Take due diligence steps to protect yourself, even though that interferes with the red mist that materializes when you find the collector car of your dreams

Most states issue certificates of title for cars, often referred to as "pink slips" because of their color (in California, at least; other states have different hues). They are considered foolproof evidence of ownership of the car, although recent incidents suggest that may not always be true.

Unfortunately, many states stop issuing certificates of title for cars over a certain age-15 years being a common cutoff-which is quite young by car collector standards. And the collector car market has expanded to the point where many very valuable cars are former competition or off-road cars that were never street legal and have therefore never had a certificate of title. These situations present plenty of opportunities for trouble.

How certificates work

At least in theory, a certificate of title serves as proof of ownership of the car identified by the VIN (vehicle identification number). The state issues the certificate to the owner of the car. Under state laws, a security interest (lien) cannot attach to the car unless it is specifically identified on the certificate. If you buy the car from the owner identified on a clean certificate, you can take it to the state's DMV and have a new certificate issued in your name, free and clear of all liens and encumbrances that were not identified on the certificate. You need look no further than the certificate and the VIN plate on the car to be sure that you will become the legal owner.

"Legal Files" has heard some stories that it cannot confirm, but they are plausible enough. First, in today's high-tech world, it may not be terribly difficult for someone to produce a counterfeit certificate of title. If that is what you got, you didn't get legal title. Second, lost certificates can be replaced.

The story goes like this. The crook went to his local DMV and ordered a duplicate certificate for his "lost" certificate of title. Next, he borrowed everything he could against the car, and gave the lender the signed-off duplicate certificate, which the DMV promptly reissued with the lender's security interest shown on the certificate. Then, he sold the car to an innocent buyer, and gave him the signed-off original, clean certificate. When the buyer tries to register the car, the DMV tells him about the pre-existing lien. The buyer learns that the seller has disappeared, and that he has lost the money he paid for the car.

This illustrates that the careful collector won't take a clean certificate of title at face value. To be safe, you have to confirm the status of the title with the state's DMV, before you give the seller the money.

Bills of sale

When there is no certificate of title-either because the car is too old for the state to issue one, or the car was never licensed for street use-title to the car transfers by bill of sale. This is essentially a document signed by the seller identifying the car, transferring ownership to the buyer, and warranting that good title is being passed free and clear of liens.

Obviously, the reliability of the bill of sale is directly related to the honesty and financial ability of the seller. Under the Uniform Commercial Code, which applies when there is no certificate of title, you can sue the seller for your losses if it turns out the title is not clear. But that claim is only as good as the seller's ability and/or willingness to correct any problems. Also, consider the possibility that your seller is honest, but he or a previous owner may have been snookered by a crook.

Clearly, you can't just trust your seller, and you should take due diligence steps to protect yourself, even though that interferes with the red mist that materializes when you find the collector car of your dreams. Take a deep breath, gather your wits, and recognize that there are two separate issues of concern-confirming the seller is the actual owner of the car, and making sure there are no liens or security interests outstanding against the car. Verification of each requires separate inquiry, as well as some time.

Establishing the chain of title

Michael Lowitt is an SCM subscriber who practices law in Connecticut, where the state issues certificates of title only for 1981-and-newer cars. Lowitt advises that the first thing to do is verify the VIN on the car is the same as that on the bill of sale, and he frequently retains an expert to make the inspection when the car is valuable. Next, Lowitt runs the VIN on police and DMV databases to verify it has not been reported stolen. That search isn't foolproof, but it's the best you can do. If you're dealing with a Shelby, Rolls-Royce, or other marque where a registry is maintained, check there as well. You can also search the state's registration history, but that doesn't really establish proof of ownership, and records frequently don't go back very far.

Sometimes, but not very often, according to Lowitt's experience, the seller will have good documentation-the last issued certificate of title and bills of sale coming forward through each subsequent owner. Other times, you have to be a sleuth to confirm the ownership history. However you do it, you should make the effort to contact each of the previous owners to confirm what you can about the chain; that is, who they sold the car to, and who they bought it from.
However, Lowitt points out that gets harder if the car hasn't spent its entire life in the same state. Obviously, this is neither an easy nor a foolproof process, but it is necessary to be sure you get good title.

Searching for liens

A savvy collector was ready to bid about $500,000 to buy a historic racer at a recent auction. He was wise to worry about what he would be buying, and he retained my law firm to verify he would acquire actual ownership. He was pretty sure about the chain of title because the history was quite well known. But he had heard that the current owner had a "colorful" history and was primarily worried about unknown liens.

The law generally considers a motor vehicle that does not have a certificate of title to a chattel, which is Latin for "a thing." It's no different than factory machinery or equipment, or a farm implement. It just happens to have a motor and some wheels. If it is pledged as collateral, the lender is given a security interest (lien) against it. Under the UCC, the security interest is perfected by filing a financing statement in the appropriate government office in the state in which the vehicle was located at the time the security interest was given.

To determine if any security interests might exist, one has to identify all the previous owners and all the states in which the car was ever located, which may not have necessarily been where the owners resided. Then, one has to search the records in each of those states under the prior owners' names to see if any filings exist. If you miss a state, you can be in trouble. In addition, it is possible the IRS or state might have filed a lien for unpaid taxes. That requires a separate search in the states in which the previous owners resided. Similarly, miss an owner, or a state of residence, and you can be in trouble.

Fortunately for our client, we had a rather short chain of title, with well-known owners, all of whom were in one state. We retained a UCC search company to search for liens, both UCC and tax, and became comfortable that clear title was being passed.

As you can clearly see, however, it's not always that clean and easy. Many times, the chain of title can't be clearly established, or the locations of the car can't be completely identified. In such cases, you can only do the best that you can and recognize what your risks are. In the end, it is always best to deal with a reputable seller who is also wealthy enough so that, if the unthinkable happens, you have somewhere to go to get your money back.

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