For both consumer and commercial
lenders, one of the most common types of collateral is motor
vehicles. It is important for lenders to make sure they are
familiar with the perfection and priority rules under
Revised Article 9 of the Uniform Commercial Code. (“UCC”).
This Alert summarizes those rules.
General - For the most part,
the general rules and principles of old Article 9 remain.
For example, Revised Article 9 still defers to the laws
of every state which requires a lien notation on a
certificate of title in order to perfect a security interest
in a motor vehicle. A handy source for state statutes is
the website
http://www.law.cornell.edu/topics/state.statutes3.htm
which lists statutes for all 50 states by topic. Under
Revised Article 9, duration and renewal of perfection are
also still governed by the applicable state law dealing with
certificates of title. Revised Article 9 also makes it
clear that a motor vehicle is covered by a certificate of
title when a valid application for certificate of title and
the appropriate fee are delivered to the appropriate
authority in the state. The local law of the jurisdiction
under whose certificate of title the motor vehicle is
covered governs perfection and priority. As under old
Article 9, lenders under Revised Article 9 still have to do
their homework and look at the laws of the applicable state
for the definition of “motor vehicle” to make sure whether
the collateral in that state is defined as such.
Possessory Security Interest -
Old Article 9 was unclear as to whether a lender could
perfect a security interest in a motor vehicle by possession
instead of lien notation on the title. Revised Article 9
severely limits the use of possession to perfect so a lender
should always look at the state statute to perfect as the
safer alternative whether or not the lender has possession.
Perfection In State With No
Connection To Debtor - Under the old Article 9, there
were conflicting court decisions on whether a motor vehicle
could be titled for purposes of perfection in a state even
when the debtor did not reside there. This might have been
done for purposes of lower costs to perfect or for tax
reasons. Under Revised Article 9, this issue is
clarified. Owners now can title a motor vehicle in a state
even if there is no relationship between the state where the
title is issued and the owner or the vehicle. Revised
Article 9 says that the law governing perfection of a
security interest in a motor vehicle is the law of the state
that issued the certificate regardless.
Multi-State Perfection -
Because of the mobile nature of titled vehicles and owners,
old Article 9 contained rules that determined the extent to
which a certificate of title issued in one state continues
to be effective in a second state. Under Revised Article 9,
titled vehicles will only cease to be covered by a
certificate of title at the earlier of: a) the time the
security interest would have become unperfected under the
law of the original jurisdiction had the goods not become
covered by a certificate of title from the new state; or b)
the expiration of four months after the goods had become so
covered. In other words, the law of the issuing state
jurisdiction governs perfection and priority from the time
the certificate is issued until the vehicle is no longer
covered by its certificate.
What happens after the secured
creditor has its lien noted on the certificate of title
issued in one state, when the owner moves to a second state
and surrenders the old title in exchange for a new title?
Normally, the motor vehicle office in the second state would
note the creditor’s lien on a new state title. Under
Revised Article 9 as noted above, the old title would become
ineffective and the new title would control so that the
security interest would be continuously perfected. But what
happens if the motor vehicle officials in the new state do
not note the lien and issue a clean title or the owner files
a certificate of lost title and the new state issues a
replacement title with no lien notation. What if the owner
then files bankruptcy? Under Revised Article 9, the
creditor’s perfection under the first state title probably
remains perfected against the trustee in bankruptcy.
However, the original creditor loses as against a buyer in
the new state who gives value and takes delivery without
knowledge of the creditor’s lien or as against a secured
creditor who gets its lien noted on the second title without
knowledge of the conflicting lien on the first title. In
view of these changes, lenders should ensure that their
security agreements specify that the debtor warrants to them
that it is liable should one of these situations occur.
Timing Of Perfection And Relation
Back - Section 9-311(b) of Revised Article 9 makes it
clear that compliance with the perfection requirements for
obtaining priority over the rights of a lien creditor is
equivalent to the filing of a UCC financing statement under
Article 9. The interplay of this section with certain
certificate of title statutes can create confusion for a
lender. For example, statutes under which perfection does
not occur until the certificate of title is issued will
create a gap between the time the goods are covered by the
certificate and the time of perfection. If the gap is long
enough, it may result in turning some transactions into
avoidable preferences under the Bankruptcy Code. The
preference risk arises in the case of a purchase money
security interest (‘PMSI”) if more than 20 days pass between
the time a security interest attaches (or the owner receives
possession of the motor vehicle in the case of a PMSI) and
the time it is perfected. Accordingly, the Legislative
Notes to this section of Revised Article 9 instruct state
legislatures to amend the applicable certificate of title
statute to provide that perfection occurs upon receipt by
the appropriate state employee or official, of a proper
application for a certificate of title on which the security
interest is indicated. The Notes also request that any state
statutory provisions that provide that perfection generally
occurs upon delivery of certain documents to a state
official, but may, in certain cases, relate back to the time
of attachment, be amended to remove such relation-back
provisions from their statutes.
Competing Creditors - Revised
Article 9 also resolves the issue of who has priority as
between a secured creditor who has its lien noted on the
vehicle certificate of title and a later lender who may have
financed a part for the motor vehicle such as a replacement
engine. Under Revised Article 9, the security interest of
the financer of a part is subordinate to the holder of the
lien noted on the title. The Comments to Revised Article 9
justify this priority rule stating that secured parties
should be able to rely on a certificate of title without
having to check UCC files to see whether additions to the
vehicle have been made and may be encumbered.
Statutory Liens - Under
Revised Article 9, if the competing creditor is the holder
of a statutory or common law lien covering the vehicle, that
statutory lien creditor prevails over the creditor whose
security is noted on the certificate of title unless the
state statute provides otherwise. For example, a car repair
company whose bill is not paid who is still in possession of
the vehicle, would gain priority over a lender whose lien
is noted on the certificate of title. If a lender gets into
a priority battle with a statutory lien holder, the lender
should carefully examine the particular state statute to see
if there are specific requirements for statutory lien
claimants and check to see if those requirements have been
met. If the requirements were not met, the lender may
prevail.
Motor Vehicles As Inventory -
Under Revised Article 9, a lender must still perfect a
security interest in the inventory of a car dealer by filing
a UCC financing statement. Also, under Revised Article 9, a
UCC filing is required whether the debtor is a dealer who
holds used vehicles for sale or a company that leases
vehicles. In both cases, the vehicles qualify as inventory
IF under Revised Article 9, the debtor is “in the business
of selling goods of that kind” See Rev. UCC Section 9-311.
Therefore, under Revised Article 9, if the cars are subject
to a certificate of title statute and the debtor only
leases, but does not sell cars, then the certificate of
title statute prevails for perfection. This will be a case
specific analysis where the lender should look closely at
the dealer and determine if the dealer primarily leases its
cars, but occasionally sells a few, or if it is in the
business of selling. Lenders should also beware that under
Revised Article 9, if the dealer takes a car out of
inventory and uses it in the business as “equipment,” the
filed UCC statement on inventory would not remain effective
to perfect the security interest in that vehicle under
Revised Article 9.
The bottom line is that while Revised
Article 9 does clarify some issues related to priorities
between creditors on motor vehicles, a wise creditor will
look at both Revised Article 9 and at state statutes where
the certificate of title is issued to verify how a security
interest must be perfected and transferred.
