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Finance Company Liability Transfer of Motor Vehicle RISCs to Unlicensed Buyers Void
By Clayton C. Swears

Having a proper license is Rule #1 for any business or business person. Failure to obtain a license could not only subject you or your company to penalties from the licensing authority but could also result in problems you could never have imagined. Take, for example, a recent case where bankruptcy filings by a dealership and its owners resulted in unintended consequences for purported buyers of the dealership’s retail installment sales contracts.

Marvin and Joan Moye sold used cars though JMW Auto Sales Ltd. The sales were often financed under retail installment sales contracts. JMW purported to sell the contracts to a pool of investors, including Warren Waite, Jr. and Warren Waite, III. The Moyes and JMW continued servicing the contracts and made periodic payments to the investors. Eventually, the Moyes and JMW were unable to make payments under the agreement with the investors, and Mid-Atlantic Finance Company bought the contracts. JMW and the Moyes filed for bankruptcy. Some of the money JMW and the Moyes received from Mid-Atlantic was transferred to the investors. Those transfers were made within 90 days of the bankruptcy filing. The bankruptcy trustee sought to recover the money as a preferential transfer. The bankruptcy court granted summary judgment in favor of the trustee. The Waites appealed.

The U.S. District Court for the Southern District of Texas upheld the judgment in favor of the trustee. The court found that transfer of the contracts was void because the Waites were not properly licensed. The Texas Finance Code requires holders of vehicle retail installment contracts to be licensed, and neither Waite held the required license at the time of the transfer.

Because no transfer of the contracts occurred, the Waites only invested money and became unsecured creditors of JMW and the Moyes. Accordingly, the transfer of money to the Waites constituted a transfer to or for the benefit of a creditor, for or on account of an antecedent debt, that was made while the debtors were insolvent and enabled the transferees to receive more than they otherwise would have received. Therefore, the bankruptcy court correctly held that the trustee was entitled to summary judgment.

The Waites argued that the transfers were not void because Waite, Jr. obtained a reinstated license, which was retroactively effective. The court found that the retroactive license did not alter the Waites’ rights, which became fixed at the time the bankruptcy petitions were filed.

Licensing requirements for RISC buyers vary by state, so now is a good time to make sure you and your company are in compliance.

In re Moye (Waite v. Cage), 2011 U.S. Dist. LEXIS 57324 (S.D. Tex. May 27, 2011).

Clayton C. Swears is an associate in the Maryland office of Hudson Cook, LLP. Clay can be reached at 410-865-5419 or by email at cswears@hudco.com.

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