Failure To Perfect A Lien On A Motor Vehicle Within The Time Periods Prescribed By Arizona Statutes Can Result In The Creditor's Loss Of Such A Lien-Particularly In Bankruptcy

Lenders who finance motor vehicle purchases, and the purchasers who buy the vehicles normally expect the vehicle dealer to "quickly" handle the paperwork to perfect the creditor's lien and have it noted on the title. Noting the lien on the title is a requirement under Arizona law. However, processing lien documentation "quickly" seems not to be the case with many motor vehicle dealers in Arizona and the consequences are potentially disastrous for lenders who finance motor vehicle purchases.

It is normally assumed that the "paperwork" processed by the dealer on motor vehicles purchased in Arizona will be done quickly and title applications, perfection of liens, and other appropriate filings made on a "next day basis." Since it is apparent that this does not happen, Bankruptcy trustees have developed a burgeoning "cottage industry" to knock the lenders out of contention when the vehicle purchaser files Bankruptcy. The primary problem is that the dealers are not processing the lien perfection paperwork within the time required under Arizona statutes.

The following is a brief summary of the statutes which apply.

A.R.S. § 28-2131 provides that any interest asserted in a vehicle required to be titled is not valid if the requirements of the law are not met. Pursuant to A.R.S. § 28-2132 and §28-2133, all liens and encumbrances against a titled vehicle are required to be set forth on that title, with the Department of Motor Vehicles maintaining an index of all recorded liens and encumbrances. The filing and issuance of a new certificate of title is constructive notice to creditors of the owner or subsequent purchasers of all liens and encumbrances against the vehicle described in the certificate of title.

Under A.R.S. § 28-2132, the applicant's signature on the application for title or registration only is consent for the lien or encumbrance to be indicated by the Department of Motor Vehicles on its official title record for the vehicle. On receipt of the application, the Department shall endorse on the application the date and hour it was received at the registering office of the Department

Any interest asserted in a vehicle required to be titled is not valid as to judgment and execution creditors if the requirements of the law are not met. A.R.S. § 28-2131 and A.R.S. § 28-2133(C). The constructive notice date to creditors of all liens against a vehicle described in a new certificate of title is the time of receipt and filing of the application for title and/or registration by the Department or the registered office. A.R.S.§ 28-2133(B).

Pursuant to A.R.S. § 47-9324(A), a purchase money security in collateral takes priority over any conflicting security interest in the same collateral or proceeds so long as the security interest is perfected at the time the Debtor receives possession of the collateral or within 20 days thereafter.

Under Arizona law, a lien against a motor vehicle is deemed to be perfected on the date the application for title reflecting that lien is endorsed with a stamped date of receipt by the Department of Motor Vehicles. See North v. Desert Hills Creditor, 310 B.R. 152, 160 (Bankr. Ariz. 2004).

Under Ninth Circuit law, (applicable in Arizona) a creditor's post-petition perfection of its lien against the vehicle is void. In re Lockridge (Pierce v. Conseco), 303 B.R. at 456 (Bankr. Ariz. 2003). Thus, a creditor's perfection of its security interest in the vehicle is avoidable as an unauthorized post-petition transfer under 11 U.S.C. §549. Pursuant to 11U.S.C. §363(f), the trustee may sell property free and clear of any interest in such property if the interest is in bona fide dispute.

Bankruptcy law provides, under 11 U.S.C. §362(a)(5), that any act to perfect against property of a debtor any lien to the extent such lien secures a claim that arose before the commencement of the bankruptcy case is a violation of the automatic stay.


What is occurring on a regular basis, at least in Arizona, is that people are buying vehicles, shortly thereafter filing bankruptcy, and the trustees in bankruptcy are avoiding the liens of the creditors who finance the purchase of the vehicles because the paperwork has not been filed by the dealer within the 20-day period required under Arizona law. This enables the trustee to take possession of the vehicle, have it sold, the proceeds deposited into the bankruptcy estate, and the lien creditor left with a claim in bankruptcy or litigation with the trustee to attempt to arrive at a compromise in the bankruptcy action. Since the problem was caused by the dealer, or the creditor's agent, by not getting the paperwork filed and the lien properly perfected within the time required under Arizona law, the creditor will hopefully have recourse against the dealer. However, this can be time consuming and result in legal expense and the creation of an adversarial relationship with the dealer.

As a motor vehicle finance creditor, the best prevention is explicit communication to the dealer or its agent to ensure that the paperwork is properly processed, on a timely basis. The contract between the creditor and the motor dealer should explicitly provide for full recourse by the creditor against the dealer in the event of the dealer's failure to perfect the lien and loss of the lien rights. This should include a provision for recovery of all costs and legal expenses.