dealer Alert

January 2008

"That Trade-In Has a What Lien?"

For a small investment of time and money, dealers can, in many cases, eliminate the costly risk of undisclosed liens

Stephen P. Linzer • 480-425-2623 • Email

Kristi M. Morley • 480-425-2688 • Email

No one likes surprises that cost them money - especially motor vehicle dealers. Recently, more than a few dealers have received very unpleasant surprises when they found out that vehicles that they had taken in trade had liens against them that were not disclosed until well after the customer had taken delivery of the new vehicle and was "down the road."

The principal reason that the dealerships experienced these "surprises" is that they did not check the traded vehicles' status for all prior liens during the vehicle financing stage. While no system is 100% foolproof, dealerships can put themselves in a much better position by altering their financing and title processing procedures to prevent having to chase a customer to repay the dealer's payment of an undisclosed lien.

As best we can glean from discussing this problem with the dealerships that have experienced undisclosed liens, their practice is to rely on the information given by the customer as to the nature and number of liens recorded against the traded vehicle. For example, a customer may tell the dealership representative that he or she makes payments to a bank. The representative then contacts that bank and confirms that payments are being made and may even get a payoff at this stage. However, the customer may not disclose the existence or amount of any other liens that have been placed against the vehicle. Or if no bank is receiving payments, a customer may bring in his or her title with no liens noted. The customer does not disclose whether there are any other liens. The dealership representative does nothing to investigate the existence of any liens not noted on the title.

Types of Liens. What types of liens may be hiding in the bushes? Well, in addition to liens from secondary sources like Pay Day lenders, there may also be "restitution" liens. A.R.S. § 13-806(A) states that "[t]he state or any person entitled to restitution pursuant to a court order may file ... a restitution lien." A restitution lien is perfected against interests in titled motor vehicles by filing the lien with the Motor Vehicle Division of the Arizona Department of Transportation, per A.R.S. § 13-806 (D). This lien could result from an order of restitution in a criminal proceeding, a child support order, an abandoned vehicle report, a bad check judgment, or any other proceeding resulting in money owed to the state.

The dealership that waits until MVD processes the temporary registration plate application for the trade to assure that there are no other liens is just asking for a bad "surprise." By the time the TRP has been sent for processing in favor of a new owner, a considerable amount of time has passed and the dealership's customer has been enjoying his or her new car without paying off all the liens on the trade. The dealer then has no practical option other than to pay off the restitution liens and seek recovery from the customer who traded in the vehicle.

What to Do. This result can be avoided. Dealerships can discover whether traded vehicles are encumbered by restitution liens by calling MVD at (602) 255-0072 and providing the MVD representative with the VIN. MVD provides this information free of charge.

Alternatively, dealerships may discover whether trade-in vehicles are encumbered by restitution liens by obtaining Full Motor Vehicle Reports from authorized third-party providers of vehicle title and registration information. (A list of authorized third-party providers is available at the MVD website.) Authorized third-party providers charge a fee for this service, but their relative promptness in responding generally justifies the fee.

All dealerships may create an online account with Service Arizona and obtain Motor Vehicle Reports, including title information, for the cost of $3.00 per vehicle. New franchised dealers using AADA title services can go to www.aada.com and click on "eDealer Services."

In return for a small investment of time and money, dealers can, in many cases, eliminate the risk of undisclosed liens. But remember: This procedure needs to be done during the financing stage and not after the customer is "down the road."

If you have any questions regarding this Dealer Alert, please contact Steve Linzer at 480-425-2623 or Kristi Morley at 480-425-2688.

Sacks Tierney P.A. is a member of Meritas, one of the world’s largest and most respected legal resources, and an integrated, non-profit alliance of more than 170 independent commercial law firms located in over 60 countries.

These materials are designed to provide general information prepared by professionals in regard to the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. Although prepared by professionals, these materials should not be utilized as a substitute for professional service in specific situations. If legal advice or other expert assistance is required, the service of a professional should be sought.