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Possession Can Perfect Security Interest in Collateral Vehicle

 Posted on July 24,2018 in Auto Lenders

Possession Can Perfect Security Interest in Collateral VehicleWhen repossessing a property from a debtor, having a perfected security interest in the property helps you prevent other interested parties from gaining possession of it. According to the Uniform Commercial Code, a security interest is created when:

  • The property has been given value;
  • The debtor has a right to the property; and
  • The debtor agrees that the creditor shall attach a security interest to the property.

The security interest gives the creditor the right to possess the property if the debtor cannot meet the debt obligation, and perfecting the security interest gives the creditor priority over other parties who may claim ownership of the property. A recorded financing statement is a common means of perfecting a security interest. However, actual possession of the property can be sufficient with properties such as vehicles.

Recent Example

In the case of Malek v. Gold Coast Exotic Imports LLC, an Illinois appellate court ruled that a car dealership had a perfected security interest in a vehicle despite not having recorded its lien on the vehicle. The dealership had made a verbal agreement to extend credit to a returning customer for the purchase of a BMW. Per the terms of the agreement, the customer later returned the vehicle because he was unable to repay the debt. The customer’s wife, who was in the process of a divorce, used a court order to transfer the title of the vehicle to her and obtained a replevin bond to possess the vehicle. A trial court agreed that the woman was entitled to possession of the car because the dealership had never filed a lien with the Illinois Secretary of State. However, the appellate court reversed that decision, stating that the dealership had perfected its security interest in the vehicle by being in actual possession of it. Thus, the dealership’s lien predated and overruled the transfer of the vehicle title to the woman.

Establishing Security Interest

There are generally four ways for a creditor to perfect security interest on a collateral property:

  • Creating and filing a financing statement;
  • Establishing actual possession of the property;
  • Establishing control over the property; and
  • Attaching a purchase money security interest on the property.

A written contract is more difficult for another party to dispute than a verbal agreement but is not the only means for you to secure priority ownership of a property. A Chicago creditor’s rights attorney at Dimand Walinski Law Offices, P.C., can explain your legal rights to repossess and retain a property from an outstanding debtor. Schedule a consultation by calling 312-704-0771.


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