MOBILE HOMES INC v. UNITED CALIFORNIA BANK (1984)

OPINION

Who prevails in a contest between a lender with a perfected security interest in a mobile home and a dealer who purchased the mobile home from private owners in reliance on the certificate of ownership erroneously issued by the Department of Motor Vehicles without naming the secured creditor as legal owner?   We hold that the lender prevails.

Plaintiff, T & O Mobile Homes, Inc. (T & O), filed its complaint against defendant, United California Bank (UCB) ¹ for a judgment declaring T & O the owner of a mobile home it purchased from Shirl and Edward E. Morgan (jointly the Morgans) free and clear of UCB's security interest therein and for an injunction restraining UCB from repossessing that mobile home.   T & O initiated this lawsuit after it had filed a separate complaint against the California Department of Motor Vehicles (DMV) for failure to issue a correct certificate of ownership on the mobile home in issue.   The trial court ordered consolidation of the two legal proceedings.   Thereafter, the trial court granted summary judgment in favor of DMV and against T & O.

T & O appeals from the judgment following court trial declaring UCB's security interest perfected and prior to T & O's interest in the mobile home it purchased from the Morgans and declaring UCB the legal owner of that mobile home.

On appeal T & O argues that the trial court erred in concluding that UCB's unregistered security interest is valid against a bona fide dealer-purchaser and that UCB is not precluded from relying on its prior security interest by its negligence in confirming and enforcing that security interest.   Additionally, T & O contends this court should, as a matter of public policy, require UCB, the secured lender, rather than T & O, the bona fide dealer-purchaser, to bear the loss caused by DMV's mistake.   As will appear, we disagree with all of T & O's contentions and will affirm the judgment.

FACTS

The facts are virtually undisputed and may be briefly stated.   On July 27, 1979, the Morgans borrowed $17,146 from UCB and granted UCB a security interest in their mobile home to secure repayment.   Ten days later UCB forwarded to DMV a “Request for Motor Vehicle Registration” to cause the reissuance of the properly endorsed certificate of ownership on the mobile home to show UCB as the legal owner.   On the same day, UCB entered the request into its computer on a 90-day “callup” to confirm DMV's issuance of the correct certificate.

The Morgans' first payment on the loan from UCB was due on September 10.   That first payment was not made until October 5.   On October 15, the DMV erroneously issued a certificate of ownership which omitted any reference to UCB as the legal owner of the mobile home and thus reflected full ownership in the Morgans.

On November 20, the Morgans sold the mobile home to T & O for $7,000.   They did not mention UCB's security interest;  they simply endorsed and delivered the certificate of ownership to T & O.   Eight days later UCB, for the first time, attempted to inspect the mobile home.   Thereafter, DMV notified T & O that the certificate of ownership was in error and that UCB was, in fact, the legal owner of the mobile home.   At no time prior to receipt of that notice did T & O have actual notice of UCB's prior security interest.   The parties stipulated that T & O was a bona fide purchaser and would not have purchased the mobile home had it known of UCB's prior security interest.

On December 31, DMV issued a certificate of ownership showing UCB as the legal owner of the mobile home.

DISCUSSION

I. Priority Between Lender's Unregistered Security Interest and Interest Acquired by Dealer-Purchaser Without Notice and for Value.

A. UCB's security interest was perfected.

 Under the provisions of California Uniform Commercial Code section 9203, subdivision (1),² a security interest does not attach and become enforceable unless the following conditions are met:  (1) there is a signed security agreement or the creditor is in possession of the property, (2) value has been given, and (3) the debtor has rights in the collateral.  (III Cal.Commercial Law (Cont.Ed.Bar 1982 Supp.) § 2.2, p. 162.)   Subdivision (2) of that section provides:  “(2) A security interest attaches when it becomes enforceable against the debtor with respect to the collateral.   Attachment occurs as soon as all of the events specified in subdivision (1) have taken place unless explicit agreement postpones the time of attaching.”

In this case UCB's security interest attached on July 27, 1979, the date on which the loan agreement and the security agreement were signed and the loan proceeds were paid over to the Morgans.   On that date the Morgans owned the mobile home and had the right, acting alone, to create a security interest in it.

Section 9303, subdivision (1), provides that a security interest is perfected when it has attached and when all the applicable steps required for perfection have been taken.   The applicable steps required for perfection of a security interest in noninventory motor vehicles appear in Vehicle Code section 6301: ³

“When 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, but the vehicle subject to the security interest shall be subject to a lien for services and materials as provided in Chapter 6.5 (commencing with Section 3068) of Title 14 of Part 4 of Division 3 of the Civil Code.”  (Emphasis added.)

The quoted section gives UCB a perfected security interest from the time it deposited with the DMV a properly endorsed certificate of ownership.   The uncontradicted evidence reveals that UCB mailed such a certificate correctly addressed to the DMV on August 6, 1979.   Under Evidence Code section 641 that letter is presumed to have been received in the ordinary course of mail.   The DMV's later conduct in notifying T & O that the certificate of ownership was in error confirms that agency's receipt of the properly endorsed certificate of ownership.   On this state of the record, we conclude that UCB's security interest attached and was perfected on or about August 8, 1979.

B. Priority of UCB's perfected security interest.

 Section 9306, subdivision (2), provides:

“Except where this division [9] otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.”

In this case we are not concerned with a claim of right by UCB as the secured party to the identifiable proceeds of the Morgans' sale to T & O.   Neither does T & O contend that UCB authorized the Morgans' sale to T & O.  Accordingly, unless division 9 of the Commercial Code otherwise provides, UCB's security interest in the mobile home continues notwithstanding the sale to T & O.

Division 9 “otherwise provides” within the meaning of section 9306, subdivision (2), in requiring that the security interest must have attached (§ 9203, subds. (1) and (2)) and must have been perfected (§ 9301, subd. (1)(c)) to be enforceable against the buyer of the collateral.   We have already concluded in the preceding section of this opinion that these two requirements were satisfied prior to the Morgans' sale to T & O.

Our conclusion that UCB has priority is supported by the provisions of section 9307:

“(1) A buyer in ordinary course of business (subdivision (9) of Section 1201) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.

“(3) A buyer other than a buyer in ordinary course of business (subdivision (1) of this section) takes free of a security interest to the extent that it secures future advances made after the secured party acquires knowledge of the purchase, unless made pursuant to a commitment entered into without knowledge of the purchase.” 4

The provisions of section 9307 do not invalidate UCB's security interest in the mobile home in the hands of T & O because T & O is not a buyer in ordinary course of business.   That appears from section 1201, subdivision (9), which provides in relevant part:

“(9) ‘Buyer in ordinary course of business' means 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 the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker․”  (Emphasis added.)

In this case T & O bought from the Morgans who were not in the business of selling mobile homes or other similar vehicles.  (See generally Security Pacific Nat. Bank v. Goodman (1972) 24 Cal.App.3d 131, 135–136, 100 Cal.Rptr. 763.)   As a buyer other than in ordinary course of business, T & O cannot take free of UCB's security interest because that security interest does not secure future advances.   None of the debt secured by UCB's security interest arose after UCB learned of the sale to T & O.   We therefore conclude that the trial court correctly determined that UCB had a prior security interest in the mobile home which was not affected by the sale to T & O.

T & O points to section 2403, subdivision (1), to support its contention that as a bona fide purchaser it has priority.   That section provides in relevant part:

“(1) A purchaser of goods acquires all title which his transferor has or had power to transfer except that a purchaser of a limited interest acquires only to the extent of the interest purchased.   A person with voidable title has power to transfer a good title to a good-faith purchaser for value.   When goods have been delivered under a transaction of purchase the purchaser has such power even though

“(a) The transferor was deceived as to the identity of the purchaser, or

“(b) The delivery was in exchange for a check which is later dishonored, or

“(c) It was agreed that the transaction was to be a ‘cash sale,’ or

“(d) The delivery was procured through fraud punishable as larcenous under the criminal law.”

Under the circumstances of this case, the title which the Morgans had or had power to transfer to T & O was an ownership interest in the mobile home subject to UCB's prior perfected security interest.   None of the statutory provisions quoted above suggests a different conclusion.  (See Security Pacific Nat. Bank v. Goodman, supra, 24 Cal.App.3d at pp. 135–136, 100 Cal.Rptr. 763.)

 Similarly, we believe T & O's reliance on Ferraro v. Pacific Fin. Corp. (1970) 8 Cal.App.3d 339, 346, fn. 1, 87 Cal.Rptr. 226, and First Nat. Bank of Hays City v. Sprigg (1962) 209 Cal.App.2d 258, 25 Cal.Rptr. 838 is misplaced.   In each of these cases the court made broad general statements about the right of a prospective purchaser to rely exclusively on the information disclosed by the statutory certificate of ownership.   Both cases involve security interests which were not perfected due to the secured creditor's error in completing the application for the certificate.   When DMV makes a mistake in the certificate it issues, the very system which makes reliance on the certificate appropriate has broken down.   In that circumstance the more specific statutes reviewed above require a decision that the perfected security interest is prior to the interest of every buyer except a buyer in ordinary course of business.   Since T & O is not a buyer in ordinary course of business, it took title to the mobile home it bought from the Morgans subject to UCB's perfected security interest.

II–III.5

The judgment is affirmed.

FOOTNOTES

1.   After this lawsuit was initiated, United California Bank changed its name to First Interstate Bank of California.   Its motion to have its change of name noted in the proceeding was granted, but the caption was never changed.

2.   All further statutory references are to the California Uniform Commercial Code unless otherwise stated.

3.   This section was amended in 1982 but only to include code maintenance changes.

4.   Section 9307 contains no subdivision (2).

5.   See footnote 1 ante.

HAMLIN, Associate Justice.

FRANSON, Acting P.J., and ANDREEN, J., concur.