Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II
Indiana Fraudulent Transfer Act: Statute Of Limitations And Bona Fide Purchaser Defenses

Innocent Purchaser Of Motorcycle Loses To Secured Party In Replevin Action

The vernacular of “foreclosure” typically relates to real estate, while “replevin” normally pertains to personal property.  For more, click on my prior post What Is Replevin?  In Dawson v. Fifth Third Bank, 965 N.E.2d 730 (Ind. Ct. App. 2012), the Indiana Court of Appeals teaches us that security interests in personal property generally will not be extinguished even if the ownership of that loan collateral changes. 

Situation.  In Dawson, Buyer purchased a motorcycle from Seller, who had given Buyer a certificate of title showing the motorcycle was free of any lienholders.  Buyer later learned that Seller fraudulently obtained the title and that the current certificate of title listed Bank as a lienholder.  Which party - Buyer or Bank - was entitled to possession of the motorcycle free and clear of all liens?

Replevin 101.  Replevin is a statutory remedy allowing one to recover possession of property “wrongfully held or detained” by another.  Ind. Code § 32-35-2 is the Indiana statute.  The elements of a replevin action require the plaintiff to prove (a) its title or right to possession, (b) that the property is unlawfully detained and (c) that the defendant wrongfully holds possession.  In the secured lending context, Indiana law is clear that, upon default, a creditor has the right to take possession of the collateral securing its claim and in accordance with the agreement with the defaulting party.

Competing rights.  Bank held a security interest in the motorcycle based upon Seller’s promissory note and security agreement.  The most current certificate of title on file with the Bureau of Motor Vehicles reflected Bank’s security interest.  Bank had never released its lien.  In what proved to be a fatal error, Buyer purchased the motorcycle without checking with the BMV to verify that the certificate of title supplied by Seller was the most recent one.  Since Seller was in default under the security agreement based upon non-payment, Bank, as the secured party, had the right to take possession of the motorcycle.  Ind. Code § 26-1-9.1-609(a).  Buyer did not dispute Bank’s rights.  Rather, Buyer contended that its purchase, and thus ownership, of the motorcycle precluded Bank from arguing that Buyer wrongfully held possession of the motorcycle – one of the elements of an Indiana replevin claim.  Bank, while not contesting ownership, asserted that such ownership was subject to Bank’s lien. 

Ownership immaterial.  A security agreement is effective against purchasers of collateral.  Ind. Code § 26-1-201-9.1.  Third-party purchasers are therefore at risk if they buy encumbered personal property from a seller/debtor in default.  Although Buyer had an interest in the motorcycle as its purchaser, the interest was not superior to Bank’s perfected security interest.  The Court affirmed the trial court’s summary judgment for Bank accordingly. 

Perfection.  Footnote 4 of the Dawson opinion contains lots of information related to certificates of title and the issue of perfecting Bank’s security interest.  Bank’s perfection was a non-issue, but the Court’s remarks are informative.

Equitable estoppel.  The Court in Dawson devoted a portion of its opinion to Buyer’s claim for equitable estoppel.  The discussion focused on certificates of title and which party was in the best position to protect itself based upon the public records.  The opinion is helpful for those who deal with motor vehicle transactions.  In the end, Bank was not responsible for Seller’s loss.