Bank of Alamance v. Isley

328 S.E.2d 867 (1985)

BANK OF ALAMANCE v. William Lee ISLEY, Sr. and James Sammy Kernodle.

No. 8415SC739.

Court of Appeals of North Carolina.

May 7, 1985.

*869 Craig T. Thompson, Graham, for plaintiff appellant.

Holt, Spencer, Longest & Wall by Frank A. Longest, Jr., Burlington, for defendant appellee.

MARTIN, Judge.

Plaintiff's contentions on appeal challenge the trial court's findings of fact and conclusions of law which determine that defendant Kernodle has superior right and title to the automobile in his possession over the plaintiff bank. As such, the sole question presented by this appeal is one of priority of claims. Because a late-perfected security interest is not retroactively valid against an innocent third party who acquired the automobile for value, we affirm the judgment of the trial court.

The Uniform Commercial Code, as adopted in North Carolina, provides the general law for transactions in consumer goods and the creation of security interests in those goods. G.S. 25-2-102; G.S. 25-9-102. However, the provisions of Article 9 of the Uniform Commercial Code pertaining to the filing, perfection and priority of security interests do not apply to a security interest in any personal property required to be registered pursuant to Chapter 20 of the General Statutes, entitled "Motor Vehicles," unless such property is held as inventory and the security is created by the inventory seller. G.S. 25-9-302(3)(b). The automobile in this case was sold in contemplation of regular use on the highway. Once a sale of an automobile has occurred contemplating regular use, whether it be a sale of a complete or limited interest, the vehicle is then subject to North Carolina's certificate of title statute, G.S. 20-58 et seq. "[A] security interest in a vehicle of a type for which a certificate of title is required shall be perfected only as" provided in this statute. G.S. 20-58. This statute *870 provides a comprehensive system for central recordation of ownership, security interests and liens in all motor vehicles registered and regularly in use in this State. Thus, Chapter 20 of the General Statutes is applicable in determining any issues regarding the perfection of a security interest in the automobile in this case.

Since filing under the provisions of Article 9 is neither necessary nor effective to perfect a security interest in this case, we turn to an examination of priorities as governed by Chapter 20 on motor vehicles. G.S. 20-52.1(c) provides that

where a security interest is obtained in the motor vehicle from the transferee in payment of the purchase price or otherwise, the transferor shall deliver the manufacturer's certificate of origin to the lienholder and the lienholder shall forthwith forward the manufacturer's certificate of origin together with the transferee's application for certificate of title and necessary fees to the Division.

According to G.S. 20-58.2, perfection of the security interest in a motor vehicle occurs when the application and proper fee are delivered to the Department of Motor Vehicles. See also Ferguson v. Morgan, 282 N.C. 83, 191 S.E.2d 817 (1972). In order to obtain protection of a lien as of the lien date, the application must be delivered to the Department of Motor Vehicles within ten days; if the delivery is not made within the ten day period, the security interest is perfected as of the date of delivery. G.S. 20-58.2.

The evidence revealed that the loan officer of the Bank of Alamance failed to take possession of the manufacturer's certificate of origin upon making the loan to defendant Isley on 24 February 1982. As a result, plaintiff's lien was not perfected until the date of delivery of the application to the Department of Motor Vehicles, 20 May 1982, a time subsequent to defendant Kernodle's purchase of the automobile for value and Wachovia Bank and Trust Company's perfection of its security interest in the automobile. It follows that at the time defendant Kernodle purchased the vehicle from Bill Isley Auto Sales, the Bank of Alamance had not perfected its lien. In fact, plaintiff bank had provided Bill Isley Auto Sales, through defendant Isley, with possession of the vehicle and all ownership documents which were incomplete as to a transfer of title and which did not show that the bank was a lienholder when defendant Kernodle purchased the vehicle for value.

While G.S. 25-9-307(1) provides that "[a] buyer in ordinary course of business... takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence," we believe this provision of the Uniform Commercial Code is not applicable in this case. This provision is not operative in instances where perfection of the security interest is required under Chapter 20 on motor vehicles. The operation of G.S. 25-9-307(1) in this case is expressly excluded by G.S. 25-9-302(3)(b). See Amended Official Comment 3, G.S. 25-9-307. The security interest in a vehicle for which a certificate of title is required under Chapter 20 shall be perfected and valid against subsequent creditors of the owner, transferees, and holders of security interests and liens on the vehicle by compliance with the provisions of G.S. 20-58 et seq. While we believe these provisions adhere to the protection of security interests against third parties who acquire rights in a vehicle with actual notice of the security interest or without giving value in the interim period between creation of a security interest and late perfection of the interest, we hold that a late-perfected security interest is not retroactively valid against an innocent third party who acquired the automobile for value. (For other cases so holding, see 79 C.J.S.Supp., Secured Transactions, § 59, p. 63.)

The evidence showed without dispute that defendant Kernodle had no actual knowledge of plaintiff's security interest until the Bank of Alamance demanded possession of the car. His constructive notice dated from 20 May 1982 when the application for a certificate of title was belatedly *871 delivered to the Department of Motor Vehicles and the security interest thus perfected. G.S. 20-58.2. Under our interpretation of G.S. 20-58.2, defendant Kernodle, whose rights in the vehicle dated from 29 March 1982, had priority, and the trial court properly concluded that "the Defendant, James Sammy Kernodle, has superior right and title to subject vehicle in his possession over the Bank of Alamance." Its judgment is

Affirmed.

WEBB and PHILLIPS, JJ., concur.