Remember the discussions following JP Morgan as agent inadvertently releasing the UCCs securing its liens on a $1.5 Billion loan? Tired of hearing about it? Well, Bank of Nova Scotia (BONS) managed to survive its inadvertent termination of its lien on a motor vehicle in St Thomas, Virgin Islands. It may be a small case (under $20,000) but the lesson is important.
Mr and Mrs Cornelius brought an action against BONS for having wrongfully repossessed their vehicle which was financed by BONS. Mr. Cornelius had received notice from the BONS that it was terminating its lien. He advised BONS that they were in error, however BONS insisted that the loan had been paid by insurance proceeds (even when Mr. Cornelius) assured that the car had not been in any accident). Monthly installments were to be made as deductions from Mr. Cornelius’ salary. As Mr. Cornelius was trying to correct the error installment payments ceased and BONS repossessed the vehicle while Mr. Cornelius was at work, causing him embarrassment. Mr. Cornelius brought an action for damages. At trial Mr. Cornelius testified that it was always his intent to pay the car loan in accordance with its terms. The Court ruled that BONS wrongfully repossessed the vehicle and awarded damages. BONS appealed.
The Superior Court of the Virgin Islands reversed trial court (which prompted me to share this story with you), as follows (with citations removed).
The UCC does not require that a security interest be perfected by filing or otherwise in order to be valid. … Indeed, the requirements of enforceability of a security interest are listed in subsection 9–203(b), and conspicuously absent from these requirements is perfection. 11A V.I.C. § 9–203(b); (“[A]n unperfected security interest is enforceable against all parties unless the holder of a later-acquired interest qualified under some other provision.”); … (explaining that sections 9–501 and 9–503 of the Uniform Commercial Code as adopted in New York, which are analogous to former 11A V.I.C. §§ 9–501 and 9–503, impose no requirement that a financing statement be filed in order to enable the creditor to effect physical repossession of the property that would otherwise qualify as the collateral).
A security interest attaches when it becomes enforceable against the debtor. 11A V.I.C. § 9–203(a). Therefore, a secured party may take possession of collateral pursuant to a security agreement if the property may be repossessed from the defaulting debtor without a “Breach of Peace.” 11A V.I.C. § 9–609(b) (“A secured party may proceed under subsection (a): … (2) without judicial process if it proceeds without breach of the peace.”). Those portions of Article 9 of the UCC in the form enacted in the Virgin Islands, 11A V.I.C. § 9–201 et seq., are devoid of any language indicating that a security agreement is only effective if perfected. … (“A security agreement is generally effective according to its terms between parties even when it is unperfected.”); … (“A security agreement is not invalid between the parties merely because it was not perfected. Perfection of an interest is important only to insure priority of the lien over intervening third-parties[.]” … (Article 9 “do[es] not require that the secured interest of the creditor be perfected in order to foreclose”).
So why did BONS earn a “get out of jail free card” when JP Morgan and its co- lenders took a $1.5 Billion loss? We need to look at the Bankruptcy Code for that. GM filed for Bankruptcy. Cornelius did not file for bankruptcy. If he had, I suspect there would have been a different outcome. Pursuant to Section 544 of the Bankruptcy Code, upon the filing of a bankruptcy the Trustee becomes a lien creditor. Once its UCC was released (it appears that St. Thomas does not treat motor vehicle liens differently from other personal property) BONS retained its unperfected security interest. Absent an intervening bankruptcy filing, and absent the filing of another lien, BONS was able to enforce its security interest.
Consider if Mr. Cornelius had been less scrupulous and refinanced the vehicle leaving him with a windfall.
Although not as dramatic as the GM situation, an error in terminating a UCC has serious implications. BONS got lucky.
Cornelius v. Bank of Nova Scotia, 2017 WL 3412202 (V.I.).