Title: Toyota Motor Credit v. Hyman Auto Wholesale

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
TOYOTA MOTOR CREDIT CORPORATION 
 
v.  Record No. 972212     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
September 18, 1998 
C.L. HYMAN AUTO WHOLESALE, INC. 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
Theodore J. Markow, Judge 
 
 
In this appeal, we determine whether a lienholder whose 
lien was omitted from a duplicate certificate of title of an 
automobile because of the fraud of the owner can enforce that 
lien against a subsequent bona fide purchaser of the 
automobile. 
 
The facts are not in dispute.  In February 1996, Traci 
Bowden purchased a Toyota vehicle pursuant to a retail 
installment contract.  The contract was assigned to Toyota 
Motor Credit Corporation (TMCC) for value.  TMCC's security 
interest was noted on the certificate of title issued by the 
Virginia Department of Motor Vehicles (DMV).  TMCC retained 
possession of the certificate of title. 
 
In July 1996, Bowden applied for a duplicate certificate 
of title from DMV, representing that TMCC's lien had been 
satisfied and released.  Bowden's application was accompanied 
by a letter purportedly from TMCC releasing its lien.  This 
letter was a forgery.  Based on these fraudulent 
representations, DMV issued a duplicate certificate of title 
showing "no liens" against the vehicle.  Bowden then sold the 
vehicle to C.L. Hyman Auto Wholesale, Inc. (Hyman). 
 
When Bowden fell behind in her payments on the Retail 
Installment Agreement, TMCC began efforts to bring the account 
current or to recover the vehicle.  Eventually, TMCC 
discovered Bowden's fraud and that she had sold the vehicle to 
Hyman.  TMCC asked Hyman to return the vehicle.  When Hyman 
refused, TMCC filed a motion for judgment in detinue against 
Hyman.  Following a hearing, the trial court found that Hyman 
was a bona fide purchaser for value without notice of the 
fraud, was "entitled to rely on the certificate issued by the 
DMV," and was not subject to TMCC's lien.  The trial court 
dismissed the motion for judgment.  We awarded TMCC an appeal. 
 
As the trial court recognized, both parties in this 
litigation are innocent victims of the fraudulent acts of a 
third party:  "Each has followed the law and done everything 
which could reasonably be expected in order to protect its 
interests . . . .  However, the case is here, and, like it or 
not, the loss must fall on one of these two innocent parties."  
In determining where the loss falls, the trial court concluded 
that the motor vehicle titling statutes, as interpreted by 
this Court, require a decision in favor of Hyman.  We agree 
and will affirm the judgment of the trial court. 
 
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The motor vehicle titling statutes, Title 42, Chapter 6, 
were enacted to protect the public by providing for the 
issuance of certificates of title as evidence of ownership of 
motor vehicles and to provide potential buyers and creditors 
with a single place where information about the status of 
motor vehicles could be found.  Maryland Credit Fin. Corp. v. 
Franklin Credit Fin. Corp., 164 Va. 579, 583, 180 S.E. 408, 
409-10 (1935).  These statutes, originally enacted in 1924, 
eliminated any requirement that a lien against a motor vehicle 
be recorded in the county or city where the purchaser or 
debtor resides or in any other manner available for recording 
a security interest in personal property, but imposed the new 
condition that a security interest in a motor vehicle would 
not be perfected "as to third parties" unless shown on the 
certificate of title.  Code § 46.2-638; Bain v. Commonwealth,  
215 Va. 89, 91, 205 S.E.2d 641, 643 (1974). 
Code § 46.2-638 specifically provides that a certificate 
of title showing a security interest "shall be adequate notice 
to the Commonwealth, creditors, and purchasers that a security 
interest in the motor vehicle exists."  We have recognized 
that the converse is also true. 
[W]hen a certificate of title is issued which 
fails to show a lien or encumbrance, it is notice 
to the world that the property is free from any 
lien or encumbrance, and if transferred to a bona 
 
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fide purchaser the latter would obtain a good 
title. 
 
Maryland Credit, 164 Va. at 582-83, 180 S.E. at 409.  To hold 
otherwise would eliminate the ability of potential buyers and 
lenders to rely on the information contained in certificates 
of title. 
Inevitably, there will be occasions when the information 
regarding the status of liens contained in a certificate of 
title will be in error.  If the erroneous information is a 
notation that no liens exist against the vehicle, the interest 
of the bona fide purchaser for value prevails over the 
interest of the creditor with a security interest in the motor 
vehicle.  Id.  This rule applies whether the error was the 
result of an innocent mistake or, as in this case, of 
fraudulent acts by the owner.  A rule which allowed reliance 
on the absence of lien notations on a certificate of title if 
such absence resulted from an innocent mistake or clerical 
error but not if such absence resulted from fraud would negate 
any ability to rely on the certificate of title.  Under such a 
rule, a potential purchaser or lender would always have to 
conduct an independent search to determine if, in fact, there 
are no liens against the vehicle, thus defeating the intent of 
the General Assembly in creating a single repository for 
recording liens against motor vehicles.  In this case, 
 
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therefore, Hyman was entitled to rely on the absence of any 
lien notations on the certificate of title, and TMCC cannot 
enforce its security interest against Hyman. 
 
TMCC asserts that this conclusion is in conflict with 
established principles underlying the law relating to title 
expressed in First Nat'l Bank of Waynesboro v. Johnson, 183 
Va. 227, 31 S.E.2d 581 (1944), and Code § 8.2-403(1), as well 
as specific cases decided by this Court in which a lienholder 
was allowed to enforce its lien against a good faith purchaser 
for value without notice, Rudolph v. Farmers' Supply Co., 
Inc., 131 Va. 305, 108 S.E. 638 (1921), and McQuay v. Mount 
Vernon Bank and Trust Co., 200 Va. 776, 108 S.E.2d 251 (1959).  
Close examination of these cases shows, however, that the 
conclusion we reach today is not contrary to the authority 
cited by TMCC.*  
Longstanding Virginia law provides that one who does not 
have title to goods cannot transfer title to a buyer, even a 
bona fide purchaser for value without notice.  Johnson, 183 
Va. at 236, 31 S.E.2d at 585.  Thus, a thief cannot pass title 
to stolen goods even to an innocent purchaser who pays for the 
stolen goods.  However, Virginia law has also recognized that 
                     
* TMCC also argues that DMV can only release a lien 
pursuant to the procedures set out in Code § 46.2-642.  
However, this case does not involve the release of a lien but 
its enforceability under certain circumstances. 
 
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a person who purchases goods from one possessing only voidable 
title can nevertheless receive good title to the goods 
purchased.  Oberdorfer v. Meyer, 88 Va. 384, 386, 13 S.E. 756, 
756-57 (1891); Old Dominion Steamship Co. v. Burckhardt, 72 
Va. (31 Gratt.) 664, 668 (1879).  These principles have been 
implicitly recognized in Code § 8.2-403(1).  That subsection 
states, in pertinent part: 
A purchaser of goods acquires all title which 
his transferor had or had the power to transfer 
. . . .  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  
. . . 
(d) the delivery was procured through fraud 
punishable as larcenous under the criminal law. 
 
 
Citing the principles embodied in Code § 8.2-403, TMCC 
argues that Bowden could not pass "greater" title in the 
automobile than she owned.  Since her title was subject to the 
encumbrance of TMCC's lien, Hyman's title must also be subject 
to the lien.   
TMCC's argument, however, misinterprets the purpose and 
applicability of Code § 8.2-403.  The statute deals with the 
power of an owner with void or voidable title to pass good 
title to a bona fide purchaser for value.  It does not apply 
to the "rights . . . of lien creditors."  Code § 8.2-403(4).  
In this case, Bowden had a "good" title to the automobile, and 
 
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she passed a good title to Hyman.  She was not a stranger to 
title, and her title was not made "void" or "voidable" by 
TMCC's security interest.  Code § 8.2-403 and the principle 
described in Johnson, therefore, simply do not apply. 
Finally, the two Virginia cases cited by TMCC in which an 
innocent lienholder has prevailed over a bona fide purchaser 
do not require a different result in this case.  Both of these 
cases involve sales to bona fide purchasers for value by motor 
vehicle dealers and the application of the doctrine of 
estoppel based on the likelihood that the secured motor 
vehicle would be put into the stream of commerce.  In neither 
case did the Court consider the impact of the motor vehicle 
titling statutes or the extent to which potential purchasers 
are entitled to rely upon a certificate of title which failed 
to note an existing lien.  
Rudolph v. Farmers' Supply Co., as TMCC notes, was 
decided prior to the enactment of the motor vehicle titling 
statutes in 1924.  Rudolph, therefore, did not consider the 
effect of a certificate of title issued by DMV showing no 
liens on the motor vehicle, because the General Assembly had 
not yet authorized its issuance.  Consequently, the decision 
in Rudolph is not controlling in this case. 
 
The second Virginia case relied on by TMCC, McQuay v. 
Mount Vernon Bank and Trust Co., was decided after the 
 
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enactment of the titling statutes.  However, it is not clear 
whether the bona fide purchaser in that case, McQuay, ever saw 
or received any title certificate from the seller or DMV and 
he did not assert a defense based on reliance on a certificate 
of title issued by DMV showing no liens on the vehicle.  The 
ability to rely on a certificate of title issued with no 
notations of liens, therefore, was not at issue, and thus the 
holding in McQuay does not control the case before us. 
For the above reasons, we conclude that the trial court 
properly held that TMCC was not entitled to enforce its lien 
against Hyman because Hyman, a bona fide purchaser for value 
without notice of the lien, was entitled to rely on a 
certificate of title which did not contain a notation of the 
lien. 
Affirmed.
 
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