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Touch of Class Leasing v. Mercedes-Benz Credit of Canada Inc.

Decided: May 29, 1991.


On appeal from the Superior Court of New Jersey, Law Division, Passaic County.

Michels, Gruccio and D'Annunzio. The opinion of the court was delivered by Michels, P.J.A.D.


Plaintiffs Touch of Class Leasing (Touch of Class), Ray Catena Motor Car Corp. (Ray Catena) and Gran Prix Auto Wholesalers, Inc. (Gran Prix) appeal from a judgment of the Law Division that declared title to and ownership of a 1987 Mercedes-Benz 560 SEL (560 SEL) vested in defendant Mercedes-Benz Credit of Canada, Inc. (Mercedes-Benz).

On December 6, 1986, Mercedes-Benz entered into a lease with Robert Barnabe (Barnabe), of Quebec, Canada. When Barnabe presented his credit application to Mercedes-Benz, he represented that he personally owned a home with considerable equity and was the president of several companies, including Rallye Motors Ltd. (Rallye Motors), of Quebec, Canada. Barnabe entered into the lease in his individual capacity for a five year term with monthly payments of $1,717.02 plus local sales tax. In accordance with the lease, Barnabe maintained and paid for liability insurance on the 560 SEL. On February 12, 1987, Mercedes-Benz received confirmation of insurance from R.J. Laws Insurance Ltd., indicating the named insured to be "Robert P. Barnabe, 129 Clemente Street, LaSalle, P.Q. H3A

1B5." On December 9, 1986, Barnabe paid his first lease payment with a personal check drawn on his personal account. Until approximately January 1989, Barnabe made timely lease payments to Mercedes-Benz. Thereafter, Barnabe's lease payments were often late. In approximately September 1989, Barnabe ceased making lease payments to Mercedes-Benz.

Mercedes-Benz agreed to enter into the lease on the condition that Barnabe operate the 560 SEL only in his personal capacity. The lease dealt specifically with the issue of title to and ownership of the 560 SEL. The lease provided that Mercedes-Benz retained title to and ownership of the 560 SEL. The lease stated that Barnabe had no right, title or interest in and to the 560 SEL, except for the right to operate the 560 SEL. The lease also required Barnabe to acknowledge that he was not an agent of Mercedes-Benz and was responsible for the registration of the 560 SEL in Mercedes-Benz's name. Barnabe agreed to use the 560 SEL only for lawful purposes during the term of the lease. Barnabe also agreed not to assign, transfer or sublet any of his rights or otherwise encumber the 560 SEL and not to make any changes to the 560 SEL which would decrease its economic value or functional utility. Finally, the lease provided that its terms would be governed by and interpreted in accordance with the laws of Quebec and that Barnabe was a consumer as defined in the Consumer Protection Act of Quebec.

Contrary to the specific terms of the lease agreement, Barnabe unlawfully obtained a Canadian Certificate of Registration in the name of Rallye Motors, an unregistered Canadian Honda dealership. On December 16, 1986, one week after unlawfully registering the leased 560 SEL, Barnabe, through Rallye Motors, entered into a contract of sale (contract) and sold the leased 560 SEL to Gran Prix for $51,500.

Gran Prix, a New York corporation with its principal place of business at 1531 Jerome Avenue, Bronx, New York, is duly licensed by the City and State of New York as an automobile

wholesale and retail dealer. Since its incorporation in 1974, Gran Prix purchased and sold over 78,000 vehicles. A former automobile dealer on Jerome Avenue introduced Edward B. Haskell (Haskell), president of Gran Prix, to Barnabe. Haskell's testimony indicates that Gran Prix's purchase of the 560 SEL from Barnabe was Gran Prix's first transaction with Barnabe, and one of the few times that Gran Prix purchased a car from Canada, a non-title jurisdiction. Although Haskell testified that he purchased approximately six cars from Canada prior to his transaction with Barnabe, he stated that he was unfamiliar with the documentation necessary to obtain registration or title for a vehicle from Canada.

Prior to Haskell's first meeting with Barnabe, Barnabe contacted Gran Prix to inform it that he had a 1987 560 SEL for sale. Barnabe represented to Haskell that he was a Honda dealer. Haskell telephoned Honda of North America (Honda) to inquire whether Rallye Motors was an authorized Honda dealership and Honda informed Haskell that it was. Haskell noted that Gran Prix regularly relied on the manufacturer's word as to the authorized status of a dealership since a dealer submits monthly financial statements to the manufacturer and the manufacturer frequently audits the dealer. However, Haskell admitted that contacting a manufacturer does not disclose whether the dealer's license is revoked.

According to Haskell, Gran Prix agreed to purchase the 560 SEL from Rallye Motors, and Barnabe personally drove the 560 SEL from Quebec to New York for delivery. After the trip, the 560 SEL's odometer registered 900 kilometers (approximately 560 miles). Upon delivery, Barnabe tendered a title document and the original warranty book to Gran Prix. Gran Prix asked the New Jersey and New York Divisions of Motor Vehicles whether the title document was sufficient to obtain title in New Jersey and New York, and both states indicated that it was sufficient provided that Gran Prix also submitted certain custom forms showing proof of payment of applicable duty tax.

The contract indicates that Barnabe sold the 560 SEL as a "demo" (demonstration) model. Haskell purchased the 560 SEL for Gran Prix without reading the entire contract, without inquiring about the vehicle's low mileage and without inquiring how a Canadian Honda dealer could sell a 560 SEL demo. Haskell contended that the 560 SEL's designation as a demo, rather than a used vehicle, did not raise his suspicions. Haskell also noted that "it was not unusual for this automobile to have only 900 kilometers appearing on its speedometer [sic] since it is common for a dealer to buy or lease a vehicle and have that vehicle sit on its premises pending a subsequent sale."

After purchasing the 560 SEL, Gran Prix sold it to Ray Catena for $53,650. Gran Prix transferred the 560 SEL to Ray Catena with a copy of the title document received from Barnabe, the customs forms and a New York State Motor Vehicle Transfer form. Using these documents, Ray Catena obtained a Title Certificate from the New Jersey Division of Motor Vehicles. Thereafter, Ray Catena transferred the 560 SEL to its wholly owned subsidiary and leasing agent, Touch of Class. Touch of Class leased the 560 SEL to Dr. Ralph Del Priore of Alpine, New Jersey. On March 23, 1990, the New Jersey State Police impounded the 560 SEL while it was in Dr. Del Priore's possession.*fn1

Plaintiffs instituted this action against Mercedes-Benz by way of a complaint and an order to show cause, claiming that title to the 560 SEL resided in Touch of Class. Mercedes-Benz moved for a judgment, declaring that title to and ownership of the 560 SEL vested in it and requiring the New Jersey State Police to deliver the 560 SEL to its authorized agent or representative.

After argument, Judge Dwyer in the Law Division held that: (1) Barnabe is not a merchant; (2) Mercedes-Benz did not entrust the 560 SEL to Barnabe, and therefore, the provisions of N.J.S.A. 12A:2-403(2) are inapplicable, and (3) Gran Prix, as well as any successor purchaser, obtained only void title to the stolen 560 SEL. Alternatively, the trial court found that even if the doctrine of entrustment applied, Gran Prix was not a buyer in the ordinary course of business because it failed to observe reasonable commercial standards of an experienced merchant trading in the industry. The trial court also held that Haskell's testimony revealed Gran Prix's lack of honesty and good faith in this transaction and entered judgment vesting title to the 560 SEL in Mercedes-Benz.

Plaintiffs appealed, seeking a judgment declaring that title to the 560 SEL vested in them. Plaintiffs contend that the trial court ignored controlling provisions of the Uniform Commercial Code (UCC) in finding that Barnabe is not a merchant and placed a burden upon Gran Prix which ran counter to established legal principles by finding that Gran Prix should have further investigated the transaction with Barnabe. We disagree and affirm.

We are satisfied from our study of the record and the arguments presented that sufficient credible evidence in the record as a whole warrants the findings and conclusions of the trial court, and we discern no good reason or justification for disturbing them. Leimgruber v. Claridge Assocs. Ltd., 73 N.J. 450, 455-56, 375 A.2d 652 (1977); Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84, 323 A.2d 495 (1974); State v. Johnson, 42 N.J. 146, 162, 199 A.2d 809 (1964). See also R. 2:11-3(e)(1)(A). Moreover, all of the issues of law raised are clearly without merit. R. 2:11-3(e)(1)(E). Accordingly, we affirm the judgment under review substantially for the reasons expressed by Judge Dwyer in his thorough and thoughtful oral opinion of June 22, 1990. However, we deem it appropriate to comment further with respect to some of the contentions raised by plaintiffs.


We are convinced that the trial court properly found that the Mercedes-Benz/Barnabe lease is a true lease, not a lease intended for security. The drafters of Article 9 of the UCC expressly provided in N.J.S.A. 12A:9-102(1)(a) that the scope of Article 9 includes all transactions, regardless of their form, that "are intended to create a security interest in personal property or fixtures . . . ." To this end, N.J.S.A. 12A:9-102(2) provides that Article 9 "applies to security interests created by contract including . . . lease[s] . . . intended as security." The drafters specifically referred to leases intended as security to clarify that Article 9 applies to transactions that, while disguised as leases, are in effect sales or conditional sales from the lessor to the lessee.

N.J.S.A. 12A:1-201(37) defines "security interest" as:

an interest in personal property or fixtures which secures payment or performance of an obligation. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (12A:2-401) is limited in effect to a reservation of a "security interest ". The term also includes any interest of a buyer of accounts or chattel paper which is subject to chapter 9. The special property interest of a buyer of goods on identification of such goods to a contract for sale under 12A:2-401 is not a "security interest," but a buyer may also acquire a "security interest" by complying with chapter 9. Unless a lease or consignment is intended as security, reservation of title thereunder is not a "security interest" but a consignment is in any event subject to the provisions on consignment sales (12A:2-326). Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security. [emphasis added].

There is a conflict among the jurisdictions that interpreted these provisions of the UCC, and there is little on the topic from the New Jersey courts. BJL Leasing Corp. v. Whittington, Singer, Davis & Co., 204 N.J. Super. 314, 498 A.2d 1262 (App.Div.1985) discusses the issue. There, defendant ...

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