You Auto Know!® - BANK ENDORSEMENTS

Scenario:      Your customer arranges his own financing on the purchase of a vehicle. When the customer arrives to take delivery of the vehicle, he brings a check from his local credit union in the full amount of the transaction. However, the check has an endorsement on the back which states in essence “by cashing this check you are obligated to provide a lien on the title and record same for the credit union.” The dealership negotiates the check, however, it does not record the lien on the title. Within 30 days the customer files for bankruptcy. What are the dealership’s obligations? This question came across my e-mail from a site to which I contribute regularly and read often. I had to search my records, and sure enough, I wrote a “You Auto Know” on this topic several years ago. However, the information is still pertinent to date.

In the above scenario, the dealership did not have a lending agreement with the credit union that financed the transaction for their customer. Therefore, there was no controlling contractual relationship between the dealership and the credit union. However, since the dealership negotiated the check, it accepted the conditions precedent on the back of the check. In essence, the additional terminology on the back of the check created a contractual obligation between the dealership and the credit union. Therefore, the dealership was obligated to perform any and all actions necessary to place a lien on the title and provide same to the credit union. There are no Ohio cases directly on-point with this scenario, however, the Indiana case of Cruisin’, Inc. v. Springleaf Fin. Servs. Of Ind., Inc. (12 N.E.3d 889) is factually on-point. The court in Cruisin’ specifically stated that “provisions of the Uniform Commercial Code … allow for negotiable instruments … to contain express conditions to payment, including separate agreements obligating the party entitled to enforce the instrument, if the instrument is issued or the obligation is incurred in reliance on the agreement or as part of the same transaction giving rise to the agreement. Such conditions may include an undertaking to protect certain collateral to secure payment.” In the case, the lender’s check contained a restrictive endorsement in which the dealership guaranteed title to the vehicle in exchange for the loan proceeds. In essence, the court states that the dealership agreed to the restrictive endorsement by endorsing and cashing the lender’s check. Therefore, the court determined the terminology on the back of the check constituted a contract between the dealership and the lender. Since the dealership accepted the lender’s check as payment in full for the financing of the buyer’s transaction, it accepted the duty of specifically placing the lien on the Certificate of Title. Ohio’s Uniform Commercial Code adopts the same provisions that allowed the court in Indiana to reach its decision in the Cruisin’ case. Ohio’s codification of these uniform provisions consists of the following Revised Code sections: R.C. §1303.03 “Negotiable instrument”; R.C. §1303.15 “Other agreements affecting instrument”; and R.C. §1303.26 “Restrictive indorsement.”

Therefore, in this scenario, the dealership would be responsible for paying off the subject vehicle to the credit union since it failed to provide a lien on the Certificate of Title in order for the credit union to properly secure its rights under the financing arrangement with its customer.

Make sure your office reviews the back of any check before negotiating same to see what obligations you may be undertaking.

CONTACT INFORMATION
Robert A. Poklar
Weston Hurd LLP
216.687.3243
rpoklar@westonhurd.com
https://www.westonhurd.com