In re Tucker

• Decision Date: 11 August 2005
• Docket Number: Adversary No. 03-00709.,Bankruptcy No. 2-02-06324-PHX-RJH.,Adversary No. 04-1179.
• Citation: 329 B.R. 291
• Court: U.S. Bankruptcy Court — District of Arizona
• Parties: In re Edward A. TUCKER and Deolinda V. Tucker, Debtors. Robert J. Davis, Trustee, Plaintiff, v. Par Wholesale Auto, Inc., Defendant. DAVCO Enterprises dba DAVCO Motors & DAVCO Leasing; and C.T. Cook, Plaintiffs, v. Par Wholesale Auto, Inc., a Texas corporation; and John and Jane Does I through X; and Black & White Corporations I through IV, Defendants.

329 B.R. 291

In re Edward A. TUCKER and Deolinda V. Tucker, Debtors.

Robert J. Davis, Trustee, Plaintiff, v. Par Wholesale Auto, Inc., Defendant.

DAVCO Enterprises dba DAVCO Motors & DAVCO Leasing; and C.T. Cook, Plaintiffs, v. Par Wholesale Auto, Inc., a Texas corporation; and John and Jane Does I through X; and Black & White Corporations I through IV, Defendants.

Bankruptcy No. 2-02-06324-PHX-RJH.

Adversary No. 03-00709.

Adversary No. 04-1179.

United States Bankruptcy Court, D. Arizona.

August 11, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Allan D. Newdelman PC, Phoenix, AZ, for Debtors.

OPINION RE PAR'S RECLAMATION RIGHTS

RANDOLPH J. HAINES, Bankruptcy Judge.

This case presents the issue of whether a reclaiming seller has priority over an unperfected secured creditor. The Court concludes that it does, because an unperfected secured creditor does not qualify as an "other good faith purchaser."

Procedural Background

This matter is before the Court on cross-motions for summary judgment filed by Par Wholesale Auto, Inc. ("Par") and DAVCO Enterprises dba DAVCO Motors & DAVCO Leasing, and C.T. Cook (collectively "DAVCO"). The issue is the ownership of three vehicles sold by Par to Harvest Car Company, which was a dba of the Debtor Edward Tucker (hereafter referred to as "Tucker" or "Harvest"). On June 23, 2005, the Court ruled in favor of Par and against DAVCO as to ownership of the three vehicles, indicating that a subsequent opinion would more fully explain the Court's analysis and rationale. This is that opinion.

Undisputed Material Facts

The parties are not in total agreement on all the facts, but there are sufficient undisputed material facts upon which the Court is able to enter summary judgment. These are:

Tucker inspected vehicles at Par's place of business in Texas and purchased the three vehicles from Par in April 2001.¹ Tucker delivered a check for one of the vehicles and promised to pay the balance for all of the vehicles. The vehicles were transported from Texas to Arizona and delivered to Tucker at Harvest Car Company.

Tucker and DAVCO had a financing agreement² whereby DAVCO or C.T. Cook provided floor financing to Tucker to allow Tucker to purchase vehicles and hold them for resale. Per the financing agreement and business dealings between DAVCO and Tucker, Tucker would sign the certificates of title and deliver them to DAVCO. DAVCO would then hold these "open" titles until Tucker sold the vehicles. At least for the vehicles at issue here, DAVCO did not immediately record its alleged interest in the vehicles with the Arizona Motor Vehicle Division, or otherwise indicate the transfer with any other vehicle titling agency, including the Texas Department of Transportation. Nor did DAVCO file a U.C.C.-1 financing statement to perfect its security interest pursuant to Article 9 of the Uniform Commercial Code ("U.C.C."). At all times until DAVCO obtained new titles in Arizona, DAVCO held Texas certificates of title that had been endorsed by the previous owners.

When the check tendered by Tucker to Par to pay for at least one of the vehicles failed to clear Tucker's bank, Par timely made demand for replacement funds or for return of all of the vehicles. Unable to make good on the purchase price, Tucker agreed to return the vehicles, and they were returned to Par on May 24, 2001. At the time the vehicles were returned to Par, DAVCO did not hold registered title to the vehicles and DAVCO's interest was not reflected in the records of either the Arizona Motor Vehicle Division or the Texas Department of Transportation.

Par applied for new certificates of title in Texas, and they were issued to Par in May 2001. DAVCO applied for and obtained certificates in Arizona in June 2001.³ Also in June, 2001 DAVCO terminated the financing agreement with Harvest Car Company and Tucker, and demanded return of the vehicles.

At no time did DAVCO ever have possession of the vehicles. The vehicles were held on Tucker's car lot until they were returned to Par in May 2001. DAVCO merely held the Texas certificates of title that had been executed by the previous owners, which DAVCO calls "open" titles. DAVCO held these open titles to secure payment for the monies advanced to Tucker and Harvest Car Company. The executed certificates of title show the transfer from Par to Tucker, but regarding the transfers from Tucker to DAVCO, on at least one of the certificates of title, C.T. Cook signed for both Tucker and DAVCO.

DAVCO's Ownership Claim Fails Due to Lack of Possession

The first issue is DAVCO's claim to be the owner of the vehicles, rather than merely a secured lender, at the time they were returned to Par. Arizona Revised Statutes (hereinafter "A.R.S.") § 44-1061(A) requires a seller of goods to immediately transfer the goods, followed by the buyer's actual and continued possession, in order for the sale to be valid as against claims of the seller's creditors.⁴

Here, DAVCO is alleging that it is the owner of the three vehicles in question. However, it is undisputed that DAVCO never had physical possession of the vehicles, or that the vehicles never left Tucker's lot until they were returned to Par in Texas. The Court finds that the situation between Tucker and DAVCO, and the nature of the vehicles that DAVCO claims were transferred to it, do not warrant any kind of symbolic or constructive delivery. The subject matter consists of three vehicles that were shipped from Par in Texas to Tucker in Arizona, and then shipped back to Par in Texas. It was practicable for the vehicles to be shipped to DAVCO, and should have been shipped to DAVCO if a true, non-fraudulent transfer had taken place. The Court finds there was no actual delivery to DAVCO and that even if some kind of symbolic or constructive delivery had been made, that the delivery was not actual and continuous within the meaning of A.R.S. § 44-1061(A).

Although the origins of this statute pre-date Arizona statehood,⁵ and in fact go all the way back to the inception of fraudulent conveyance law more than 400 years ago,⁶ Arizona Courts have applied this statute only very infrequently.

Of the few Arizona cases applying A.R.S. § 44-1061, Wightman v. King, 31 Ariz. 89, 250 P. 772 (1926), offers additional support. There, based on the absence of actual and continued change of possession after an alleged sale of cattle, or change in the brands on the animals, the Court held that the public would have no knowledge of anything indicating that there had been a sale. Wightman, 250 P. at 773. In the present case, because the vehicles remained on the used car lot of Tucker, and DAVCO did not file the certificates of title with the Arizona Motor Vehicle Division, the public and creditors of Tucker would have no knowledge that the vehicles had allegedly been transferred to DAVCO. It is without question that Par was a creditor of Tucker as to all three of the vehicles delivered by Par to Tucker. Upon the dishonor of the check from Tucker, Par was owed the full purchase price for all three of the vehicles. Par qualifies as a creditor and the applicable statute therefore renders the alleged sale to DAVCO fraudulent and void as to Par.

The California Court of Appeals' application of a similar provision in S. Calif. Collection Co. v. Napkie, 106 Cal.App.2d 565, 235 P.2d 434 (1951), is also illustrative. In Napkie, the claimant purchased a vehicle from Napkie by paying off a bank loan against the vehicle. Napkie handed the keys of the automobile to the claimant, who was also Napkie's employer. The claimant immediately returned the keys to Napkie and allowed Napkie full and continued use of the vehicle. The question before the California Court of Appeals was whether the alleged transfer of the vehicle from Napkie to the claimant was fraudulent and therefore void. The California statute, Cal. Civil Code § 3440 is similar to the Arizona statute in that it requires the immediate delivery of the personal property sold, followed by the actual and continued change of possession of the things transferred. Napkie, 235 P.2d at 437. The court stated that the "delivery must be immediate, actual, visible, apparent and not constructive; possession of the transferee must be continued, and so open and unequivocal as to carry with it the usual marks and indications of ownership." Id. (citing Hepner v. Hepner, 32 Cal.App.2d 582, 584, 90 P.2d 321, 322 (1939)). "The change in possession must be an open, visible change, manifested by such outward signs as render it evident that the transferor's possession has wholly ceased." Id."No writings pertaining to the transfer, regardless of number or character, can be substituted for actual and continued change of possession." Id. The California Court of Appeals also addressed the symbolic exchange of keys. The Court stated that the delivery of the keys from Napkie to the claimant is not significant because the keys were immediately returned to Napkie. "Symbolic delivery is sufficient only where the character and situation of the property delivered is such that actual and physical delivery cannot be had." Id. at 438. When the nature of the property and the situation of the parties renders it practicable, such as in the case of the transfer of an automobile, actual delivery is required. Id.

Because A.R.S. § 44-1061 invalidates DAVCO's claim of ownership, its interest must be limited to that of a secured creditor. And because it never perfected either by filing a UCC financing statement, nor reflected its lien on the certificates of title before Par executed its reclamation, it must be regarded as an unperfected secured creditor at the time of the events in question.⁷

Sellers' Rights of Reclamation vs. Secured Creditors

Pursuant to A.R.S. § 47-2702 (U.C.C. § 2-702), a seller has a right to reclaim goods when the seller discovers that the buyer has received goods on credit while insolvent. The demand for reclamation must occur...