Floor Plan Lenders May Possess Vehicle Title Documents Under Virginia Law, Bankruptcy Court Says
Commercial lenders in Virginia have another tool at their disposal to ensure repayment of vehicle floor plan loans, according to a bankruptcy court.
Lenders providing vehicle floor plan financing have traditionally perfected their security interest in the inventory of an automobile dealer by filing a UCC-1 financing statement. However, it’s not unheard of for commercial lenders to take additional precautions to secure repayment of their floor plan loans by taking physical possession of the dealer’s vehicle title documents.
A recent opinion by the United States Bankruptcy Court for the Eastern District of Virginia backs up this practice.
The Court’s Opinion on Possession of Title
The bankruptcy court held that absent any specific restrictions otherwise imposed by federal or state law, commercial floor plan financing lenders are permitted to take possession of title documents, even though the preferred method of perfection requires the filing of a financing statement.
In the bankruptcy case of Barrett v. Vehicle Acceptance Corp., the debtor, a used automobile dealership, entered into a floor plan loan agreement with the defendant lender to finance its motor vehicle inventory for resale. Although the lender filed a UCC-1 financing statement to perfect its lien, the floor plan loan agreement also required all original vehicle title documents to be transferred to and held by the lender. The debtor later filed for bankruptcy, and the lender continued to hold the certificates of title after subsequent sales to consumers as a means to require the debtor to continue to make its floor plan loan payments.
The trustee and the estate of the debtor in bankruptcy filed a claim against the lender asserting, among other things, that the lender’s possession of the vehicle title documents as unlawful and that the trustee incurred damages and attorney’s fees resulting from the unauthorized post-bankruptcy petition transfers. They also argued that the perfected lender’s security interest in the debtor’s inventory, vis-à-vis its UCC-1 financing statement, was invalid because the lender held the vehicle titles that the debtor purchased for resale after the vehicles were sold to consumers.
Ultimately, the court rejected the trustee’s argument and dismissed many of the complaints against the lender because the trustee failed to show that the lender’s possession of the title documents violated Virginia law or that applicable state or federal law prohibited the lender from holding titles to vehicles subject to its lien. The court, citing a handbook published by the Office of Comptroller of the Currency (OCC) to guide OCC examiners in their oversight and supervision of the lending practices of national banks and federal savings associations, found that “a prudent floor plan lender may hold the title documents to its collateral even when perfection of its security interest requires the filing of a financing statement.”
Although the court dismissed the trustee’s claims in this case, it is important to note that the court’s decision was limited to Virginia state law. As such, other states may have laws that prohibit the practice of taking possession of vehicle title documents when the lender’s security interest is otherwise perfected through a financing statement filing.
Further, it’s worth noting that the dealer’s customers (and their lenders) likely have additional protections and superior claims against a floor plan lender when they retain possession of certificates of title after the sale of the motor vehicle, especially when the proceeds of the sale are passed on to the floor plan lender.
Michael Smith is a commercial lending attorney who works with lenders and borrowers in financial transactions. For more information on vehicle floor plan loans, contact him at 301-657-0166 or firstname.lastname@example.org.