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Legal Corner: Protecting a Lien Holder’s Rights When a Bonded Title Is Applied For
Protecting a Lien Holder’s Rights When a Bonded Title Is Applied For
by
Michael W.
Dealer Question: I was just notified by the state that someone has applied for a bonded title to a vehicle that has been on my skip list for two years. How do I protect my lien, and will a bonded title be superior to my lien?
Response: We have seen an increase in recent months of dealers/lien holders receiving notice letters from the Vehicle Titles and Registration (VTR) division of the Texas Department of Motor Vehicles (TxDMV) regarding applications being filed for bonded titles to vehicles the lien holders have been trying to find.
While the issuance of a bonded title certificate will create an administrative presumption that the bonded title is superior to your lien in the state’s motor vehicle title system, most courts recognize that your prior, unsatisfied lien is still valid. However, the surety bond that is filed with the bonded title application (which must be issued by a licensed surety company) may offer a better and less costly remedy for the prior lien holder in recovering its loss than in fighting for possession of the collateral.
The bonded title procedure was established by the legislature as a way of allowing a person to obtain a title certificate to a vehicle when the original certificate is unobtainable and the applicant is the apparent owner of the vehicle. The procedure presumes that the prior owner and lien holder can’t be found and no longer have an interest in the vehicle. We’ve observed that this presumption is often incorrect.
Dunagan
TIADA GENERAL COUNSEL
The bonded title legislation addressed a problem many vehicle owners had faced in obtain ing title certificates ...the surety bond that to their vehicles after indebtedness was is filed with the bonded paid off. The prob lem was particutitle application (which larly acute when the banking and finance must be issued by industries were faced with massive shuta licensed surety downs and consolicompany) may offer dations in the late 1980s. a better and less There has also been a persistent costly remedy for the problem with other lien holders who prior lien holder in go out of business or close down, and recovering its loss can’t be found when the time comes to than in fighting for get liens released. possession of the And, owners often lose title certificates collateral. that have been given by lien holders upon pay off, along with copy of the original title, or (2) lien release on the certificate. If request a hearing from the county the lien holder, who properly fultax assessor to establish the right filled its obligations, is no longer of ownership to the vehicle. in business when the owner needs The problem with the former the certificate, the bonded title procedure is that the owner or lien process offers a solution. holder must sign the application
Before institution of the bonded and represent that the original title title procedure, the methods for certificate was lost (although this obtaining a title to a vehicle withrequirement hasn’t stopped many out having a title certificate were thieves who have no qualms about (1) apply for and obtain a certified forging lien holders’ names and
lien releases to applications).
Some tax assessors are reluctant to cause a new title to be issued without knowing more facts than the applicant often has available at the hearing, so that procedure was not always an efficient way to determine the true ownership of a vehicle.
The bonded title procedure seemed to be a good compromise for allowing a person to get a title when the normal channels were not available, but at the same time offering financial protection for a real owner or lien holder whose interest was overlooked.
Under Section 501.053 of the Texas Transportation Code, a person may file a surety bond issued by a licensed surety company in an amount equal to one and one-half times the value of the vehicle. If the paperwork is in order, a title certificate is issued.
Usually, a notice of the filing of the bonded title application is sent by the VTR to the registered
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owner and lien holder prior to the time the bonded title is issued. The registered owner and/or lien holder are given the opportunity to oppose the process by filing a petition in a county or district court to seek a declaration of proper ownership (a costly and potentially time-consuming process.)
The law provides that any registered owner or lien holder can recover on the bond any expense, loss, or damage, including reasonable attorney’s fees, occurring because of the issuance of the bonded title. The bond is valid for three years from its effective date.
What has become apparent recently is that the bonded title procedure is being used in situations other than where lien holders have disappeared. It seems that more and more individuals are “selling” their vehicles to third persons, who are “buying” the vehicles without obtaining a title certificate or investigating whether there are outstanding liens. When the buyers seek to title and register the vehicles, they are informed that they can’t because of outstanding liens. Most tax offices then give out information on alternative means to obtain title, including tax office hearings and bonded title procedures, and often give a list of surety companies that write bonds.
If records indicate that the vehicle has a lien that is less than ten years old, the surety bonding company is responsible for insuring that the lien has been satisfied or released. We’ve found that the surety companies that issue the bonds generally do no investigation as to the existence of liens or whether they’ve been satisfied.
Once a lien holder gets notice that a bonded title has been issued, it can obtain information about the applicant and the issuer of the bond from VTR.
We have assisted a number of lien holders recently in collecting
written-off balances on collateral long given up on. When a lien holder finds that a bonded title has been applied for, we suggest the following options:
If the bonded title has not been issued yet, the lien holder can certainly repossess its collateral under the usual repossession rules.
Repossessing after a bonded title certificate has been issued, even though probably justified under the law, may result in costly repercussions, such as theft charges being filed. Remember that the police (and other law enforcement officials) will generally rely on the state’s title records and will probably not understand the complications of competing title interests.
If a lien holder finds out that a bonded title has been issued without notice to the lien holder, the legitimate lien holder should consider making a claim against the surety company that issued the bond, presenting evidence of the valid prior lien and the balance owed against the vehicle. Unlike a claim on a dealer bond, a court judgment is not required to recover. However, if the surety company balks at paying, it may be necessary to file suit. Attorney’s fees can be sought as additional damages.
Michael W. Dunagan is an attorney in Dallas, Texas who has represented the Texas Independent Automobile Dealers Association for over 40 years. He has written a number of books and hundreds of articles for trade journals and law reviews. His clientele includes dealers, banks, finance companies, auto auctions and credit unions.
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