Financial Services, Inc. D/B/A Champion Auto Auction v. Republic National Bank

Opinion Issued January 13, 2005 In The Court of Appeals For The First District of Texas NO. 01-03-01356-CV ____________ FINANCIAL SERVICES, INC., D/B/A CHAMPION AUTO AUCTION, Appellant V. REPUBLIC NATIONAL BANK, Appellee On Appeal from the 55th District Court Harris County, Texas Trial Court Cause No. 2003-49845 MEMORANDUM OPINION Appellant, Financial Services, Inc., d/b/a Champion Auto Auction (Champion), challenges both the trial court’s rendition of summary judgment in favor of appellee, Republic National Bank (Republic), and the trial court’s denial of its own summary judgment motion. In a single issue, Champion contends that the trial court erred in granting Republic’s summary judgment motion and erred in denying its summary judgment motion. We affirm. Factual and Procedural Background Champion, in its declaratory judgment action, alleged that it is a “motor vehicle auction company.” It agreed to sell nine cars from two used-car dealers to Global Sales, Inc. (Global), a third dealer. After the sale to Global, Champion paid Global’s costs for the cars pursuant to a separate agreement that it had with Global. Champion retained the certificates of title to the cars, pending repayment of the money that Champion had advanced on behalf of Global. Global took possession of each car, and its name appears as the purchaser on the certificates of title, but it failed to repay Champion. Meanwhile, Republic, pursuant to a floor-plan financing arrangement, had perfected a security interest in each of the cars as inventory of Global and on the proceeds of their sales. After Global declared bankruptcy, it sold the cars pursuant to an agreed order in its Chapter 11 case, and the proceeds are being held in a separate account at Republic. Champion sought a declaration that it is entitled to the proceeds and sought recovery of its reasonable and necessary attorney’s fees. Champion asserted its entitlement to the proceeds on the grounds that it retained possession of the certificates of title in the nine cars, albeit that the titles name Global as the purchaser. In its answer, Republic asserted a general denial and counterclaim, also seeking a declaration that it, not Global, is entitled to the sales proceeds, as well as recovery of its reasonable and necessary attorney’s fees. Republic asserted its entitlement to the proceeds from the sale on the grounds that it has the first-filed security interest in the cars and the proceeds from their sale. Thereafter, Champion and Republic filed cross-motions for summary judgment based on a set of stipulated facts. The trial court granted Republic’s motion and denied Champion’s motion. In support of their respective summary judgment motions, the parties stipulated to the following facts: (1) Republic has a first perfected security interest in Global’s inventory and its proceeds as security for loans that Global owes to Republic; (2) Since February 1, 2002, Global has continued to owe Republic in excess of $350,000 on loans secured by Global’s inventory and its proceeds; (3) Global is a non-franchised motor vehicle dealer licensed in 2002 by the Texas Department of Transportation, and it filed a Chapter 11 bankruptcy in August 2002, which was later converted to a Chapter 7 bankruptcy; (4) Champion is “a motor vehicle auction company licensed by the Texas Department of Transportation to conduct motor vehicle auto auctions”; (5) During June and July 2002, Global agreed to buy nine cars at Champion’s auto auction; (6) The nine cars were subject to a June 7, 2002 agreement between Global and Champion, attached as summary judgment evidence, and “[p]aragraph 1 of the Agreement was performed as to each of the [n]ine [v]ehicles”; (7) Each car transaction was evidenced by an auction sheet, copies of which were attached as summary judgment evidence, and Champion paid the “Seller” [a car dealer] identified in each auction sheet the amount shown therein as the “Selling Price”; (8) A copy of Champion’s Policies/Procedures was attached as summary judgment evidence; (9) After Global agreed to acquire the nine cars, Champion permitted Global to possess the cars and place them “on Global’s lot for prospective sale to retail customers”; (10) Although Champion retained possession of the original certificates of title to the nine cars, pursuant to the terms of the June 7, 2002 agreement, Global never repaid Champion the amounts owed on the nine cars, except for a 2000 Chevrolet Camaro, and Champion never delivered the original certificates of title to the nine cars to Global, except for the title to the Camaro; (11) Champion recovered possession of the nine cars, except for the 2000 Chevrolet Camaro, and sold them at auction, with the net proceeds being deposited into an escrow account at Republic, together with the proceeds from the Camaro, pursuant to the agreed order (There is presently a balance of $71,745.00 in the escrow account, which Republic and Champion both claim); and (12) Champion and Republic agree that the prevailing party shall be entitled to recover its reasonable attorney’s fees, not to exceed $5,000.00, incurred in connection with this dispute. Standard of Review To prevail on a summary judgment motion, a movant has the burden of proving that it is entitled to judgment as a matter of law and that there is no genuine issue of material fact. See Tex. R. Civ. P. 166a(c); Black v. Victoria Lloyds Ins. Co., 797 S.W.2d 20, 23 (Tex. 1990); Farah v. Mafrige & Kormanik, P.C., 927 S.W.2d 663, 670 (Tex. App.—Houston [1st Dist.] 1996, no writ). When both parties move for summary judgment, we review the summary judgment evidence presented by both sides. Comm’rs Ct. of Titus County. v. Agan, 940 S.W.2d 77, 81 (Tex. 1997); Cigna Ins. Co. v. Rubalcada, 960 S.W.2d 408, 411-12 (Tex. App.—Houston [1st Dist.] 1998, no pet.). When the trial court grants one party’s motion and denies the other’s, the non-prevailing party can appeal both the summary judgment rendered against it and the denial of its own motion. Holmes v. Morales, 924 S.W.2d 920, 922 (Tex. 1996). When a summary judgment does not specify the grounds on which the trial court granted it, the reviewing court will affirm the judgment if any theory included in the motion is meritorious. Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989); Summers v. Fort Crockett Hotel, Ltd., 902 S.W.2d 20, 25 (Tex. App.—Houston [1st Dist.] 1995, writ denied). Analysis Citing Texas Transportation Code sections 501.071(a) and 501.073, Champion argues that it did not make a valid “sale” of the nine cars to Global because, (1) in order for there to be a valid sale, “there simply must be a transfer and delivery of title to the [v]ehicles”; (2) “[f]or purposes of deciding this case, [Republic] as mortgagee is the same or equivalent to a purchaser since [s]ection 1.201(b)(29) of the Texas Business and Commerce Code defines ‘purchase’ as ‘. . . taking by sale . . . mortgage, pledge, lien, [or] security interest . . .’”; and (3) “[u]nless Global (or the Bank) received certificates of title to the [v]ehicles, there could be no valid sale and thus, the Bank had no rights in the [v]ehicle pursuant to its security interest.” Section 501.071 provides that a motor vehicle may not be the subject of a subsequent sale unless the owner designated in the certificate of title transfers the certificate of title at the time of the sale. Tex. Transp. Code Ann. § 501.071(a) (Vernon 1999). Furthermore, a sale made in violation of the Transportation Code is void, and title does not pass until the requirements of the Code are satisfied. Id. § 501.073 (Vernon 1999). It is only the “owner” of a motor vehicle that is required to secure a certificate of title before selling it, and the term “owner” expressly excludes manufacturers, importers, distributors, or dealers. Id. § 501.002(16) (Vernon Supp. 2004-2005). Furthermore, a “subsequent sale” is partly defined as “the bargain, sale, transfer, or delivery of a motor vehicle that has been previously registered or licensed in this state or elsewhere, with intent to pass an interest in the vehicle, other than a lien, regardless of where the bargain, sale, transfer, or delivery occurs.” Id. § 501.002(20) (Vernon Supp. 2004-2005) (emphasis added). A “lien” expressly includes a security interest in a motor vehicle. Id. § 501.002(9)(B) (Vernon Supp. 2004-2005). Here, section 501.071 is inapplicable. The summary judgment evidence shows that Global is not an “owner” as defined by the Transportation Code. The stipulated facts filed by both Champion and Republic as summary judgment evidence state that Global is a “non-franchised motor vehicle dealer.” The summary judgment evidence also shows that Global did not make a “subsequent sale,” as defined in the Transportation Code, to Republic. Rather, Republic claims a security interest in the proceeds from the nine vehicles sold by Champion, which constitutes a lien. A lien, as noted above, is excluded from the definition of “subsequent sale.” Id. §§ 501.002(9)(B), (20). Moreover, the summary judgment evidence shows that Champion is not an “owner” because its name does not appear on the certificates of title and because it does not meet the definition of an “owner,” as defined by the Transportation Code. In support of the proposition that a party who retains possession of a certificate of title should prevail over a perfected security interest because, without the title, a “sale” never occurs, Champion relies primarily on Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., Inc., 78 S.W.3d 619 (Tex. App.—Austin 2002, pet. denied); Bank One Texas N.A. v. Arcadia Financial, Ltd., 219 F.3d 494 (5th Cir. 2000); and Gallas v. Car Biz, Inc., 914 S.W.2d 592 (Tex. App.—Dallas 1995, writ denied). However, each of the cases is substantively distinguishable from the instant case. In Southwest-Tex Leasing, Advantage had agreed to sell cars to Lone Star, but Advantage retained the certificates of title until Lone Star paid for the cars. 78 S.W.3d at 621. Lone Star also had an agreement with Arcadia for Arcadia to finance retail installment contracts to Lone Star’s customers, provided that Lone Star assign the contracts to Arcadia. Id. The agreement required Lone Star to transfer the certificates of title to Arcadia after a purchase by a customer. Id. Lone Star sold four of the cars it had acquired from Advantage to customers, but Lone Star failed to pay Advantage for the cars. Id. Consequently, Advantage never transferred the certificates of title to Arcadia. Id. However, Lone Star and its customers had executed retail installment contracts, and Lone Star had assigned the contracts to Arcadia without the certificates of title. Id. After Lone Star went out of business and refused to buy back the cars from Arcadia, Arcadia demanded that Advantage relinquish the certificates of title. Id. at 621-22. Advantage refused, and Arcadia sued. Id. at 622. The court held that Lone Star had not yet acquired ownership of the cars because it had not paid Advantage for them, and, because Lone Star never acquired ownership, it could not transfer a security interest in the cars to Arcadia. Id. at 624-25. The court expressly based its holding on the stipulation between Lone Star and Advantage that the sale of any car to Lone Star was contingent upon Advantage’s receipt of full payment from Lone Star. Id. at 624. Here, no stipulation exists between Champion and Global as to what constituted a “sale.” Rather, the summary judgment evidence shows that each of the nine car transactions was evidenced by an auction sheet. The reverse side of each auction sheet specifies that title and ownership of the cars passed from the “seller” to the “buyer” when the draft given for the sales prices had been paid in full. The “seller” is identified as either Economy Car Broker or Auto Concepts, and the “buyer” is identified as “Globe Auto Sales.” The summary judgment evidence also shows that Champion paid the draft for each car’s sales price to each “[s]eller.” Furthermore, the June 7, 2002 agreement between Champion and Global provides only that Champion would retain possession of the certificates of title of the nine cars until Global repaid Champion the “[r]epayment [a]mount,” plus any unpaid draft fees. Thus, ownership of the nine cars transferred to Global when Champion paid the two other dealers on Global’s behalf. In Bank One, Bank One had a perfected security interest in Lone Star’s inventory to secure a line of credit for inventory or “floor plan” financing, and, under its arrangement with Lone Star, it retained physical possession of all the cars in Lone Star’s inventory until Lone Star forwarded money to Bank One following a purchase by a consumer. 219 F.3d at 498. Lone Star purported to sell nine used cars to consumers without informing Bank One. Id. The buyers were given possession of the cars and entered into loan agreements with Arcadia. Id. The court held that Bank One’s perfected security interest in Lone Star’s inventory was not interrupted when a purported buyer attempted to purchase a car without receiving title. Id. at 499. However, contrary to Champion’s assertion, the determinative aspect of Bank One was not that Bank One had physical possession of the certificates of title. Rather, the key factor was that Lone Star purported to sell cars to consumers without also transferring the certificates of title to the consumers. Under section 501.071(a), no legal sale could be made to the consumers without transfer of the titles, so the consumers could not be considered “buyers in the ordinary course of business” as required to interrupt Bank One’s security interest. See id. Here, Global did not “sell” the cars to Republic, and, therefore, Global was not required to transfer the certificates of title to Republic. Additionally, unlike in Bank One, here, the summary judgment evidence does not establish that Champion ever perfected a security interest in the nine cars that Global purchased from dealers at Champion’s auction. In Gallas, Car Biz, a dealer, sold two cars to Stamper, another dealer, and allowed Stamper to take possession of the cars. However, Stamper failed to pay Car Biz, so Car Biz did not relinquish possession of the certificates of title. Stamper then sold a car to Gallas, a non-dealer, who, in return, paid Stamper. However, Gallas did not receive a certificate of title because it was still in Car Biz’s possession. Gallas sued Car Biz, seeking a declaration that he was the owner and specific performance for title transfer. The court held that, because Stamper did not have the title to transfer to Gallas, the subsequent sale from Stamper to Gallas was void as to Car Biz and did not pass title. However, Gallas is not applicable because the instant case does not involve a dealer making a subsequent sale to a non-dealer without also transferring the certificate of title. Rather, this case involves Global, a car dealer that purchased cars at Champion’s car auction from two other car dealers, and Republic, a secured party attempting to have its perfected security interest in Global’s inventory attach to the nine cars. Champion also asserts that Republic “could obviously have protected itself by extending credit to Global only when Global delivered certificates of title” because “[s]ection 501.111 of the Transportation Code provides that perfection of a security interest requires notation on the title of each vehicle.” Section 501.111(b) provides that a “person may perfect a security interest in a motor vehicle held as inventory by a person in the business of selling motor vehicles only by complying with Chapter 9, Business & Commerce Code.” Tex. Transp. Code Ann. § 501.111(b) (Vernon 1999). A security interest is perfected when it has attached and when all the applicable steps required for perfection have been taken. Tex. Bus. & Comm. Code Ann. § 9.308(a) (Vernon 2002). Generally, a security interest attaches when (1) the debtor authenticates a security agreement containing a description of the collateral; (2) the secured party gives value for a security interest; and (3) the debtor obtains rights in the collateral or the power to transfer rights in the collateral to a secured party. Id. § 9.203(b) (Vernon 2002). The official comments to section 9.203(b) provide that a debtor’s limited rights in collateral, short of full ownership, are sufficient for a security interest to attach. The attachment of a security interest in collateral gives the secured party the rights to proceeds. Id. § 9.203(f) (Vernon 2002). Generally, a financing statement must be filed to perfect a security interest in inventory. Id. § 9.310(a) (Vernon 2002). Under section 9.311(d), perfection of a security interest in the inventory of a person in the business of selling goods of that kind is governed by the normal perfection rules, even if the inventory is subject to a certificate-of-title-statute. Id. § 9.311(d) (Vernon Supp. 2004-2005). Compliance with a certificate-of-title statute is both unnecessary and ineffective to perfect a security interest in inventory to which § 9.311(d) applies. See id. Thus, a secured party who finances an automobile dealer that is in the business of selling and leasing its inventory of automobiles can perfect a security interest in all the automobiles by filing a financing statement with the Secretary of State but not by compliance with a certificate-of-title statute. Id. § 9.310(a), § 9.311(d); see Tex. Transp. Code Ann. § 501.111(b). The summary judgment evidence shows that Republic’s security interest in Global’s inventory included the nine cars that Global purchased at Champion’s auction. Specifically, Republic’s security interest in Global’s inventory attached to the nine cars because Global had “rights in the collateral.” See id. § 9.203(b). Global had “rights in the collateral” because the summary judgment evidence shows that ownership of the nine cars had been transferred to Global when it purchased the cars at Champion’s auction. Particularly, the summary judgment evidence included the auction sheets that documented the sale of the nine cars to Global. In the first paragraph under “Terms & Conditions of Sale” on the reverse side of each auction sheet, the following provision concerning the transfer of title and ownership of each car exists: The buyer agrees . . . that the title and ownership of said vehicle above mentioned, with all its equipment, radio, heater, etc. shall remain in the seller until any check or draft given for the Sale Price of said vehicle or any part of the same, has been honored and paid in full, and until said check or draft shall have been honored and paid in full, title to the above described vehicle shall be retained by the seller and not pass to the buyer, nor shall this sale be considered consummated. The “seller” in each auction sheet is identified as either “Economy Car Brokers” or “Auto Concepts.” The “purchaser/buyer” is identified as “Globe Auto Sales.” Champion is identified as the “auction company.” The bottom of the front page of each auction sheet states that the “sale is solely a transaction between the buying and selling dealers.” And, on the back side of each auction sheet, paragraph ten provides that “[i]n permitting buyers and sellers to use its sales facilities the auction company acts only in the capacity of broker and not as agent for either buyer or seller.” Moreover, as part of their summary judgment evidence, Champion and Republic stipulated to the facts that “Paragraph 1 of the [June 7, 2002] Agreement was performed as to each of the [n]ine [v]ehicles.” The first paragraph in the June 7, 2002 agreement between Champion and Global provides: Champion will pay for Dealer’s [Global’s] drafts for vehicles purchased by Dealer at Champion’s auction. However, when a draft is submitted for payment, Champion may in its discretion elect not to pay a particular draft and if so Champion will promptly inform Dealer of its decision. In any event in order to qualify for payment, Dealer represents that it has examined the title and the condition of each vehicle purchased and is satisfied with the same. Furthermore, the summary judgment evidence shows that “Champion paid the ‘Seller’ identified in each auction sheet the amount shown therein as the ‘Selling Price.’” The evidence establishes that Champion paid the two dealers from whom Global purchased the nine cars and that ownership of the cars transferred to Global. Thus, Republic’s security interest in Global’s inventory attached to the nine cars when Global purchased the cars at Champion’s auction from the two dealers because Global had obtained “rights in the collateral” sufficient for Republic’s security interest to attach. The summary judgment evidence also shows that Republic has a first perfected security interest in Global’s inventory and its proceeds, which includes the proceeds from the nine cars. Because the summary judgment evidence shows that the nine cars became a part of Global’s inventory, Republic’s security interest in the nine cars was perfected. Therefore, we hold that the trial court did not err in granting Republic’s summary judgment motion and in denying Champion’s summary judgment motion. Conclusion We affirm the judgment of the trial court. Terry Jennings Justice Panel consists of Justices Taft, Jennings, and Bland.