ATHA v. BOCKIUS (1951)

Cecil B. Mark, in 1944, purchased a Ford automobile in Florida, and later secured a California registration for the car. Thereafter, he engaged in a series of transactions, several of which were fraudulent, using the automobile as security. Among other things, he first mortgaged the car in California and then took it to Texas. In that state he mortgaged it to the Government Employees Finance Corporation. Later he returned to California, and, in this state, sold the car to his sister, Dorothy E. Atha, a bona fide purchaser without notice of the prior unrecorded out-of-state mortgage, who, as part of the transaction, paid off the California mortgage. The Texas finance company seized the car for nonpayment of its loan, and later sold it. In this action for conversion brought by the bona fide purchaser against the prior mortgagee and its employees, the trial court held that the subsequent bona fide purchaser prevailed over the prior out-of-state mortgagee. The mortgagee, and its representatives in this state, appeal.

The principal actors in this legal drama are the following: Cecil B. Mark, the crook, who is not a party to this action; Dorothy E. Atha, his sister, who is admittedly the bona fide purchaser of the car, and who is the plaintiff and respondent; the Government Employees Finance Corporation, a Texas company, the holder of a Texas chattel mortgage on the car, and one of the defendants and appellants in this case; E. H. Bockius, local representative of the Texas company, and Hansen and Castro, employees of Bockius, also defendants and appellants.

The case comes to us on an agreed statement of facts. So far as pertinent here, that statement is as follows:

‘One, Cecil B. Mark, bought the Ford automobile (which is the subject of this action and of all transactions described herein) in Florida in 1944, paying some cash and giving a purchase money mortgage. After procuring a Louisiana registration therefor, he brought it to California in June of 1945.

‘In Los Angeles, on June 18, 1945, he borrowed money from the Vine-Sunset Loan Company, executing a chattel mortgage of the car as security. With the proceeds of the loan, he paid off the purchase money mortgage. California registration was substituted for the Louisiana registration, and pursuant to California law, on the new registration Mark appeared as ‘registered owner’ (holder of the ‘white slip’) and the Vine-Sunset Company appeared as ‘legal owner’ (holder of the ‘pink slip’).

‘On November 10, 1945, Mark executed a new chattel mortgage to the Vine-Sunset Company, refinancing the first loan by that company.

‘On January 30, 1946, Mark executed a third chattel mortgage to the Vine-Sunset Company, refinancing the second mortgage.

‘On February 14, 1947, Mark executed a chattel mortgage of the car to secure a loan from the Remedial Loan Company in San Francisco, and with the proceeds paid off the outstanding mortgage to the Vine-Sunset Company. Mark, of course, remained the ‘registered owner,’ while Remedial Loan Company became the ‘legal owner’ on the new title certificate.

‘On August 26, 1947, Mark sold the automobile to plaintiff herein in a rather complicated transaction of which the result was that plaintiff became ‘registered owner’ of the car (holder of the ‘white slip’), while Remedial Loan Company remained the ‘legal owner’ of the car (holder of the ‘pink slip’). Mark received some more money, and both he and plaintiff signed a new note to Remedial Loan Company. In due course, this note was entirely paid by plaintiff, so that at the time of trial, plaintiff was both ‘legal’ and ‘registered’ owner, i. e., the holder of both the ‘pink’ and ‘white’ slips.

‘At all times when the above transactions took place, the record title to the car under California law was perfectly clear and showed no liens other than those stated above.

‘In the meantime, however, in September of 1946, Mark had driven the car to Texas. There he procured another Louisiana registration, dated September 28, 1946. (He did not, however, cancel or otherwise notify anyone of his California registration which remained unaffected by this transaction). Then on October 1, 1946, still in Texas, living at a Texas address, and showing only the Louisiana registration, he procured a loan on the car from Government Employees Finance Company and executed a chattel mortgage to that company.

‘Mark's purpose in the above transaction was to swindle the Government Employees Finance Company. He made a few payments on the loan, however, but soon returned to California, where he replaced his California license plates. Not long after his return there occurred the transaction in February, 1947, with Remedial Loan Company and subsequently, in August, 1947, the sale to plaintiff described above.

‘By April of 1947, the Government Employees Finance Company had traced Mark to California and had notified defendants herein to track him and the car down. Defendants proceeded to do so, and in October of that year, seized the car on behalf of the Government Employees Finance Company, although the car bore California license plates and although plaintiff, who was present at the seizure, exhibited her white registration certificate to defendants, telling them that she was the owner.

‘After the seizure, defendants sent the car to Texas, where Government Employees Finance Company sold it. Plaintiff accordingly brought this action.

‘It is conceded that Government Employees Finance Company and defendants did not make any effort to record the Texas lien at Sacramento with the Department of Motor Vehicles; and it is further conceded that no efforts were made by Government Employees Finance Company or any of the defendants who were hunting for Mark and the car in California for over six months before the seizure (although they had no actual knowledge of Mark's or the car's presence in California until approximately two weeks before seizure) to notify the Department of Motor Vehicles at Sacramento of the Texas lien so that transfers might be blocked, or potential transferees at least notified of the lien.

‘There is also uncontradicted evidence given by Mr. Francis Auger, Loan Manager at Remedial Loan Company in San Francisco, and who has been in the automobile loan business for twenty-one years, to the effect that Louisiana registrations are looked upon in his business as highly dangerous. Unlike California registrations, they do not require the listing of prior liens, and otherwise are not surrounded with the safeguards required by California, as well as by many other states. Mr. Auger stated that he would not loan money upon a Louisiana registration without an exhaustive investigation. However, the chain of title shows the car first entered California on a Louisiana registration before the first Vine-Sunset mortgage was executed.’

On these facts the court concluded that, as between the subsequent bona fide purchaser in California and the prior out-of-state mortgagee, the former was the owner of the car.

The legal question of the priorities between successive mortgagees or purchasers of an automobile, where the transactions occur in different states, has given rise to much litigation. In the absence of a statute requiring all chattel mortgages, whether on property in the state or on property thereafter brought into the state, to be recorded, it is the general rule that the law of the place where the contract is made governs its validity, and that a foreign mortgage will be held to be valid if in conforms to the foreign law even though it does not conform to the law of the state to which the property subsequently is brought. Therefore, if a chattel mortgage is properly executed on an automobile in a foreign state, and later the automobile is brought to another state and there sold or mortgaged, the prior chattel mortgage will be given priority, even though not recorded in the state in which the car is located, at least where the prior mortgagee has not consented to or had knowledge of the removal of the car from his state.

These rules have been recognized in California. In the leading case of Mercantile Acceptance Co. v. Frank, 203 Cal. 483, 265 P. 190, 57 A.L.R. 696, a Minnesota mortgagee was given priority over a subsequent bona fide purchaser in California. The facts were that Frank purchased an automobile in Minnesota, giving a chattel mortgage to Mercantile's assignor. This mortgage was executed and filed in Minnesota in full accordance with the laws of that state. Thereafter, without the knowledge or consent of the mortgagee, Frank drove the car to California where he sold it to a bona fide purchaser without notice of the prior chattel mortgage which, of course, was not recorded in California, nor did it comply with California law as to form. The Supreme Court pointed out that the basic statute on the recordation of chattel mortgages was then section 2959 of the Civil Code, and held that that section applied only to domestic chattel mortgages on personal property within this state at the time of the mortgage, and had no application to a foreign chattel mortgage, even though the mortgaged property was subsequently brought into this state. The court held, therefore, that the lien of the prior Minnesota mortgage took priority over the claims of the subsequent California bona fide purchaser even though the mortgage was not recorded here, nor did it comply, as to form, to California law. The rule of the Mercantile case has been followed. Motor Acceptance Co., Inc. v. Finn, 124 Cal.App. 766, 13 P.2d 761; Deposit Guaranty State Bk. v. Hessel Motor Car Co., 90 Cal.App. 428, 265 P. 954. In the absence of a statute specifically requiring foreign mortgages to be recorded in a state to which mortgaged property is subsequently brought, at least where the prior mortgagee has no knowledge of and does not consent to the removal, the rule of the Mercantile case is in accord with the great weight of American authority. See cases collected and commented upon 14 C.J.S. Chattel Mortgages, § 15, p. 607, 2 Univ. of Chicago L.Rev. 345; 27 Iowa L.Rev. 528; 40 Harv.L.Rev. 805; 57 A.L.R. 702; Stevenson v. Lima Locomotive Works, 180 Tenn. 137, 172 S.W.2d 812; 148 A.L.R. 375. This rule of comity, of course, may be changed by statute. But before a recording act will be held applicable to foreign mortgages where the property is subsequently removed to another state, the statute must be clearly applicable and specifically so provide. As was stated in Shapard v. Hynes, 8 Cir., 104 F. 449, 453, 52 L.R.A. 675, a case cited with approval in the Mercantile case: ‘Hence a state may be appropriate legislation decline to observe the rule of comity, and may require all mortgages affecting personal property which is situated therein or brought therein to be there recorded, as a condition precedent to the recognition of their validity in that state. But the statutes of a state which prescribe how mortgages on personal property shall be executed and recorded are generally, if not universally, regarded as speaking with respect to mortgages made within the state upon property there situated, and as having no reference to personalty brought within the state which is at the time incumbered with a valid lien created elsewhere. * * * [Citing authorities.]’

The respondent, while recognizing the rule of the Mercantile case, contends that, by certain amendments to the recordation statutes dealing specifically with automobiles, the rule of comity has been renounced by this state, and that all foreign mortgages on automobiles, where the car is subsequently brought into this state, must be recorded or registered or a bona fide purchaser or mortgagee here will prevail. This was the main theory upon which the case was tried and decided by the trial court. We think this contention is unsound.

The basic section relied upon by respondent in support of her argument on this point is section 195 of the Vehicle Code enacted in 1935 and amended in 1949. Reference is also made to sections 195.5, 196, 197, 198, 146, 146.1, 146.5, 132 and 222 of the Vehicle Code. Respondent argues that these sections make it clear that the Legislature intended to set up a system of registration that would protect bona fide purchasers in this state from all unrecorded prior claimants, whether such prior claim was created inside or outside this state.

The argument of respondent is ably presented at some length, but we think it unsound. The statutes involved are quite lengthy and need not here be quoted. While they contain general language that could easily be interpreted to apply to all mortgages, foreign or domestic, they do not specifically so provide. Such statutes, as already pointed out, will not be interpreted to abrogate the rule of comity, unless they clearly and specifically so provide. See, in addition to authorities already cited, Ragner v. General Motors Acceptance Corporation, 66 Ariz. 157, 185 P.2d 525. These statutes do not specifically so provide. It follows that the rule of the Mercantile case is still the law of this state. This being so, the judgment of the trial court cannot be sustained on the theory adopted by it.

Respondent also seeks to sustain the judgment on the theory that the rule of the Mercantile case does not protect a negligent foreign mortgagee, and contends that the facts here demonstrate that the Texas company was negligent. Respondent refers to the fact that when Mark borrowed from the Texas company he gave a Texas address, and presented a Louisiana registration dated three days before he applied for the loan. Respondent also refers to the evidence of Francis Auger, loan manager of Remedial, that Louisiana registrations in the automobile finance business are looked upon as dangerous registrations because they do not require prior loans to be listed. The trial court did not expressly find that this constituted negligence on the part of the Texas company, but, even had it done so, such evidence falls far short of that required to bar a lien holder from the legal priority to which it normally would be entitled. The burden was on respondent, and this burden was not sustained by a mere showing that the Texas company might have been negligent. There was no showing what the Texas company did that is claimed to constitute negligence. While due diligence is required on the part of the foreign lien holder to entitle it to priority, no lack of due diligence is here shown. Moreover, this theory seems to be an afterthought, and is not the theory upon which the trial court decided the case.

However, even though the rule of the Mercantile case is still the law of California, and, even though the Texas company was not negligent, respondent is not completely without some rights in the automobile here involved. In our opinion, under the admitted facts, respondent was subrogated to the rights of a prior mortgagee, whose rights were prior and superior to those of the Texas company.

In order to explain this subrogation point, which was not presented to or considered by the trial court, the facts should be set forth in chronological order:

1944—Mark purchased the car in Florida and secured a Louisiana registration.

June of 1945—Mark brought the automobile to California, secured a California registration, and borrowed money thereon from the Vine-Sunset Loan Co., giving a chattel mortgage as security, which was properly recorded in California. In November, 1945, and in January, 1946, Mark refinanced this loan with the same company. The California registration showed Mark as registered owner and Vine-Sunset Loan Company as legal owner.

1946—In September of 1946 Mark took the automobile to Texas, secured another Louisiana registration, but did not cancel the California registration. On October 1, 1946, Mark, in Texas, borrowed money on the car from the Government Employees Finance Corporation, giving a chattel mortgage as security.

It is too clear to require any discussion that, at this moment under California law, the rights of the Vine-Sunset Loan Company, being prior in time, were superior to those of the Texas company.

Now, to continue with the chronological history:

1946—Mark returned with the car to California and resumed the California registration which had never been abandoned.

Feb. 14, 1947—Mark secured in California a new loan from Remedial Loan Company with which to pay off, and he did pay off, Vine-Sunset Loan Company. The California registration now showed Mark as registered owner and Remedial as legal owner.

Aug. 26, 1947—Mark sold the automobile to respondent in a transaction whereby respondent became obligated to pay off the Remedial Loan Company lien, which she subsequently did.

October, 1947—Appellants seized the car.

Under this state of facts it is quite apparent, as already pointed out, that in February of 1947 when Mark borrowed from Remedial to pay off the Vine-Sunset loan, the Vine-Sunset loan, being prior to the Texas company's loan, was superior to that of the Texas company. Under fundamental principles of subrogation Remedial stepped into the shoes of Vine-Sunset and became subrogated to its rights. In 70 A.L.R. 1396 there is an annotation entitled: ‘Subrogation to prior lien of one who advances money to discharge it and takes new mortgage, as against intervening lienor.’ At page 1398 the general rule, supported by many cases from twenty-five states, including one from California, is stated as follows: ‘In the majority of the cases within the scope of the annotation, one advancing money to discharge a prior lien on real or personal property, and taking a new mortgage as security, has been held entitled to subrogation to the prior lien, as against the holder of an intervening lien of which he was ignorant.’

The California case cited in support of this rule is Simon Newman Co. v. Fink, 206 Cal. 143, 273 P. 565. There is plaintiff loaned money and took a chattel mortgage with the understanding that an outstanding chattel mortgage on the same personalty was to be paid. Unknown to plaintiff there was an outstanding second chattel mortgage on the same personalty. The Supreme Court held that the last lender was subrogated to the rights of the first lender, and had priority over the second chattel mortgage. The court specifically held that the doctrine of subrogation applies to liens on personal property. See, also, Darrough v. Herbert Kraft Co. Bank, 125 Cal. 272, 57 P. 983.

There are cases, cited in the annotation, that have adopted a contrary rule. One such case is Richards v. Griffith, 92 Cal. 493, 28 P. 484. That case must be deemed to have been overruled by the much later Simon Newman Co. case, supra. The majority rule already quoted appeals to us as the sound and equitable rule to be applied in such case.

When this rule is applied to the facts of this case, there can be no reasonable doubt but that the rights of Remedial on February 14, 1947, were superior to those of the appellants. Remedial then had all the prior and superior rights of Vine-Sunset.

It is equally clear that, in October of 1947 when respondent purchased the car from Mark, and then, as part of that transaction, became obligated on the note to Remedial, which she ultimately paid off, she became subrogated to the rights of Remedial. Her rights thereupon became superior to those of the Texas company, not because she was a bona fide purchaser, but because she became subrogated to the rights of Remedial. As between the appellants and respondent, the latter was the holder of the senior lien.

The determination that respondent is entitled to be subrogated to the rights of Remedial does not determine that the judgment should be affirmed. Respondent's right is to step into the shoes of Remedial. The judgment is for the full value of the car and its accessories on the date of seizure. The case was not tried on the theory of subrogation, so that there does not appear in the record the precise amount of the Remedial loan to which respondent became subrogated. Respondent and the Texas company are in the position of sucessive lien holders, with respondent as the senior claimant. But her claim is limited to the amount of the Remedial loan, and does not extend to the full purchase price of the car. As a bona fide purchaser, her rights are junior to those of the Texas company. The cause will have to be reversed to ascertain the precise amount of the Remedial loan on the date respondent purchased the car.

The judgment is reversed with instructions to the trial court to ascertain the amount of the Remedial loan to which, under the rules already set forth, respondent is entitled to be subrogated, and when such amount is ascertained, to enter judgment in favor of respondent in that amount, plus interest. Both sides to bear their own costs on this appeal.

PETERS, Presiding Justice.

BRAY and FRED B. WOOD, JJ., concur.