Wholesaling? Consignment? Floor planning? What’s the difference?

Recent events concerning retail dealers going out of trust with their floor plan providers in several parts of North Carolina, should remind dealers that there is a severe limit on secure methods of wholesaling a vehicle to another dealer. Basically, the State of North Carolina will only recognize a cash sale and immediate transfer of ownership. Any modification from that lessens lawful enforcement. In a worst case you will lose the vehicle and have an unenforceable contract for monies owed.
So what should you not do?
In a perfect world you never transfer possession of a vehicle or title until you have verified funds in hand. In the real world finances are tight, floor plan companies want a title before they will fund a dealer, and the turnaround time for funding can take a couple of days. There are a lot of good wholesale dealers out there who will sell and deliver a vehicle to a good retail dealer knowing the check will not be negotiable for a few days. That transaction is riskier than you may think. If the check bounces the selling dealer may have a priority security interest in the vehicle, and may have the right to repossess the vehicle and title from the buying dealer…But, that priority is only good for 20 days from the date of the transaction, and may not be superior to a floor plan security interest. The reason the selling dealer’s security interest may not defeat other security interest(s) is due to several factors:
1. When you accept a payment by check, you have entered into a contract which creates a negotiable instrument at the time it is written.
2. If you delay depositing the check, you modify that contract, and it could be interpreted as an implied installment sale, or a consignment. Any security interest you have in the vehicle could be secondary to a floor plan lien without proper UCC-1 filings against the vehicle and the buying dealer.
3. If you are aware that the dealer has to obtain floor plan funding to honor your payment you have likely waived the purchase money security interest implied with a purchase by check.
North Carolina law is certainly not clear on who has a superior security interest in wholesale automobile inventories. This is due to conflicts between the Uniform Commercial Code (UCC codified as NCGS§ 25) and the Motor Vehicle Act (MVA codified as NCGS§ 20). For example, consignment is an industry standard method of business in most industries, and is detailed in the UCC, however the MVA expressly prohibits consignment of automobile inventory between dealers. Another example is transfer of title, which in UCC terms is transferred upon delivery, where the MVA requires the execution and delivery of titling documents. The UCC provides a purchase money security interest in goods sold to another merchant. It is implied and automatic for 20 days, and can be perfected by filing a UCC-1 financing statement with the Secretary of State’s Office. This filing provides priority over other creditors that may have blanket filings against the buyer. The blanket filing is the type of security interest a floor plan company is going to have in place. This is complicated in the automotive world by assignment of title which unilaterally transfers possession of the vehicle.
3. It becomes murkier when a consumer is thrown in the mix. The UCC holds that when a consumer purchases a good in the ordinary course of business, from a merchant that is in the business of selling those particular goods, an expectation of title is assumed to transfer upon the sale. All commercial security interests are extinguished. This is the exact reason why NC DMV requires a dealer to have the title in his possession before offering a vehicle for retail sale. Once a thirty day tag is bolted on a consumer purchase, some merchant is going to produce a title for that consumer. What does that mean? If you are holding a title or a bad check for a vehicle and it is sold to a retail customer, that consumer is going to get a title whether you get paid or not. They will not even have to hire an attorney, as the NC DMV is tasked with protecting consumers. You might get lucky and eventually get paid by the other dealer’s bond company, but that will depend on your attorney’s knowledge of UCC, MVA, and how the wholesale transaction was executed, not to mention that consumers get priority on the limited bond monies.
4. There is no protection against entering into an unlawful contract. If you take hold checks for payment, or hold titles until payment, these are consignment agreements which are expressly prohibited by the MVA. North Carolina Courts will not provide you with a civil remedy. This means if a floor plan company comes in and seizes every vehicle on the lot, you may not have a priority security interest. You may be required to surrender titles to the floor plan company, and you may not even have a valid civil claim to seek judgment for your damages.
So what should you do?
1. If the dealer is relying on floor plan funding, take the time to go to the floor plan office to complete the sale. Of course, most floor plans are located at an auction, and the auction is most likely going to want an outside sale fee, but that’s a small price to pay for insuring payment.
2. Stop “putting cars’ on another dealer’s lot without getting verified funds before releasing the vehicle or title. If that is your primary business model it’s actually an unlawful consignment plan, which the courts will not enforce if the retail dealer goes under. In this business model you’re not a wholesaler you’re a floor plan company. If you want to have security in this method of business you need to comply with the requirements of a floor plan company.
3. If a check is returned for non-payment, possession of the vehicle and/or the title is key. Immediately take action to secure the vehicle and title. Do not agree to extend time or accept any partial payment from the dealer, unless you’re willing to lose your security interest. Time is of the essence; your purchase money security interest is implied for only 20 days from the date the check was written. If the vehicle has been retailed contact your NC DMV Inspector and file a complaint. Be prepared to hire an attorney to negotiate with a floor plan company if they have the title or the vehicle….not many vehicles are worth what it would cost to litigate, and would depreciate by half before your day in court. If the floor plan company has both title and vehicle, you are likely out in the cold.
I can appreciate the fact that a lot of dealers out there are running very thin margins. I know retail and wholesale lending have gotten to the point that many dealers just need “a little help”. I also realize that there is money to be made providing that “little help” to dealers. Considering recent events with dealers going out of trust, you have to wonder if the risk is worth the potential reward.
Like they used to say on the TV show “Hill Street Blues”, “Let’s be careful out there”.
This brief essay is full of the words may, likely, should, and could. It is meant for informational purposes and is not legal advice. If you have a similar situation I highly recommend contacting your attorney. Your attorney may, or may not agree with this information. It is based on my experience with several dealers who have suffered considerable losses due to wholesale transactions that went bad. If you need my help, I’m available.
About the Author
R.E. “Steve” Stevenson, III is a licensed North Carolina Attorney providing business and consumer solutions. For 22 years before venturing into the practice of law, Steve worked his way up in the automobile business from a new car salesman, to F&I manager, to an independent dealer with a multi-million dollar Buy Here Pay Here operation. The practice concentrates on regulatory compliance, including administrative law, contract law, consumer law, complex civil litigation, and alternative dispute resolution. His clients include New and Used Car dealers, Inspection Station Owners, Auto Industry Trade Groups, Property management companies, and more than a few consumers.

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