REQUEST LETTER

01-036

Response 12/21/01

NAME

COMPANY

ADDRESS

PHONE

Re: Request for Administrative Opinion

This request for an administrative opinion is being submitted on behalf of the NAME, a non for profit association that represents the new car and truck dealers of the State. The question is relatively simple – Is there a format currently under Utah law whereby a motor vehicle dealer or a lender can obtain a perfected security interest in a motor vehicle on or about the date when a customer purchases the vehicle. The UADA is cognizant of current law as set forth in 41.1a-601 U.P.C.A and that law’s interrelationship with 70a-1-201 et seq.

The following is an example that occurs quite often in the State of Utah:

Mr. A purchases a motor vehicle from a Utah motor vehicle dealer on DATE. Part of the transaction involves a trade-in wherein Mr. A is given a $$$$$$ trade in allowance on a vehicle which has a lien in favor of INSTITUTION in the amount of $$$$$$. The dealership, in processing the transaction, makes contact with INSTITUTION and receives an exact pay-off for DATE, wherein the receipt of the $$$$$$ obligation owed by Mr. A on the trade-in vehicle would be extinguished by the payment to INSTITUTION. On DATE Mr. B notices Mr. A’s trade-in vehicle on the dealer’s lot. Mr. B agrees to purchase the same from the dealer. Mr. B executes all the documents pertaining to the transaction including a Utah Application for Title and Registration wherein he is required to make a $$$$$$ deposit with the balance of the purchase price being financed by INSTITUTION. Customer Mr. B drives off the lot in possession of the vehicle. The dealer submits the application for new title and registration to the Department of Motor Vehicle but the application is rejected inasmuch as the Utah title to the vehicle has not been forwarded to the dealership from INSTITUTION. In fact, INSTITUTION asserts that it will take them approximately two weeks to forward the title. In the paperwork between the dealer and customer Mr. B, Mr. B. granted the dealer security interest in the vehicle purchased to secure the dealer for all payments owed to the dealer but unpaid by Mr. B. Unfortunately, the $$$$$$ deposit check from Mr. B. Bounces and is referred to the dealership marked “Refer to Maker”. How does the dealer obtain a perfected security interest in the vehicle if the Department of Motor Vehicles will not accept the Application for Title and Registration without the prior evidence of ownership?

Some states including STATE have adopted interim or temporary ownership criteria which if met established under Motor Vehicle law a perfected security interest that is retroactive to the date of the transaction and not dependent on the machinations of transferring an existing title as a prerequisite to obtaining such a perfected security interest. That is the issue that we are interested in receiving some guidance on as quickly as possible inasmuch as we are contemplating what modifications we could make in the Utah statue to provide an “temporary or interim ownership document.

Thank you for your assistance.

NAME

ORGANIZATION

RESPONSE LETTER

DATE

NAME

COMPANY

ADDRESS

RE: Advisory Opinion – Perfecting Security Interests in Motor Vehicles

Dear NAME,

You have requested information concerning how a motor vehicle dealer may perfect its security interest in a vehicle traded in by one customer and purchased by a second customer. The first customer often does not have possession of the certificate of title to remit to the dealer because it may be held by a party (i.e., a bank) that previously had a security interest in the vehicle. When the dealer purchases the vehicle from the first customer, a period of time often passes before the party holding the title releases its security interest and remits the title to the dealer. In this interim, the dealer does not have a title to submit to the Division of Motor Vehicles to document its interest in the vehicle. Should the dealer sell the vehicle to a second customer during this period, the dealer is at risk that this customer may not make payments required under the contract or even declare bankruptcy prior to its security interest being perfected, thus subjecting the dealer to a potential loss. Because of this possibility, you ask the Tax Commission whether a dealer can perfect its security interest in a motor vehicle on or about the date the customer purchases the vehicle.

First, we should clarify that a court of law would determine whether a security interest is perfected and which party has a superior security interest in a vehicle, should there be competing claims. Such a determination is outside the Tax Commission’s jurisdiction. Nevertheless, the Tax Commission is designated to enforce the provisions of Title 41, Chapter 1a of the Utah Code. Part 6 of Chapter 1a concerns motor vehicle liens and security interests and assigns the Tax Commission certain duties relating to documenting security interests in motor vehicles. Therefore, we will offer a nonbinding opinion based on our specific statutory duties related to these issues.

Utah Code. Ann. §41-1a-606 provides that a party giving constructive notice for a lien or encumbrance on a motor vehicle under the circumstances you describe must do so under the guidelines exclusively provided in Sections 41-1a-602 through 41-1a-605. The Utah Supreme Court has stated in Creer v. Valley Bank & Trust Co., 770 P.2d 113 (Utah 1988) that even if a security interest in a motor vehicle would have attached under the provisions of the Uniform Commercial Code, it is not perfected in Utah until the provisions of the Motor Vehicle Act are satisfied because of the “exclusive” language in Section 41-1a-606.

As a result, the date of constructive notice (and the date on which a dealer’s security interest would be perfected) is governed by Section 41-1a-605, which provides that:

If the documents referred to in Section 41-1a-602 are received and filed with the division within 30 days after the date the documents were executed, the constructive notice dates from the time of the execution of the documents; otherwise, constructive notice dates from the time of receipt and filing of the documents by the division as shown by its endorsement.

Therefore, if the dealer submits the certificate of title and other required paperwork to the division within 30 days of selling the vehicle to the second customer, its security interest would appear to be perfected on the date of sale. However, if the title or other paperwork is submitted after this timeframe, the dealer’s security interest would not appear to be perfected until the division receives the documents, as shown by the date the division stamps on the documents upon their receipt.

Should 30 days be insufficient for a dealer to receive the certificate of title from the first lienholder and submit it to the division, perhaps a longer period could be statutorily imposed. We are aware that a prior Legislature extended the period from 10 days to the current 30 days. Under current statutes, however, the Tax Commission is not authorized to enact rules providing for “interim ownership” during the period at issue.

We hope this explanation provides you the guidance you seek, but should you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

01-036