Then the flip turned into a flop.

The TR was still unsold when the loan matured. The bank demanded payment and then filed suit to recover the TR. The court granted possession of the TR to the bank, which then entered into an arrangement to leave the TR with Jim. Jim was confident he could find a buyer, but he agreed to keep the TR in Oklahoma, pending sale.

Apparently, Jim was having trouble finding a local buyer, so he entered into a consignment agreement with an East Coast broker experienced in selling Ferraris. The broker advised Jim that the sale would be easier if he had the Ferrari in his showroom — and if there were a certificate of title for the TR. Jim agreed, sent the TR to the broker and obtained an Oklahoma certificate of title on the TR showing the shell company as the owner. The newly issued certificate of title did not show a lien on the car in favor of the bank.

The broker negotiated a deal to sell the TR to an apparently innocent buyer. The buyer is an LLC organized in Montana, but its business activities, buying and selling classic cars, are conducted exclusively in another East Coast state.

The sales price was a disappointing $1,950,000.

Jim sold the car to the buyer, giving it both a bill of sale and an assignment of the Oklahoma certificate of title. Jim contends that Bob approved the sale, which Bob denies. The buyer paid the full amount of the purchase price and took possession of the TR.

Then, Bob decided he wanted the Testa Rossa back.

The maneuvers begin

The lawsuit filings don’t tell us why, but the Montana company then transferred ownership of the TR (which was already in the possession of the buyer) to Bob, with the bank’s consent. The bank must have thought that things were getting too weird at this point, so they pressed Bob for payment. Bob paid off the bank but structured the transaction as the purchase of their note, security interest and interest in the TR. That approach was pretty smart, as it legally put Bob into the bank’s shoes.

Asserting his rights as both the rightful owner of the TR and the secured party by way of succession to the bank’s position, Bob filed suit to recover the Testa Rossa in Oklahoma state court.

The buyer responded by having the claim dismissed for lack of jurisdiction, as it had no connection to Oklahoma.

Bob responded by filing suit against the buyer in federal court in Montana, the state in which the buyer was formed. The buyer responded by asking that the case be transferred to federal court in the broker’s state, where everything occurred. As of this writing, that motion is still pending.

Confused yet? Don’t feel bad. That is a lot of complicated background. But we can still address the two key legal issues:
• Where will this case finally find a home?
• Who is entitled to the TR — the bank, because of its security interest and lien, or the buyer, because he paid for it?

Where do we party?

Bob chose to file his lawsuit in Oklahoma state court, probably because that was where Jim and the bank were — and that was where the TR was supposed to stay. Bob’s problem was that the buyer had the Ferrari, so he had to sue them to get it back. But the buyer correctly pointed out that it could not be sued in an Oklahoma state court.

State court jurisdiction is based upon significant contacts on the part of a defendant within a state. Since the buyer had no connection with Oklahoma, the suit was dismissed. Lack of state court jurisdiction is a common problem when dealing with complex transactions with parties in multiple states, so this is why these cases usually end up in federal court.

Federal court jurisdiction is based upon residency. A U.S. resident is subject to the jurisdiction of every federal court in the country. However, the issue becomes one of venue. Although you can be sued in any federal court in the country, you can move the lawsuit, or venue, to whichever federal district essentially makes the most sense under the circumstances of the case.

The buyer’s brief looks very impressive. It would seem that the case is going to be moved to the broker’s state. Does all this sound expensive? We’re just getting started!

Any dealers here?

Who gets the TR is the more complicated question. It may depend upon who initially owned the TR and which of the parties are and are not considered to be dealers.

Under the Uniform Commercial Code, if a vehicle is entrusted to a dealer, a purchaser will usually obtain clear title — even if the owner does not get his money or the sale is otherwise in violation of the owner’s agreement.

A related analysis applies to the bank’s security interest. To be valid against a subsequent purchaser of a car, a security interest must be perfected.
With a vehicle, perfection is usually accomplished by having the secured party identified on the certificate of title, which did not happen here. But if the owner is a dealer, the security interest can be perfected by filing a financing statement in the UCC records office, which is what the bank did. Thus, dealer status is important.

The first potential dealer is the shell company.

Bob and the buyer both allege that the shell company never really owned the car, but merely took title as an “accommodation party” or “nominee,” whereby it held title for the benefit of someone else, sort of like a trustee. Bob claims that the shell company was a nominee for him, which would establish his ownership of the TR. The buyer points to an agreement that identifies 33 cars for which the shell company was acting as nominee for Jim — and which gives Jim the right to sell the cars.

Both positions would seem to undercut the perfection (and effectiveness) of the bank’s security interest. If the shell company were a dealer, the bank’s UCC filing would ordinarily perfect its security interest. But that wouldn’t be the case if the shell company did not really own the car in the first place.

The broker is certainly a dealer. But for him to be able to pass good title, the TR would have had to be entrusted to him by its owner. Since it appears that Jim (or the shell company) gave the car to the broker, there would be no entrustment if Bob was the real owner. With no entrustment by the owner, the broker would not be able to pass good title to the buyer.

There is another reason that the broker’s dealer status may not matter. He does not seem to be the one who sold the car to the buyer — Jim did. The broker negotiated and arranged the sale, but the buyer received a bill of sale and an assignment of the certificate of title from Jim. That makes it appear that Jim (or the shell company) was the seller, not the broker.
But what if the bank was the owner? It clearly entrusted the TR to Jim, and if Jim was a dealer, he might be able to pass good title to the buyer. That’s a tough situation because the bank doesn’t seem to have been the owner of the car — it was just a lender that claimed a security interest in the car. In its lawsuit, it was only awarded possession of the TR, not ownership.

Finally, the buyer might well be a dealer. If so, the UCC rule that a dealer can pass good title might not apply, because it only applies when the sale is in the ordinary course of business, and a dealer-to-dealer sale might not be.

Certificates aren’t foolproof

Confused now? You deserve to be. There are a lot of facts floating around here, and we have no way of really knowing what really happened. We’ll have to wait and see how the litigation proceeds.

But one takeaway for the savvy car collector is that certificates of title are not always as good as gold. This Legal File demonstrates that Jim was somehow able to obtain a seemingly valid Oklahoma certificate of title when his ownership of the TR was, to say the least, subject to question.

The Legal Files experience has been that almost all true car collectors are dependable and honest people. However, it is unfortunately all too easy for a crook to masquerade as a true car collector.

Today, it probably isn’t enough to blindly rely upon a seemingly clear certificate of title. When it has been recently issued — or when it has been issued by a state that appears to be foreign to the car or the transaction — it may be a signal that further investigation is warranted.

Thankfully, there are a variety of registries, clubs and experts who can assist you in researching the history of a car before you buy it. They are often a much better resource than a state’s motor vehicle department. ♦

JOHN DRANEAS is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney.

Comments are closed.