DISCLAIMER: The information in this document may change over time with new information and developments. All content and materials are for general information purposes only. It does not provide, and is not intended to constitute, legal advice. Important: As necessary, dealers should consult an attorney familiar with dealership operations, Federal, State and/or local laws at issue.

As many of you may be unpleasantly aware, a bankruptcy trustee can avoid preferences made up to 90 days prior to the filing of bankruptcy, including motor vehicle purchase security agreements. The Bankruptcy Code, however, makes an exception for liens physically perfected within 30 days after the purchaser takes possession of the vehicle. 11 USC §547(c)(3)(B). Kentucky law governs the perfection of these security interests.

So, how can Kentucky dealers make sure they perfect title liens within 30 days of vehicle delivery? Pursuant to KRS 186A.190(1), a security interest is deemed perfected when it is noted on the vehicle title, which notation is in turn deemed to have occurred when the title lien statement: 

1. Is received by the County Clerk of the County of residence of the purchaser/ debtor, as noted by the purchaser on any state-approved title or licensing form;
   
2. Describes the vehicle to be titled by year, model, make, and vehicle identification number;
   
3. Provides required information about the secured party with reasonable particularity; and
   
4. Includes the date and time-stamped entry of the notation of the security interest by the county clerk in the Automated Vehicle Information System (AVIS), or its successor title processing system. 

KRS 186A.195(5) likewise requires that a security interest can only be perfected if the appropriate perfection steps are taken within 30 days of attachment of the security interest. Attachment occurs upon the exchange of value between the customer and the dealer, along with execution of the security agreement and the debtor taking possession of the automobile. As the saying goes in the car business, when the monies collected and taillights are out the door. 

As you all know here’s the problem: with County Clerk offices having had random and indeterminate closures during the Covid-19 pandemic, many dealers experienced difficulties in providing physical documents to clerks and ensuring that lien information would be entered into the AVIS system in a timely manner. In some instances, documents were left sitting in baskets for days, if not weeks. While the governor extended the timeline for processing title liens, that extension was not honored by the bankruptcy courts if a customer took bankruptcy and there was no perfected lien. We cannot guarantee that clerks’ offices will remain open as we see the Covid-19 Delta variant surging, however we can provide some tips for making sure that your title liens are perfected, and thus not subject to avoidance in bankruptcy. 

To protect your security interest to protect the lender’s security interest, and limit your liability recourse, remember that: 

1. The 30-day clock runs from date of delivery of the vehicle to the customer (Spot Delivery Accounts) after credit worthiness, or you have documentation to collect (verification of employment, salary, wages or qualifications for special programs). Try your best to make sure that all items necessary to conclude the deal are obtained even to the extent of delaying delivery by a day or two to allow more time for perfection of the security interest. In the car business that may be illogical, but it may save you money in the long term. Make sure your appropriate title clerks know the importance of getting all documents necessary to the deal put together and that they follow up in the lien perfection process; 
   
2. The title-lien statement must be on the appropriate, state-approved form; 
   
3. The title-lien statement must be filed in the county of residence ­as provided by the buyer on a notarized form. Thanks to a statutory amendment sponsored by KADA, you may now rely on customer supplied information as to county of residence.

Certain commercial realities associated with vehicle sales and government bureaucracies mean that it can take time to perfect a lien after a motor vehicle is delivered and a security agreement is signed. If you believe there may be an issue with a customer’s creditworthiness, again, it may be advisable to delay delivery of the vehicle in order to give yourself more time to perfect the security interest.

As always, if you have any questions or concerns, please feel free to reach out to any of the below individuals. 

KADA: Jason Wilson; jason@kyada.com; (502) 695-3333

Stoll Keenon Ogden PLLC automotive team: Sarah Bishop; sarah.bishop@skofirm.com; (502) 875-6245 |
Ron Smith; ron.smith@skofirm.com; (317) 822-6787