Hempstead Bank v. Andy's Car Rental System, Inc.

• Decision Date: 06 July 1970
• Parties: , 7 UCC Rep.Serv. 932 HEMPSTEAD BANK, Appellant, v. ANDY'S CAR RENTAL SYSTEM, INC. et al., Defendants, and Auto Buyers, Inc., Respondent.
• Court: New York Supreme Court — Appellate Division

Page 317

312 N.Y.S.2d 317

35 A.D.2d 35, 7 UCC Rep.Serv. 932

HEMPSTEAD BANK, Appellant, v. ANDY'S CAR RENTAL SYSTEM, INC. et al., Defendants, and Auto Buyers, Inc., Respondent.

Supreme Court, Appellate Division, Second Department.

July 6, 1970.

Dalton & Henoch, Hempstead, (Gilbert Henoch, Hempstead, of counsel), for appellant.

Murray Schwartz, New York City, (Herbert Monte Levy, New York City, of counsel), for respondent.

Leo P. Dorsey, New York City, (James F. Hart, New York City, of counsel), for New York State Bankers Association, amicus curiae.

George R. Adams, Valley Stream, for Long Island Bankers Association, Inc., amicus curiae.

Before HOPKINS, Acting P.J., and MUNDER, MARTUSCELLO, BRENNAN and BENJAMIN, JJ.

MARTUSCELLO, Justice.

The major question presented upon this appeal, which is one of first impression, is whether an automobile wholesaler who purchases used automobiles from an automobile leasing or rental company qualifies as a 'buyer in ordinary course of business', as that term is defined by subdivision (9) of section 1--201 of the Uniform Commercial Code (hereinafter after referred to as U.C.C.), and, therefore purchases free of a third party's validly perfected security interest in the automobiles, pursuant to section 9--307 of the U.C.C.

"Buyer in ordinary course of business' means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker' (U.C.C. § 1--201, subd. (9)). Such a buyer 'takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence' (U.C.C. § 9--307, subd. (1)).

The defendant Auto Buyers, Inc. is a wholesaler in the business of purchasing used automobiles from new car dealers and leasing and rental companies and reselling them to used car dealers. The defendant Andy's Car Rental System, Inc. (hereinafter called Andy's) was engaged in the business of renting or leasing automobiles. Between November, 1964 and May, 1965 the plaintiff, a commercial bank, financed Andy's purchase of new cars, taking back security interests therein. The 'Security Agreement--Retail Instalment Contract' employed for the purpose contained the following provision: '9. Default shall exist hereunder * * * (2) if the buyer shall or shall attempt to * * * (b) sell, encumber or otherwise dispose of this contract or any interest therein or the vehicle or any interest therein.' However, no similar provision is contained in the financing statement filed by the plaintiff pursuant to the U.C.C. with the County Clerk of Nassau County and the Department of State in Albany. As permitted by the U.C.C. ( § 9--402, subd. (1)), the plaintiff's financing statement sets forth the names and addresses of the debtor and of the secured party, but does not contain a description (i.e., the serial numbers) of the particular automobiles covered. Instead, it provides:

'5. This financing statement covers the following types (or items) of property: New motor vehicles, used motor vehicles, whether inventory or equipment, and all accessions thereto. All motor vehicles used in leasing and/or rental operations, both at the present and to be acquired hereafter.'

The statement also contains this notation: 'Proceeds--Products of the Collateral are also covered.'

Between May and October, 1965, Auto Buyers purchased from Andy's a total of 13 of the automobiles in which the plaintiff had subsisting and validly perfected security interests. Auto Buyers purchased the automobiles one, two or three at a time, paying a reasonable price for each. Although it knew that leasing and rental companies generally financed their cars, in accordance with its general practice it did not check to see if there were any liens filed against these automobiles. Nor was any inquiry made of Andy's in that regard at the times of purchase.

Andy's ultimately defaulted under its retail instalment agreements with the plaintiff; and the plaintiff seeks to recover in conversion against Auto Buyers on the theory that the sale of the cars by Andy's to Auto Buyers was in violation of the plaintiff's rights under the security agreements. Auto Buyers' position is that it was a 'buyer in ordinary course of business' (U.C.C. § 1--201, subd. (9)) and, as such, took free of the plaintiff's security interest. And so the jury apparently found. In our opinion, that finding is not merely contrary to the evidence, but is erroneous as a matter of law.

It will be recalled that in order to qualify as a buyer in the ordinary course of business one must (a) act 'in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods' and (b) purchase 'in ordinary course from a person in the business of selling goods of that kind' (U.C.C. § 1--201, subd. (9)).

Did Auto Buyers act in good faith and without knowledge that the sales to it were in violation of the plaintiff's rights under its security agreements with Andy's? "Good faith' means honesty in fact in the conduct or transaction concerned' (U.C.C. § 1--201, subd. (19)) and, in the case of a merchant, it means 'honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade' (U.C.C. § 2--103, subd. (1), par. (b)).

The plaintiff argues that, since it was common knowledge in the trade that leasing and rental companies financed their cars, it was incumbent upon Auto Buyers, in the exercise of good faith, to make a search for liens. Whatever the common-sense appeal of this argument, it would appear that Auto Buyers is not to be charged with such bad faith as would deprive it of the protection afforded buyers in the ordinary course of business by section 9--307 merely because it failed to search for liens. That section expressly provides that one is entitled to its protection even if he knows of the existence of a security interest in the goods. There is no evidence that Auto Buyers actually knew that the sales were violative of the plaintiff's rights under the security agreements with Andy's (see U.C.C. § 1--201, subd. (25)). Although the Security agreements provided that any sale of the cars constituted a default thereunder, the financing statement filed by the plaintiff contained no such provision. To the contrary, the financing statement contained a notation that the plaintiff's security interest extended to the proceeds of any sale of the collateral. Thus, even if Auto Buyers had checked for liens, there was nothing on file which would have revealed that a sale of the cars was prohibited. All that Auto Buyers would have learned was that the plaintiff had a security interest in the automobiles; and, even with such knowledge, Auto Buyers could have taken free of the plaintiff's security interest, assuming, of course, that Auto Buyers otherwise qualified as a buyer in the ordinary course of business. Apart from its failure to search for liens, there is nothing in the circumstances surrounding the sales to suggest that Auto...