05.20.2021 | Articles

Why Do We Care About Motor Vehicle Titles?

By David C. Phalen, Brian F. Plunkett, Jacqueline M. Price

Registries of Motor Vehicles (“RMVs”) do not often evoke pleasant feelings, but are critical tools for lenders when perfecting a security interest in non-inventory motor vehicles (or even trailers, mobile homes, boats, and farm tractors depending on state laws). 

Most states require a lender to notify the proper registration department so that the lender’s lien can be reflected on the certificate of title where the motor vehicle is registered. Most states, including Massachusetts, also make this notification on the certificate of title the exclusive method of perfecting a security interest in a titled vehicle.  Unless you are providing “floor plan financing” to a dealer, it is generally not enough to perfect a security interest in a motor vehicle by just filing a Uniform Commercial Code (“UCC”) financing statement or by taking possession.

The special rules for motor vehicles can have big implications.  Commercial lenders often file UCC financing statements covering “all assets” of the borrower’s business to secure those loans. While this is normally the most efficient way for the lender to perfect its lien on customary categories of assets of the borrower’s business such as equipment, accounts receivable and inventory, it leaves out entirely another valuable asset category – motor vehicles. It is important to note that the definition of what constitutes a motor vehicle can be extremely state law dependent.  If there is a motor vehicle of sufficient value, the lender should seek advice to determine whether it is “non-titled Equipment” rather than a “titled motor vehicle” under the relevant state law.

Motor vehicles often constitute a valuable portion of a borrower’s assets, especially if the borrower is in the construction industry or other industries where borrower needs a fleet of vehicles to complete its work. Lenders can get complacent with an “all asset” UCC filing because the extra step of registering its lien on the certificate of title is additional “paperwork” when the borrower’s business is profitable and meeting its loan obligations.   Borrowers often object to a lender’s request to have their lien notated on the title certificate due to the added expense and inconvenience involved.  However, when things go bad, the extra “paperwork” will seem well worth it.  The issue here is when the borrower’s business cannot be sold as a going concern and assets like motor vehicles are sold off individually. Unless the lender is listed as lienholder on the title certificate, the bankruptcy trustee can avoid the lender’s lien and the lender will receive no recovery as a secured party on the motor vehicles.  We have also had situations where the lender is holding the actual vehicle titles and seeks to have its liens perfected after an event of default occurs under the loan relationship. This approach is problematic because if the Borrower files for bankruptcy within 90 days of lien registration, the lender’s late perfection of its security interest would likely be deemed a preference and thus the lender would still be unsecured with respect to the motor vehicle collateral.   

Additionally, it is not only bankruptcy where a lender should be concerned if its lien is not perfected.  The normal progression when there are multiple lenders is that the original lender receives first priority to borrower’s collateral and any additional lenders who later provide funding to the borrower would be in line behind the original lender.  If the original lender has not done its due diligence to get its lien noted on the certificate of title, a new lender can easily obtain first priority over the original lender by completing that additional titling step that the original lender neglected to do.

With this in mind, it becomes crucial that a lender complete proper perfection if the borrower’s assets include a large portfolio of motor vehicles. The good news is most states have made the titling process somewhat easier.  Many states, including Massachusetts, have adopted the Electronic Lien and Title (“ELT”) Program. ELT allows for an electronic title rather than a paper title, which means the lender will not have to wait for a paper title to arrive in the mail to verify that its liens are perfected. Instead, the lender would receive electronic notification of lien perfection. This allows the lender to keep close tabs on its collateral. Some states, like Virginia and Pennsylvania, even require lenders to participate in ELT if lenders meet certain lending criteria.

ELT Motor Vehicle Registration in Massachusetts includes the following steps. The lienholder records its lien in the RMV database. The RMV then issues a title number and transmits a lien notification to the lienholder. The lienholder then retains the electronic record instead of a paper title, allowing the lienholder to easily locate the title. If the lien has been satisfied, the lienholder then sends the RMV an electronic message releasing the title. Additionally, the lienholder may request a paper title listing themselves as lienholder at any time.

State RMVs continue to make the lien registration process simpler and faster. As the value of motor vehicle collateral rises and the lien registration process is made easier, more lenders should take the extra step to have their lien noted on the title certificate to protect their rights in that collateral. It will prove to be well worth the effort. This small inconvenience can result in protecting lenders’ investments to the tune of hundreds of thousands of dollars.

This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.

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