Brasher's Cascade Auto v. Valley Auto Sales

• Decision Date: 25 June 2004
• Docket Number: No. F043502.,F043502.
• Citation: 15 Cal.Rptr.3d 70,119 Cal.App.4th 1038
• Court: California Court of Appeals Court of Appeals
• Parties: BRASHER'S CASCADE AUTO AUCTION, Plaintiff and Appellant, v. VALLEY AUTO SALES AND LEASING, Defendant and Respondent.

15 Cal.Rptr.3d 70

119 Cal.App.4th 1038

BRASHER'S CASCADE AUTO AUCTION, Plaintiff and Appellant, v. VALLEY AUTO SALES AND LEASING, Defendant and Respondent.

No. F043502.

Court of Appeal, Fifth District.

June 25, 2004.

The Miles Law Firm and Lawrence W. Miles, Jr., Sacramento, for Plaintiff and Appellant.

Fishback, Dominick, Bennett, Stepter, Ardaman, Ahlers & Bonus and Charles R. Stepter, Jr., Orlando, FL, for National Auto Auction Association as Amicus Curiae on behalf of Plaintiff and Appellant.

D. Mitchell Taylor, Fresno, for Defendant and Respondent.

OPINION

DAWSON, J.

The Uniform Commercial Code establishes rules that address a variety of situations where losses must be allocated between relatively innocent parties because a third party whose misconduct caused the loss is insolvent or no longer available. That situation is presented here. A middleman who purchased vehicles from an auction company-secured lender and resold the vehicles to a used car dealer failed to apply the proceeds from the resale to pay off the auction company-secured lender. This appeal concerns whether the loss caused by the insolvent middleman should be borne by the auction company-secured lender or by the used car dealer.

The fundamental legal question raised in this appeal is whether, under the former version of the California Uniform Commercial Code,¹ a merchant buyer was required to observe reasonable commercial standards to qualify as a buyer in the ordinary course of business for purposes of section 9307. If the merchant buyer attained buyer in the ordinary course status, then it would have purchased the goods free of any perfected security interest.

We hold that the former version of the California Uniform Commercial Code requires a merchant buyer to adhere to reasonable commercial standards to obtain the status of a buyer in the ordinary course. The ultimate policy goal of the statute is not served best by allowing a merchant buyer to engage in modes of dealing that are commercially unreasonable without bearing responsibility for the losses resulting from those modes of dealing.

The application of reasonable commercial standards presents a question of fact not addressed by the trial court. Accordingly, we reverse and remand for further proceedings.

FACTS

Parties and Background

Appellant Brasher's Cascade Auto Auction (Auction) operates an automobile auction located in Oregon. Auction sells automobiles as a consignee and functions as a wholesale clearinghouse that liquidates used cars for its consignors, which include banks, financing companies, fleet and lease companies, manufacturers, government agencies, and new and used car dealerships. In connection with its auction business, Auction provides financing to preapproved buyers on certain vehicles it designates.

Respondent Ronald P. Fena, Inc., doing business as Valley Auto Sales and Leasing (Valley), operates a used car dealership in Fresno County, California.

Pacific Title Service, Inc. (Pacific) was a used car wholesaler in Oregon. Pacific bought cars and resold them to dealers. Pacific was owned by Rhonda Huillier, a daughter-in-law of Robert Huillier, who worked for Pacific buying and selling cars.²

Transactions involving Robert Huillier, Valley, and Auction first began in 1994 when Robert Huillier was authorized by Valley to act as its agent for the purpose of purchasing vehicles from Auction. After March 1998, Robert Huillier stopped acting as an agent for Valley and began to work exclusively for Pacific. In April 1998, Robert Huillier began to buy vehicles from Auction on behalf of Pacific.

Robert Huillier was convicted of two felonies in California in the 1980's relating to odometer roll-back and to obtaining vehicles valued at approximately $800,000 from Bay Cities Auto Auction without paying for them. After serving time and attempting to reestablish himself in Fresno, California, Robert Huillier moved to Oregon and started Huillier Auto Wholesale. When the bond issued to Huillier Auto Wholesale was cancelled by the insurer, Pacific was formed and Robert Huillier went to work for it.

Transactions Between Consignor and Auction

Auction sells vehicles on consignment and sometimes extends credit to the buyers purchasing vehicles at its auctions. Although consignors selling vehicles through Auction are not required to provide certificates of title to the vehicles at the time of the auction sale, approximately 70 percent of the time the consignor will deliver the certificate of title to Auction before the vehicle goes on the auction block. Auction does not pay a consignor for a vehicle until after it is sold and the consignor delivers the vehicle's title documents to Auction. In addition to holding payment, Auction motivates consignors to deliver title documents through its rules, which assess consignors a late title charge for any title not provided within three weeks of the sale date.

Because Auction's payment to the consignor depends upon when the consignor delivers title, the actual length of time between the sale of a vehicle at auction and payment of the consignor varies. For example, of the nine vehicles sold to Pacific on August 3, 2000, Auction paid the consignors of eight of the vehicles with checks dated August 7, 2000. Auction paid for the ninth vehicle with a check dated September 21, 2000.

Transactions Between Auction and Pacific

Auction sold the 32 vehicles that are the subject of this lawsuit to Pacific between July 6 and September 7, 2000. The total amount owed by Pacific to Auction for the purchase of the 32 vehicles was $300,299.

The terms of Pacific's obligation to pay for the vehicles arose from its position as a buyer at an auction and as a debtor that financed its purchases through Auction. A preprinted dealer registration form Pacific was required to complete to do business with Auction included Pacific's agreement to "honor promptly all checks and drafts presented for payment for vehicles purchased at Auction." Pacific obtained financing through Auction by executing a document called "4-Week Float Pre-Authorization Request" (Float Program) which required Pacific to pay for the vehicles on the earlier of 28 days from the date of purchase or when Pacific sold the vehicles to third parties.³ Pacific signed three of these request forms; they were dated July 12, 2000, August 2, 2000, and September 7, 2000. In approving the first two requests, Auction indicated that the amount Pacific was authorized to purchase under the Float Program in that month was $100,000. The amount authorized was left blank in the last request form.

To collateralize Pacific's payment obligation under the Float Program, Auction retained and perfected a security interest in the vehicles it sold to Pacific. Pacific signed a financing statement on a standard form UCC-1 that named Auction as the secured party. Auction filed the financing statement with the Oregon Secretary of State on March 2, 2000. The financing statement covered collateral that included inventories, whether "now owned or hereafter acquired." As additional protection, Auction obtained and held the certificates of title for the 32 vehicles.

The signed drafts Pacific provided to Auction to pay for vehicles took approximately 20 to 25 days to clear after Auction submitted them to the bank for processing. Apparently, the draft and title documents were submitted by Auction to Pacific's bank and (1) if Pacific honored the draft, the bank would pay Auction and forward the title documents to Pacific or (2) if Pacific dishonored the draft, the bank would return the draft and the title documents to Auction.

Transactions Between Pacific and Valley

Pacific resold the 32 vehicles it purchased from Auction to Valley over a three-month period. Valley paid Pacific in full for each of the vehicles it purchased, and the price for each was consistent with fair market value. Valley acquired the vehicles individually and not as a sell-off of inventory that would qualify as a bulk sale.

Pacific had not received the certificates of title at the time it sold the vehicles to Valley because Auction (or perhaps the consignor) held the title documents to the vehicles at that time. Valley did not demand a certificate of title to a vehicle at the time it paid Pacific for the vehicle.

Pacific's Failure to Pay Auction for the Vehicles

Pacific received payment for each of the 32 vehicles from Valley, but failed to pay Auction for those vehicles.⁴ Pacific's failure to pay Auction for the 32 vehicles is the reason the parties to this appeal became involved in litigation over their respective rights in the vehicles. The trial court found: "The evidence adduced at the trial demonstrated a bona fide dispute between the parties over titles to 32 vehicles which was caused almost entirely by the wrongful conduct of Pacific."

Auction became aware during the second week of September 2000 that Pacific was not paying for vehicles acquired under the Float Program when Auction was notified by Pacific's bank that the drafts provided by Pacific were being returned unpaid. About three or four days later, on September 19, 2000, Jerry Hinton, the general manager of Auction, reached Robert Huillier by telephone. Hinton testified that Huillier told him that Pacific would not pay the drafts, the vehicles had been sold to Valley, and Valley had paid Pacific in full for them.

After his conversation with Huillier, Hinton telephoned Ron Fena of Valley and told him that the 32 vehicles had been purchased from Auction by Pacific and Auction had not been paid by Pacific for the vehicles. Both men were upset that Pacific's breach had left them with competing claims to the vehicles.

Pending the resolution of their dispute over the 32 vehicles, Auction and Valley entered into an agreement under which Auction provided certificates of title to the 32 vehicles as each one was sold to the general public by Valley and the amount of money owed to...