Insights

The requirements for perfecting security interests in motor vehicles vary from state to state. Because the creditor's security interest is at stake, it is important for creditors to have procedures in place to ensure that they have properly perfected their liens. Not only must these procedures ensure compliance with state vehicle titling laws, but they should also ensure accuracy with respect to the identification of the creditor and the vehicle in the title documentation. Failure to comply can result in a creditor losing its lien priority.

In a recent case out of Illinois, a bankruptcy trustee challenged Wells Fargo's lien on a debtor's vehicle on the grounds that the lien was not properly perfected. The bankruptcy trustee sought to avoid Wells Fargo's lien, arguing that the notation on the debtor's vehicle title improperly identified Wells Fargo by its former corporate name. Here's what happened.

Juan Alvarado bought a car from Own a Car of Fresno. In connection with his purchase, Alvarado entered into a retail installment sale contract, which granted a security interest in the car to Wachovia Dealer Services, Inc. Wachovia perfected its security interest via notation in the records of the California secretary of state. Subsequently, Alvarado retitled the car in Illinois. Between the time of purchase and the time of retitling the car, Wachovia was merged into Wells Fargo Bank, N.A. However, on the application for Illinois title, Alvarado listed the lienholder as Wachovia, with its California address. Subsequently, Alvarado filed a Chapter 7 bankruptcy petition. The bankruptcy trustee filed a complaint against Wells Fargo to avoid its lien on the grounds that its interest in the car was not properly perfected because the certificate of title listed Wachovia as the lienholder. Both parties moved for summary judgment.

The U.S. Bankruptcy Court for the Central District of Illinois entered judgment for Wells Fargo. The court found that notation of a lien on a certificate of title serves to give notice of a party's interest. As such, as long as an error in the notation of a lien on a car's title is not seriously misleading, substantial compliance is sufficient. Because the California address listed on the certificate of title was valid and because Wells Fargo's employees would have been aware that Wachovia was the former name of the corporation, an inquiry made to the listed address would have enabled a reasonably diligent creditor to ascertain correct information about the status of the lien. Because inquiry notice was satisfied, the court found that Wells Fargo held a properly perfected lien on Alvarado's car.

While the Alvarado court decided in favor of Wells Fargo, it is entirely possible that a court in another state or interpreting slightly different facts might reach a different conclusion. Thus, the Alvarado case serves as a good reminder for creditors to double-check their compliance with state vehicle titling perfection requirements and to make sure that the lien information in the title documentation is accurate or at least not seriously misleading.

In re Alvarado, 2014 Bankr. LEXIS 3861 (Bankr. C.D. Ill. September 10, 2014).

Catharine S. Andricos is a partner in the Washington, D.C., office of Hudson Cook, LLP. Catharine can be reached at 202-327-9706 or by email at candricos@hudco.com.