Certificate of Title Systems. Assignment 25 Maintaining Perfection in. Certificate of Title Systems. Certificate of Title Systems

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1 Certificate of Title Systems Assignment 25 Maintaining Perfection in Certificate of Title Systems Reference: Understanding Secured Transactions 4.02[F], 9.03, 9.04 In all 50 states, secured party must perfect SI in a car by compliance with state s certificate of title law [ 9-311(b), state title certificate law] In most states, the certificate of title law says that a secured party is perfected when it files an application for the issuance of a title certificate with its lien to be noted on that certificate [UMVCTA 20(b)] In some states, the certificate of title law says that a secured party is perfected only if the issued certificate actually reflects the secured party s lien In those states, the secured party runs the risk of being unperfected if the titling agency messes up Certificate of Title Systems In most states, the secured party files the application and asks for the certificate to be sent to the secured party upon issuance The secured party then holds the actual title certificate until the debtor repays in full Secured party s possession of the title certificate is not significant for perfection purposes However, secured party s possession of title certificate makes it harder for debtor to sell the car (as debtor can t produce original title certificate) Certificate of Title Systems Just like there are 50 state UCC filing systems, there are 50 state title certificate systems But, only one state s law can control the question of whether a SI in a car is perfected General rule: perfection of SI in titled good is governed by law of the state that issues a title certificate [ 9-303(c)] But: what happens if multiple certificates are issued by different states; which law controls? 1

2 Problem 25.2(a) United Missouri Bank (UMB) has a SI in a Nissan owned by Babs; UMB s lien is noted on a title certificate issued by Missouri Dept. of Revenue Babs moves to NY, w/out notifying UMB >> 4 months has now passed; Babs has not titled or registered the car in NY (even though NY law requires her to title the car in NY within 4 months after she becomes a NY resident) Problem 25.2(a). Once Babs has been in NY for four months, without having the car retitled in NY, what s the status of UMB s security interest in the car? A. It is still perfected B. It is unperfected, b/c more than four months has lapsed without UMB perfecting in NY It is still perfected 0% It is unperfected, b/c mor... 0% Problem 25.2(a) MO law still governs perfection of UMB s SI [ 9-303(b), 9-303(c), 9-316(d)], so its SI remains perfected (on MO title certif.) Mere fact that car moves from MO to NY doesn t terminate applicability of MO law Relocation of debtor (Babs) from MO to NY doesn t matter; 4-month re-perfection rule in 9-316(a)(2) doesn t apply to titled goods governed by 9-316(d) MO law applies until another state issues a title certificate [ 9-303(b)], which hasn t happened Problem 25.2(a) NY law says Babs must title the car within 4 months after she moves there How can she do that, if UMB is still holding the original title certificate? 2

3 Titling a Used Vehicle Ordinarily, a titling agency will not issue a new title for a vehicle unless the existing title certificate is surrendered Babs can t surrender the existing title certificate for the Nissan if she doesn t have it Thus, Babs will have to ask UMB to surrender existing certificate and apply for new NY title certificate (showing UMB s lien) Assume Babs gets NY license plates, but NY doesn t issue a new title certificate for the car This would not change the result in Problem 25.2 MO law will continue to apply until another state issues a title certificate [ 9-303(c)] Note: some states won t register a car or issue plates w/out also titling it Problem 25.2(b) Assume Babs is holding CoT (rather than UMB) When Babs moves to NY, she applies for NY CoT, surrenders MO CoT She lies to the titling agency and says she has paid off UMB s lien NY titling agency issues a clean CoT that doesn t show UMB s lien Problem 25.2(c) Once NY issues the new clean title certificate, which statement is correct? A. NY law now controls; UMB no longer has a perfected SI B. NY law now controls; UMB has a perfected SI in the car C. MO law still controls (NY title was improperly issued and is invalid); UMB has a perfected SI in the car NY law now controls; U.. 0% 0% 0% NY law now controls; U.. MO law still controls (NY... 3

4 Continued Perfection of Security Interest Following Change in Governing Law (d) [Goods covered by certificate of title from this state.] Except as otherwise provided in subsection (e), a security interest in goods covered by a certificate of title which is perfected by any method under the law of another jurisdiction when the goods become covered by a certificate of title from this State remains perfected until the security interest would have become unperfected under the law of the other jurisdiction had the goods not become so covered. Rationale: UMB should not lose its perfected status just b/c Babs wrongly obtained a new certificate of title from another state (NY) Continued Perfection of Security Interest Following Change in Governing Law (d) [Goods covered by certificate of title from this state.] Except as otherwise provided in subsection (e), a security interest in goods covered by a certificate of title which was perfected on the old State s title certificate at the time the new State issued its title certificate remains perfected until perfection would have lapsed under the law of the old State if the new State had not issued a title certificate. Rationale: UMB should not lose its perfected status just b/c Babs wrongly obtained a new certificate of title from another state (NY) Once NY issues title certificate for the Nissan, MO law ceases to govern perfection [ 9-303(b)], NY law now governs perfection [ 9-303(c)] Car cease[s] to be covered by MO title certificate when NY issues title certificate But, UMB s SI remains temporarily perfected despite the change in governing law [ 9-316(d)] B/c UMB was perfected under MO law, it remains perfected (even under NY law) until its SI would have become unperfected under MO law if NY hadn t issued a title for the car (and title certificates don t customarily lapse like UCC-1s do after 5 years) Problem 25.1 Firstbank has SI in Kahled s teal blue Jaguar (perfected as noted on Wisconsin CoT) Kahled moves to AL, and by fraud gets a clean AL CoT (i.e., it doesn t show Firstbank s lien) 1 month later: Secondbank loans $50K to Kahled, takes SI in Jaguar, perfected as noted on AL CoT 6 months later: Thirdbank loans $45K to Kahled, takes SI in Jaguar, perfected as noted on AL CoT 7 months later: Kahled files bankruptcy 4

5 Problem Which Statement Is Correct? A. Firstbank s SI in unperfected B. Firstbank s SI is perfected and is entitled to first priority C. Firstbank s SI is perfected and is entitled to second priority D. Firstbank s SI is perfected and is entitled to third priority Firstbank s SI in unperfected 0% 0% 0% 0% Firstbank s SI is perfected... Firstbank s SI is perfecte... Firstbank s SI is perfected Effect of Change in Governing Law.... (e) [When subsection (d) security interest becomes unperfected against purchasers.] A security interest described in subsection (d) becomes unperfected as against a purchaser of the goods for value and is deemed never to have been perfected as against a purchaser for value if the applicable requirements for perfection under Section 9-311(b) or are not satisfied before the earlier of: (1) the time the security interest would have become unperfected under the law of the other jurisdiction had the goods not become covered by a certificate of title from this State; or (2) the expiration of four months after the goods had become so covered. Firstbank s SI did remain generally perfected under AL law [ 9-316(d)], versus Kahled s lien creditors (including the bankruptcy trustee) But, SI is deemed never to have been perfected versus a purchaser for value unless Firstbank reperfected in AL within 4 months after AL issued a title certificate [ 9-316(e)], which it did not Thus, while Firstbank is still perfected vs. trustee, it is deemed unperfected vs. Secondbank and Thirdbank (which were purchasers for value b/c they extended loan, took SI) [ 1-201(b)(29), (30)] Problem 25.1 Priority of respective creditors in Kahled s Jaguar is thus: Secondbank (first priority) Thirdbank (second priority) Firstbank (third priority; perfected vs. trustee, but not Secondbank or Thirdbank) Trustee (which has status of lien creditor ) 5

6 If Firstbank discovers that Kahled has gotten the car titled in AL, what can it do to avoid losing its expected priority? It can have its lien noted on the AL title certificate, but it can t do that without cooperation of Kahled or Secondbank, if Secondbank is holding CoT Firstbank can repossess the car from Kahled (this will perfect its SI by possession!) [ 9-313(b)] Problem 25.1(b) After three months, Firstbank learns of the new AL title certificate (which now shows Secondbank s lien on it) Firstbank demands that Secondbank apply to have Firstbank s lien noted on that title certificate, and Secondbank complies Who has priority? 9-316(e) appears to suggest that Firstbank would keep its priority here, b/c (a) it was perfected under WI law and (b) it acted to re-perfected under AL within the 4-month grace period But, 9-337(2) protects Secondbank and gives Secondbank priority over Firstbank, b/c AL issued a clean title certificate for the Jaguar Secondbank s SI attached and was perfected on the clean AL title certificate after that certificate was issued, and Secondbank did not have knowledge of Firstbank s SI Suppose that after Kahled got his clean AL title certificate, he sold the Jaguar one week later Hypo 1: He sells it to his neighbor Stan for $75,000 Hypo 2: He sells it to Ted s Used Cars for $75,000 Would Stan (or Ted s) take free of Firstbank s SI? Buyers 6

7 9-337(1): Buyers and Clean Titles If secured party s interest is perfected under State A s law, and State B issues a clean CoT, a buyer who gives value and takes delivery after the clean CoT is issued, and w/out knowledge of the SI, takes free of that SI [ 9-337(1)] But, this rule does not protect a person in the business of selling goods of that kind (i.e., it would protect Stan, but not Ted s Used Cars) Hypo 1: Stan would take the car free of First Bank s security interest [ 9-337(1)] Hypo 2: at first, Ted s Used Cars would take the car subject to First Bank s SI [ 9-337(1)] But, if Firstbank didn t take steps to reperfect its SI in the Jaguar w/in the 4-month grace period in 9-316(e), Firstbank s perfection will lapse Upon lapse, Firstbank would then be deemed never to have been perfected vs. Ted s Used Cars [ 9-316(e)], and at that point, Ted s Used Cars would then hold the car free of First Bank s SI 7