BANK OF
v.
GEORGE NERU, GENERAL
REPAIRS, INC., and
AMERICAN SAMOA
GOVERNMENT, jointly and severally, Defendants.
Trial Division
CA No. 65-96
April 3, 1997
[1] In
[2] In order to perfect a chattel mortgage or
other security agreement, the agreement (1) must be in writing signed by the
person to be bound and attested to by at least one witness; (2) must be filed
with the territorial registrar within 10 days after its execution; and (3) must
truly state the consideration upon which it was [1ASR3d52] based or the debt or liability which it was intended to
secure, and contain a description of the specific article, articles, or land
sold or mortgaged.
[3] One cannot grant a chattel
mortgage or security interest in property without first having some rights in
that property.
[4] The common law rule that title passes as soon
as the bargain is struck is ill-suited for determining when the transfer of
title occurs in today's sophisticated global economy.
[5] Under Uniform Commercial Code §
2-401(2) title passes to the buyer at the time and place at which the seller
completes his performance with reference to the physical delivery of the goods,
despite any reservation of a security interest and even though a document of
title is to be delivered at a different time or place; and in particular and
despite any reservation of a security interest by the bill of lading, (a) if
the contract requires or authorizes the seller to send the goods to the buyer
but does not require him to deliver them at destination, title passes to the
buyer at the time and place of shipment; but (b)
if the contract requires delivery at destination, title passes on tender there.
[6] Uniform Commercial Code § 2-401(2) is an
appropriate rule for determining when title passes in
[7] A “buyer in the ordinary course of
business” is a U.C.C. term and is defined as 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 goods buys in ordinary course
from a person in the business of selling goods of that kind but does not
include a pawnbroker.
[8] Under the U.C.C., a buyer in ordinary course
of business takes free of a security interest created by his seller even though
the security interest is perfected and even though the buyer know of its
existence.
[9] Rule
regarding “buyer in the ordinary course of business” did not apply
against seller-defendants were they were not
in the business of selling buses, were not licensed bus dealers, and did not
hold themselves out to the general public as bus dealers.
[10] Where
security holder waited until over eight
months after debtor transferred possession and title of chattel to third party
to assert its interest, such delay was unreasonable and estopped security
holder from asserting said interest. [1ASR3d53]
[11] Fact that bus was of a different model year and had different VIN number was of no consequence since all parties knew that particular bus was to be covered by the security agreement.
Before RICHMOND, Associate Justice,
VAIVAO, Associate Judge, and ATIULAGI, Associate Justice.
Counsel: For Plaintiff, Jennifer L.
Joneson
For Defendants George Neru and General
Repairs, Inc., Pro Se
For Defendant
Initially, plaintiff Bank of Hawaii ("BOH")
filed this action to recover the unpaid principal balance, interest, attorney's
fees and costs on a promissory note executed by defendant General Repairs, Inc.
("General Repairs"), secured by a chattel mortgage in two 1995
Chevrolet mini buses (respectively "bus #1" and "bus #2"),
and guaranteed by defendant George Neru ("Neru"). Later, BOH filed an amended complaint to
additionally set aside the conveyances of both buses by General Repairs and
Neru to defendant American Samoa Government ("ASG"), recover
possession of the buses from ASG, and enforce the security agreement.
On November 13, 1996, the court entered a default
judgment in BOH's favor against General Repairs and Neru for $45,509.12,
including prejudgment interest of $5,398.52, post-judgment interest at the rate
of 11.75% per year, and an as yet undetermined amount of attorney's fees and
costs. The cause of action against
ASG came regularly for trial on January 31, 1997, with both counsel and Neru
present.
On November 16, 1994, ASG issued a
"Solicitation for Bids," No. 571-95, to procure a 1995 Chevrolet mini
bus. On February 7, 1995, ASG,
using this solicitation, awarded General Repairs contracts for the purchase of
bus #1 for ASG's Special Education program, Purchase Order No. P50186, and bus
#2 for its Vocational Rehabilitation program, Purchase Order P50188.
ASG paid General Repairs $16,726.50 of the
contract price for bus #1 on or about March 6, 1995, and the balance of
$31,063.50 on or about July 14, 1995.
A-Z Bus Sales, Inc. ("A-Z Sales") invoiced bus #1 to General
Repairs on May 8, 1995, and shipped the bus from
ASG paid General Repairs $16,027 of the contract
price for bus #2 on or about March 17, 1995, and the balance of $29,763 on or
about May 15, 1995. A-Z Sales also
invoiced bus #2 to General Repairs on May 8, 1995. However, A-Z Sales actually
shipped a 1996 Chevrolet mini bus ("bus #3"), in lieu of bus #2, from
On May 26, 1995, BOH loaned General Repairs $70,000,
payable in full on August 24, 1995.
On the same date, Neru, as president of General Repairs, signed a
Security Agreement/Chattel Mortgage ("security agreement") providing
BOH security for the repayment of the loan. The security agreement granted a
security interest in, among other things, bus #1 and bus #2. General Repair failed to pay off the
loan on time and BOH extended the due date to November 13, 1995. Then, on December 29, 1995, when General
Repairs still had not fully paid the loan, BOH and General Repairs refinanced
the loan, with a new due date of March 31, 1996.
On May 12, 1996, after General Repairs failed to
pay the refinanced loan, BOH notified ASG that General Repairs was not
permitted to transfer BOH's security, bus #1 and bus #2, without BOH's consent
and that BOH did not consent to the transfer of the buses to ASG. On July 3, 1996, ASG responded by
denying that General Repairs had ever held title to the Vehicles and thus could
not have granted a security interest in them.
On August 1, 1996, BOH requested that ASG
relinquish bus #1 and stated that BOH intended to take possession of bus #2
upon its arrival in September 1996.
On August 1, 1996, BOH also notified General Repairs and Neru that it
demanded delivery of bus #2 upon its arrival in
ASG has procured buses and vans from General
Repairs in the past. A partial list
includes three buses and two vans in 1994.
However, neither General Repairs nor Neru is licensed as a dealer of any
kind of vehicles, and neither offers buses for sale to the general public.
BOH asserts a security interest in both bus #1
and bus #3 and wishes to foreclose on that interest. ASG asserts that it owns both buses free
from BOH's claims. [1ASR3d55]
[1]
In
[2] A.S.C.A.
§ 27.1510 dictates when a chattel mortgage is valid:
No mortgage, bill of sale,
conditional sales contract, deed of trust or conveyance or personal property
which is not accompanied by a permanent delivery thereof to the vendee is valid
as to persons who do not have actual knowledge thereof unless all of the
following conditions are met:
(1) it is in writing signed by the person to
be bound and attested to by at least one witness;
(2) it is filed with the territorial
registrar within 10 days after its execution;
(3)
it truly states the consideration upon which it was based or the debt or
liability which it was intended to secure, and contains a description of the
specific article, articles, or land sold or mortgaged.
[3]
Of course, one cannot grant a chattel mortgage or security interest in property
without first having some rights in that property. Here the parties disagree as to whether
General Repairs or Neru ever had any property interest in any of the buses at
issue.
The resolution of this question depends largely
on when and to whom A-Z Sales transferred title to the buses. A-Z Sales' invoices state that General
Repairs is the customer to whom the buses were sold. However, this alone does not dictate
when and to whom the title attached.
Under the common law, title passes as soon as the
bargain is struck. See J.W.
Ehrlich, Ehrlich's Blackstone, 395 (Nourse Publishing Co. 1959). Thus,
under the common law, General Repairs would have had title to both vehicles on
May 8, 1995, the dates of the invoices and the apparent date when the
"bargain was struck."
However, it appears that, under this rule, ASG acquired title to bus #1
and bus #2 on February 7, 1995, when it accepted General Repairs bid and
rendered purchase orders P50186 and P50188. Thus, when the common law is applied to
the situation at bar it appears that ASG acquired title from General Repairs
before General Repairs could have acquired title from A-Z Sales. Obviously, General Repairs could not
possibly transfer a title which it did not have.
[4]
Instead of speculating on how the common law might deal with such a situation,
however, we find it more appropriate to determine that this is one [1ASR3d56] of those instances in which the common law is
inapplicable to present conditions.
The short passage from Erlich's Blackstone on this issue did not,
and could not, properly address the transfer of title in complicated sales
contracts. In Blackstone's time
sales contracts were simple.[1] Contracts did not deal with delivery to
foreign lands or installment sales or purchase orders. As such, we believe that this common law
principle is ill suited for determining when the transfer of title occurs in
today's sophisticated global economy.
[5]
Although the common law does not adequately address the issue of title transfer
in the modern context, the Uniform Commercial Code ("UCC") does. Under UCC § 2-401(2) it is clear
that:
(2) . . . title passes to the buyer at
the time and place at which the seller completes his performance with reference
to the physical delivery of the goods, despite any reservation of a security
interest and even though a document of title is to be delivered at a different
time or place; and in particular and despite any reservation of a security
interest by the bill of lading
(a) if the contract requires or authorizes the seller
to send the goods to the buyer but does not require him to deliver them at
destination, title passes to the buyer at the time and place of shipment; but
(b) if the contract requires delivery
at destination, title passes on tender there.
[6]
Although the UCC has not been adopted in
Thus, prior to their arrival in
I. Bus
#1
Bus #1 is without question the same bus described
in the security agreement. It is
the same year, make and model and has the exact same VIN number. As such, BOH's security interest in bus #1
had vested upon its arrival to
A. Buyer
in Ordinary Course
ASG, however, argues that it is a buyer in the
ordinary course and should not have constructive knowledge imputed to it. We disagree. First, the "buyer in the ordinary
course" doctrine was not available, as such, at common law. Rather there were common law cases which
recognized that a mortgage on a stock of goods, wares, and merchandise was void
as to purchasers of such goods. See
e.g. Boice v. Finance & Guaranty Corp., 127
[7]
The "buyer in the ordinary course" doctrine was a label used by the
UCC in an attempt to organize and codify these common law principles. UCC § 1-201(9) defines a buyer
in the ordinary course of business as 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 goods buys in ordinary course from a person in the
business of selling goods of that kind but does not include a pawnbroker. [1ASR3d58]
[8]
UCC § 9-307(1) goes on to state:
A buyer in ordinary course of business . . .
takes free of a security interest created by his seller even though the
security interest is perfected and even though the buyer know of its existence.
[9]
These UCC provisions make good commercial sense when, for example, a dealer or
retailer collateralizes inventory for credit purposes. Thus, under the UCC, if we were to
determine that General Repairs was in the business of selling buses, ASG would
have taken both bus #1 and bus #3 free and clear, even with actual knowledge of
BOH's security interest. We, however,
do not believe that the evidence suggests that General Repairs or Neru was in
the business of selling buses.
Neither General Repairs nor Neru is a licensed bus dealer. More important, they do not hold themselves
out to the general public as bus dealers.
The present and past transactions are occasional, occurring only when
ASG periodically procures buses and vans.
As such, even if this court were to apply the UCC's rule regarding
"buyers in the ordinary course," we do not find that General Repairs
or Neru is "in the business of selling" buses.
B. Equitable
Estoppel or Laches
As discussed above, the common law recognized a
quasi-buyer in the ordinary course doctrine. ASG argues that the common law rule of
equitable estoppel should be applied in this circumstance. ASG's argument is based on BOH's failure
to assert it rights to bus #1 until well after BOH knew that ASG had gained
title and possession of bus #1. We
believe that Tumber v. Automation Design & Mfg. Corp, 324 A.2d 602
(1974) is closely on point with the case at bar.
[10]
In Tumber an owner entrusted a machine to a corporation under a lease
agreement which was never completed.
The owner acquiesced to the use of machines by two others and the
machines were later purchased by another corporation. A couple years later the original owner
demanded the machines. The court
held that the original owner was the one who made the wrongful sale possible
and should bear the loss by being estopped from asserting title. In the case at bar, BOH knew that bus #1
was going to be sold and delivered to ASG, in violation of the security
agreement. Bus #1 arrived in
II. Bus #3
Bus #2, the vehicle specifically in the security
agreement, and bus #3, the vehicle that actually arrived in
[11]
As stated above, A.S.C.A. § 27.1510 dictates when a chattel mortgage is
valid. The description requirements
set forth in subsections (1)-(3) only apply to "persons who do not have
actual knowledge thereof."
Both General Repairs and ASG had actual knowledge of BOH's security in
two buses. Two buses are described
in the security agreement, were sold to General Repairs by A-Z Sales, and
arrived on island. Regardless of
their model years and VIN numbers, all parties knew that these buses were the
buses to be covered by the security agreement.[4] Specifically, ASG knew of this security
interest before it took title and possession of bus #3 in place of bus #2. As such, we find that BOH has a valid
security interest in bus #3.
Therefore, since the equitable considerations
discussed as to bus #1 are not applicable to bus #3, we find that BOH has an
enforceable security interest in bus #3.
Conclusion
General Repairs owned bus #1 and bus #3. BOH had a security interest in both of
those vehicles, which attached prior to General Repair's transfer of title to
ASG. As to bus #1, we find that BOH
is estopped from asserting its security interest. As to bus #3, we find BOH's security
interest is valid and enforceable and order foreclosure of that security
interest. General Repairs' transfer
of bus #3 to ASG is set aside, and ASG must surrender possession of bus #3 to
BOH.
It is so Ordered.
**********
[1] Indeed in his discussion of title transfer, Blackstone uses an example of a sale of a horse for ten pounds. This common law principle was meant to apply to such simple sales. See J.W. Ehrlich, Ehrlich's Blackstone, 395.
[2]
The UCC has, however, been adopted in every state save
[3] We note that there is a strong presumption against the creation of destination contracts and in the absence of a contract term or trade usage to the contrary, a contract which contemplates the transportation of goods from the seller to the buyer will be interpreted as a shipment contract and not as a destination contract. 67 Am. Jur. 2d, Sales 393.
[4] Even the A-Z Sales invoice indicated bus #2 was
the bus being shipped to General Repairs.