Automobiles and Titled Collateral Under Revised Article 9

Automobiles and Titled Collateral Under Revised Article 9

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As a young child, my mother always warned me to stay away from cars. That was good advice then. I find that it is even better advice now that I have grown up and become a Uniform Commercial Code and bankruptcy law professor. The law books are filled with examples of secured creditors losing their security interests in automobiles because of the confusing tangle of inconsistent state certificate-of-title laws.

Revised Article 9 makes the world a little bit safer for automobile lenders and others lending against collateral covered by a certificate of title. However, even the drafters of the revision admit that they were unable to straighten out all of the problems associated with titled collateral. As official comment 6 to §9-3031 states, "[T]he potential for innocent parties to suffer losses will continue. At best, this article can identify clearly which innocent parties will bear losses in familiar fact patterns."

Although automobiles are the most common type of collateral that will be subject to the special rules for titled collateral, certificate-of-title statutes may apply to many other types of goods. Such statutes commonly cover trailers, mobile homes, boats, farm tractors and other relatively valuable mobile items. However, there is much variety from state to state both as to the types of collateral covered and the rules that govern perfection.

Perfection of Titled Collateral

Many aspects of the revised act's treatment of titled collateral parallel current law. Like current law, the revised act generally requires that the security interest must be noted on the certificate of title in compliance with the relevant state's certificate of title statute in order for perfection to occur. §9-303.

With the exception of titled collateral that is held as inventory, the usual perfection method of filing a financing statement is not necessary or effective to perfect a security interest in the collateral. Compare current §9-302(3)(b) with §9-311(a)(2 & 3). Similarly, with one narrow exception discussed below, it is not possible to perfect a security interest in titled property by taking possession of the collateral. See §9-313(b). Finally, although purchase-money security interests in consumer goods generally are perfected automatically as soon as they attach, the automatic-perfection rule does not apply to consumer goods that are covered by a certificate-of-title statute. See §9-309(1).

Like current law, where titled collateral is held as inventory, the usual perfection by filing rules will apply. See §9-311(d). Thus, a lender financing the inventory of an automobile dealer must file a financing statement in order to perfect a security interest in the inventory. Compliance with the certificate-of-title statute is not necessary or effective to perfect an inventory security interest that is granted by the merchant. See §9-311, cmt. 4. This rule allows the inventory financier to perfect its security interest in all of the items of inventory by filing a single financing statement in the state where the debtor is located, without having to note its security interest on the title of each automobile.

Application of the rule becomes a bit tricky when the business leases titled goods. The inventory exception applies only if the debtor is in the "business of selling" goods of that kind. Thus, for example, if the debtor is in the business of selling cars, filing a financing statement would be the proper method for perfecting a security interest in the cars held for sale, as well as those held for lease and those that had been leased by the debtor as lessor. See §9-311(d). However, notation on each car's certificate of title would be necessary if the debtor was in the business of leasing, but not selling, cars. Further, the comment makes clear that the fact that the debtor eventually sells the cars does not automatically mean that it is in the business of selling cars. See §9-311, cmt. 4.

Timing of Perfection

The revised act adopts the view that goods become covered by a certificate of title (and thus subject to the special rules) at the time when a valid application for the certificate and the applicable fee are delivered to the appropriate authority. See §9-303(b). This will create problems in those states with certificate-of-title acts that define "perfection" as occurring at some different point in time.

For example, if perfection does not occur until the certificate is issued, there may be a gap between the time when the goods become covered by a certificate of title and the time of perfection. If this gap is longer than 10 days, or 20 days for a purchase-money security interest, the security interest might be avoidable as a preferential transfer.2 On the other hand, several certificate-of-title statutes, including the Uniform Motor Vehicle Certificate of Title and Anti-Theft Act, provide that perfection may relate back to a time prior to the application under certain circumstances. These statutes will also create problems under the revised act because they would deem the security interest perfected under the certificate-of-title statute at a time before the goods became covered by a certificate of title for Article 9 purposes.

Because of the complexity required by the variety of state certificate-of-title statutes, the revised act "does not attempt to coordinate Article 9 with the entire array of certificate-of-title statutes." See §9-303, cmt. 6. Instead, the revised act assumes that the certificate of title statutes provide that perfection occurs upon receipt by the appropriate official of a properly tendered title application. A Legislative Note accompanying the act recommends that the state's certificate-of-title statutes be amended accordingly. Problems will be created if a state fails to follow that recommendation.

Multi-state Issues

Special choice-of-law rules apply to goods that are "covered by a certificate of title." Instead of looking to the law of the location of the debtor or collateral, the law of the jurisdiction issuing the certificate governs perfection, the effect of perfection or non-perfection, and the priority of the security interest until the goods cease to be covered by the certificate of title. See §9-303. Further, the revised act clarifies that the law of the issuing jurisdiction governs "even if there is no other relationship between the jurisdiction under whose certificate of title the goods are covered and the goods or the debtor."3

While this provision allows a secured creditor to rely upon the certificate of title without having to investigate the relationship of the collateral or debtor to the issuing state, it will create problems, especially in those cases where the collateral is subject to a certificate-of-title statute in one state, but not in another. For example, if outboard boat motors are covered by the certificate of title law in State A, but not in State B, a secured party lending against an outboard boat motor in State B runs the risk that the motor may be "covered by" a State A certificate of title, even if neither the debtor nor the motor has ever had any connection with State A. Since the motor is "covered by a certificate of title," the secured creditor's attempt to perfect by filing a financing statement will be ineffective. Further, any security interest noted on the State A certificate would be perfected and have priority.

What happens to a security interest perfected by notation on a certificate issued by one state when a new certificate is issued by a second state? If the process works properly, the certificate issued by the first state will be surrendered and the new certificate issued by the second state will note the security interest. If this occurs, the security interest will remain continuously perfected.

Unfortunately, through fraud or error, sometimes a new "clean" certificate of title is issued that does not contain a notation of the security interest. In such a case, the security interest remains perfected until the security interest would have become unperfected under the law of the first jurisdiction had no new certificate been issued. See §9-316(d).4 Although the security interest may remain perfected, special rules protect certain buyers, secured creditors and purchasers for value.

First, with respect to "purchasers" of the goods for value, the security interest becomes unperfected and is deemed never to have been perfected if it is not re-perfected in the new state before the earlier of (a) the time the security interest becomes unperfected under the law of the first state, or (b) four months after the new certificate is applied for. See §9-316(e).5 Since the term "purchase" includes "any voluntary transaction creating an interest in property," this provision would protect both buyers and competing secured creditors. See §1-201(32). Note further that this protection is not limited to purchasers who acquire an interest in the collateral after the new certificate is applied for or to those who lack knowledge of the security interest.

Re-perfection can prove difficult in those cases where a "clean" certificate has been issued, because the cooperation of the debtor will be necessary in order to add a notation of the creditor's interest to the certificate.6 For this reason, §9-313(b) creates a narrow exception to the general rule that titled goods cannot be perfected by possession. In those cases where goods that were perfected in the first state become covered by a certificate of title in a new state, §9-313(b) permits the secured creditor to re-perfect by repossession, assuming that the security agreement gives it a right to take possession.7

If a "clean" certificate of title has been issued, the four-month grace period does not apply to certain buyers and secured creditors who may have relied on the "clean" certificate. Like current law, a buyer other than a dealer is free of the security interest if the buyer gives value and takes delivery after issuance of the certificate and without knowledge of the security interest. Compare current §9-103(2)(d) with §9-337(1). The revised act expands this rule to also give priority to a new security interest that attaches and is perfected by notation on the certificate after issuance of the "clean" certificate, as long as the new secured party lacked knowledge of the original security interest. See §9-337(2).

Accessions and Artisan's Liens

Under current law, if an accession (such as an auto sound system) is added to a liened automobile, the creditor holding a security interest in the accession can obtain priority as to the accession over the competing security interest in the automobile. See current §9-314. The revised act reverses this rule for goods covered by a certificate of title. See §9-335(d). Thus, if an automobile lender has perfected its security interest in the car by notation on the certificate of title, it will have priority with respect to an accession,8 even if the accession lender perfected its security interest in the accession before it was added to the car and even if the accession security interest was a purchase-money security interest. While this rule provides greater protection to creditors loaning against the car, it imposes new risks on those who finance goods that may become accessions. See §9-335, cmt. 7.

The revised act generally continues the current law's priority for common law and statutory liens that arise in favor of a person who furnishes services or materials with respect to the goods in the ordinary course of business. However, whereas current law gives priority to artisan's liens as long as the lienholder retains possession of the collateral, the revised act gives priority only to those liens whose effectiveness depends on possession. Compare current §9-310 with §9-333.9

Transfer of Record Title

In order to sell the collateral upon default, the secured party may need to become the record title-holder or have the ability to obtain a certificate showing the foreclosure sale purchaser as record title-holder. Although many automobile certificate-of-title statutes provide a mechanism for obtaining a repossession certificate of title, §9-619 of the revised act supplements such provisions by providing an alternative mechanism to obtain a certificate of title listing either the secured party or its transferee as the record title-holder. See §9-619(b). The revised act also clarifies that the secured party may obtain a certificate listing it as record title-holder prior to disposition of the collateral and that the transfer of record title is not of itself a disposition of the collateral. See §9-619(c).

Enactment Update

There has been no new enactment activity since the October column. A total of 27 states plus the District of Columbia have adopted revised Article 9. A regularly updated listing of enactment activity is available at


1 All citations are to the revised 1999 version of Article 9 of the Uniform Commercial Code, unless otherwise indicated. Citations to the currently applicable 1972 version of Article 9 are indicated by the term "current." Return to article

2 See §9-311, cmt. 5; See, also, Fidelity Financial Services Inc. v. Fink, 522 U.S. 211, 118 S.Ct. 651, 139 L.Ed.2d 571 (1998). Return to article

3 See §9-303(a). Cases under the current law are divided on this issue. Compare In re Westfall, 277 B.R. 734, 739 (Bankr. W.D. Mo. 1998) (there is no perfection where neither debtor nor automobile was located in the issuing jurisdiction) with In re Stinnett, 241 B.R. 599, 602 (Bankr. W.D. Ark. 1999) (no nexus required). Return to article

4 Three different examples show how this provision operates. First, if the security interest was perfected by filing in the original jurisdiction (e.g., because that jurisdiction's certificate of title statutes did not apply to the type of goods involved), then the security interest would remain perfected until the filing lapsed. Second, if the original certificate was not surrendered, there may be two certificates of title for the item. Here the security interest reflected on the original certificate would continue to be perfected by that certificate, notwithstanding the existence of the second "clean" certificate. If the original certificate had been surrendered when the new certificate was applied for, the certificate of title law of the original jurisdiction would determine whether the security interest remained perfected following the surrender of the certificate. If surrender of the certificate caused the security interest to become unperfected, then it would not remain perfected. See §9-316, cmt. 5. Return to article

5 Note that the secured party would have the benefit of the four-month rule only if the security interest otherwise remained perfected. In those cases where the original certificate was surrendered and the surrender caused the security interest to become unperfected, the secured party immediately becomes unperfected upon the surrender of the original certificate. Return to article

6 If a competing security interest is noted on the new certificate, the cooperation of the competing secured party may also be needed. Return to article

7 Section 9-313 does not create a right to repossess the collateral. See §9-313, cmt. 7. Return to article

8 The collateral description in the automobile lender's security agreement must be sufficiently broad to cover the accession in order for its lien to attach. See §§9-203(b) & 9-204. Return to article

9 The §333 priority does not apply if the lien is created by statute and the statute expressly provides that the security interest has priority. See §333(b). Return to article

Journal Date: 
Wednesday, November 1, 2000