Financing loans are commonly secured by automobiles, boats, and recreational vehicles which serve as an effective source of security in the event of a default. So long as the vehicle is able to be located and in good condition, it can typically be easily repossessed and sold in order to pay off the loan, even if not in full.
But what happens if the collateral is no more? Lenders protect against theft and accidents by requiring borrowers to maintain insurance which can pay to replace or repair damage or losses. And the ubiquitous lien holder card usually serves as an effective measure to deter sales without the lender’s consent. But what happens if a borrower’s vehicle is seized by law enforcement?
Law enforcement seizure of property used in connection with a crime, often referred to as civil asset forfeiture, is a powerful law enforcement tool. For example, Minn. Stat. § 609.5314 allows law enforcement to seize cash and firearms connected to the sale or possession of illegal drugs or other controlled substances. In addition, law enforcement can seize “all conveyance devices containing controlled substances with a retail value of $100 or more if there is probable cause to believe that the conveyance device was used in the transportation or exchange of a controlled substance intended for distribution or sale.” In other words, law enforcement can seize vehicles and almost any other means of transportation if they believe the vehicle is being used to transport illegal drugs for sale. Similar forfeiture provisions exist for property used in commission of numerous other offenses, such as fleeing a police officer, and first-degree DWI. These seized items will subsequently be forfeited and often sold, with law enforcement agencies retaining the proceeds.
Questions about the constitutionality of these civil asset forfeiture aside, while they may be an effective law enforcement tool, they present unique challenges for others with interests in the vehicle. Thankfully, the statutes have provisions protecting “innocent owners” from forfeiture. Essentially, a vehicle may be not subject to forfeiture and should be released from law enforcement possession if an owner or person with an interest in the vehicle can prove that they “did not have actual or constructive knowledge that the vehicle would be used or operated in any manner contrary to law or that the asserting person took reasonable steps to prevent use of the vehicle by the alleged offender.” Further, the statute specifically provides that any property seized will remain subject to a bona fide security interest by a bank or other financial institution. Typically, a lender should be able to easily establish they constitute an innocent owner, and any subsequent sale will be subject to the lender’s interest.
Generally, law enforcement must provide persons claiming an interest in the property with notice of the forfeiture and an opportunity to contest the forfeiture. If a lender has to incur legal fees to establish its security interest or recover possession of the vehicle, most security agreements have provisions allowing the lender to add those costs of protecting their security interest to the outstanding balance of the loan.
By timely asserting its rights after learning of a seizure, a lender can protect its position and collateral. Seizure by law enforcement should not present a major risk to a lender’s security interest, but will probably result in at least a headache to deal with the situation.
