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Titled Vehicles: Not as Simple as You Might Think

Date: May 20, 2014 @ 07:00 AM
Filed Under: Legal

Editor’s note: In February of this year, attorney Frank Peretore authored an Equipment Finance Advisor blog on the often misunderstood nuances of fixture filings. In his blog, Peretore notes that secured creditors have learned -- many times through their mistakes -- to approach such filings with some caution. Article 9 is widely acknowledged to be complex in this regard.

With regard to preparing filings for titled vehicles, secured creditors may be under a misconception that Article 9 is relatively straight forward. In the following article, Peretore warns that such is not the case. As with all instances concerning Article 9, nothing is ever really simple.

Vehicles Held as Inventory

Yes, with titled vehicles one generally perfects a lien by simply noting the lien on the certificate of title 1. Listing the secured party on the title as the owner, as opposed to as lienholder, is also generally adequate to perfect a lien under Article 9 of the U.C.C. 2. It is not, however, always as simple as record your lien on the title and put it in the file. If the vehicle is inventory in the hands of the debtor, placing a lien on the title will not properly perfect a lien. Where the vehicle is inventory perfection must be in accordance with the inventory requirements of Article 9, including advance notice and advance filing (no 20 day grace period) 3.

In all but four states, titled vehicles are deemed inventory “[d]uring any period in which collateral subject to a [state Certificate of Title Law] 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...” 4.  Thus, in all but four states in order to be deemed inventory in the hands of the debtor, the debtor must not only hold the vehicle for sale or lease or lease the vehicle with the debtor as lessor, but in the latter case the debtor must also be in the business of selling such vehicles.

The four outlier states present a trap for the unfamiliar. In Idaho, Illinois, Louisiana and Rhode Island, the vehicles are inventory if they are held by the debtor as lessor and the debtor is in the business of selling “or leasing” goods of that type. 5.  These states adopted an older, and since abandoned version of 9-311(d), and consequently their definition of inventory is broader than intended. Thus, in these four states titled vehicles will be deemed inventory where the debtor is a holding company that owns the vehicles and leases them to an operating company, even though the debtor does not sell any vehicles. And in such a case, a secured party who only filed its lien on the titles will be vulnerable to attack by a bankruptcy trustee or a secured party with a perfected lien in inventory.

It should also be noted that determining whether vehicles are held by the debtor as inventory is not always as easy as it may appear 6.  One problem is the subjectivity of the test. The test is based upon the debtor’s intentions and activities which, of course, may change from time to time. For example, if a debtor originally places a vehicle in inventory, but subsequently removes the vehicle from inventory and places it into the debtor’s own fleet of vehicles, the vehicle may no longer be inventory, especially if the debtor no longer has any present interest to sell or lease the vehicle. A problem also arises when the debtor’s activities do not fall into the typical definition of a seller or non-seller. In one such case, the debtor, a car rental company, sold approximately 4,000 vehicles per year, earning 60-70% of its revenues in this manner, yet the Court found that the vehicles were not held as inventory because the debtor only sold vehicles after they were 9-10 months old and were no longer of value to the rental business, and they only sold the vehicles through wholesale auctions 7.

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