Akron-Cleveland Auto Rental, Inc., In re

• Decision Date: 18 December 1990
• Docket Number: AKRON-CLEVELAND,No. 90-3282,90-3282
• Citation: 921 F.2d 659
• Parties: In reAUTO RENTAL, INC., Debtor. Charles GARRETT d/b/a Garretts, Plaintiff-Appellee, v. AUTO RENTAL, INC., Defendant, Freed Ford Sales, Inc., Defendant-Appellant, Family Pontiac, Inc., Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 659

921 F.2d 659

In re AKRON-CLEVELAND AUTO RENTAL, INC., Debtor.

Charles GARRETT d/b/a Garretts, Plaintiff-Appellee, v. AKRON-CLEVELAND AUTO RENTAL, INC., Defendant, Freed Ford Sales, Inc., Defendant-Appellant, Family Pontiac, Inc., Defendant.

No. 90-3282.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 15, 1990.

Decided Dec. 18, 1990.

John R. Kassinger, James R. King (argued), James E. Becker, Nickolas P. Andreeff, Amer, Cunningham & Brennan, Akron, Ohio, for plaintiff-appellee.

Mark E. Staib (argued), Daniel A. DeMarco, Alan S. Kopit, Hahn, Loeser & Parks, Cleveland, Ohio, James R. McIlvaine, Palecek, McIlvaine & Paul Co., Wadsworth, Ohio, for Freed Ford Sales, Inc.

Before KENNEDY and MILBURN, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

KENNEDY, Circuit Judge.

This case concerns the ownership of 12 motor vehicles. Although the suit involved several defendants below, the parties on appeal are plaintiff-appellee Charles Garrett, d/b/a Garretts ("Garretts"), a Pennsylvania used car dealer, and defendant-appellant Freed Ford Sales, Inc. ("Freed"), an Ohio new and used car dealer. Freed appeals from the District Court's judgment in favor of Garretts adopting the proposed findings of fact and conclusions of law of the Bankruptcy Court in this action to determine title to the vehicles under Ohio law. For reasons that follow, we REVERSE and REMAND.

I.

The following facts are undisputed. In or about November 1986, Freed began selling new cars to Akron-Cleveland Auto Rental, Inc., d/b/a Thrifty Car Rental ("ACAR"), a licensed Ohio motor vehicle leasing and used vehicle dealer. After a course of dealing spanning 19 months, Freed and ACAR engaged in the transactions at issue in this appeal. During May and June 1988, Freed delivered to ACAR as a fleet rental buyer the 12 vehicles involved here. The Bankruptcy Court described the sales process as follows:

19. ACAR, through its principal Jay Robson (Robson), would place an order for new vehicles pursuant to its fleet rental discount with ... Freed ... who would then prepare a buyer's order reflecting a sale of each vehicle to ACAR. Personnel at Freed ... would prepare the paperwork for the temporary license tags and temporary license tags in the name of ACAR were placed on each vehicle. At or about the time of sale, ACAR, through Robson, would tender a check for the purchase price for each vehicle to Freed ... which check was to be held until a subsequent time. Each of the vehicles was delivered to the possession and custody of ACAR with the consent of Freed....

20. At some time subsequent to the tendering of the check, Robson would advise Freed ... that the checks could be cashed. Said time period varied from one to three weeks and sometimes as long as six weeks.

21. From 1986 to April, 1988, Freed delivered to ACAR the Manufacturer's Certificate of Origin [also referred to as manufacturer's statements of origin or] (MSO) along with the cars prior to being advised that ACAR's checks were to be cashed which was usually about a week later. In March, 1988, Freed was holding ACAR's checks for as long as three weeks after ACAR purchased and took possession of the cars. Therefore, in April, 1988 through July 18, 1988 Freed did not deliver MSOs to ACAR with the cars. The MSOs were delivered upon Robson's advice that the checks could be cashed.

Garretts began buying used cars from ACAR in April 1987, and purchased a total of 332 cars from ACAR through July 11, 1988. In June 1988 and continuing through July 1988, Garretts purchased from ACAR the 12 cars at issue here, making payment for and taking delivery of the vehicles. In accordance with usual practice, Garretts was not provided with titles to the vehicles at the time of delivery but was advised that they were forthcoming. It was not unusual for Garretts to wait three weeks for a title from ACAR. Garretts returned one of the twelve cars to ACAR in late July for repair of a defective windshield. Freed obtained possession of that car from the lot of ACAR on July 27, 1988 and subsequently resold it.

On July 29, 1988, ACAR ceased operations when an involuntary Chapter 7 petition was filed by several creditors. Freed had apparently not yet been paid for the 12 vehicles and still maintained possession of the MSOs for the vehicles that ACAR had resold to Garretts. Freed demanded that Garretts turn over the remaining 11 cars at issue but Garretts refused. Instead, Garretts commenced these proceedings on August 31, 1988, in the Bankruptcy Court seeking a declaratory judgment and equitable relief. Garretts alleged, inter alia, that title to the vehicles had passed to it by operation of Ohio law and in addition that it was an innocent purchaser for value and a buyer in the ordinary course of business to whom title was vested. Freed countered that since it never transferred the MSOs, under Ohio law Garretts has no recognizable interest in title to the vehicles.

The Bankruptcy Trustee relinquished any claim to an interest in the subject vehicles. Freed therefore asserted that the Bankruptcy Court lacked subject matter jurisdiction and that this was not a core proceeding under 28 U.S.C. Sec. 157(b). The Bankruptcy Court concluded that the complaint pertained to prepetition activities and raised state law issues between nondebtor parties, and therefore that this was a non-core proceeding. However, the court also found that it had jurisdiction under 28 U.S.C. Sec. 1334(b), as a matter related to a case under Title 11 of the United States Code. Because Freed did not consent to that court's jurisdiction to enter a final order, the Bankruptcy Court decided to hear the matter pursuant to 28 U.S.C Sec. 157(c)(1), and submit proposed findings of fact and conclusions of law to the United States District Court.

On April 11, 1989, following a trial, the Bankruptcy Court entered its Proposed Findings of Fact and Conclusions of Law. Therein the court held, among other things, that Freed had "sold" the vehicles in question to ACAR; that Freed had violated Ohio Rev.Code Ann. Sec. 4505.03 (Anderson 1990) by selling and delivering the cars to ACAR without providing title documents; ¹ that Garretts had purchased and paid for the vehicles from ACAR; and that ACAR had violated several provisions of Ohio law, including section 4505.03, in selling the vehicles to Garretts without obtaining or providing a certificate of title. Consequently, the court concluded that as between Freed and Garretts, Freed should bear the burden of the loss since its "conduct created the opportunity for ACAR to perpetrate the wrong or cause the loss" to Garretts. In re Easy Living, Inc., 407 F.2d 142, 145 (6th Cir.1969) and Hardware Mutual Casualty Co. v. Gall, 15 Ohio St.2d 261, 267, 240 N.E.2d 502 (1968). Although Garretts also argued that it was entitled to the vehicles under the Ohio version of the Uniform Commercial Code, Ohio Rev.Code ch. 1302, the Bankruptcy Court did not base its decision on that argument.

The Bankruptcy Court recommended that judgment be rendered in favor of Garretts and that an order be issued directing that Ohio certificates of title be issued in Charles Garrett's name for all of the vehicles at issue. The court also suggested that Garretts was entitled to damages against Freed for the value of the vehicle that Freed had repossessed and resold. Finally, the court recommended that Freed become an unsecured creditor of ACAR in the bankruptcy case to the extent of any monies owed from the sale of the vehicles by Freed to ACAR.

On March 1, 1990, the District Court adopted the Bankruptcy Court's Proposed Findings of Fact and Conclusions of Law after reviewing and considering de novo the record together with the Bankruptcy Court's findings and conclusions and Freed's objections thereto. Freed appeals from the District Court's judgment.

II.

The question on appeal is whether Freed, as holder of the MSOs on the vehicles, is entitled to keep them or whether Garretts is entitled to the vehicles. In deciding the question presented, we must follow the law of Ohio as declared by its legislature and supreme court. Where the Ohio Supreme Court has not spoken, our task is to discern, from all available sources, how that court would respond if confronted with the issue. Bailey v. V & O Press Co., 770 F.2d 601, 604 (6th Cir.1985). In addition, we will normally treat decisions of state courts of appeals on issues of state law as authoritative absent a strong showing that the state's highest court would decide the issue differently. Laundree v. AMCA Int'l, 908 F.2d 43, 45-46 (6th Cir.1990).

Freed vociferously contends that this case must be resolved by application of Ohio Rev.Code Ann. Sec. 4505.04, claiming that statute is dispositive of the issue before us. In pertinent part section 4505.04 provides:

(B) [N]o court shall recognize the right, title, claim, or interest of any person in or to any motor vehicle sold or disposed of, or mortgaged or encumbered, unless evidenced:

(1) By a certificate of title, [or] a manufacturer's or importer's certificate ... issued in accordance with sections 4505.01 to 4505.19 of the Revised Code.

Freed argues that since it never relinquished the MSOs, section 4505.04 precludes a court from recognizing title in Garretts.

Section 4505.04 is not as inflexible as Freed suggests. Although the Ohio Supreme Court has not addressed a situation like this one, that court has explicitly recognized that section 4505.04 is not to be construed literally and that "narrowly drawn case-law exceptions" involving "equitable ownership" do exist, including where fraud has occurred. State v. Shimits, 10 Ohio St.3d 83, 85, 461 N.E.2d 1278 (1984). Therefore, we must look to the cases creating and applying these exceptions to determine whether the Bankruptcy and District Courts below properly applied Ohio law.

III.

A.

The District Court relied on two cases to support its judgment awarding the vehicles to...