The Missouri legislature recently passed legislation that will impact the manner in which a lender perfects a security interest in vehicles held for lease by a debtor engaged in leasing activity. Banks should be aware of this change in order to ensure that they are properly perfecting their security interests in vehicles held for lease.
Missouri law currently provides that to perfect a security interest in a vehicle, the secured party must take action with the director of revenue to notate the security interest on the vehicle’s certificate of title. Mo. Rev. Stat. §§ 400.9-311, 301.600. However, the statute presently contains an exception for vehicles held as inventory for sale or lease. § 400.9-311(d). In order to qualify for the exception, the debtor must be engaged in the business of selling or leasing vehicles and must currently be holding the vehicle for sale or lease or actually leasing the vehicle as lessor. Provided these requirements are met, the proper way for a secured party to perfect that security interest is by filing a financing statement, rather than through notation on the certificate of title.
The rule allowing for perfection by filing a financing statement is sound from a practical standpoint because vehicles held for sale or lease are treated as inventory. Accordingly, the burden that would be placed on a secured party to ensure that proper notations are made individually on the certificates of titles of hundreds of vehicles held by a single car dealership or leasing company debtor seems to weigh in favor of allowing a blanket financing statement to cover all vehicles held for sale or lease as inventory by a particular debtor. Only after a vehicle is sold, or otherwise ceases to be inventory, does it become necessary for a secured party to see that its interest appears on the certificate of title. 
Despite this seemingly sound rule, the Missouri legislature has recently passed a bill that may complicate perfection procedures for lenders. S.B. No. 485 is available at http://www.senate.mo.gov/12info/pdf-bill/tat/SB485.pdf. The change specifically relates to debtors engaged in the business of leasing, rather than selling vehicles. Indeed, the change will remove those debtors engaged in the business of leasing from the exception. In other words, if a lender finances the activities of a debtor only engaged in the business of leasing, not of selling, the lender will be required to perfect by notation of its lien on the certificate of title. A financing statement will not be effective as the means of perfection.
The change potentially poses problems for lenders. Obviously, if a lender is not aware of the change, there will be negative implications if they continue to rely on financing statements as the proper means of perfection. Because lenders were previously entitled to rely on a financing statement in order to perfect their security interests in vehicles held for lease by a debtor engaged in the business of leasing, even lenders who know of the change may be tempted to continue to file such financing statements because it is an easier process.
Perhaps the larger risk, however, stems from the fact that lenders are still entitled to rely on financing statements with respect to debtors who are engaged in the business of selling vehicles. Thus, lenders will have to make a determination as to whether the debtor is actually in the business of selling vehicles versus leasing vehicles. Yet, while lenders are forced to make the determination as to what line of business a debtor operates in order to select the proper method of perfection, they are given very little guidance into making this determination. The official comments to the Uniform Commercial Code simply provide that, “[t]he fact that the debtor eventually sells the goods does not, of itself, mean that the debtor ‘is in the business of selling goods of that kind.’” U.C.C. § 9-311, cmt. 4 (2011). This guidance does little to clarify the situation for lenders, and instead may actually cause confusion.
In order to deal with this confusion, prior to accepting vehicles as collateral under a security agreement, lenders should make sure to have a clear understanding of the business of the debtor. Lenders should develop specific procedures for doing so, such as obtaining answers to standardized questions and obtaining written representations from the debtor. After the lender reaches a conclusion as to whether the debtor is in the business of selling, leasing or both, the lender must choose the proper perfection method. If the debtor is only in the business of selling or in the business of both selling and leasing, the current method of perfection by filing a financing statement is still effective. However, if the lender is only in the business of leasing, the lender must have its lien noted on the certificate of title of each vehicle.
The bill including the proposed change was agreed to and passed by both the Missouri House and Senate on May 17, 2012. The bill was delivered to the governor on May 30, 2012. The bill has not yet been signed by the governor, but there is little reason to expect that it will not be signed. The bill is set to become effective on August 28, 2012.
In order to make certain that security interests are properly perfected, banks should begin making changes to their internal procedures as soon as possible. It is imperative that banks are not only aware of this change to the perfection method for vehicles, but that they take affirmative steps to respond to the change in order to protect their interests.
Heather M. Morris is an associate with Spencer Fane Britt & Browne LLP. She will be happy to answer any questions that you have on this topic. You can reach Heather at email@example.com or (816) 474-8100.
Though less common, where a vehicle is converted into inventory by a debtor, the lender must perfect by filing a financing statement even if its interest appears on the certificate of title. See Blue Ridge Bank and Trust Co. v. Hart, 152 S.W.3d 420 (Mo. Ct. App. 2005)(holding that despite having notated its security interest on the certificate of title, a bank was not properly perfected because the debtor held the vehicle which served as collateral as inventory).
The change will make the Missouri statute consistent with the Uniform Commercial Code § 9-311.