“After-Acquired” UCC-1 Filing Has Priority Over Unperfected Car Loan Security Interest

On Behalf of | May 12, 2016 | Firm News

Justice Stern of the Rhode Island Superior Court has issued a decision holding that a creditor with a UCC-1 filing that includes after-acquired property has a priority security interest in the debtor’s company car over another lender who financed the purchase of the vehicle but failed to perfect its security interest. Pet Food Experts, Inc. v. Alpha Nutrition, Inc., d/b/a Doggiefood.com, C.A. No. KC-2015-1003, slip decision, (R.I.Super. May 10, 2016). The decision extensively analyzes Rhode Island law on security interests and is a good primer for those who practice in the area.

Plaintiff had loaned the debtor company $700,000 pursuant to a promissory note. Plaintiff and debtor entered into a security agreement that included after-acquired equipment. Plaintiff filed a UCC-1 financing agreement that included after-acquired property. A credit union subsequently financed the debtor’s purchase of a company car through a loan and security agreement. The State of Rhode Island issued a title for the vehicle that listed no lienholders. The debtor delivered the title to the credit union which kept possession of it. Debtor subsequently failed to make loan payments to the plaintiff and defaulted on that note. Plaintiff sued and obtained a pre-judgment attachment on all of debtor’s assets. Debtor failed to answer the complaint and plaintiff obtained default judgment in the amount of $616,000. Plaintiff filed a motion for a writ of replevin for the vehicle to which the credit union objected.

The credit union asserted three reasons why plaintiff’s security interest in the vehicle was not superior to its own: (1) plaintiff did not give value for the vehicle; (2) plaintiff’s security agreement does not adequately describe the secured collateral; and (3) the purchase of the vehicle was a consumer goods purchase which is exempt from the after-acquired clause of plaintiff’s agreement. In a detailed analysis, the Court rejected each of these arguments. It also found that the credit union had not perfected its security interest under Rhode Island by failing to have its lien listed on the vehicle’s title. The Court held that the security interests of both plaintiff and the credit union attached at the same time, i.e., when the debtor acquired the vehicle. It then applied its equitable powers and held that plaintiff should have a priority security interest in the vehicle because it had done everything it could to perfect its security interest but the credit union was not diligent in that it did not research the possible security interests of other lenders nor did it do all it could to perfect its security interest.

The lesson here for auto lenders is to be sure to perfect their security interest in company vehicles or risk losing their priority to a prior lender with an “after-acquired” property security interest.

Pet Food Experts, Inc. v. Alpha Nutrition, Inc., d/b/a Doggiefood.com, C.A. No. KC-2015-1003 (R.I.Super. May 10, 2016). The Decision is available at: https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/15-1033.pdf

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