First Nat. Bank of Arizona v. Carbajal

• Decision Date: 06 April 1982
• Docket Number: No. 15739-PR,15739-PR
• Citation: 132 Ariz. 263,645 P.2d 778
• Parties: , 33 UCC Rep.Serv. 1523 FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff- Appellee, v. Richard CARBAJAL, dba Baja Vans and Fidelity and Deposit Company of Maryland, a Maryland insurance corporation, Defendants-Appellants.
• Court: Arizona Supreme Court

Page 778

645 P.2d 778

132 Ariz. 263, 33 UCC Rep.Serv. 1523

FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff- Appellee, v. Richard CARBAJAL, dba Baja Vans and Fidelity and Deposit Company of Maryland, a Maryland insurance corporation, Defendants-Appellants.

No. 15739-PR.

Supreme Court of Arizona, In Banc.

April 6, 1982.

Rehearing Denied May 25, 1982.

Streich, Lang, Weeks & Cardon by William S. Hawgood II, Earl E. Weeks, Phoenix, for plaintiff-appellee.

Rawlins, Ellis, Burrus & Kiewit by Timothy C. Westfall, David A. Clarke, and Lewis & Roca by Paul G. Ulrich, Phoenix, for defendants-appellants.

CAMERON, Justice.

The First National Bank of Arizona filed a complaint against defendant Richard Carbajal, doing business as Baja Vans (hereinafter Baja), for the unlawful conversion of a certain customized van. The trial court granted summary judgment in favor of First National, and Baja appealed to Division One of the Court of Appeals. Finding the dispute governed by the Uniform Commercial Code, the Court of Appeals recognized the conflict as one between a cash seller's reclamation rights under Article 2 (A.R.S. § 44-2301 et seq.) and the rights of a holder of an unperfected security interest under Article 9 (A.R.S. § 44-3101 et seq.). The Court of Appeals held that First National's Article 9 unperfected purchase money security interest entitled it to priority over Baja's Article 2 reclamation rights and summary judgment in favor of First National was affirmed. First National Bank of Arizona v. Carbajal, --- Ariz. ---, 645 P.2d 830 (App.1981). We accepted Baja's petition for review to correct what we believe to be a misstatement of the law regarding a cash seller's security interest. We have jurisdiction pursuant to A.R.S. § 12-120.24 and Rule 23, Arizona Rules of Civil Appellate Procedure, 17A A.R.S.

We must answer the following questions on appeal:

1. To what extent does the non-compliance with Arizona's Motor Vehicle Registration Code affect the rights of the parties?

2. What are the rights of a cash seller under Article 2 of the Uniform Commercial Code?

3. What are the rights of a seller under Article 9 of the Uniform Commercial Code?

The facts necessary for a determination of these issues are as follows. Baja Vans is in the business of customizing vans and selling them wholesale to motor vehicle dealers in Arizona. Sometime in the summer of 1977, Baja delivered a customized 1976 GMC van to Arizona Imports, a licensed motor vehicle dealer. In the preceding year, Baja had delivered approximately 12 vans to Arizona Imports. Of these vans, about half were paid for on the same day as delivery and the remainder were paid for shortly thereafter. Until paid, it was Baja's practice to retain the certificates of title and registration slips to the vans. Upon delivery of the van in question, Arizona Imports did not immediately tender payment and Baja therefore retained the various documents of ownership.

On 13 June 1977, Arthur and Mary Renner purchased the van from Arizona Imports. As part of the transaction, the Renners executed and delivered to Arizona Imports a purchase money security agreement pursuant to which Arizona Imports retained a security interest in the vehicle. On the same day, the purchase money security agreement was assigned by Arizona Imports to the First National Bank of Arizona for consideration and without recourse. Sometime thereafter, for reasons which do not appear in the record, the Renners returned the van to Arizona Imports. During this time, First National had no knowledge that the title documents to the vehicle had not been delivered to Arizona Imports by Baja or that the Renners had returned the van and revoked their acceptance of the vehicle. Likewise, Baja did not know that Arizona Imports had sold the vehicle and that chattel paper evidencing a purchase money security interest in the van had been issued by the Renners in favor of Arizona Imports and subsequently assigned to First National.

Throughout this period, Baja had been making repeated demands for payment from Arizona Imports. Finally, Baja received a telephone call from an employee of Arizona Imports who reported that the deal was off and that Baja had better come pick up the van because "everything was falling apart." By this, the employee was referring to the impending financial collapse of Arizona Imports. Baja took possession of the van and subsequently sold the vehicle in the normal course of business.

When First National did not receive the monthly payments from the Renners, an investigation was made which revealed that Baja had reclaimed the van. First National then made demand on Baja for return of the van, or, in the alternative, for payment of its value. Upon Baja's refusal, this litigation ensued. Because Baja had sold the van, the resulting judgment in favor of First National was for the fair market value of the van. Baja appealed and the Court of Appeals affirmed. We granted Baja's petition for review.

COMPLIANCE WITH THE MOTOR VEHICLE REGISTRATION CODE

Article 9 of the Uniform Commercial Code provides that if a state has a central filing statute, that statute will prevail over the provisions for security interests that arise under the Uniform Commercial Code:

"C. The filing of a financing statement otherwise required by this article is not necessary or effective to perfect a security interest in property subject to:

"2. A statute of this state (other than § 41-3140) which provides for central filing of, or which requires indication on a certificate of title of, such security interest in such property, including § 28-325, which requires indication thereof on a certificate of title for a vehicle required to be titled and registered under § 28-302 and for a mobile home required to be titled under § 42-643; but during any period in which such property subject to such a statute is inventory held for sale by a person who is in the business of selling goods of that kind, the filing provisions of this article (§ 44-3140 through 44-3146.02) apply to a security interest in that collateral created by him as debtor;

"D. Compliance with a statute or treaty described in subsection C is equivalent to the filing of a financing statement under this article, and a security interest in property subject to the "statute or treaty can be perfected only by compliance therewith except as provided in § 44-3103 on multiple state transactions. Duration and renewal of perfection of a security interest perfected by compliance with the statute or treaty are governed by the provisions of the statute or treaty; in other respects the security interest is subject to this article. " A.R.S. § 44-3123(C) & (D) (U.C.C. § 9-302(3)(b) ).

Arizona has such a central filing system, but neither First National nor Baja complied with the detailed filing and registration provisions of Arizona's Motor Vehicle Registration Code. A.R.S. § 28-301 et seq. A.R.S. § 28-325 provides for priority of liens. Subsections B through F of that statute establish a detailed process by which a security interest in an automobile is perfected. A perfected security interest will not arise unless the lien appears on the certificate of title to give constructive notice of encumbrances to all subsequent purchasers of the vehicle. The only exceptions to the filing and registration requirements are security interests dependent upon possession and security interests in inventory. A.R.S. § 28-325(E), (F) & (I); General Electric Credit Corp. v. Tidwell Industries, Inc., 115 Ariz. 362, 565 P.2d 868 (1977).

For a party seeking to perfect a security interest in a motor vehicle, these provisions are mandatory and failure to comply with the motor vehicle code results in the parties having no rights to enforce under that code. Since neither party followed the requirements of the Motor Vehicle Registration Code, neither party may claim a superior interest under that code. This does not mean, however, that the parties may not rely on the Uniform Commercial Code for guidance. On the contrary, since neither party complied with the provisions of the Motor Vehicle Registration Code, they must rely exclusively on the Uniform Commercial Code as adopted in Arizona to determine their rights. A.R.S. § 44-2201 et seq.

RIGHTS OF THE CASH SELLER UNDER ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE

Baja's first argument is based on its rights as an aggrieved cash seller under the Uniform Commercial Code's Article 2 (A.R.S. § 44-2301 et seq.) on sales. At common law, a cash seller had greater rights than a credit seller by virtue of the cash seller's retention of title until the price of the goods was paid for. A cash purchaser who was somehow able to snatch the goods from the seller without paying or who more likely paid for the goods with a bad check, was treated no better than a thief. As Professor Gilmore has stated:

"The courts have held * * * in the cash sale situation that something more serious than 'mere' fraud is involved, something approaching theft-'larceny by trick or device' as the time-honored phrase runs-and that consequently the defaulting cash sale buyer gets no title, and can transfer none to a good faith purchaser." The Commercial Doctrine of Good Faith Purchase, 63 Yale L.J. 1057, 1060 (1954).

The cash seller had the power to reclaim goods even though they had been resold by the buyer to a good faith purchaser because the buyer could receive no greater rights than his seller. A credit seller, however, gave his buyer voidable title to the goods in the buyer's possession, and a credit seller could not reclaim the goods from a bona fide purchaser, but could only sue the buyer for the purchase price. The preference given to a cash seller resulted in unfairness to the subsequent purchasers from defaulting cash buyers. Time and effort had to be taken in order to obtain documentation of the title to the goods in question and this restricted the free flow...