle sales that did not meet traditional, financing criteria, that the Debtor primarily funded its lending activities through borrowings from numerous individuals and entities, including the petitioning creditors, and that it had loan obligations of approximately $70 million owed to approximately 200 creditors. RCG, the Debtor's largest lender, filed a Statement in Support of the Emergency Motion in which it observed that "[u]nless these these loans are continually serviced, their value will decline precipitously."

Although the Court initially denied the Emergency Motion for multiple reasons stated on the record, including the absence of a return of service of the involuntary summons, the Court; on February 16, 2011, entered an order for relief. Mark G. DeGiacomo (the "Trustee") was appointed interim trustee and his appointment became permanent when creditors did not request an election of a trustee at the section 341 meeting of creditors held on April 19, 2011.

RCG and Inofin, then known as First Investors Factoring, Inc., commenced their lending relationship in April of 1996. During the 15 years in which they engaged in business,  they executed a number of documents pertinent to the resolution of the issues before the Court.

Regarding the foreclosure sale, which also had deficiencies in the notice: There were no bidders present other than representatives of Raymond C." Green, Inc. After reading the Notice of Sale of Collateral aloud, I then began the auction sale. Raymond C. Green, Inc. bid $4;000,000.00 for the collateral package, which was the highest bid received. The Memoranda were signed by Stephen Dean, President of Dean and Associates, Inc. No bill of sale was prepared or executed conveying the collateral. The only testimony concerning the value of the collateral, aside from that of Raymond C. Green, was that of Craig Jalbert. He testified that the value of RCG's  collateral was $10,196,218.23. The auctioneer received $500 for conducting each sale, and the advertisements in the Boston Herald cost $400 each. Thus, RCG Incurred total costs of $1,800 in scheduling and conducting foreclosure sales of RCG's purported collateral which Raymond C. Green valued at $4 million. Dean and Associates, Inc. did no advertising other than the two ads in the Boston Herald. Neither the auctioneer nor RCG engaged in any marketing efforts to identify and notify the Debtor's competitors or other persons or entities in the business of buying retail installment sale contracts; no display ads were placed in newspapers of general circulation, other than the Boston Herald, or trade journals.

Regarding the documents: The most critical issue in this case is whether the Allonges independently gave RCG a security interest in the portfolio of Retail Installment Sale Contracts between Consumers and automobile dealers, which were assigned to Inofin and to which RCG was not a party. RCG maintains that the Allonges do just that, while the Trustee maintains that RCG's security interest extends only to Retail Installment Sale Contracts and other collateral purchased with the proceeds of the loans from RCG and assigned and delivered to RCG pursuant to the April 17, 1996 Security Agreement. The Trustee emphasizes that RCG's weekly loan advances did not fund the purchase of the corresponding weekly Retail Installment Sale Contracts received in the weekly Allonge packages from Inofin, resulting in the absence of an enforceable security interest and that the assignments contained in the Allonges did not expand the scope of the security interest granted to RCG under the 1996 Security Agreement.

In the 1996 Security Agreement the parties expressly agreed that it, and all rights and obligations pertinent to it, would be governed by Massachusetts law.
Section 9-203 of the Uniform Commercial Code 10 contains the method for determining whether a security interest has attached. See 25A Herbert Lemelman, Manual on Uniform Commercial Code, Mass Practice Series, § 9:53 (3d ed., 2011). 11 The Massachusetts version of the Uniform Commercial Code provides that,, for. a security interest to attach, it must be enforceable; attachment is automatic when the security interest becomes enforceable, Id.
Under Massachusetts law, the creation of a security interest requires a security agreement that describes the collateral. M.G.L.c. 106, § 9-203(1). A security interest attaches only to the property described in the security agreement. To be effective, a security interest must have attached to the Collateral in question. UCC § 9-308(a). Unless an agreement between  [*38] the parties provides otherwise, a security interest attaches to collateral only when it becomes enforceable against a debtor with respect to the collateral. § 9-203(a). A security interest in a debtor's assets becomes enforceable when (i) value has been given, (ii) the debtor has rights in the collateral or the power to transfer the rights and (iii) the debtor has authenticated a security agreement that provides a description of the collateral. § 9-203(b). In order for a security interest to have priority over subsequent secured creditors, it must. be perfected. § 9-317(a). An attached security interest is perfected upon the filing of a financing statement in the appropriate centralized registry §§ 9-308(a) and 9-310(a).

A debtor need not...sign a document designated 'security agreement' in order to satisfy the code requirement that the debtor sign a security agreement. A combination of documents may meet that requirement.

The usual rule in Massachusetts is that "where the wording of the contract is unambiguous, the contract must be enforced according to its terms.

The Security Agreement was limited to chattel paper and instruments that were 1) purchased with proceeds of RCG's loans; and 2) assigned and delivered to RCG. If this Court were to conclude that the Security Agreement is not an integrated document and that the Allonges are sufficient, in and of themselves, to constitute security agreements, then RCG obtained a security interest, perfected by possession, in the Retail Installment Sale Contracts it obtained from Inofin regardless of whether they were purchased with proceeds of its loans. Alternatively, if this Court were to find that the language used in the Security Agreement is either patently or latently ambiguous, the Court could consider extrinsic evidence as to the parties' intent. Court discussed latent and patent ambiguities.

The Court found that the 1996 Security Agreement was at least partially integrated. Although the agreement did not contain an Integration clause, the Financing Statement, in which the parties employed the same language used in the Security Agreement, provides strong evidence that the Security Agreement was the complete and exclusive agreement between them as to the scope of RCG's security interest until such time as the parties executed the Loan Agreements and later the Loan Modification Agreement. Notably, those agreements contained language which again circumscribed the scope of RCG's security Interest to Retail Installment Sale Contracts acquired with the proceeds of RCG's loans.

Neither RCG nor the Trustee argue that the 1996 Security Agreement is ambiguous.
 The "absolute" nature of an assignment does not preclude its service as a security agreement. Since the assignment is a legally sufficient writing, and since the bankruptcy court's finding that the assignment was in fact intended as a security agreement is not clearly erroneous, we do not disturb the court's determination that the assignment was as a security.

In contrast, the Allonge provided: "In consideration of One Dollar... and other valuable consideration... Inofin, Inc. hereby assigns, with full recourse, to Raymond C. Green Inc., all its right, title and interest in, to and under, the following instruments .... " As noted above, the retail installment contracts have been held to be chattel paper, not an instruments.

The Trustee's argument is premised on the 1996 Security Agreement being a fully integrated contract.

The Security Agreement executed by the parties in 1996, unlike the two Loan Agreements executed on May 2. 2008 and August 21, 2009, does not contain an integration clause. Nevertheless, it is a four-paged, single spaced document drafted by an attorney engaged by RCG, Stanley Wallerstein, Esq. Because of the absence of an integration clause, however. the presumption that it is the full and final agreement does not exist. Where an integration clause exists in the written agreement, a presumption exists that the written document constitutes a final and full expression of the parties' agreement.

The 1996 Security Agreement, as a partially integrated agreement, cannot be contradicted by the parties' course of dealing. There can be no doubt that the parties contemplated that RCG was to obtain a security interest in chattel paper, instruments and the Retail Installment Sale Contracts based upon the Loan Documents, defined in the Loan Agreements Nevertheless, in drafting the Security Agreement and Loan Agreements, the parties circumscribed RCG's rights in and to instruments and chattel paper by limiting its security interest to collateral purchased with the proceeds of RCG's loans, which were not placed in a segregated account and cannot, therefore; be traced. The question of whether the Allonges have the effect of overriding the limitation set forth in both the Security Agreement and the Loan Agreements, at least with respect to the Retail Installment Sale Contracts which were assigned to and possessed by RCG, poses significant legal and factual challenges. Both the Trustee and RCG make compelling arguments in support of their respective positions; and case law exists which supports both sides. Resolution of the issue is by no means crystal clear as the Loan Agreements executed in conjunction with the $7 million and $8 million notes could be interpreted, liberally to permit the Allonge assignments to serve as independent security agreements. Alternatively the Allonges can be viewed as serving merely as a type of cover sheet pursuant to which the Retail Installment Sale Contracts and Partial Purchase and Assignments were to be delivered to RCG pursuant to the 1996 Security Agreement and the 2008 arid 2009 Loan Agreements. Indeed, this is the more likely scenario as some sort of tracing measure was necessary in the absence of segregated accounts.

The Court concludes that at the time each Allonge was executed; the parties did not intend that each Allonge would constitute a separate security agreement.

The conclusion that the parties did not intend the Allonges to be independent security agreements, which  is reinforced by the terms of the Loan Agreements.  An "allonge" is defined as "[a] piece of paper annexed to a bill of exchange or promissory note, on which to write endorsements for which there is no room on the instrument itself. Such must be so firmly affixed thereto as to become a part thereof.
Because the Loan Agreements provided that "Lender agrees that if and to the extent that there is a difference between the Borrower's rights under any 'Partial Purchase and Assignment' and any 'Recourse Assignment' [the Allonge], the former shall control," the Court finds that the Trustee could prevail with respect to his argument that the Allonge assignments did not create independent Security agreements that trump the 1996 Security Agreement. Because the Court has determined that the Allonges are not separate security agreements, however, the Court need not reach this issue.

RCG argues that, even if the 1996 Security Agreement is given a narrow interpretation, the Loan Modification Agreement expanded the scope of the security interest because the parties modified their prior agreement through the subsequent writing. The Trustee maintains that the Loan Modification Agreement did not expand the scope of RCG's security interest or constitute a new security agreement. In his view, it merely increased the amount of collateral security that the Debtor needed to provide RCG. Based upon the language employed by the parties in the Loan Modification Agreement, and the provisions of
Mass. Gen. Laws ch. 106, § 9-203(b), the Court concludes that RCG did not obtain a perfected security interest in the entire portfolio of Retail Installment Sale Contracts, although the parties attempted to grant RCG a security interest in collateral delivered to it after the date of the Loan Modification. The language employed in the Loan Modification Agreement amended the Security Agreement dated April 17, 1996 by deleting the requirement that Retail Installment Sale Contracts be purchased by Inofin proceeds of loans from RCG.

Turning to the enforceability of the security interest, the issue is whether RCG gave value for the Retail Installment Sales Contracts delivered to it after October 1, 2010. The Court finds that it did not.

Because this Court has determined that RCG did not have a valid security interest in the Retail Installment Sale Contracts, however, that consideration would not constitute '"value" for the grant of a security interest in the Loan Modification Agreement. Indeed, the Trustee argues that the delivery of Allonge packages totaling $4,937,111.34 between July 16, 2010 and December 24, 2010 constituted fraudulent transfers, particularly as RCG, in its July 20, 2010 letter to counsel recognized that Inofin was thinly capitalized and was unable to make its weekly principal payments because the SEC had prohibited it from obtaining new loans from "small investors." Additionally, the Trustee has asserted that the Allonge packages totaling $2,312,869.94 received during the 90-day period preceding the commencement of the case constituted preferential transfers.

The Court has determined that RCG did not have an enforceable security interest in the portfolio of Retail Installment Sale Contracts, instruments and chattel paper. Thus, the foreclosure sale of RCG's purported collateral was a nullity." Moreover, the Court concludes that even were RCG to have a valid-security interest in any of the collateral, the sales it conducted were not commercially reasonable.

RCG argues that it has a purchase money security interest ("PMSI") in the RCG portfolio. It reasons that because
UCC § 9-103 provides for a PMSI "to the extent that goods are purchase-money collateral," "a PMSI can be valid to the extent of the financed goods, and, subject to this limitation, a PMSI can cover non-consumer goods as well." RCG has a PMSI over the RCG Portfolio to the extent of the original financing amount for the underlying vehicles. The total amount financed equals the amount of RCG's loans. As such, RCG is fully secured through its dual-status PMSI.

For transactions other than consumer-goods transactions, this Article approves what some cases have called the "dual-status" rule, under which a security interest may be a purchase-money security interest to some extent and a non-purchase-money security interest to some extent. The Trustee, on the other hand, maintains that RCG cannot invoke the "dual-status rule" and has misstated the law. In view of the plain language of the Security Agreement and Loan Agreements, the absence of any reference to "goods" and the underlying PMSI in consumer goods obtained by the dealers, RCG's argument as to the applicability of the "dual-status" rule lacks merit. Not only do the cases cited by RCG fail to address circumstances analogous to those present in the instant case, RCG's argument is convoluted and wholly unconvincing. RCG, as a sophisticated lender, could have required that its name, together with Inofin's name, appear on the Certificate of Title to the motor vehicles purchased by consumers from dealers with .whom the Debtor had a lending relationship. It did not do so.
In short, RCG failed to establish a colorable claim to secured status and concomitantly failed to establish entitlement to relief from the automatic stay.

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