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Certificate of title
Vehicles (automobiles, motorcycles, motor homes, trailers, trucks, buses), aircraft, and waterborne vessels share several characteristics that are relevant to their use as collateral: (1) they are generally valuable and thus are commonly used as collateral, both in purchase-money and non-purchase-money transactions; (2) a debtor generally requires possession of them, making perfection through possession by the secured party impractical; (3) their primary function is to move, both intrastate and interstate, thus making ineffective a system of constructive notice through filing in a single state. Accordingly, notice of a security interest in such collateral is best accomplished either by reflecting the security interest on a certificate of title that travels with the collateral or by giving constructive notice of a security interest through a single national recording system.
Security interests in vehicles and certain waterborne vessels are perfected (and notice of a security interest in them is thus given) through a system of notation on certificates of title (sometimes also known as certificates of ownership), pursuant to certificate of title legislation enacted in each state. See, e.g., Cal. Vehicle Code 6300, 6301, 6302, 6303 (vehicles), 9919, 9920, 9921, 9922 (vessels). Certicates of title are issued by a designated state agency (e.g. California Department of Motor Vehicles). Like deeds to real property, they identify the owner of the vehicle or vessel for which the certificate is issued. They also identify any person with a lien on the vehicle or vessel. Procedures and forms may differ slightly among states. We describe the use of certificates of title in generic form.
When a manufacturer sells a newly manufactured vehicle or vessel, the manufacturer issues a certificate of origin that identifies the manufacturer as the owner and transfers ownership to a distributor or dealer (or to an ultimate purchaser). Upon sale, a distributor or dealer signs on the certificate of ownership an assignment of its ownership to the purchaser who, in turn, presents the certificate of ownership to the designated state agency, with requisite application and fee, for issuance of the initial certificate of title. If the vehicle or vessel is to stand as security for the purchase price, the holder of the security interest will apply for the certificate of title, will require that the certificate of title reflect its lien, and will frequently retain the certificate of title until the obligation is paid and the lien is released.
Prior to consummation of any subsequent purchase or loan transaction involving the vehicle or vessel, the prospective purchaser or lender should insist upon seeing the certificate of title to verify both ownership and the existence or non-existence of prior consensual liens. The owner will then sign on the certificate of title an assignment of its interest and surrender the certificate of title to the purchaser or lender who will then forward it, with the requisite application and fee, to the designated state agency that will then issue a new certificate of title that reflects the purchaser's ownership interest or the lender's lien in the vehicle or vessel, as the case may be. When an obligation secured by a vehicle or vessel is paid, the holder of the security interest will sign a release of lien on the certificate of title.
Under U.C.C. 9-311, one can perfect a security interest in property subject to certificate of title legislation only by complying with the provisions of the certificate of title legislation. Filing of a financing statement with respect to such property is neither necessary nor effective to perfect a security interest. Compliance with such certificate of title legislation is treated as the equivalent of filing a financing statement. Note also that there is no automatic perfection of a purchase-money security interest in consumer goods that are subject to certificate of title legislation. U.C.C. 9-309(1).
One further note. Vehicles or vessels waiting on the dealer's lot until they find the perfect home almost always serve as collateral for the floor plan loan that the dealer has with a financier. During that time, the property is inventory that is being held by the dealer for sale or lease. Perfection of the security interest of the financier in that inventory is not governed by certificate of title legislation. U.C.C. 9-311(d). Rather, the financier perfects its security interest in the inventory by the filing of a financing statement. When the dealer sells the property, the security interest of the financier terminates (as we study elsewhere) and the new security interest (if any) to be held by the party financing the purchase may be perfected only by compliance with certificate of title legislation.
Perfection of a security interest in an aircraft and certain aircraft parts is governed by federal statute requiring recordation of a security interest with the Federal Aviation Administration. 49 U.S.C. 44107, 44108. Perfection of a security interest in certain waterborne vessels is governed by federal statute requiring filing with the Secretary of Transportation. 46 U.S.C. 31321. By the terms of those statutes, those methods of perfection preempt the methods of perfection specified by state law (in particular the state law found in U.C.C. 9-310(a)). Under U.C.C. 9-311, one can perfect a security interest in such property (or in other property subject to federal statute, regulation or treaty that preempts state law on the method of perfection) only by complying with the relevant federally specified methodology. Filing of a financing statement with respect to such property is neither necessary nor effective to perfect a security interest. Compliance with the federally specified methodology is treated as the equivalent of filing a financing statement.
While perfection of security interests in the collateral subject to certificate of title legislation or federal statute, regulation or treaty cannot be accomplished by filing a financing statement, such security interests are otherwise subject to the provisions of Article 9 (e.g. provisions regarding rights on default and provisions governing priority disputes). U.C.C. 9-311(c).