Combating Title Washing, Understanding the BFP Defense

Title washing means the removal of a lien by fraud. Often, by the time the fraud is discovered, the car has been resold to a buyer who claims to be a “BFP”. BFP means bonafide purchaser. A buyer can only be a BFP if he had no knowledge that the lien was removed by fraud. Most BFP claimants are in fact innocent buyers. The Uniform Commercial Code (UCC 2-403) creates what we will call the “BFP defense”. If the BFP defense applies, then the UCC will allow the BFP to retain the car free from the claims of the lienholder whose lien was removed by fraud. Thus, a lienholder who is attempting to recover a vehicle that has been subject to title washing may have a dispute with someone who claims to have the BFP defense. The key, then, is to understand when the BFP defense applies. As will be discussed, the BFP defense does not apply to the majority of title washing cases.

UCC 2-403 provides that the BFP defense can only arise where the crook obtained the lien release through a “purchase” transaction. A “purchase” transaction means that the crook obtained a lien release voluntarily from the lienholder. In other words, the lienholder must have intended to give the lien release to the crook. The most common example of a lienholder voluntarily giving a lien release to a crooks the situation where the crook gives the lienholder a check to pay the balance in full and the check bounces after the lien-holder has voluntarily issued a lien release.In this scenario, the crook obtained the lien release through the voluntary participation of the lienholder. Accordingly, the BFP defense could apply to protect a third-party who buys the car from the crook.

Now, contrast the scenario where the crook obtains the lien release without the voluntary action of the lienholder. The most common situation involves the crook forging a lien release. In this situation, the lienholder does not participate in anyway. Under UCC 2-403 the absence of voluntary participation by the lien-holder prevents the lien release from being considered a “purchase” transaction. Because the lien release was not obtained in a “purchase” transaction,the BFP defense does not apply and the lienholder can recover the car from the person who has it.

In summary, if a lienholder is faced with a situation where someone is claiming to be a BFP, the key factor the lienholder must review is whether the lienholder voluntarily released its lien. If the lienholder did voluntarily release its lien, then the BFP defense will likely apply. But if the lien-holder did not voluntarily release its lien, the BFP defense will not apply.

A recent title washing scheme provides an illustration of the rules. A fraud ring started selling cars after obtaining false duplicate titles in the State of Indiana. The crooks obtained duplicate titles in Indiana by submitting forged documents that showed that the vehicles had been repossessed after a default on a finance contract. Apparently, the State of Indiana will issue “repo” titles based upon a finance contract and an affidavit of repossession?the crooks simply forged these documents in the name of a Bank and then posed as representatives of the Bank when they obtained the “repo” titles from the Indiana DMV. The crooks then took their new “lien-free” Indiana repo titles and used them to start a false second chain of title. The cars ended up in the hands of unwitting purchasers. Ultimately, the legitimate lienholders located the cars setting up the question of who has the right to the car?the original lienholder who still has its lien in the original title or the innocent purchaser who acquired a clean title through the chain of title created in Indiana by the crooks.

In Suburban Motors v State Farm Mut., 218 Cal. App.3d 1354, 1359, the Court provided the answer, stating:

Although Section 2403 may enlarge the circumstances in which, at common law, a good faith purchaser for value can take good title, there is no authority for Suburban Motor’s contention that Section 2403 validates a second chain of title to an automobile spuriously created after it has been stolen. Indeed, the language of Section 2403itself, the decisions in jurisdictions construing cognate statutes, and authoritative comment on the Uniform Commercial Code belie the notion that by a process of “laundering” a thief or his successors can generate a second chain of valid title to a stolen vehicle no matter how facially credible the product of these efforts. (Emphasis Supplied).

Likewise, in Alamo Rent-A-Car, Inc. v Mendenhall, 113 Nev. 445, the Court held that because the original title was still possessed by the party seeking to repossess (the original lienholder) no other party cloud have obtained actual legal rights “?simply by obtaining a facially valid [Indiana] title”.

The Courts focused on the rule that we just covered?in cases of title washing, the original lienholder will win, unless the lienholder voluntarily participated in a lien release. The central legal principal is that a thief (including someone altering liens without authority) can never pass good title. The actions of the thief are void as are all of the transactions flowing from the thief.

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