COMMERCIAL DISCOUNT CO v. LOS ANGELES COUNTY

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District Court of Appeal, Fourth District, California.

COMMERCIAL DISCOUNT CO. v. LOS ANGELES COUNTY et al.*

Civ. 2511

Decided: March 07, 1940

Chapman & Chapman, of Los Angeles, for appellant. J.H. O'Connor, Co. Counsel, and Gordon Boller, Deputy Co. Counsel, both of Los Angeles, for respondents.

This is an appeal from a judgment entered after a demurrer to plaintiff's complaint has been sustained without leave to amend.

Plaintiff is a California corporation engaged in the business of lending money to finance the purchase and sale of automobiles. On March 4, 1936, it owned what were admittedly solvent credits amounting to $3,666,322.76 and had other debts owing to it amounting to $1,611,967.24 which were secured by trust receipts. Defendant Hopkins, assessor of Los Angeles County, assessed all of these credits to plaintiff. Plaintiff paid its tax on the total amount but under protest as to that portion secured by the trust receipts. It filed its verified claim for a refund of that portion of the tax which amounted to $1,611.96. Defendants refused to repay the money to plaintiff and this action to recover it followed.

Plaintiff has attached a copy of its form of trust receipt to the complaint. It has also attempted to plead its construction of the legal effect of the trust receipt, some of which allegations are not supported by the terms of the writing. It is well settled that “when a pleader sets forth in his pleading what he either admits or alleges to be the substance or legal effect of an instrument in writing and in the same pleading sets forth in haec verba the written instrument itself, if the latter is unambiguous, (Silvers v. Grossman, 183 Cal. 696, 701, 192 P. 534), the matter in the pleading inconsistent with the text of the writing will be treated as surplusage”. Peak v. Republic Truck Sales Corp., 194 Cal. 782, 230 P. 948; Silvers v. Grossman, 183 Cal. 696, 192 P. 534; Bashford v. A. Levy & J. Zentner Co., 123 Cal.App. 204, 11 P.2d 51. As the form of the trust receipt is unambiguous we will confine ourselves to a consideration of its terms and will disregard the conflicting allegations of the complaint.

The trust receipt was evidently prepared under The Uniform Trust Receipts Law as it was originally passed in 1935. Stats.1935, p. 1930, secs. 3012 to 3016.16, inc., Civ.Code. Under this law a trust receipt was given by the automobile dealer, called the trustee, to the plaintiff, called entruster, to secure repayment by the dealer of money loaned to him by plaintiff, which money enabled him to pay for automobiles purchased from the manufacturer or distributor. The trust receipt recites that the trustee holds in trust for the entruster, as security for payment on demand of a stated amount, certain described motor vehicles in which “a security interest remains in or is hereby transferred to Entruster as security for the payment of the sums mentioned herein, together with interest and charges thereon from date hereof, as agreed”. The trustee agrees to hold the motor vehicles in trust as the property of the entruster for the purpose of sale or exchange. The entruster is given the right to insure the motor vehicles against certain named hazards, the premiums to be paid by the trustee and to be secured by the trust receipt until paid. The trustee is prohibited from lending, renting, mortgaging, pledging, encumbering, operating, using or demonstrating any of the motor vehicles but may sell any of them for cash or on terms approved by the entruster and for amounts not less than the amounts due it, the cash and other considerations received to be paid to the entruster. The entruster is given the right to repossess any or all of the motor vehicles upon default by the trustee and to sell them after specified notice of intention to sell. The trust receipt provides that “the proceeds of any such sale or sales shall be applied, first, to payment of the expenses thereof; second, to the payment of the expenses of retaking, keeping and storing said motor vehicle or vehicles including a reasonable attorney's fee; and, third, to the satisfaction of the Trustee's indebtedness hereby secured. The Trustee shall receive any surplus and shall pay unto Entruster upon demand any deficiency. * In the event of default by the Trustee in the payment of any moneys hereunder due on the due date hereof, Entruster may declare all moneys secured immediately due and payable. In event of such default Entruster may at his option and in lieu of sale as hereinabove provided declare a forfeiture of the Trustee's interest in any or all of said motor vehicles against cancellation of the then remaining indebtedness against said motor vehicle or motor vehicles in accordance with the provisions of Section 3016.2 of the Civil Code of the State of California. No waiver of any existing default shall be deemed to waive any subsequent default and all rights hereunder are cumulative and not alternative.”

The question to be decided here is the nature of the trust receipt. If it is a note or a chattel mortgage it is exempt from taxation (there having been an income tax in effect in California in 1936) and the demurrer to plaintiff's complaint should not have been sustained without leave to amend. If it is a solvent credit it is taxable and the judgment must be affirmed. Secs. 1, 14, art. XIII, Const.; sec. 3627a, Pol.Code. This question seems to be one of first impression in California.

That the trust receipt cannot be classified as a note seems clear from its terms. It contains nothing that may be construed as an original and unconditional promise to pay a sum of money. Sec. 3082, Civ.Code. Its language is appropriate in an instrument which gives security for a debt. Further, The Uniform Trust Receipts Law, under which the trust receipt was prepared, clearly was intended to authorize a manner of giving security for a debt and not of creating a debt.

We have found but one case commenting on The Uniform Trust Receipts Law in California. In speaking of trust receipts similar to the one before us, it was said in In re Boswell, D.C. 20 F.Supp. 748, 751:

“Trust receipts have long been independent security devices employed in commercial credit transactions. In re Cattus (C.C.A. 2, 1910) 183 F. 733.

“Their use has become greatly extended in the United States since the automobile has assumed its nationwide and popular proportions in financing and credit requirements for this major industry. In re Bell Motor Co. (C.C.A. 8) 45 F.(2d) 19. So that today these mercantile mediums, because of their beneficial features in quick credit transactions and their frequent judicial concern, have become thoroughly established and identified in business and law. When the term ‘Trust Receipt’ is used in commerce, the credit and financial agencies of present-day activities associate it with a security instrumentality that resembles a pledge, a chattel mortgage, or a conditional sale contract, but which is exactly none of these mediums of trade and credit. It is a transaction germane to these instrumentalities because it is like them, closely allied and related to them. Some chief differences that readily enter the mind when the term is used include the absence of actual or immediate delivery or change of possession, the removal of notice, recordation or verification requirements, and the retention of title in the vendor.”

This decision was approved and the judgment affirmed by the Circuit Court of Appeals. In re Boswell, 9 Cir., 96 F.2d 239. See also, Pacific Finance Corp. v. Hendley, 103 Cal.App. 335, 284 P. 736, 285 P. 1048; Commercial Credit Co. v. Barney Motor Co., 10 Cal.2d 718, 76 P.2d 1181.

There are a vast number of decisions of many courts in the United States dealing with trust receipts. A number of them are cited and discussed in 49 A.L.R. 283 et seq., 87 A.L.R. 305 et seq., and 101 A.L.R. 453 et seq.

Originally the trust receipt came into use in transactions involving the importation of goods from foreign countries. While the decisions disclose many variations in the original transactions the following may generally illustrate the practice: The importer would have the goods consigned to a bank and the bill of lading would be delivered to it. When the importer executed a trust receipt, the bank would either deliver the bill of lading, or the goods, or both, to him. The trust receipt would either permit title to remain in the bank or give it a lien on the goods until its bill was paid. It would give the importer possession of the property and the right to manufacture and sell, or to sell, title to the proceeds or a lien on them to be retained by the bank. Many courts have called such transactions true trust receipts transactions.

With the increased sales of automobiles, with the need for quick financing, the true trust receipt transaction has been modified. Under this modification the retail dealer purchases his motor vehicles direct from the distributor or manufacturer. He borrows money with which to pay for them from a bank or finance company which has neither actual nor constructive possession of any of them. The debt to the finance company is secured by a trust receipt which is intended to give the lender an equitable lien on the cars. The dealer has possession of them and the right to sell them in the usual channels of trade. This is the transaction we have before us. Plaintiff had neither actual nor constructive possession of any of the automobiles described in the trust receipts.

These two factual situations distinguish many of the cases dealing with trust receipts decided in other jurisdictions. We will confine our citation of authorities to the second type we have described as it presents the factual situation we have before us. The transactions before us merely involved the lending of money to the dealers, repayment of which was secured by the trust receipts. They were clearly intended to create an equitable lien on the automobiles to secure the loans made by plaintiff. See The Uniform Trust Receipts Law, supra.

There have been many decisions in other jurisdictions in which the factual situations were similar to the one before us. The courts are not in agreement on the relationship created between the debtor and creditor by these trust receipts and the exact liens arising from them. See A.L.R. citations, supra. In a majority of the jurisdictions the courts have reached the conclusion that the trust receipts were chattel mortgages. In Re A.E. Fountain, Inc., 2 Cir., 282 F. 816, 821, 25 A.L.R. 319, it was said:

“The trust receipt contains an agreement to hold the goods in trust for the bank and ‘as their property.’ It starts out with the statement that the bankrupt has set aside the merchandise ‘as the property of the said bank,’ and concludes with the statement that:

“ ‘The intention * is to protect and preserve unimpaired the title of said bank * to the said merchandise and the proceeds thereof.’

“This arrangement seems more nearly to resemble a chattel mortgage than any other form of security.”

See, also, In re Schuttig, D.C., 1 F.2d 443; In re Draughn & Steele Motor Co., D.C., 49 F.2d 636; Commercial Inv. Trust Corp. v. Wilson, 6 Cir., 58 F.2d 910; Central Acceptance Corp. v. Lynch, 6 Cir., 58 F.2d 915; McLeod–Nash Motors, Inc., v. Commercial Credit Trust, 187 Minn. 452, 246 N.W. 17, 87 A.L.R. 296; Motor Bankers' Corp. v. C.I.T. Corp., 258 Mich. 301, 241 N.W. 911; General Motors Acceptance Corp. v. Berry, 86 N.H. 280, 167 A. 553; Hartford Accident & Ind. Co. v. Callahan, 271 Mass. 556, 171 N.E. 820; Karkuff v. Mutual Securities Co., 108 N.J.Eq. 128, 148 A. 159, 160; Commonwealth Finance Corp. v. Schutt, 97 N.J.L. 225, 116 A. 722; Habegger v. Skalla, 140 Kan. 166, 34 P.2d 113; Universal Credit Co. v. Reily, 171 Okl. 286, 42 P.2d 516; Universal Credit Co. v. Gasow–Howard Motor Co., Tex.Civ.App., 73 S.W.2d 909.

Subdivision 3 of section 2955 of the Civil Code provides that a chattel mortgage may not be given on “The stock in trade of a merchant”. Section 2957 of the same Code provides that a chattel mortgage shall be “void as against creditors of the mortgagor and subsequent purchasers and encumbrancers of the property in good faith and for value, unless” it be executed, acknowledged and recorded in accordance with law. Defendants do not come within the classification of creditors, purchasers or encumbrancers as used in that section.

Section 2973 of the Civil Code provides as follows: “Mortgages of personal property, other than that mentioned in section twenty-nine hundred and fifty-five, and mortgages not made in conformity with the provisions of this article, are nevertheless valid between the parties, their heirs, legatees, and personal representatives, and persons who, before parting with value, have actual notice thereof.”

A chattel mortgage on property upon which the law does not permit such mortgage to be placed is nevertheless good between the parties. Bank of Ukiah v. Moore, 106 Cal. 673, 39 P. 1071; Bank of Ukiah v. Gibson, 109 Cal. 197, 41 P. 1008; Tomlinson v. Ayres, 117 Cal. 568, 49 P. 717; McLeod v. Barnum, 131 Cal. 605, 63 P. 924; Perkins v. Maier & Zobelein Brewery, 133 Cal. 496, 65 P. 1030; McRae v. Lackmann, 8 Cal.App. 241, 96 P. 505; Pacific States Corp. v. Pan–American Bank, 213 Cal. 58, 1 P.2d 4, 981.

Section 2888 of the Civil Code provides as follows: “Notwithstanding an agreement to the contrary, a lien, or a contract for a lien, transfers no title to the property subject to the lien.”

Section 2924 of the Civil Code contains the following: “Every transfer of an interest in property, other than in trust, made only as a security for the performance of another act, is to be deemed a mortgage, except when in the case of personal property it is accompanied by actual change of possession, in which case it is to be deemed a pledge.”

Upon the foregoing authorities we have reached the following conclusions: (1) That the trust receipts created liens upon the automobiles in favor of plaintiff; (2) that these liens must be construed to be chattel mortgages; (3) that although these chattel mortgages were void as against creditors, purchasers and encumbrancers in good faith and for value without notice either actual or constructive, they were valid between the parties; (4) that the attempted transfer of title, if any, to the plaintiff, in the trust receipts which created the liens, were void; (5) that because an income tax law was in force in California in 1936, the trust receipts, being chattel mortgages, were exempt from taxation under the provisions of section 3627a of the Political Code.

Defendants maintain that the property taxed must be classed as solvent credits, and therefore taxable. As we have concluded that the trust receipts are chattel mortgages there can be no merit in this argument under the provisions of subdivision 6 of section 3617 of the Political Code.

The judgment is reversed.

MARKS, Justice.

We concur: BARNARD, P.J.; GRIFFIN, J.

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