Moving Vehicles No Longer Hidden Treasure

Moving Vehicles No Longer Hidden Treasure

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Throughout the course of recent history, motor vehicles have been the source of hidden treasure for chapter 7 trustees at the expense of secured creditors. Trustees scrutinized the lien status in motor vehicles in cases in which debtors relocated from one state to another prior to filing their respective bankruptcy petitions for any basis on which to avoid the secured lien asserted by the secured creditor.

In a typical case, the debtor purchased an automobile using the proceeds from a loan he or she obtained from a secured creditor. The debtor granted a security interest in the automobile to the secured creditor who properly perfected its interest under the law of the jurisdiction in which the debtor resided. In most states, the perfection was accomplished by a notation on the certificate of title for the vehicle.

Sometime after the transaction and perfection of the security interest, the debtor moved to another state and eventually required bankruptcy protection. If prior to the filing of the bankruptcy petition the debtor resided in the new state for more than four months and the creditor had not taken steps to perfect its interest in the vehicle under the laws of the new state, the trustees argued that the secured creditor was no longer perfected under the Uniform Commercial Code and promptly invoked their position as hypothetical lien creditors under 11 U.S.C. §544 to exact a release of the lien from the secured creditor or a cash settlement for the benefit of the bankruptcy estate. The economics in most cases did not justify the expense the secured creditor would incur to litigate with the trustee, so secured creditors frequently abandoned their interests in motor vehicles or reached settlements with trustees resulting in assets available for the benefit of the unsecured creditors.

Arguments Under Former Article 9

Former Article 9 addressed the perfection and priority of goods covered by certificates of title in §9-103(2), the relevant portions of which for the purposes of the above factual scenario are in subsections (a), (b) and (c), which state as follows:

(2) Certificate of Title.
(a) This subsection applies to goods covered by a certificate of title issued under a statute of this state or of another jurisdiction under the law of which indication of a security interest on the certificate is required as a condition of perfection.
(b) Except as otherwise provided in this subsection, perfection and the effect of perfection or nonperfection of the security interest are governed by the law (including the conflict-of-laws rules) of the jurisdiction issuing the certificate until four months after the goods are removed from that jurisdiction and thereafter until the goods are registered in another jurisdiction, but in any event not beyond surrender of the certificate. After the expiration of that period, the goods are not covered by the certificate of title within the meaning of this section.
(c) Except with respect to the rights of a buyer described in the next paragraph, a security interest, perfected in another jurisdiction otherwise than by notation on a certificate of title, in goods brought into this state and thereafter covered by a certificate of title issued by this state, is subject to the rules stated in paragraph (d) of subsection (1).

Under §9-103(1)(d), when the vehicle was transported to another state while subject to a security interest perfected under the law of the jurisdiction from which it was removed, the security interest remained perfected unless action was otherwise required to perfect the security interest. If that action was not taken before the earlier of expiration of the period of perfection in the original jurisdiction or the end of four months after the collateral was brought into the new jurisdiction, §9-103(1)(d)(i) provided that the security interest became unperfected against a person who became a purchaser after removal.

Clearly, §9-103(2) applied to the liens in automobiles and other motor vehicles, perfection in which required the notation on the certificate of title. A perfected security interest on the original certificate of title remained perfected for at least four months after the vehicle was moved to another state, unless the certificate was surrendered. After four months, the security interest remained perfected until registration of the vehicle in the new state. Dubis v. General Motors Acceptance Corp., 238 Wis. 2d 608, 614, 618 N.W.2d 266, 268 (Ct. App. 2000).

Both trustees and secured creditors relied on the provisions of §9-103(2) to support their respective positions in the battle over the vehicle in such cases. Trustees generally argued that the secured creditor had to re-perfect in the new state within the four-month period or lose the perfected status of the lien. Trustees, as hypothetical lien creditors, claimed they could rely on §§9-103(2)(c) and 9-103(1)(d)(i) and argued that under those sections, the secured creditor had to take action to re-perfect to prevail over hypothetical lien creditors like the trustees. They argued that failure to do so was critical to the perfected status of the secured creditor's lien. The trustees also argued in favor of a literal interpretation of "registered" under §9-103(2)(b). In many states, a debtor can register a vehicle for purposes of licensing without obtaining a new certificate of title. Dubis, 238 Wis. 2d at 616.

Conversely, secured creditors argued that the original perfection on the certificate of title survived the four-month period unless the certificate was surrendered or the debtor titled the vehicle in the new state. Secured creditors argued further that "registered" must be interpreted in light of commercial law to uphold the purpose of the Uniform Commercial Code (UCC) and assure that the marketplace is not chilled by worries overperfected, but secret, liens by providing for notice to subsequent creditors. See Vega v. Ford Motor Credit, 323 B.R. 656, 660 (Bankr. W.D. Mich. 2005). Therefore, the secured creditors argued, the word "registered" had to be synonymous with "titled" because a debtor can register a vehicle in many states without disclosing the pre-existing lien, but the lien must be reflected on a certificate of title in states that require perfection by notation on the certificate of title. See General Motors Acceptance Corp. v. Rupp, 951 F.2d 283, 287 (10th Cir. 1991) (registration certificate is not a certificate of ownership); In re Males, 999 F.2d 607, 614 (2nd Cir. 1993).

Decisions under Former Article 9

Under former Article 9, the cases hinged primarily on the interpretation of "registered" and whether the vehicle was registered in the new jurisdiction. While some courts interpreted "registered" literally, others interpreted it in the context of commercial transactions to be synonymous with "titled." See Associated Financial Services Company of Nebraska Inc. v. Hrbek, 18 B.R. 631 (Bankr. D. Neb. 1982); In re Males, 999 F.2d 607, 614 (2nd Cir. 1993); Dubis v. General Motors Acceptance Corp., 238 Wis. 2d 608, 615, 618 N.W.2d 266, 269 (Ct. App. 2000).

In Hrbek, the debtor purchased the vehicle in Nebraska and noted the secured creditor's lien on the title. Subsequently, the debtor moved to Colorado, titled the vehicle in that state, and again included the lien on the Colorado title. Prior to filing bankruptcy, the debtor returned to Nebraska, obtained a replacement Nebraska title claiming the original was lost, and indicated on his application that the vehicle was free from liens. Nebraska issued a clean replacement title, which the debtor then used to convey the vehicle to a relative on the eve of filing for bankruptcy relief. The trustee in the bankruptcy asserted his right to avoid the transfer to the relative as a fraudulent transfer. At that time, the secured creditor asserted its lien status.

The Hrbek court acknowledged that other courts had found "registered" to be synonymous with "titled," but refused to read the statute to require a certificate. 18 B.R. at 632. The court relied instead on the Official Comments to §9-103 at 4(c), which included a specific reference to a vehicle that was registered in a second jurisdiction without issuance of a new certificate of title, "indicating a distinction is to be made between registration of a vehicle and procurement of a certificate of title." Id. at 632-633. So even though the secured creditor's lien was noted on the Colorado title and the debtor procured the Nebraska title through fraud, the court held that the determining issue was whether the vehicle was registered in Nebraska. If the vehicle was registered in Nebraska as well, then the Colorado title was not effective and the trustee would prevail. Conversely, if the vehicle was not registered in Nebraska, then the Colorado title was effective to perfect the secured creditor's interest and the secured creditor would prevail. The court could not resolve the case on the record before it at the time. Id. at 633.

As noted above, some jurisdictions found that "registered" actually meant "titled." Again relying on the Official Comments, the court in Murray found that "the drafters meant the act of registration of a certificate of title." In re Murray, 109 B.R. 245, 247 (Bankr. E.D. Mich. 1989). Courts adopting the "title" interpretation were persuaded in part by the policy inherent in the Uniform Commercial Code that promotes "looking to one place—the certificate of title—to discover prior security interests." In re Males, 999 F.2d 607, 613 (2d Cir. 1993) (citations omitted).

Revised Article 9

As part of the revisions to the Uniform Commercial Code (UCC), former §9-102(2)(a) and (b) was substantially revised and relocated to new §9-303, which provides as follows:

9-303. Law Governing Perfection and Priority of Security Interests in Goods Covered by a Certificate of Title.
(a) Applicability of section. This section applies to goods covered by a certificate of title, 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.
(b) When goods are covered by certificate of title. Goods become covered by a certificate of title when a valid application for the certificate of title and the applicable fee are delivered to the appropriate authority. Goods cease to be covered by a certificate of title at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time the goods become covered subsequently by a certificate of title issued by another jurisdiction.
(c) Applicable law. The local law of the jurisdiction under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

In §9-303, Revised Article 9 has eliminated the most compelling argument available to trustees under its predecessor statute by removing the reference to "registered" and clearly establishing the significance of the certificate of title for continuing perfection. Furthermore, the revised provision clearly establishes that the law of the original jurisdiction continues to govern perfection and the effect of nonperfection until the vehicle ceases to be covered by that jurisdiction's certificate of title.

Under §9-303 (b), the vehicle ceases to be covered by the original certificate of title "at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction" or the time the vehicle "becomes covered by a certificate of title issued by another jurisdiction." In the latter event, the laws of the issuing jurisdiction will no longer cover perfection and the effect of nonperfection. However, the secured party's interest does not automatically become unperfected.

In instances where the vehicle becomes covered by a certificate of title issued by another jurisdiction, §9-316(d) provides that the security interest in the vehicle remains perfected "until the security interest would have become unperfected under the law" of the original jurisdiction had the vehicle not become covered by the second certificate of title. In other words, the second certificate of title issued by another jurisdiction will not eliminate the perfected security interest created by the first certificate of title as long as the interest continues to be perfected in the jurisdiction that issued the first certificate. As a result, the inquiry under revised Article 9 is whether the security interest was properly perfected in the issuing jurisdiction and continues to be perfected in that jurisdiction regardless of whether a second jurisdiction has issued another certificate of title. Secured creditors with interests in goods covered by certificates of title can rely on the perfection created by the original certificate.

Conclusion

Under Revised Article 9, secured creditors have greater certainty and protection with respect to security interests in motor vehicles and other goods covered by certificates of title when debtors move and subsequently file for bankruptcy relief. The revisions to the provisions relating to goods covered by certificates of title have effectively closed the door on attempts by aggressive trustees in bankruptcies to exact releases or settlements from secured creditors as some were able to do under the predecessor statutes.


Footnotes

1 With assistance from Jacob J. Orth. Return to article

Journal Date: 
Tuesday, November 1, 2005