Escrow Connection v. Haas

• Decision Date: 09 March 1987
• Parties: , 3 UCC Rep.Serv.2d 547 The ESCROW CONNECTION, Plaintiff and Appellant, v. Herbert HAAS, et al., Defendants and Respondents, Lauren Haas, Klaus Meininger and Autohaus Imports, Inc., Third Party Claimants. E003056.
• Court: California Court of Appeals Court of Appeals

Page 200

235 Cal.Rptr. 200

189 Cal.App.3d 1640, 3 UCC Rep.Serv.2d 547

The ESCROW CONNECTION, Plaintiff and Appellant, v. Herbert HAAS, et al., Defendants and Respondents, Lauren Haas, Klaus Meininger and Autohaus Imports, Inc., Third Party Claimants.

E003056.

Court of Appeal, Fourth District, Division 2, California.

March 9, 1987.

Best, Best & Krieger and Basil T. Chapman, Riverside, for plaintiff and appellant

No appearance for defendants and respondents.

No appearance by third-party claimants.

McDANIEL, Associate Justice.

This appeal is from an order after judgment, more particularly a ruling in favor of third-party claimant and against plaintiff-judgment creditor in connection with its efforts to levy execution on property believed to be owed by defendant-judgment debtors. There is no dispute on the facts and the legal determination turned on interpretation and application of section 2326 of the California Uniform Commercial Code. In our view, the trial court incorrectly interpreted the section, and so the order appealed from will be reversed with directions.

OPERATIONAL FACTS

In an effort to satisfy its judgment against defendants who do business as Unique Motor Cars, Ltd., plaintiff instructed the Riverside County Marshall to seize and levy upon a certain new 1985 Mercedes Benz automobile, carrying dealer plates and in the possession of defendants. After the levy, Klaus Meininger and Autohaus Imports, Inc., (third-party claimants) filed their third-party claim with the Marshall, and in due course the matter came before the trial court for resolution.

According to the undisputed facts, as disclosed by the record, defendants were in physical possession of the seized automobile. Although third-party claimants insisted that they owned a hidden security interest in the automobile, plaintiff was unaware of such interest; moreover, third-party claimants had never filed a financing statement asserting a security interest in this automobile. Based solely on these facts, the trial court ruled in favor of third-party claimants, and this appeal followed.

DISCUSSION

The sole issue presented on appeal calls for interpretation of Section 2326 of the California Uniform Commercial Code, more particularly subsections (2) and (3). ¹

Before the introduction of the UCC, even though the interest of a consignor was commonly viewed as a "secret lien against creditors ... as harmful as an unfiled chattel mortgage or conditional sale," ² a consignor could nevertheless retrieve the consigned goods in a contest with the consignee's creditors. The draftsmen of the UCC effectively did away with the "secret lien" by providing, where a consignment be intended for security, that the consignor must file a financing statement under Article IX. The drafters also provided that all goods on consignment--whether or not so placed to "secure" the consignor--are subject to the claims of the consignee's creditors if the consignor fails to comply with the notice requirements of Article II.

In the case here, the third-party claimants neither filed a financing statement under Article IX nor complied with the notice requirements of ARTICLE II. CALIFORNIA UNIFORM COMMERCIAL CODE SECTION 2326³, subdivision (2) provides in pertinent part: "... goods held on sale or return are subject to such claims while in the buyer's possession." (Emphasis added.)

Thus, the sole question in determining the respective rights of plaintiff and third-party claimants is whether the automobile was held by the judgment debtor as a "sale or return" item.

Section 2326, subdivision (3) defines when goods are deemed held for "sale or return," stating that:

"Where goods are delivered to a person for sale and such person maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return. The provisions of this section are applicable even though an agreement purports to reserve title to the person making delivery until payment or resale or it uses such words as 'on consignment' or 'on memorandum'." (Emphasis added.)

It is undisputed that judgment debtors, Herbert Haas and Patricia Haas, were maintaining a business selling cars under the name Unique Motor Cars, Ltd. They do not do business under the names Autohaus Imports, Inc., Klaus Meininger, or any other name even related to that of the third party claimants. Thus, with reference to creditors' claims against property held by Herbert and Patricia Haas and Unique Motor Cars, Ltd., the Code creates a presumption ⁴ that those automobiles are held on a "sale or return" basis. The California Comment to the cited section, subsection 3, states: "This rule applies without regard to the agreement made between the wholesaler and retailer relative to retention of title in the wholesaler. The wholesaler can protect himself only by complying with the filing provisions of Chapter [Division] 9 of the Code or (in States which have 'sign statutes,' which California does not) by putting up signs indicating that the goods are on consignment. This subsection [subdivision] relieves the court of the onerous task of determining whether, despite words of 'consignment' in the agreement, the contract was in reality one of sale, thus making the goods available to the retailer's creditors."

In other words, the agreement between the consignor and consignee cannot In an attempt to avoid the obvious applicability of California Uniform Commercial Code section 2326, third party claimants have cited Allgeier v. Campisi, et al. (1968) 117 Ga.App. 105, 159 S.E.2d 458, in support of their argument that the seized automobile was not delivered to defendants "for sale" but was only delivered to enable defendants to "look for buyers." This argument misconstrues Allgeier and California Uniform Commercial Code section 2326. In Allgeier the court held:

operate to grant the consignor a unpublicized, nonpossessory lien.

"Where, as in the present case, an individual owner of an automobile delivers it to an automobile dealer for the purpose of having said dealer secure offers for the purchase thereof, to sell the same upon approval of an offer by the individual owner, the automobile dealer to receive a commission of a set sum regardless of the sales price, such transaction is not a 'sale or return' transaction between a buyer and a seller within the meaning of Georgia Uniform Commercial Code section 109A-2-326, so as to make said automobile subject to levy and sale upon executions obtained against the automobile dealers by creditors of the dealers." (Id., at p. 459, emphasis added.)

The sparse 200 word opinion in Allgeier did not elaborate upon the court's reasoning, but clearly involved distinguishable facts. The opinion emphasized that the automobile was delivered by an individual owner and that the dealer was to receive a set sum regardless of the sales price. In the case here, third party claimants are commercial dealers in automobiles and the defendants were to receive a commission on the sales price, not a flat fee. In other words, this case involves a commercial supplier of automobiles who should be bound to comply with the California Uniform Commercial Code in the course of operating its business; whereas, the Georgia case merely involved a private individual who was essentially renting lot space to sell his used car. In fact, the California Legislature amended Uniform Commercial Code section 2326 in 1965 by adding subsection (3)(d) providing for a special exemption relieving noncommercial transactions, which involve used goods, from the burden of compliance with section 2326.

In any event, the Georgia decision certainly does not stand for the proposition that a consignor's reservation of authority to approve the sales price entitles the consignor to a secret lien. This would obviously open the door to fraud and would defeat the purposes of section 2326.

Lack of express authority to conclude a sale does not bar a finding that the transaction between the dealer and his supplier was a sale or return under section 2326, subdivision (3). Another Georgia court, determining the applicability of the Allgeier decision stated: "We agree that the undisputed facts of this case fall squarely within the provisions of OCGA § 11-2-326(3). Logan, the owner of the tractor, delivered the tractor to Davis for the purpose of having Davis receive offers to purchase the tractor. The offers were to be approved by Logan, and Davis was to receive a commission for his efforts. Davis was an authorized Massey-Ferguson dealer which dealt in goods of this kind, and operated under a trade name different from that used by Logan....

"Allgeier v. Campisi (1968) 117 Ga.App. 105, 159 S.E.2d 458, relied upon by appellant, is not controlling here. 'All that case says is that the facts did not qualify the situation as a "sale or return" under [OCGA § 11-2-326(1)(b) ].' In re A & T Kwik-N-Handi, Inc. (M.D.Ga.1973) 13 UCC Rep. 779, 782. The case at bar is concerned with the application of OCGA § 11-2-326(3), which is much broader in scope than § 11-2-326(1)(b), which was at issue in Allgeier. Id.

"The purpose of OCGA § 11-2-326(3) is 'to protect the creditors of the person in possession of goods (the dealer) who would have a right to assume the goods were the property of the dealer [Davis]. The real owner [Logan] can protect [itself] by showing the creditor ... of the dealer had no right to assume such ownership. This can The third-party claimants have argued that a judgment creditor here is not a creditor who "extended credit" to defendants and that therefore the statute is inapplicable. However, there is no support for such an interpretation, and the express language of the Code is squarely to the contrary. California Uniform Commercial Code section 1201 subdivision (12)...