April 27, 2012
BRENNER FINANCIAL, INC., T/A BRENNER CAR & TRUCK RENTALS, INC., PLAINTIFF-RESPONDENT,
CINEMACAR LEASING, DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-9085-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE COMMITTEE ON OPINIONS
Argued January 10, 2012
Before Judges Carchman and Baxter.
Defendant Cinemacar Leasing appeals from an order of the Law Division granting summary judgment in favor of plaintiff Brenner Financial, Inc., denying defendant's cross-motion for summary judgment, and awarding plaintiff damages in the amount of $69,506.65. Defendant raises three issues on appeal: 1) the trial court erred in finding that plaintiff's interest in a vehicle repossessed by defendant took priority over defendant's interest in the vehicle; 2) the trial court erred in its calculation of damages owed to plaintiff as a result of that repossession; and 3) the trial court failed to require that All Points Capital Corp. (All Points) be added as an indispensable party due to its status as a lienholder of the vehicle. We agree with defendant that the trial court erred in finding that plaintiff's interest in the vehicle took priority over defendant's interest. In fact, defendant's interest took priority over plaintiff's. However, our further conclusion that defendant's interest in the vehicle represents a security interest necessitates a remand for consideration of other issues. We reverse the trial court and remand for further proceedings consistent with this opinion.
We briefly set forth the facts adduced from the record presented on the motion for summary judgment. On November 1, 2007, defendant, a New Jersey company, entered into a motor vehicle sale-leaseback agreement (lease agreement) with Flexible Transport, Inc. d/b/a Luxury Limousine Dearborn, Inc. (Luxury), a Michigan company. Luxury agreed to sell defendant a 2007 stretch Hummer (the vehicle), and defendant agreed to lease the vehicle back to Luxury. The vehicle was to be used in Michigan in Luxury's limousine business. The agreement provided for a lease term of sixty months, not terminable by Luxury. Over the life of the lease, Luxury was contractually obligated to pay defendant in excess of $160,000 in total lease payments.*fn1 At the end of the lease term, Luxury had the option to purchase the vehicle for $106.05, together with an administrative fee and other potential charges, including rentals and taxes then due.
Pursuant to the lease agreement, on November 30, 2007, Luxury transferred title to the vehicle - which at the time was titled and registered in Michigan - to defendant. Defendant confirmed the transfer by executing the assignment section of the title. Shortly thereafter, on December 4, 2007, defendant re-titled the vehicle in New Jersey; that title noted defendant as the owner of the vehicle and All Points - which had financed defendant's purchase of the vehicle - as a lienholder. That same day, defendant executed a power of attorney in favor of Luxury limited to applying for a "registration and/or title" in Michigan for the vehicle, provided that such registration listed defendant as the titled owner and All Points as the lienholder.
Although the vehicle was now titled in New Jersey, it remained registered in Michigan, it displayed Michigan license plates, and Luxury continued to operate it primarily in Michigan.*fn2
Within days of the vehicle being titled in New Jersey, on December 12, 2007, Luxury entered into a financing agreement with plaintiff, a Pennsylvania company. In the financing agreement, Luxury pledged the vehicle as collateral for a $98,580 loan. On February 14, 2008, Michigan issued a certificate of title identifying Luxury as the owner of the vehicle, Citizens Bank of Pennsylvania as the first secured party, and plaintiff as the second secured party. During the course of Luxury's dealings with plaintiff, Luxury utilized an old Michigan certificate of title issued for the vehicle on November 1, 2007 (before title to the vehicle was transferred to defendant). That title noted GMAC as the first secured party on the vehicle. Luxury also presented a letter from GMAC, dated November 8, 2007, representing that this lien had been satisfied. In contrast, when Luxury transferred title to defendant, Luxury did so using a duplicate certificate of title, issued November 26, 2007, but identical to the November 1, 2007 title in all other pertinent respects.
Luxury defaulted on both the lease agreement with defendant and the financing agreement with plaintiff. Plaintiff repossessed the vehicle and moved it to an automobile sales facility in Ohio. Thereafter, defendant located the vehicle, repossessed it, and moved it to New Jersey.*fn3
In September 2010, plaintiff filed a replevin action against defendant by way of a verified complaint and an order to show cause. As plaintiff had by this time leased the vehicle to a third party, the court ordered defendant to post $52,000 in escrow in lieu of turning over the vehicle.
The parties cross-moved for summary judgment. The judge granted summary judgment in favor of plaintiff, denied defendant's cross-motion for summary judgment, and awarded plaintiff damages in the amount of $69,506.65.
With regard to defendant's liability to plaintiff, the motion judge found that Michigan law applied because "[t]he law of the jurisdiction where the collateral or debtor is located governs perfection and the priority of a security interest in collateral." The judge then noted that Michigan law "require[s] that when an owner transfers title, he 'shall' remove the registration plates and endorse the certificate of title before delivering it to the purchaser," and that, "within 15 days, the purchaser [shall] deliver the certificate of title and the registration certificate if the plates are transferred to another vehicle to the secretary of state whereupon a new certificate of title and registration certificate shall be issued." Then, because he found that these requirements had not been satisfied, the judge held that plaintiff was entitled to possession of the vehicle because defendant "never had a perfected security interest," whereas plaintiff "perfected [its] security interest." The judge also opined that "[i]f [defendant] had delivered the documents to the [Michigan] Secretary of State, [plaintiff] would have known that Luxury did not have valid title to the vehicle and would not have refinanced it."
With regard to the value of the vehicle, the trial court held that it was a question of law. The judge continued: if [plaintiff] was in possession of the vehicle it could have presumably entered into a lease agreement identical to [defendant's current] lease. As such, by preventing [plaintiff] from possessing the vehicle, [defendant] kept [plaintiff] from reaping the profits associated with leasing the collateral.
As a result, the judge accepted plaintiff's computation of damages as certified by Daniel Dyson, an employee of plaintiff - which combined the $64,000 "capitalized cost" for the vehicle with the $5,506.65 "profit" defendant stood to earn from the lease - and found that the vehicle "must be valued" at $69,506.65. The judge rejected defendant's argument that defendant's method of calculation was not the best method, based on certifications by Guy J. Carnazza, president of defendant, and Michael DeMeo, president of an automobile leasing and financing company; and that an issue of fact existed regarding the value of the vehicle.
When reviewing a grant of summary judgment, we employ the same standard that governs the trial court. Perrelli v. Pastorelle, 206 N.J. 193, 199 (2011). Under that standard, "summary judgment should be granted only if the record demonstrates there is 'no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law.'" Ibid. (quoting R. 4:46-2(c); Henry v. N.J. Dept. of Human Servs., 204 N.J. 320, 330 (2010); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)).
Regarding issues of fact, the movant must demonstrate the absence of a "genuine issue" as to a "material fact," not simply an issue "of an insubstantial nature"; in other words, "a non-movant will be unsuccessful merely by pointing to any fact in dispute." Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.) (quoting Brill, supra, 142 N.J. at 529-30) (internal quotation marks omitted), certif. denied, 154 N.J. 608 (1998). "An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion . . . would require submission of the issue to the trier of fact." Perrelli, supra, 206 N.J. at 199 (citations omitted). We must view that evidence in the light most favorable to the non-moving party. Lee v. First Union Nat'l Bank, 199 N.J. 251, 254 (2009).
In the absence of any genuine issues of material fact, we must review the trial court's legal conclusions, which are "not entitled to any special deference." Henry, supra, 204 N.J. at 330 (quoting Manalapan Realty, L.P. v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995)).
Defendant argues that the trial court erred both in its findings of fact and conclusions of law. Specifically, defendant maintains that, contrary to the trial court's findings: 1) New Jersey law, not Michigan law, governs this case; 2) defendant properly complied with New Jersey law when it re-titled the vehicle; 3) defendant owns the vehicle, and the lease agreement represents a true lease, not a security agreement; 4) defendant could not have prevented the fraud Luxury perpetrated against plaintiff; and 5) plaintiff could have prevented that fraud by exercising due diligence, such as by checking the vehicle's Carfax report. As a result, defendant asserts that its interest in the vehicle takes precedence over plaintiff's and summary judgment should have been entered in defendant's favor.
Plaintiff counters and maintains that: 1) Michigan law governs; 2) defendant failed to re-title and re-register the vehicle in accordance with Michigan law; 3) defendant's "lease agreement" represented, in actuality, a security interest; and
4) defendant failed to record its security interest in Michigan. As a result, plaintiff argues that defendant was, at best, an unsecured creditor to Luxury, whereas plaintiff had a perfected security interest, and therefore the trial court did not err by granting summary judgment in plaintiff's favor.
The primary issue focuses on whose interest in the vehicle - plaintiff's or defendant's - takes precedence over the other. Determination of this issue requires application of the law of secured transactions, which is governed by the New Jersey Uniform Commercial Code, N.J.S.A. 12A:1-101 to :12-26 (UCC).*fn5
First, we must determine whether the "lease agreement" between Luxury and defendant constituted a true lease agreement or a disguised security interest. We conclude that the agreement is a security interest.
A security interest is "an interest in personal property . . . which secures payment or performance of an obligation." N.J.S.A. 12A:1-201(37). The definition continues:
Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and
(d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement. [N.J.S.A. 12A:1-201(37)].
Where a purported lease agreement provides that the lessee cannot prematurely terminate the lease and has the option to buy the goods at the end of the lease for no additional or nominal consideration, such an agreement creates a security interest as a matter of law, eliminating the need to consider any other factors. See In re Pillowtex, Inc., 349 F.3d 711, 717 (3d Cir. 2003) (interpreting identical language in the New York UCC). With regard to a vehicle, the fact that title to the vehicle is transferred to a creditor does not preclude a determination that the creditor is a secured party. BJL Leasing Corp. v. Whittington, Singer, Davis & Co., 204 N.J. Super. 314, 321 n.3 (App. Div. 1985) (citing N.J.S.A. 12A:9-102).
Here, the lease agreement required Luxury to pay defendant in excess of $160,000 over the sixty-month life of the agreement, provided no right for Luxury to terminate it prematurely, and permitted Luxury to purchase the vehicle at the end of the lease term for $106.05, a $495 administrative fee, and other non-quantified charges, including rentals and taxes then due - a nominal sum representing less than one percent of the total required lease payments. The "lease agreement" between Luxury and defendant was a security agreement.
Next, we must determine whose interest - plaintiff's or defendant's - takes priority. We conclude that defendant's interest takes priority over plaintiff's.*fn6
Where non-purchase-money*fn7 security interests conflict, their priority is generally determined as follows: 1) among perfected interests, the first to perfect has priority; 2) perfected interests have priority over unperfected interests; and 3) among unperfected interests, the first to attach has priority. See N.J.S.A. 12A:9-322.
A security interest in a vehicle is perfected by compliance with the motor vehicle certificate of ownership law, which requires a notation of the interest on the vehicle's title. See N.J.S.A. 12A:9-311(a)(2); N.J.S.A. 39:10-11J. Here, the New Jersey title for the vehicle noted defendant as owner of the vehicle and All Points as a lienholder of the vehicle. While defendant was not listed as a lienholder or secured party, the majority rule in jurisdictions throughout the United States accepts "substantial compliance" for the perfection of security interests under state certificate of title statutes. See In re Charles, 323 F.3d 841, 843 (10th Cir. 2003) (citing various caselaw). In other words, "a secured creditor is not required to disclose its status as a lienholder on a vehicle's certificate of title in order to achieve perfected status. Instead, it is sufficient if the creditor is identified as the owner of the vehicle." Ibid. This approach is particularly appropriate in situations where a purported motor vehicle lease actually created a security agreement, because otherwise, all such motor vehicle "lessors" will have the much less powerful unperfected interest in the vehicle, despite the fact that "no third party could be misled" by a certificate of title listing that creditor as the owner rather than a lienholder of the vehicle. Ibid. (citation omitted). Defendant perfected its security interest. Also, because plaintiff did not note its security interest on the vehicle's New Jersey title, its interest was unperfected. While plaintiff's security interest was noted on a title for the vehicle issued in Michigan, because this Michigan title was void, as discussed infra, this notation failed to perfect plaintiff's interest.
Plaintiff maintains that defendant failed to record its security interest in Michigan, and therefore defendant was, at best, an unsecured creditor to Luxury. Plaintiff cites section 234 of the Michigan motor vehicle code, which requires that the purchaser of a vehicle "shall present . . . the certificate of title and registration certificate if plates are being transferred to another vehicle . . . to the secretary of state accompanied by the fees as provided by law, whereupon a new certificate of title and registration certificate shall be issued to the assignee." Mich. Comp. Laws Ann. § 257.234(1). In granting summary judgment in favor of plaintiff, the trial court below also relied upon this statute.
However, defendant intended to, and in fact did, title the vehicle in a new state, New Jersey. As defendant notes, New Jersey also requires the purchaser of a vehicle to submit evidence of that purchase - either "assignment of the certificate of ownership or an assignment of the bill of sale" - in order to secure the issuance of a new title. See N.J.S.A. 39:10-9; N.J.S.A. 39:10-11A. Moreover, Michigan's law presupposes the situation where, unlike here, a purchaser seeks a new Michigan title. See Mich. Comp. Laws Ann. § 257.234(1) (noting that upon presentation of the old title to the secretary of state, "a new certificate of title and registration certificate shall be issued to the assignee"). Under plaintiff's theory, defendant would either have to submit the old title to both jurisdictions or submit the old title first to Michigan, and after Michigan issued a new title, then submit that new title to New Jersey. We reject that theory and conclude that defendant acted appropriately.
The trial court also held, and plaintiff asserts, that defendant's failure to obtain new registration for the vehicle controls here.*fn8 However, while a failure to comply with a state's registration requirements may constitute a violation of the motor vehicle code, such a failure does not negate the validity of the vehicle's change in title or the transfer of ownership rights. See James v. Francesco, 61 N.J. 480, 489 (1972) ("[t]he fact that defendant neglected to remove his license plates from the car at the time of transfer of title, while a violation by him of N.J.S.A. 39:3-30, does not have the legal consequence of retention in him of title to the vehicle"); Allstate Ins. Co. v. Demps, 348 N.W.2d 720, 723 (Mich. Ct. App. 1984) (holding the same under Michigan law and noting that while "Michigan courts have held that the sale of a motor vehicle which did not include a transfer of certificate of title as required by law was void, . . . the courts have been reluctant to find lesser defects, even those involving statutory violations, fatal to the transfer of ownership"). See also Mich. Comp. Laws Ann. § 257.233(9) (providing that "the effective date of the transfer of title or interest in [a] vehicle is the date of signature on either the application for title or the assignment of the certificate of title by the purchaser, transferee, or assignee").
Nor does such a violation affect attachment or perfection of a security interest, as the UCC, not the motor vehicle code, determines if and when attachment and perfection has occurred. See Clymer v. Summit Bancorp., 171 N.J. 57, 70 (2002) ("[i]t is a well established precept of statutory construction that when two statutes conflict, the more specific controls over the more general") (internal quotation marks and citation omitted). See also Messer v. Averill, 183 N.W.2d 802, 805 (Mich. Ct. App. 1970) (holding that the motor vehicle code, not the UCC, governs matters regarding the transfer of automobile ownership). As noted above, a security interest in a motor vehicle is perfected by proper notation on the vehicle's title; the vehicle's registration is, for purposes of the UCC, irrelevant. See N.J.S.A. 12A:9-311(a)(2); N.J.S.A. 39:10-11J. Defendant satisfied this requirement.
Plaintiff claims that "[t]here is no authority for the proposition that a New Jersey [c]ertificate of [t]itle is sufficient indicia of title for a vehicle located in Michigan with a history of Michigan use, certification, registration and licensure." However, in In re Paige, 679 F.2d 601 (6th Cir. 1982), the court held under Michigan law that, where the debtor owned a vehicle titled in Illinois and a security interest was noted on that title in accordance with Illinois law, the interest was perfected, regardless of the fact that the debtor's chief place of business was in Michigan. The court explained that "[t]he advantage of [this] interpretation . . . is that a potential creditor need look only to one place - the certificate of title - to discover prior security interests." Id. at 603. We agree with this approach, as it furthers the interests of comity, as well as the purpose of the UCC "to make uniform the law among the various jurisdictions." See N.J.S.A. 12A:1-102(2)(c).
Both plaintiff and the trial court below maintain that defendant's behavior in this matter somehow "enabled" Luxury to defraud plaintiff; as the trial court put it, "[i]f [defendant] had delivered the documents to the [Michigan] Secretary of the State, [plaintiff] would have known that Luxury did not have valid title to the vehicle and would not have refinanced it." First, the proofs on the motion do not support such a finding. No representative of plaintiff reviewed the vehicle's registration or relied upon it when agreeing to finance the vehicle. Luxury defrauded plaintiff by using a defunct copy of the vehicle's Michigan certificate of title to obtain an apparently "clean" but, in fact, void title showing itself as the owner of the vehicle and omitting any reference to defendant's interest. Nothing defendant did could have prevented that fraud.
Second, even if Luxury could defraud plaintiff, this does not negate the fact that defendant titled the vehicle in its name, which is all that is required under the UCC. In that regard, IAC, Ltd. v. Princeton Porsche-Audi, 75 N.J. 379 (1978), is instructive. IAC, a Canadian corporation, financed a buyer's purchase of a Porsche. Id. at 381. IAC perfected its security interest in the Porsche under Canadian law, which did not require a notation of that interest on the vehicle's certificate of registration. Id. at 381-82. Thereafter, the buyer drove the vehicle to New Jersey and changed the vehicle's registration and title to New Jersey. Id. at 382. During that process, the buyer falsely represented that the vehicle had no liens, and as a result was issued a "clean" certificate of title. Ibid. The buyer later sold the vehicle to Princeton Porsche-Audi, which was unaware of IAC's lien at the time of the sale. Ibid.
The Court held that IAC's lien remained valid, despite the fact that Princeton Porsche-Audi purchased the vehicle in good faith and without knowledge of that lien. In doing so, the Court noted that "the majority view is that if a security interest is perfected under the law of the jurisdiction in which it attaches, its priority cannot be defeated by the unauthorized securing of a 'clean' certificate of title in another jurisdiction." Id. at 386. The Court noted that "[t]his position not only promotes interests of comity but also discourages the fraudulent conduct indirectly sanctioned by [a contrary] construction." Id. at 388.
Here, the fraudulent conduct by Luxury is more apparent. In IAC, the buyer used the Porsche's valid registration to obtain an otherwise-valid New Jersey certificate of title that failed to note IAC's lien by exploiting a difference between Canadian and New Jersey perfection law. Luxury, on the other hand, used an old certificate of title to obtain a new but invalid certificate of title that failed to reveal defendant's security interest. Like in IAC, upholding defendant's interest in the vehicle promotes the interests of comity and discourages fraudulent conduct like Luxury's.
We conclude that defendant's interest in the vehicle takes priority over plaintiff's interest in the vehicle. However, because we also find that defendant's interest represents a security interest rather than an interest as a lessor, we must remand the case for further consideration, specifically regarding the UCC's rules concerning the enforcement of a security interest. See N.J.S.A. 12A:9-601 to -628. Issues to address upon remand include: 1) whether defendant was entitled to accept the vehicle in full satisfaction of Luxury's obligation; 2) whether defendant was required to notify plaintiff before doing so, and if so, whether defendant complied with that obligation; and 3) whether and to what extent plaintiff is entitled to damages given the value of the vehicle as well as the amount and priority of the pertinent security interests. The trial court should also consider whether any other parties with a security interest in the vehicle, including All Points and Citizens Bank of Pennsylvania, should be joined as interested parties, so that their interests in the vehicle, and the relative priorities of those interests, may be considered.
Because plaintiff may be entitled to a portion of the value of the vehicle, and because defendant retained the vehicle rather than disposing of the vehicle in a manner by which the vehicle's value can be determined, calculating the value of the vehicle may be relevant on remand. Although the trial court previously found that the value of the vehicle was $69,506.65 as a matter of law, we conclude that this issue must be revisited. The trial judge arrived at this figure based upon a calculation of defendant's profits from the subsequent lease of the vehicle, on the theory that "if [plaintiff] was in possession of the vehicle it could have presumably entered into a lease agreement identical to [defendant's current] lease."
Such a measure of damages is inappropriate given our finding that defendant's security interest had priority over plaintiff's. Defendant had the right to take possession of the vehicle, see N.J.S.A. 12A:9-609, and plaintiff cannot claim damages in the form of lost profits. Rather, in the event that calculation of the vehicle's value becomes necessary upon remand, that measure must be based upon what proceeds would have been realized had the vehicle been disposed of in a "commercially reasonable" manner. See N.J.S.A. 12A:9-610, -615(f), -627.
Finally, we note that while the proper method by which to measure damages is a question of law, the quantum of damages is generally a question of fact, best left to the factfinder. Only where the party seeking to have damages set as a matter of law establishes that there is "no genuine issue as to any material fact" with regard to the quantum of damages, considering the burden of persuasion at trial, and viewing the evidence in the light most favorable to the non-moving party, see Perrelli, supra, 206 N.J. at 199 (citations omitted), may summary judgment with regard to damages be granted.
We reverse and remand for further proceedings consistent with this opinion. We do not retain jurisdiction.