By Donald W. Gould, II and Andrew Sharenson

If you ask the average title clerk what is the deadline to perfect a security interest on a vehicle, more often than not the answer would be that the lenders give dealership sixty days to record their lien on the vehicle’s title. A sharp title clerk might note that they are required by the state to submit the title application within a shorter period of time, usually twenty to thirty days from the date of the sale. But while the concerns of late filing fees and repurchase demands from lenders are significant, most dealerships are completely unaware that the most important deadline is thirty days from the date of delivery. That is the period of time the United States Bankruptcy Code gives a purchase money lender to perfect a security interest in order to not be subject to the bankruptcy trustee’s avoidance powers.

There are generally two main variations on how state law approaches the perfection of security interests on financed motor vehicle sales. Some states allow perfection to relate back to the time of creation of the security interest if the required application and fee is submitted within the deadline set forth by the statute. Otherwise, the security interest is perfected upon delivery to the relevant title office. Other states have no provision to allow a security interest to relate back to the time of creation. However, these state generally have two variations on how the security interest is perfected. In some states, the security interest is perfected upon filing or delivery of the application and required fee to the title office. In other states, the security interest is perfected upon the resolution of the lien on the title or the notation by the clerk in the title processing system. Finally, in most jurisdictions, dealerships have thirty days to file an application for certificate of title.

Under the Bankruptcy Code, a creditor has thirty days after the debtor receives possession of the property to perfect a security interest in order to escape the trustee’s ninety day avoidance powers. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the deadline was only twenty days. This raised the issue of whether a state’s relation back statute could save a creditor from failing to perfect within the time required under the bankruptcy code. This issue came before the U.S. Supreme Court, which held that the perfection period under the Bankruptcy Code could not be modified by any state relation back statute.

If a dealership fails to timely perfect a security interest, the trustee has the power to avoid the lien and sell the vehicle to satisfy other creditors. The dealership, after presumably having to repurchase the retail installment contract from the lender, is then an unsecured creditor and may only recover pennies on the dollar in the bankruptcy proceeding. The only option at that point is to initiate an adversary proceeding to see whether the trustee will agree to release the vehicle to the dealership in lieu of further litigation.

It is probably a universal practice for dealerships to put used vehicles on the front line before the dealership obtains the certificate of title from the prior lien holder. Dealerships seem to be willing to risk penalties from the state and a repurchase demand from a lender in order to get a used vehicle on the market as fast as possible. Dealerships must understand that the real risk behind marketing a vehicle prior to obtaining the certificate of title is losing the vehicle to a bankruptcy trustee in exchange for pennies on the dollar as an unsecured creditor.

Donald W. Gould, II is a Shareholder and Andrew Sharenson is an Associate in the Houston office of Johnson DeLuca Kurisky & Gould. This article was originally published in NADC Defender, October 2016.