Banking Law Alert – February 2016 Issue

Collateral Seizure – Is Your Collateral Safe?

Consider the following hypothetical:

Archie decides to purchase a new vehicle for his son Peyton.  Recently, Peyton won the “big game” in his local football league and Archie wanted to reward him.  So, Archie goes to All American Bank to secure a loan for a new truck. The Bank loans Archie $50,000 and notes its lien on the certificate of title with the truck.  The Bank gives little concern that Archie has been out of work for a number of years because they know that they have the truck as collateral.  All parties are happy. The truck is titled in Archie’s name.

Due to his continued enthusiasm from winning the championship and receiving the new truck, Peyton makes the unfortunate decision to partake of a bit too much Budweiser.  Peyton is arrested for DUI.  The new truck is seized by the local police.  A video is later shown of Peyton declaring his love for Budweiser and he is easily convicted of this criminal offense.

Archie is not thrilled with Peyton’s behavior.  Archie is able to get the truck back from the authorities and assures All American Bank that Peyton will never be allowed to drive the truck again.  Instead, Archie decides to give his other son, Big E, the truck.  Big E, while somewhat perturbed to get another hand-me-down from his older brother, is nonetheless pleased to have the new vehicle.  All American Bank is aware of this DUI conviction, but allows Archie to take the vehicle back. It knows it has the truck as collateral and is happy that Peyton will no longer be operating the vehicle.  The Bank thinks it still has solid collateral.

On his way back from a visit to his alma mater down south to show off his new gift, Big E is stopped by authorities in Tennessee because of suspicious driving.  Unfortunately, Big E was exposed to large quantities of Milwaukee Best and was arrested for a DUI.  Once again, All American Bank is notified of the truck being seized by the local authorities.  All American Bank is not happy about his latest encounter with the law.  The Bank sends Phil, the loan officer, to the seizure hearing to ask for the truck to be turned over to the Bank.

 At the hearing, the attorney for the State (the notorious Attorney Bama) informs Phil that the truck is now the property of the State.  Phil argues that his Bank has a lien on the truck and that it should be turned over to it.  He states the Bank did not condone the drinking and driving, and it should not be punished for the acts of Archie’s sons.  Attorney Bama is more than happy to advise Phil that he has beat Phil again because Tennessee law allows the Department of Safety to seize the truck and have it subjected to forfeiture due to the second conviction.

This hypothetical is more common than you may think.  The State has the authority to keep and sell the vehicle since there has been a second DUI conviction involving the same vehicle.  Prior to May 15, 2015, the law allowed the State to seize and subject a vehicle to forfeiture regardless of whether there was an actual conviction involved by the users of the vehicle or not.  The law now requires that there must be a second conviction for DUI.  Also, the previous violation must have occurred within the last five (5) years of the current DUI conviction.   Similarly, the Tennessee Department of Safety can seize a vehicle, money or other personal property if narcotic drugs were involved or if a person was driving on a revoked license due to driving under the influence.

OUR ADVICE:

1.         The Bank should get notice of a forfeiture hearing from the State because of its lien being noted on the car title.  Pay close attention to the notice and notify your legal counsel as soon as possible.  The notices have short deadlines that must be met in order not to lose rights to your collateral.

2.         Make sure your loan documents provide that a seizure or forfeiture proceeding by state or federal authorities results in a default of the loan and provides immediate ability to accelerate the note and take possession of the collateral.

3.         If a customer gets convicted of a DUI or drug related offense, then the Bank should strongly consider either swapping collateral with its loan or accelerating the note and taking possession of the collateral.

All characters and examples appearing in this hypothetical are fictitious.  Any resemblance to real persons, living or dead, or real events is purely coincidental.