Fariba v. Dealer Services Corp.

Decision Date07 October 2009
Docket NumberNo. D053162.,D053162.
Citation100 Cal. Rptr. 3d 219,178 Cal.App.4th 156
CourtCalifornia Court of Appeals Court of Appeals
PartiesBEHYAR FARIBA, Plaintiff and Appellant, v. DEALER SERVICES CORPORATION, Defendant and Appellant.
OPINION

NARES, J.

On these appeals we are confronted with an issue of first impression that centers on the interpretation of those portions of the California Uniform Commercial Code1 dealing with the priority of security interests in personal property among competing creditors. Specifically, where a secured creditor of a business has actual knowledge that the business is substantially engaged in selling the goods of others, i.e., consignment sales, are the rights of the consignor superior to those of the secured creditor? We hold that they are.

INTRODUCTION

Plaintiff Behyar Fariba is an automobile wholesaler. California Auto Sales & Leasing (CASL), which is not a party to this action, was an independent retail automobile dealer to which Fariba provided vehicles on a consignment basis. Defendant Dealer Services Corporation (DSC) is a finance company that financed CASL's inventory under a written promissory note and had a perfected security interest in, among other things, CASL's inventory of vehicles.

When CASL went out of business and Fariba attempted to retrieve his vehicles, he discovered 14 of his vehicles were being repossessed by DSC. When DSC refused to return the vehicles, Fariba sued. At trial, the court dismissed Fariba's fraud and breach of contract causes of action, as well as his claim for punitive damages. The case went to the jury solely on the issue of who—Fariba or DSC—had priority under the California Uniform Commercial Code as to the vehicles.

The special verdict form asked the jury to answer two questions: (1) Did DSC have actual knowledge that CASL was substantially engaged in the sale of vehicles belonging to others; and (2) who had possession of the 14 vehicles at issue in the dispute. The jury answered "yes" to the first question and "Brian Fariba" to the second. The court entered judgment in Fariba's favor, awarding possession of the vehicles and $32,500 in damages.

DSC appeals, asserting (1) the court erroneously instructed the jury that Fariba's interest in his consigned vehicles had priority over that of DSC if DSC had "actual knowledge" CASL was substantially engaged in selling vehicles that belonged to others; (2) there is no substantial evidence DSC had actual knowledge CASL was substantially engaged in selling vehicles that belonged to others; (3) Fariba's security interest was subordinate to that of DSC because he did not file a UCC-1 financing statement; (4) the court erred in instructing the jury on the issue of possession; and (5) there is no substantial evidence to support the jury's finding Fariba had possession of the vehicles.

Fariba also appeals, asserting the court erred by granting a directed verdict on his fraud and breach of contract claims, as well as on his claim for punitive damages.

We conclude that (1) the court properly instructed the jury that Fariba's interest in his consigned vehicles was superior to that of DSC if DSC had actual knowledge CASL was substantially engaged in selling vehicles that belonged to others; and (2) there is substantial evidence DSC had such knowledge. We also conclude the court properly instructed the jury on the definition of possession, and there is substantial evidence to support the jury's finding Fariba had possession of the vehicles. We further conclude that, because we are upholding the jury's verdict in favor of Fariba, we need not address whether the court erred in granting a directed verdict on Fariba's fraud and breach of contract claims. Finally, we conclude the court did not err in granting a directed verdict on Fariba's claim for punitive damages.

FACTUAL AND PROCEDURAL BACKGROUND
A. CASL

CASL was a used car retailer located on the parking lot of the San Diego Sports Arena. A substantial portion of CASL's inventory consisted of vehicles owned by others who delivered them to CASL on a consignment basis. The owners would get paid by CASL only when the vehicles were sold.

B. Fariba's Relationship with CASL

Beginning in 2005, Fariba entered into a relationship with CASL whereby Fariba delivered vehicles to CASL. They agreed on a price for the vehicle and, when CASL sold the vehicle, Fariba received an established price for the vehicle. Fariba held title to the vehicles and released title to CASL only upon receiving payment for the vehicles.

From September 2005 forward, Fariba supplied approximately 45 percent of CASL's inventory. Fariba, however, did not file a UCC-1 financing statement to perfect his interest in the vehicles.

C. DSC's Relationship with CASL

In October 2005 CASL executed a promissory note in favor of DSC, a used car dealer finance company, in the amount of $200,000. DSC secured the loan to CASL with a security interest in CASL's entire inventory, including after-acquired inventory. DSC filed a UCC-1 financing statement covering its security interest in the inventory.

D. DSC's Knowledge of CASL's Consignment Sales

CASL was introduced to DSC by Marina Colli, who worked for Automotive Finance Company (AFC), CASL's then finance company. When Colli left AFC to work for DSC, she convinced CASL to close their account with AFC and deal with DSC. Colli was DSC's manager in San Diego County and was in charge of the CASL account.

Fariba testified that Colli told him that she always knew that CASL was substantially engaged in selling goods that belonged to others. Colli told Fariba that she acquired the information from Rex Garwick and Carmine Malanga, the owners of CASL, while she worked with AFC, prior to the time CASL entered into the loan agreement with DSC.

John Denardo, CASL's car lot manager, testified that prior to DSC's loan to CASL he saw Colli on CASL's lot inspecting the vehicle inventory. Additionally, DSC sent people to CASL's lot on a monthly basis. Denardo also testified that he had conversations with Colli about the fact that CASL was selling vehicles on consignment. While Denardo testified that he was not certain when the conversation occurred, he said that it occurred sometime between 2002 or 2003 and July 2006.

Garwick testified that prior to CASL's obtaining the loan from DSC, Colli knew that CASL was substantially engaged in selling vehicles that belonged to others. Specifically, he testified that Colli was at CASL's lot "numerous times from the beginning of 2005 until the middle of 2006" and that CASL worked with Colli for a few years prior to October 2005. He testified that when CASL obtained the loan from DSC, Colli was "well aware" of the nature of their business. When Colli performed inventory audits at CASL, she would ask him to distinguish which were owned by CASL and which were on consignment.

E. CASL Defaults on Note

In July 2006 CASL went out of business and defaulted on its note with DSC. At the time, Fariba had approximately 45 vehicles on CASL's lot. On or around July 10, Fariba terminated his relationship with CASL and demanded his vehicles back. The owner of CASL agreed and told Fariba he could retrieve his vehicles at any time.

Fariba arranged for drivers and began retrieving his vehicles from CASL. After moving approximately 31 of the vehicles, Fariba's drivers returned to CASL's lot and found tow trucks working on behalf of DSC repossessing CASL's inventory. One of Fariba's drivers called Fariba and told him what was happening. Fariba talked to Colli at DSC. According to Fariba, they agreed DSC would be allowed to take Fariba's remaining vehicles and, when DSC verified that Fariba held title to the vehicles, they would be returned to Fariba. Fariba agreed to give DSC the keys to the vehicles so DSC would not have to make new keys for the cars it was repossessing. According to Fariba, later in the day Colli and another representative of DSC, Floyd Smith, again confirmed the arrangement by phone. In total, DSC took 14 of Fariba's vehicles, each of which Fariba held title to.

The next day, however, DSC refused to return the 14 vehicles to Fariba. When Fariba spoke with Colli and Smith, Fariba alleges they told him they were instructed to tell him the day before that he would get his vehicles back even though DSC had no intention of returning the vehicles. According to Fariba, he also spoke with John Wick, DSC's corporate counsel, who told him DSC "conned" and "tricked" Fariba in order to get the vehicles from him.

F. The Lawsuit

In July 2006 Fariba filed suit against DSC and others. He alleged claims against DSC for breach of contract, goods delivered, fraud, wrongful possession, unfair business practices, quiet title, and declaratory relief. The breach of contract and fraud claims, as well as the claim for punitive damages, were based upon Fariba's conversation with Colli and his agreement to give her the keys to the vehicles in exchange for her (and DSC's) alleged agreement to return them if he could prove ownership.

G. The Trial
1. Motion in limine

Prior to trial, DSC filed a motion in limine seeking to exclude any evidence DSC knew that CASL was substantially engaged in selling vehicles that belonged to others. Fariba opposed the motion, arguing the information was relevant to proving who had superior title to the vehicles under the California Uniform Commercial Code. The court denied the motion, noting that while there was no California authority on point, cases from other jurisdictions had held that a creditor's actual knowledge of the fact the business dealt in consigned goods made the consignor's interest prevail over that of the creditor. Therefore, the...

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