Security interests in motor and other titled vehicles

Banks and other lenders frequently provide financing to customers or dealers for the purchase of a titled motor vehicle. Lenders are aware that to perfect a lien on a titled motor vehicle the lender must note its lien on the face of the certificate of title. All states now have statutes that require lien notation on a certificate of title as a condition of perfection. Therefore, a secured creditor must get its lien noted on a certificate of title to prevail against purchasers of the titled vehicle and creditors, including, of course, in the case the debtor files for bankruptcy, the debtor’s trustee in bankruptcy. In those cases, the filing of a Uniform Commercial Code (UCC) financing statement is unnecessary and ineffective to perfect the lien. Possession of a certificate of title alone without the notation of the lender’s lien is also not sufficient to perfect the lien. If an automobile is involved and qualifies as consumer goods and the transaction qualifies as a PMSI, the automatic perfection rule of UCC § 9-309(1) does not apply; the lien still must be noted on the title as a condition of perfection.

The certificate of title statute determines whether a particular item of collateral falls under the definition of “motor vehicle.” A lender must examine the relevant certificate of title statute. For example, a boat, tractor or manufactured home may be covered by a certificate of title law in one state but not in another. If a lender is not certain in a particular case whether to note a lien on a certificate of title or file a financing statement, the lender should take a “belt and suspenders” approach and have the lien noted on the title and file a financing statement.

An interesting exception to the general rule that perfection of a security interest in titled vehicles is accomplished by notation of a lien on the face of the title is found in UCC § 9-311(d), which states  that “during any period in which collateral subject to [a certificate of title] is inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind, this section [the requirement to perfect by noting the lien of the certificate of title] does not apply to a security interest in that collateral created by that person.” In other words, perfection of a security interest in the inventory of a car dealer is accomplished by filing a financing statement describing the collateral. Illinois adopted a non-uniform version of UCC § 9-311(d) under which a UCC financing statement perfects a security interest in a dealer’s entire inventory of motor vehicles (and notation of a lien on a certificate of title does not), even if the dealer’s only business is leasing motor vehicles. Therefore, Illinois does not require the car dealer to be a seller and a lessor to avoid the certificate notation requirement; the Illinois dealer can be a lessor only. Under the Official Text version of UCC § 9-311(d), however, if a dealer’s only business is leasing motor vehicles (and isn’t also in the business of selling motor vehicles), title notation is required to perfect.

Feel free to contact our banking attorneys with questions or for additional information regarding security interests in titled vehicles. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: James B. Gottlieb, Of Counsel