NASHVILLE, N.C. -

Why should a dealer read this?

Recent events in North Carolina concerning retail dealers going out of trust with their floor plan providers should remind dealers that there is a severe limit on secure methods of wholesaling a vehicle to another dealer.

With very few exceptions, in wholesale transactions, the State of North Carolina will only recognize a cash sell and immediate transfer of ownership. Any modification from that lessens lawful enforcement. In a worse case, you will lose the vehicle and have an unenforceable contract for monies owed.

So what should you not do?

First, for the sake of clarity, allow me to translate a few legal definitions to avoid confusion. While I understand some dealers may have concerns for their physical well-being, references to security and priority security are not recommendations to hire bodyguards. In the context of this essay, security refers to the implied lien the law provides a commercial seller in the event a commercial buyer defaults on an inventory purchase. Priority refers to the order in which creditors’ claims are superior, not unlike first mortgages and second mortgages in real estate.

In a perfect world, you never transfer possession of a vehicle and title until you have verified funds in hand. In the real world, finances are tight, floor plan companies want a title before they will fund a dealer and the turnaround time for funding can take a couple of days.

There are a great deal of careful wholesale dealers out there who will sell and deliver a vehicle to a honest, hardworking retail dealer knowing the check will not be negotiable for a few days.

That transaction is riskier than you may think. If the check bounces you may have an implied Purchase Money Security Interest that could give you priority security interest in the vehicle, and you may have the right to repossess the vehicle and title from the defaulting dealer … But, that priority would only be good for 20 days from the date of the transaction, and may not be superior to a floor plan security interest. The reasons your security interest may not defeat other security interest are due to several factors:

1. When you accept a payment by check, you have entered into a contract which creates a negotiable instrument at the time it is written.

2. If you delay depositing the check, you modify that contract, and it could be interpreted as an implied installment sale, a structured sale or a consignment. Any security interest you have in the vehicle could be secondary to a floor plan lien without proper UCC-1 filings against the vehicle and the buying dealer.

3. If you are aware that the dealer has to obtain floor plan funding to honor your payment you have likely waived the purchase money security interest implied with a purchase by check.

North Carolina law is certainly not clear on who has a superior security interest in wholesale automobile inventories. This is due to conflicts between the Uniform Commercial Code (UCC codified as NCGS§ 25) and the Motor Vehicle Act (MVA codified as NCGS§ 20). For example, consignment is an industry standard method of business in most industries, and is detailed in the UCC, however, the MVA expressly prohibits consignment of automobile inventory. Another example is transfer of title, which in UCC terms is transferred upon delivery, where the MVA requires the execution and delivery of titling documents.  The UCC provides a purchase money security interest in goods sold to another merchant. It is implied and automatic for 20 days, and can be perfected by filing a UCC-1 financing statement with the Secretary of State’s Office.

This filing provides priority over other creditors that may have blanket filings against the buyer. The blanket filing is the type of security interest a floor plan company is going to have in place. This is complicated in the automotive world by assignment of title, which unilaterally transfers possession of the vehicle.

4. It becomes murkier when a consumer is thrown in the mix. The UCC holds that when a consumer purchases a good in the ordinary course of business, from a merchant that is in the business of selling those particular goods, an expectation of title is assumed to transfer upon the sale. Any commercial security interest is extinguished. This is the exact reason why NC DMV requires a dealer to have the title in his possession before offering a vehicle for retail sale. NC case law considers the issuance of a thirty day tag to be execution of titling documents. Once a 30-day tag is bolted on a consumer purchase, some merchant is going to produce a title for that consumer.

What does that mean? If you are holding a title or a bad check for a vehicle and it is sold to a retail customer, that consumer is going to get a title whether you get paid or not.

They will not even have to hire an attorney, as the NC DMV is tasked with protecting consumers. You might get lucky and eventually get paid by the dealer’s bond company, but that will depend on your attorney’s knowledge of UCC, MVA, and how the wholesale transaction was executed, not to mention that consumers get priority on the limited bond monies.

5. There is no legal protection against entering into an unlawful contract. If you take hold checks for payment, or hold titles until payment, these are consignment agreements which are expressly prohibited by the MVA. North Carolina Courts will not provide you with a civil remedy. This means if a floor plan company comes in and seizes every vehicle on the lot, you may not have a priority security interest. You may be required to surrender titles to the floor plan company, and you may not even have a valid civil claim to seek judgment for your damages.

So what should you do?

1. If the dealer is relying on floor plan funding, take the time to go to the floor plan office to complete the sale. Of course, most floor plans are located at an auction, and the auction is most likely going to want an outside sale fee, but that’s a small price to pay for insuring payment.

2. Stop “putting cars” on another dealer’s lot without getting verified funds before releasing the vehicle or title. If that is your primary business model, it’s actually an unlawful consignment plan, which the courts will not enforce if the retail dealer goes under. In this business model, you’re not a wholesaler; you’re a floor plan company. If you want to have security in this method of business, you need to comply with the requirements of a licensed commercial lender.

3. If a check is returned for non-payment, possession of the vehicle and/or the title is key. Immediately take action to secure the vehicle and title. Do not agree to extend time or accept any partial payment from the dealer, unless you’re willing to lose your security interest. Time is of the essence; your purchase money security interest is implied for only 20 days from the date the check was written. If the vehicle has been retailed, you will only have a civil remedy; I recommend you contact your NC DMV inspector and file a complaint.

Be prepared to quickly hire an attorney to negotiate with a floor plan company if they have the title or the vehicle … Not many vehicles are worth what it would cost to litigate, and would depreciate by half before your day in court. If the floor plan company has both title and vehicle, you are likely out in the cold.

I can appreciate the fact that a lot of dealers out there are running very thin margins. I know retail and wholesale lending have got to the point that many dealers just need “a little help.” I also realize that there is money to be made providing that “little help” to dealers. Considering recent events with dealers going out of trust, you have to wonder if the risk is worth the potential reward.

Legal disclaimer: This brief essay is full of the words may, likely, should, and could. It is meant for informational purposes and is not legal advice.  It is based on extensive research and my experience representing several dealers who have suffered considerable losses due to wholesale transactions that went bad. If you have a similar situation I highly recommend contacting your attorney. Your attorney may, or may not agree with this information. If I may be of any assistance in a similar situation, or any legal issue concerning the automobile business, you or your attorneys are welcome to contact me at the following email address: steve@businessconsumersolutions.com.

About the Author: R.E. “Steve” Stevenson, III is a licensed North Carolina Attorney providing business and consumer solutions for legal issues in the automotive field. For 22 years before venturing into the practice of law, Steve worked his way up in the automobile business from a new car salesman, to F&I manager, to an independent dealer with a multi-million dollar buy-here, pay-here operation. The legal practice concentrates on regulatory compliance, to include administrative law, contract law, consumer law, complex civil litigation, and alternative dispute resolution. Clients include mew and used-car dealers, inspection station owners, auto industry trade groups, property management companies and more than a few consumers.

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