By Paul Hodnefield, Esq.
In general, UCC Article 9 requires security interests in motor vehicles not held as inventory to be perfected under state certificate of title law. Normally, this means the secured party must have its lien noted on the certificate of title document or its electronic equivalent. But what happens when the certificate contains errors or omissions in the secured party’s information? Article 9 addresses the impact of errors or omission in a financing statement, but is silent with respect to certificates of title. A recent decision provides some insight on how courts address the issue. The case is In re: Bryant, 2014 Bankr. LEXIS 4942 (Bankr. W.D. Ky. Dec. 8, 2014).
Bryant (the “Debtor”), a Kentucky resident, purchased a new Ford truck on credit in early 2012. Later, the Debtor refinanced the vehicle through the dealer. After the parties executed the loan documents and a title lien statement, the dealer assigned the note and security interest to Santander Consumer U.S.A., Inc. (“Santander”).
The dealer submitted the title lien statement to the Green County Clerk (the “Clerk”). Under Kentucky law the county clerk is responsible for issuing vehicle titles. The Clerk issued a new title that reflected Santander’s lien on July 30, 2013.
On September 10, 2013, the Debtor refinanced the truck through Santander and signed another title lien statement. A couple of days later, the Debtor applied for a duplicate title. The Debtor surrendered the original title certificate to the Clerk. After surrender, the original title certificate was destroyed.
The Clerk issued the duplicate title certificate on September 12, 2013. The duplicate certificate, however, incorrectly listed Community Trust Bank (“CTB”) as the first lienholder and “Santander Consumer” as the second lienholder (the Clerk had to truncate the name due to space limitations on the certificate). CTB never had any interest in the transaction and never should have been listed as a lienholder on the vehicle.
The Debtor filed a Chapter 7 bankruptcy petition on December 5, 2013. Shortly thereafter, the trustee brought an adversary action against the Debtor, Santander and CTB seeking to void the Santander lien. The trustee argued that Santander was never properly perfected because the duplicate title listed CTB as the first lienholder. Moreover, the title certificate failed to provide the correct lienholder’s name because it truncated the information to “Santander Consumer.” According to the trustee, these deficiencies rendered the lien unperfected. The trustee and Santander then brought cross-motions for summary judgment.
The court first determined that Santander was perfected when the Clerk issued the title that reflected Santander’s lien on July 30, 2013. Although the Clerk destroyed the original certificate, there was no evidence that there was any deficiency in the certificate or that the lien had been released.
The problem was with the duplicate title that listed CTB as first lienholder and truncated the correct lienholder’s name. Thus, the court had to determine whether these errors left Santander unperfected.
According to the court, the purpose of identifying the lienholder on a certificate of title is to provide inquiry notice. In this case, the trustee contacted CTB and learned that CTB had no interest in the vehicle. For all practical purposes, that made Santander the first lienholder.
Nor did the truncation of Santander’s correct name adversely affect the sufficiency of the title certificate for perfection purposes. The court again noted that the identification of the secured party is to provide inquiry notice. Relying on prior cases, the court determined that using a shortened version of the secured party name is not seriously misleading. The certificate provided the lienholder’s correct address and other information. The trustee would have learned of Santander Consumer U.S.A., Inc.’s lien simply by inquiring at the address provided on the certificate.
The court determined that the listing of CTB as first lienholder was inconsequential because CTB had no interest whatsoever in the vehicle. Likewise, the truncation of Santander’s name did not render the certificate of title seriously misleading. Consequently, the court held that Santander complied with the perfection requirements when the Clerk issued the original title on July 30, 2013, and that Santander’s perfected lien carried forward to the duplicate title.
The takeaway from this case is that minor errors or omission in the lienholder name on a certificate of title may not make the record seriously misleading. In fact, it may be impossible for a certificate to correctly provide the full name of the lienholder due to space limitations on the document or in the computer database field that stores the information. Nevertheless, lienholders should not assume that errors or omissions are always of no consequence. Lienholders should make every effort to provide the information correctly to the state authority responsible for issuing certificates of title.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 62375.
For more information or to speak with a UCC specialist, please visit cscglobal.com/ucc.