T & O Mobile Homes, Inc. v. United California Bank

• Decision Date: 05 December 1985
• Docket Number: S.F. 24763
• Citation: 40 Cal.3d 441,220 Cal.Rptr. 627,709 P.2d 430
• Court: California Supreme Court
• Parties: , 709 P.2d 430, 42 UCC Rep.Serv. 549 T & O MOBILE HOMES, INC., Plaintiff and Appellant, v. UNITED CALIFORNIA BANK, Defendant and Respondent.

Page 627

220 Cal.Rptr. 627

40 Cal.3d 441, 709 P.2d 430, 42 UCC Rep.Serv. 549

T & O MOBILE HOMES, INC., Plaintiff and Appellant, v. UNITED CALIFORNIA BANK, Defendant and Respondent.

S.F. 24763.

Supreme Court of California.

Dec. 5, 1985.

Marshall W. Krause, Richard M. Grant, Krause, Timan, Baskin, Shaell & Grant, Larkspur, and T.W. Salter, Modesto, for plaintiff and appellant.

Cook, Perkiss & Liehe, David J. Cook, San Francisco, Ross, Ivanjack & Alborg, Kenneth P. Gray and Thomas E. Alborg, Oakland, for defendant and respondent.

BIRD, Chief Justice.

Who should bear the loss when a bona fide purchaser relies on a vehicle certificate of ownership which fails to disclose that the vehicle is subject to a perfected security interest?

I.

On July 27, 1979, Shirl and Edward E. Morgan obtained from defendant, United California Bank (UCB), ¹ a personal loan for $17,146 to finance the purchase of a mobilehome. The Morgans granted UCB a security interest in the mobilehome to secure repayment of the loan.

On August 6, 1979, UCB mailed to the Department of Motor Vehicles (DMV) a request for issuance of a new certificate of ownership showing UCB as the legal owner. The necessary fees and the existing certificate, properly endorsed by the Morgans, were enclosed. That day or soon thereafter, bank personnel made an entry in a UCB computer to remind them in 90 days to confirm that the DMV had issued an accurate certificate of ownership.

On October 15, 1979, the DMV issued a certificate of ownership showing the Morgans as the registered owners of the mobilehome. Although UCB had properly requested issuance of a certificate showing it as the legal owner, the space reserved for the "lienholder" and "legal owner" was mistakenly left blank. Thus, the certificate did not disclose UCB's interest.

On November 20, 1979, Shirl Morgan offered to sell the mobilehome to plaintiff, T & O Mobile Homes, Inc. (T & O), a dealer in used mobilehomes. She did not inform T & O that UCB was the legal owner. Relying on the "clean" certificate of ownership, T & O purchased the mobilehome for $7,000 cash. Shirl Morgan endorsed the certificate and delivered it to T & O.

T & O's status as a bona fide purchaser was undisputed. The parties stipulated that T & O had no actual notice of the existence of UCB's security interest when it purchased the mobilehome. It was also stipulated that T & O would not have made the purchase had it known of UCB's security interest.

On December 6, 1979, the DMV sent a letter to the Morgans, with copies to T & O and UCB, which stated that the October 15th certificate of ownership had been incorrectly issued and was invalid. The letter indicated that a new certificate would be issued listing UCB as the legal owner. The new certificate was issued to UCB on December 21, 1979.

After UCB demanded possession of the mobilehome, T & O brought an action against UCB. ² T & O sought a judgment declaring it the legal owner and enjoining UCB from repossessing the mobilehome. A court trial was held. The court found that UCB's security interest had been perfected and was prior to the interest of T & O. Judgment was entered declaring UCB the legal owner. T & O appeals that judgment.

II.

Division 9 ( §§ 9101-9508) of the California Uniform Commercial Code "sets out a comprehensive scheme for the regulation of security interests in personal property." (Official com. to Cal.U.Com.Code, § 9101.) ³ Section 9201 provides that, except as provided otherwise by the Code, "a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors." (Emphasis added.) ⁴

A security interest attaches and becomes enforceable when (1) either the debtor has signed a security agreement or the secured party is in possession of the collateral, (2) value has been given, and (3) the debtor has rights in the collateral. ( § 9203.) These conditions were satisfied on July 27, 1979, when the Morgans signed the security agreement and received the loan proceeds.

To be effective against a purchaser of the collateral, a security interest in goods must also have been "perfected" prior to the purchase. An unperfected security interest is subordinate to the rights of "a person who is not a secured party and who is a ... buyer not in ordinary course of business to the extent that he gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected." ( § 9301, subd. (1)(c).) ⁵

For most kinds of goods, a security interest is perfected when it has attached and a financing statement has been filed in the office of the Secretary of State. (See §§ 9303, 9401.) However, the filing provisions of the UCC are not applicable to noninventory mobilehomes. (See § 9302, subd. (3)(b).) ⁶ At the time of the transactions at issue here, perfection of a security interest in a noninventory mobilehome was governed exclusively by the provisions of section 6301 of the Vehicle Code. That section provides that "[w]hen the secured party, his or her successor, or his or her assignee, has deposited with the department a properly endorsed certificate of ownership showing the secured party as legal owner or an application in usual form for an original registration, together with an application for registration of the secured party as legal owner, the deposit constitutes perfection of the security interest and the rights of all persons in the vehicle shall be subject to the provisions of the Uniform Commercial Code...." ⁷ (See also Veh.Code, § 6303.)

As previously noted, the UCC provides that a perfected security interest is generally effective against a purchaser of the collateral. (See §§ 9201, 9301, subd. (1)(c) but see § 9307, subd. (1).) This rule is premised upon the assumption that the filing of a financing statement with the Secretary of State will permit prospective purchasers and encumbrancers to ascertain the existence of security interests in the property by checking a centralized record system. In other words, the UCC's perfection system, like the title recordation systems employed for real property, is based on constructive notice given through recordation. (See Note, Security Interests in Motor Vehicles Under the UCC: A New Chassis for Certificate of Title Legislation (1961) 70 Yale L.J. 995, 1005 [hereafter Security Interests in Motor Vehicles ].)

By contrast, the special scheme employed for the registration of security interests in motor vehicles relies primarily on actual notice to subsequent purchasers through a certificate of ownership held by the seller. (See Security Interests in Motor Vehicles, ibid.; Comment, The California Used Car Dealer and the Foreign Lien--A Study in the Conflict of Laws (1959) 47 Cal.L.Rev. 543, 546-547.) Because this "full title" system requires all security interests to be listed on the statutory certificate of ownership (see Veh.Code, §§ 370, 4451, 4453), a purchaser may rely on the certificate and is not expected to check a centralized set of records to determine whether a security interest has been recorded. ⁸

California adopted the full title system decades before the advent of the UCC, and the system remains essentially unchanged. The buyer's right to rely on the information on the certificate of ownership has been emphasized by our courts both before and after the enactment of the UCC. In First National Bank of Hays City v. Sprigg (1962) 209 Cal.App.2d 258, 25 Cal.Rptr. 838, decided one year before the enactment of the UCC, the court observed that "California is known as a 'full title' state insofar as registration of motor vehicles is concerned. This means that anyone transacting business with the owner of a motor vehicle can rely upon the title as reflected by the registration certificate, without further inquiry." (Id., at pp. 259-260, 25 Cal.Rptr. 838.)

Ferraro v. Pacific Finance Corp. (1970) 8 Cal.App.3d 339, 87 Cal.Rptr. 226, decided seven years after adoption of the UCC, reached the same conclusion. "In California, as is well known to anyone engaged in the business of selling or lending money on the security of automobiles, a prospective purchaser of a motor vehicle without knowledge of any defect of title may rely exclusively on the information disclosed by the statutory certificate of ownership." (Id., at p. 346, fn. 1, 87 Cal.Rptr. 226.)

Like full title statutes in other states, Vehicle Code section 6301 holds a purchaser to constructive notice of a security interest from the time the secured party's application for registration as legal owner is deposited with the DMV. (See Veh.Code, §§ 6301, 6302; Security Interests in Motor Vehicles, op. cit. supra, at p. 1005.) However, the purpose of this provision is primarily to establish priority among two or more competing lienholders according to time of receipt of the applications. (See ibid.) The deposit of the application is deemed to impart constructive notice only because it is assumed that the security interest will actually be recorded in the DMV's files. (See Eckhardt v. Morley (1934) 220 Cal. 229, 230-231, 30 P.2d 423.) In Eckhardt, this court construed the predecessor to Vehicle Code section 6301 to require actual registration before constructive notice would be deemed to date from the time of deposit. (Ibid.)

The same reasoning applies to the requirement for notation of the security interest on the certificate of ownership. Upon registration, the DMV is required to issue a new certificate of ownership to the legal owner listing the legal owner's name and address. (See Veh.Code, §§ 1800, subd. (a), 4450, 4451, 4453, 6302.) Thus, it is assumed that the deposit of an application for registration will result in simultaneous registration of the security interest and issuance of a new certificate of ownership listing the secured party as the legal owner. The deposit should not be deemed to impart constructive notice to a buyer unless the...