The inventory lien perfection versus title lien perfection issue is not likely to arise in the typical financing of new car inventory because certificates of title are not generally issued until a sale to an end user. The confusion often arises in the financing of used car dealerships, where titles exist for the vehicles. The inventory rule of Article 9 does not distinguish between new car inventory and used car inventory and secured parties should not be distracted by the existence of a title. Of course, where titles exist, if there is any doubt about whether the vehicles are held as inventory the secured party should file its lien on the title(s) and perfect an inventory lien under Article 9.

Assignments of Liens in Titled Vehicles

Under Article 9, a UCC-1 financing statement is not required to be assigned of record when the underlying security agreement is assigned 8.  The assignee of a lien in a titled vehicle is also generally not required to amend the title to reflect the assignee as secured party 9.  When dealing with a portfolio of titled vehicles, however, it is advisable to employ a title trust to simplify and expedite the transfer the liens by avoiding the need to file the requisite documents with the various motor vehicle divisions across the country.

More Than One Title

A significant issue arises when there are titles issued in more than one state with regard to a particular vehicle. The majority view is that “…if a security interest is perfected under the law of the jurisdiction in which it attaches, its priority cannot be defeated by the unauthorized securing of a ‘clean’ certificate of title in another jurisdiction 10.”  Thus, if a debtor somehow obtains a clean title in a second state, the secured creditor which takes a lien on that vehicle in the second state will be junior to any lien holder in the original title 11. 

Vehicles Required to Be Titled in One State But Not Others

An issue can also arise when a vehicle requires a title in one state, but not in another state, such as some cranes. This can be particularly problematic with secondary sales/financings of cranes. While the debtor may present a clean title in a state requiring a title, the crane may be the subject of a prior UCC-1 filing in a non-title state. In such a case the secured party must make sure there are no prior filings against the crane or that any such filings have been terminated or expired or are otherwise no longer valid and effective. Because Article 9 is a debtor based recording system as opposed to a property based recording system (e.g. real property recording systems), the secured party cannot be sure there are no UCC-1 filings against the collateral unless it has a complete title history, and it must search all entities/individuals in the chain of title. Secured parties often assume title of used equipment is clean so long as the obligor is purchasing the equipment from a dealer. The secured party must remember the dealer only sells free and clear of any liens against the dealer, it does not sell free and clear of any pre-existing liens against a prior owner 12. Thus, once again, with used equipment the secured party must check out the full chain of title.

Bankruptcy Filings Before the Lien is Placed on the Title

Unlike a UCC-1 filing, which a secured party can make sure is filed immediately, a secured party has no control over delays by a state’s motor vehicle division in placing a secured party’s lien on a title. This can be of particular concern where a debtor files a petition in bankruptcy after the secured party has submitted the lien documents to the division of motor vehicles, but before the division has placed the lien on the title. To address this issue the drafters of Revised Article 9 urged the state legislatures to amend the certificate of title statutes to provide that perfection occurs upon receipt by the proper authorities of a proper application for a certificate of title on which the lien is to be placed 13.   Of course, not all states have heeded the drafters’ recommendation. Nevertheless, the courts have generally protected secured parties in this and similar fact patterns 14. 

Titles Issued By Jurisdictions Unrelated to the Debtor or the Goods

Under old Article 9 there was some confusion as to whether a vehicle could be titled in a state wholly unrelated to the debtor or the goods, usually for tax purposes. Revised Article 9 has resolved this issue by making clear the law governing perfection is the law of the state in which the title is issued, regardless of the absence of any ties to the debtor or the goods 15. 

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