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Date: 03-15-2019

Case Style: Ron Miller Enterprises, Inc. v. Lobel Financial Corporation, Inc.

Case Number: F076205

Judge: Levy, Acting P.J.

Court: California Court of Appeals Fifth Appellate District, on appeal from the Superior Court, County of Fresno

Plaintiff's Attorney: D. Mitchell Taylor

Defendant's Attorney: Ronald Green, Jr. and Gary Dean Lobel

Description:




Miller Enterprises, Inc. dba Fresno Commercial Lenders (plaintiff) provides
short term loans to automobile dealers, also known as flooring loans. In the present case,
plaintiff made such loans to two now-defunct dealerships in the Fresno area, Elizabeth
Chavez dba King of Kars (King of Kars) and Carmen Zepeda dba Cars of Clovis (Cars of
Clovis) (also referred to as the dealership(s)). Whenever plaintiff advanced a specific
loan amount to either of the two dealerships, (i) the dealership in question signed a
2.
separate agreement identifying a particular vehicle as collateral (collateral agreement)
and (ii) plaintiff took possession of that vehicle’s title certificate as security for the loan
advance. These same vehicles were sold by King of Kars and Cars of Clovis to
consumers under conditional sales contracts, and the conditional sales contracts were then
sold and assigned by the dealerships to a finance company known as Lobel Financial
Corporation, Inc. (defendant). Afterwards, both Cars of Clovis and King of Kars went
out of business without repaying the sums loaned by plaintiff concerning the sold
vehicles. Plaintiff, who still retained the title certificates for the vehicles and believed it
had a perfected security interest, sued defendant for the amounts that plaintiff should
have been paid by the dealerships (i.e., the loan amounts due) upon the sale of the subject
vehicles. Allegedly, defendant was required under the circumstances to make such
payment(s) to plaintiff to acquire the title certificates for said vehicles.
Plaintiff’s claims were largely premised on the holding and rationale of the
appellate decision in Quartz of Southern California, Inc. v. Mullen Bros., Inc. (2007) 151
Cal.App.4th 901 (Quartz). Here, in its decision following trial, the trial court held
plaintiff did not have a security interest in the vehicles and further concluded the Quartz
case was distinguishable. As a result, the trial court found in defendant’s favor and did
not require defendant to pay plaintiff the amounts allegedly due to obtain the title
certificates for said vehicles. Plaintiff has appealed from the resulting defense judgment.
For the reasons explained hereinbelow, we conclude the trial court prejudicially erred
because the circumstances of this case were sufficiently close and/or analogous to those
in the Quartz decision to warrant its application here. Accordingly, we reverse and
remand the matter to the trial court for further proceedings to determine the precise
amount due to plaintiff for defendant to obtain the title certificates for the vehicles
pursuant to Quartz, after which a new judgment shall be entered by the trial court in favor
of plaintiff.
3.
FACTS AND PROCEDURAL HISTORY
The Loan Transactions
Plaintiff entered a “Commercial Promissory Note” (Note) with each of the two
dealerships, respectively, pursuant to which plaintiff agreed to extend credit to the
individual dealership named therein. The purpose of the Notes, as observed by the trial
court, was to finance the acquisition by the dealerships of used cars. The Notes
established a revolving line of credit under which specific loan advances could be made
but also provided that “[a]ll advances and fees are due and payable on the first day of sale
or at the end of 120 days.”
As each loan advance was made to a dealership under its line of credit, the
dealership signed a separate “Collateral Agreement and Advance on Revolving Credit
Line” (collateral agreement). Each of the collateral agreements indicated the specific
loan advance was “for” a particular vehicle that was identified therein by its year, make,
model, license number and vehicle identification number. The collateral agreements
included spaces for indicating “80% of Kelly Book” and “Dealer Cost,” and thus it
appeared (and the trial court found) that the amount of each loan advance was based on a
percentage of the estimated value of the vehicle. Under the terms of each of the collateral
agreements, the loan obligation reflected therein was due “upon sale of vehicle,” or by a
certain date, whichever was first to occur. The collateral agreements further provided
that “If, for any reason, the vehicle is returned to [plaintiff] for non-payment, [dealership]
will pay the deficiency balance when [plaintiff] disposes of the vehicle.”
In addition to requiring the dealerships to execute a collateral agreement for each
separate loan advance, plaintiff also took physical possession of the title certificates for
the vehicles identified in the collateral agreements. According to plaintiff, this was done
“as evidence that the vehicles and their titles were/are security” for the loan amounts.
Plaintiff filed “UCC-1” financing statements (or UCC-1’s) on both of the
dealerships. As to King of Kars, plaintiff’s UCC-1 listed as collateral “any and all
4.
vehicles, equipment, tools and accounts receivable located at 618 Fulton Street, Fresno,
CA 93701 or any other locations controlled by … King of Kars.” As to Cars of Clovis,
plaintiff’s UCC-1 listed as collateral “any and all vehicles, tools, equipment and accounts
receivable located at 1308 Clovis Ave., Clovis, CA 93612 or any other locations
controlled by … Cars of Clovis.”
The Sale of the Vehicles
The trial court found, and neither party disputes, the following facts and
circumstances relating to the sale of the vehicles: “The vehicles in question were sold by
the dealerships to their customers pursuant to Conditional Sales Contracts that required
down payments and monthly payments and provided that the title to the vehicles would
serve as security for the performance of the loans [to the customers]. [Defendant]
purchased the Conditional Sales Contracts from the dealerships but did not require that
title certificates be provided at the time it paid the dealerships for the Contracts. [¶] The
dealerships went out of business and did not repay the flooring loans from [Plaintiff].
[Defendant] has demanded that [Plaintiff] turn over the title certificates and [Plaintiff] has
refused.”
Summary of Pleadings
Plaintiff alleged a cause of action for declaratory relief, seeking a judicial
declaration that defendant must pay plaintiff for the title certificates held by plaintiff as
security for vehicle flooring loans made to the defunct dealership, King of Kars. A
second lawsuit making substantially the same allegations was filed by plaintiff regarding
vehicle flooring loans made to another defunct dealership, Cars of Clovis. The two
actions were consolidated. According to plaintiff’s allegations, the vehicles in question
were sold by the dealerships to individual customers under conditional sales contracts.
Defendant ultimately provided financing for the customers’ purchases by taking
assignment of (i.e., purchasing) the conditional sales contracts from the dealerships.
However, in doing so, defendant failed to require production of the title certificates. The
5.
dealerships went out of business without paying the monies owed to plaintiff. Later,
plaintiff refused to release the title certificates to defendant unless defendant paid off the
loans made to the dealerships on the subject vehicles. In essence, plaintiff alleged—
pursuant to the holding in Quartz—that as between plaintiff and defendant, plaintiff was
the legal owner of the title certificates and was entitled to the requested declaratory relief
because defendant “was in the position to prevent anyone from being harmed by [the
dealerships] by requiring the production of the title certificates ….” In its answer,
defendant denied that plaintiff is entitled to the relief sought.
As summarized by the trial court, all parties other than defendant (i.e., Lobel
Financial Corporation, Inc.) had been dismissed prior to trial from the consolidated action
or defaulted. Thus, by the time of trial, the only matter to be resolved was the request for
declaratory relief that we have described above.
Thirty Transactions Claimed
Plaintiff claims there were a combined total of 30 instances of vehicles sold by the
dealerships to consumers where the resulting conditional sales contracts were assigned to
defendant, and, as to the same vehicles, the dealerships had previously signed collateral
agreements and surrendered the title certificates to plaintiff, but concerning which
plaintiff was never paid on its loan advances. The 30 instances included seven vehicles
sold by King of Kars and 23 vehicles sold by Cars of Clovis. In the instant appeal,
plaintiff asserts the total principal due for its loan advances on the seven vehicles sold by
King of Kars was $31,430, and the total principal due for its loan advances on the 23
vehicles sold by Cars of Clovis was $102,000. Plaintiff further asserts that it is entitled to
these principal amounts plus the maximum interest allowable by law as payment for the
title certificates to the vehicles. Since plaintiff did not prevail in the trial court, the court
never addressed the issue of the precise amount that should be paid for the titles.1

1 We note that because the amounts due for the titles largely present a factual matter
that is best determined by the trial court, that issue will be remanded to the trial court.
6.
Trial Court’s Decision
After consideration of the evidence introduced at trial and the parties’ posttrial
briefing, the trial court issued its statement of decision on July 21, 2017. In framing the
issues, the trial court indicated that plaintiff contended it must be paid by defendant for
the titles to the vehicles because either (i) plaintiff held a perfected security interest in the
vehicles, or (ii) plaintiff was and is the lawful holder of the title certificates to the
vehicles.
In its statement of decision, the trial court first addressed the issue of whether
plaintiff had a security interest in the vehicles. The trial court reviewed the relevant
documents, including the Notes, the collateral agreements and the UCC-1 financing
statements and concluded that no security interest was ever created. The trial court
reached this conclusion based on its assessment that the relevant documents failed to
adequately or explicitly articulate an intent to create a security interest in the vehicles.
Lacking an agreement to create a security interest, there was no existing security interest
in place for the UCC-1 financing statements to perfect. Thus, the trial court concluded
that plaintiff’s security interest theory failed.
Next, the trial court addressed plaintiff’s contention that because it held physical
possession of the title certificates to the vehicles, defendant was required to pay plaintiff
for them. The trial court acknowledged that plaintiff was relying on the applicability of
the Quartz decision to support this claim. However, the trial court found that Quartz was
inapplicable because of material factual differences between Quartz and the present case,
including the fact that the plaintiff in Quartz was an automobile auction house that
“actually owned legal title to the vehicles in question.” The trial court continued: “Here,
on the other hand, [plaintiff] is a finance company that loaned money to the dealerships,
in exchange for the dealerships giving plaintiff physical custody of the title documents
purportedly as security for the loans. There is no evidence that plaintiff ever actually
intended to obtain … legal title to the subject vehicles, as opposed to holding the physical
7.
title documents as purported security for the loans.” In other words, since plaintiff here
was never the vehicles’ owner nor in the chain of title, but merely had physical
possession of the title certificates, the trial court held that Quartz was distinguishable.
Accordingly, the trial court rejected plaintiff’s claim that because it held the title
certificates it was entitled to be paid by defendant.
The trial court’s disposition was as follows: “As to [plaintiff’s] claim for
declaratory relief in … these consolidated actions, the court finds in favor of [defendant]
and declares that [defendant] is not obligated to pay [plaintiff] for the title certificates for
the vehicles which are the subject of this action.” Plaintiff’s timely notice of appeal
followed.
DISCUSSION
I. Standard of Review
We independently review the trial court’s rulings on questions of law, including
issues of statutory construction and the correct application of a statute under undisputed
facts. (Brasher’s Cascade Auto Auction v. Valley Auto Sales & Leasing (2004) 119
Cal.App.4th 1038, 1048 (Brasher’s).) We also exercise de novo review regarding the
interpretation of written contracts or other writings. (Mayer v. C.W. Driver (2002) 98
Cal.App.4th 48, 57 [“[u]nless resolution depends on the credibility of conflicting
extrinsic evidence, the interpretation of a writing involves a question of law for de novo
review by the appellate court”]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d
861, 865–866.) Findings of fact set forth in the trial court’s statement of decision are
reviewed under the substantial evidence standard. (Brasher’s, supra, 119 Cal.App.4th at
p. 1048.)
Here, it appears that the essential issues raised are questions of law, including the
interpretation of written agreements and the application of legal or statutory principles
under undisputed facts. Therefore, we exercise de novo review.
8.
II. Plaintiff’s Alleged Security Interest
Plaintiff first argues that it was entitled to receive payment for the certificates of
title from defendant because, allegedly, plaintiff had a perfected security interest in the
vehicles in question. As noted, the trial court rejected this theory of recovery due to its
finding that no security interest was agreed to by plaintiff and the dealerships. In the
instant appeal, plaintiff contends the trial court’s finding and conclusion on this matter
were in error. We shall consider this issue in two parts by initially addressing the extent
to which plaintiff had a perfected security interest, and then deciding whether any such
interest would entitle plaintiff to the relief sought in this case.
A. The Existence of a Security Interest
Where a motor vehicle is concerned, the manner of perfecting a security interest is
governed by either the Vehicle Code or the Uniform Commercial Code,2 depending on
whether the vehicle in question constituted inventory. (See, Quartz, supra, 151
Cal.App.4th at p. 908 [stating Vehicle Code provides the exclusive method of perfecting
a security interest “in a vehicle not constituting inventory”]; Louis & Deiderich, Inc. v.
Cambridge European Imports, Inc. (1987) 189 Cal.App.3d 1574, 1585 [stating that since
vehicle was part of dealer’s inventory, “the Commercial Code, rather than the Vehicle
Code governs the manner of perfecting the security interest”].) The general rule and
primary method for effectuating a security interest in a vehicle is set forth in Vehicle
Code section 6300. Under that section, no security interest in a motor vehicle is
perfected until the secured party has submitted to the Department of Motor Vehicles
(DMV) a properly endorsed “certificate of ownership”3
to the vehicle subject to the

2 Unless otherwise indicated, all further statutory references are to our state’s
Uniform Commercial Code.
3 A vehicle’s “certificate of ownership” is the same as what we have referred to
herein as a title certificate. (See, e.g., Hirsch v. Department of Motor Vehicles (1974) 42
Cal.App.3d 252, 257; T&O Mobile Homes, Inc. v. United California Bank (1985) 40
9.
security interest showing the secured party as legal owner. (§ 6300; see also Veh. Code
§ 5600 [similar rule concerning transfers of title or ownership].) However, an exception
to this general rule exists pursuant to Vehicle Code section 5907 where the vehicle
constitutes inventory. (See Veh. Code, § 6300 [stating exception under § 5907]; see also
§ 9311, subds. (a)(2)(A) & (d).) Vehicle Code section 5907 states, in pertinent part, as
follows: “A secured party who holds a security interest in a registered vehicle that
constitutes inventory as defined in the Uniform Commercial Code, who has possession of
the certificate of ownership issued for that vehicle, … need not make application for a
transfer of registration and the Uniform Commercial Code shall exclusively control the
validity and perfection of that security interest.”
Here, the trial court found that the vehicles in question were held by the
dealerships as inventory. Based on that finding, which the parties do not dispute, the trial
court correctly observed that the question of whether plaintiff had an enforceable security
interest in the vehicles must be “analyzed pursuant to the California Uniform Commercial
Code.” Division 9 of that code (sections 9101 et seq.) “ ‘sets out a comprehensive
scheme for the regulation of security interests in personal property.’ ” (T&O Mobile
Homes, Inc. v. United California Bank, supra, 40 Cal.3d at p. 446.) We now consider
those provisions.
Under section 9203, a security interest is created with respect to specific collateral
when three elements are present: (1) the debtor has authenticated (or signed)4 a security
agreement describing the collateral, (2) value has been given, and (3) the debtor has
rights in the collateral. (New West Fruit Corp. v. Coastal Berry Corp. (1991) 1
Cal.App.4th 92, 97 (New West); Louis & Diederich, Inc. v. Cambridge European

Cal.3d 441, 449 [under California law, title and security interests reflected in the
certificate of ownership]; Veh. Code, §§ 370, 460, 4450.)
4 The term “authenticate” means “to do either of the following: [¶] (A) To sign. [¶]
(B) To with present intent to adopt or accept a record, attach to or logically associate with
the record an electronic sound, symbol, or process.” (§ 9102, subd. (a)(7).)
10.
Imports, Inc., supra, 189 Cal.App.3d at p. 1586; § 9203, subd. (b)(1), (2), (3)(A).) Here,
the second and third elements were clearly established on the record before us,5 and only
the first element—i.e., whether a security agreement was entered concerning the
collateral (i.e., the subject vehicles)—is at issue in the present appeal. In its statement of
decision, the trial court reviewed the relevant documents and concluded there was no
security agreement in place between plaintiff and the dealerships. For reasons explained
below, we disagree.
A “security agreement” is defined as “an agreement that creates or provides for a
security interest.” (§ 9102, subd. (a)(74).) The “property subject to a security interest” is
referred to in the code as the “collateral.” (§ 9102, subd. (a)(12).) A security agreement
is “effective according to its terms between the parties, against purchasers of the
collateral, and against creditors.” (§ 9201, subd. (a).) A security agreement must be
authenticated (i.e., signed) by the debtor and it must adequately describe the collateral.
(§ 9203, subd. (b)(3).) The term “security interest” is defined under the basic definitional
provisions of the Uniform Commercial Code as follows: “ ‘Security interest’ means an
interest in personal property or fixtures which secures payment or performance of an
obligation….” (§ 1201, subd. (b)(35).)
The case law makes clear that no special wording or formulaic language is
required to evidence that the parties intended to create a security interest. “[T]he creation
of a valid security interest turns on ‘whether the parties intended the transaction to have
effect as security.’ [Citations.]” (New West, supra, 1 Cal.App.4th at p. 97.) Therefore:
“ ‘No special form is necessary to create a security interest. [Citation.] It is sufficient if
the parties use language that indicates the parties intended to create a security interest …

5 As noted by plaintiff’s opening brief, value was given in the form of the loan
advances (thereby meeting the second element); and the loans were apparently for 80
percent of value and, thus, there was approximately 20 percent unencumbered equity
owned by the dealerships while the vehicles remained in the dealerships’ possession as
part of their inventory to be sold to customers (thereby meeting the third element).
11.
and if the security agreement reasonably identifies the property subject to the agreement.’
[Citations.]” (Id. at pp. 97–98; see also In re Amex-Protein Development Corp. (9th Cir.
1974) 504 F.2d 1056, 1059 [no magic words necessary to create security interest].)
Further, the security agreement and the parties’ intent need not be evidenced by a
single stand-alone written document, but may be ascertained through consideration of
several documents. (Komas v. Future Systems, Inc. (1977) 71 Cal.App.3d 809, 813–814
(Komas).) In Komas, the appellate court viewed several writings together to reach its
conclusion that the parties intended to create a security interest in the collateral. It
summarized this conclusion as follows: “No special form is necessary to create or
provide for a security interest. [Citation.] It is sufficient if the parties use language
which leads to the conclusion that it was the intention of the parties that a security interest
be created. [Citations.] In the present case, the financing statement, loan application,
promissory note and other documents, taken together, establish that there was an
agreement to create or provide for a security interest. [Citations.]” (Id. at p. 816.)
Applying these principles to the matter before us, we conclude that plaintiff and
the dealerships did intend to create a security interest in the vehicles identified within the
collateral agreements. That intent was especially shown by the collateral agreements
themselves. As summarized previously herein, when each loan advance was made by
plaintiff to a dealership under its line of credit, the dealership signed a separate collateral
agreement specifically identifying a particular vehicle, stating the loan advance was “for”
that particular vehicle, and requiring repayment of the loan advance upon the sale of the
same vehicle or by a certain date, whichever was first to occur. The collateral
agreements further provided that “If, for any reason, the vehicle is returned to [plaintiff]
for non-payment, [dealership] will pay the deficiency balance when [plaintiff] disposes of
the vehicle.” These terms plainly establish the vehicles described in the collateral
agreements were intended to serve as collateral for, or to effectively secure, the loan
advances. The fact that plaintiff would have a right to dispose of a vehicle if the
12.
dealership defaulted leaves no room for doubt that an actual security interest in the
vehicles was intended.
Moreover, in addition to requiring that the dealerships execute a collateral
agreement for each separate loan advance, plaintiff also took physical possession of the
title certificates for the vehicles identified in the collateral agreements. According to
plaintiff, this was done “as evidence that the vehicles and their titles were/are security”
for the loan amounts. We agree this course of performance evidenced the nature of the
parties’ agreement as constituting a security interest. The Uniform Commercial Code
defines the term “agreement” to mean “the bargain of the parties in fact, as found in their
language or inferred from other circumstances, including course of performance, course
of dealing, or usage of trade ….” (§ 1201, subd. (b)(3).) As we concluded hereinabove,
the language of the collateral agreements was, by itself, sufficient to reflect an intention
to create a security interest. However, the correctness of that conclusion is strongly
confirmed and corroborated by the undisputed fact that the title certificates to the vehicles
identified as collateral were surrendered by the dealerships to plaintiff and were retained
in plaintiff’s possession. Although a security interest may exist without regard to the
location of title (see § 9202), that does not mean that holding the title certificates is
irrelevant to the issue of whether the parties to the transaction intended to create a
security interest. To the contrary, the fact that the title certificates to the vehicles were
surrendered to plaintiff, as part of the underlying loan transactions, was indicative in this
case of an intent to create or facilitate a security interest. (See Veh. Code, § 5907
[Uniform Commercial Code controls validity and perfection of security interest in
vehicles in a car dealer’s inventory where secured party has possession of certificates of
ownership of the vehicles]; see also, e.g., § 1201, subd. (b)(35) [a retention of title by a
seller generally indicative of security interest].)
Finally, we consider plaintiff’s publicly filed UCC-1 financing statements
covering vehicles located at both the dealerships. As the trial court correctly observed,
13.
since the financing statements were not executed by the dealerships and described the
collateral in very general terms, they were insufficient by themselves to establish the
existence of any underlying agreement(s) on the part of the dealerships to grant security
interests to plaintiff in particular vehicles. Nevertheless, the financing statements may be
considered together with the other relevant documents. (Komas, supra, 71 Cal.App.3d at
pp. 813–814.) Here, as we explained in our discussion above, the other documents (i.e.,
collateral agreements) sufficiently demonstrated the existence of security agreement(s);
therefore, the UCC-1 financing statements are not necessary for that purpose. We do
note, however, that when considered together with the other evidence, the financing
statements filed by plaintiff concerning the two dealerships are consistent with our
conclusion that the underlying agreements and loan transactions entered by plaintiff with
the dealerships were intended to create enforceable security interests in the vehicles
identified in the collateral agreements. (See, e.g., Goehring v. Superior Court (1998) 62
Cal.App.4th 894, 907 [the purpose of filing a financing statement is to give notice to and
assure priority over other creditors and interested third parties with respect to security
interests in collateral]; Turbinator, Inc. v. Superior Court (1995) 33 Cal.App.4th 443, 451
[filing of financing statement perfects security interest as against creditors and transferees
of the debtor].)
Based on the foregoing analysis, we conclude that plaintiff did have security
interests in the vehicles in the dealerships’ inventory that were identified in the collateral
agreements. Furthermore, it appears that plaintiff’s security interests were perfected in
light of the filing of the UCC-1 financing statements on the dealerships describing the
covered collateral as, among other things, “all vehicles … located at” the dealerships.
(§ 9310, subd. (a) [security interest perfected by filing financing statement]; see also
§ 9311, subds. (a)(2)(A) & (d) [filing a financing statement is an applicable and effective
method for perfection of security interest in motor vehicle that is in inventory held for
sale or lease].)
14.
Defendant has questioned in a cursory fashion the adequacy of the collateral
descriptions set forth in the financing statements, but we conclude they are sufficient. A
financing statement need only “indicate[] the collateral covered by the financing
statement.” (§ 9502, subd. (a)(3).) As the trial court explained, the indication of
collateral covered in a financing statement may be, and often is, broader or more general
than the collateral description in the security agreement. (See Northwest Acceptance
Corp. v. Lynnwood Equipment, Inc. (9th Cir. 1988) 841 F.2d 918, 921 [explaining
different purpose behind collateral description in security agreement and in a financing
statement].) Generally speaking, a financing statement sufficiently indicates the
collateral where, as here, it describes the type or category of property items covered,
which may include stating “all” of a type or category of property items. (See § 9504
[sufficient to indicate “all” assets]; Official Comments on Uniform Commercial Code
§ 9504, comment 2 [noting that narrower description than “all assets,” such as “all assets
other than automobiles” is sufficient for purposes of this section]; § 9108, subd. (b)(2)
[sufficient to reasonably identify collateral by category]; Biggins v. Southwest Bank (9th
Cir. 1973) 490 F.2d 1304, 1308 [financing statement which described the assets covered
as “new and used automobiles” was sufficient since the purpose of a financing statement
is to merely alert the third party to the need for further investigation as to perfected
security interest].) Thus, the financing statements here adequately indicated the
collateral; plaintiff’s security interests in the vehicles were perfected.
B. Impact on Relief Sought by Plaintiff
However, our conclusion that plaintiff did have perfected security interests in the
subject vehicles held by the dealerships as inventory does not mean that plaintiff prevails
on its security interest theory of recovery. Defendant points out that to the extent plaintiff
had security interests in the vehicles identified in the collateral agreements, the security
interests did not continue to exist in the vehicles once they were sold by the dealerships to
consumers. Defendant is correct.
15.
A security interest in collateral does not continue to apply after sale of the
collateral if the sale was authorized by the secured party free of the security interest.
(Brasher’s, supra, 119 Cal.App.4th at p. 1049; § 9315, subd. (a)(1); see also § 2403,
subd. (2).) Here, the collateral agreements and Notes clearly reflected the parties’
understanding that the dealerships would be selling the vehicles identified in the
collateral agreements. In fact, the basic triggering event for the loans to be repaid was the
sale of the vehicles by the dealerships. Since the dealerships were in the business of
selling used cars to consumers, the sales contemplated by the parties necessarily included
sales to consumers. Obviously, where a consumer purchases a vehicle from a used car
dealer such as the dealerships here, the vehicle would be sold to the consumer
unencumbered by the dealer’s flooring loan obligations or the flooring lender’s security
interests. We conclude that plaintiff, as the secured party, authorized the dealerships to
sell the vehicles to consumers free and clear of plaintiff’s security interest, and therefore
the security interests did not continue in the vehicles once those sales to consumers
occurred under the conditional sales contracts.6

It follows that plaintiff’s security interest theory of recovery fails. When
defendant purchased the conditional sales contracts from the dealerships, the security
interests that had previously existed in the vehicles while they were in inventory no
longer continued. Consequently, to the extent that plaintiff is seeking relief against
defendant (i.e., payment for the title certificates) as a remedy for enforcement of the
security interests as such, plaintiff’s claim falls short and cannot prevail.
However, we would also observe that the filing of the UCC-1 financing
statements, by which plaintiff’s security interests were perfected as to each of the subject

6 Because of our conclusion, we need not address defendant’s additional argument
that the consumers who purchased the vehicles from the dealerships would take free of
the security interests as buyers in the ordinary course of business pursuant to section
9320, subd. (a). (See § 1201, subd. (b)(9) [defining “buyer in ordinary course of
business”].)
16.
vehicles prior to their individual sale(s) to consumers, provided notice to consumer
financing lenders such as defendant that a reasonable inquiry should be made concerning
the nature and circumstances of any potential security interest. (See, e.g., Cassel v. Kolb
(1999) 72 Cal.App.4th 568, 575 [a financing statement puts third parties on notice that
another party may have a security interest in the collateral and that further inquiry is
required].) Moreover, since vehicles were indicated as collateral in the financing
statements, and since title certificates to vehicles in the used car industry are sometimes
held by a creditor as a security device in regard to such vehicles (see Veh. Code, § 5907),
a reasonable inquiry by defendant would have included the status of title and/or where the
title certificates were held. The notice provided by the financing statements is a
consideration weighing in favor of plaintiff’s claim that the Quartz case should apply
here. We now turn to that alternative ground upon which plaintiff sought declaratory
relief in its action against defendant.
III. Plaintiff’s Claim for Relief Based on Quartz
Plaintiff contends that the holding of Quartz, supra, 151 Cal.App.4th 901, is
applicable to this case, and therefore defendant is required to pay plaintiff to acquire the
certificates of title. Defendant’s position is that Quartz is distinguishable because of
plaintiff’s status as a mere flooring lender rather than a wholesaler/seller in the chain of
ownership as was the Quartz plaintiff. The trial court agreed with defendant and
concluded that Quartz did not apply. As explained below, we conclude that plaintiff is
correct. We begin our consideration of this issue with a summary of the Quartz case.
A. The Quartz Case
In Quartz, the plaintiff was a wholesale used car auction known as Quartz of
Southern California, Inc. (Quartz) that would acquire used vehicles and sell them to other
dealers at an auction sale. (Quartz, supra, 151 Cal.App.4th at p. 904.) For various
reasons, title was usually not available at the time of auction. (Ibid.) Although Quartz
would generally require a buying dealer to pay for vehicles before taking possession,
17.
some buying dealers by prior arrangement with Quartz were permitted to take the
vehicles after agreeing to return and pay for title when it became available. (Ibid.) In the
latter case, the buying dealer would not be obligated to pay for the vehicles until Quartz
received the title certificates from the original selling dealer. (Ibid.) Mohawk was a used
car dealer that had such an arrangement with Quartz. Mohawk purchased 17 vehicles at
auction from Quartz and took possession without paying. With Quartz’s knowledge,
Mohawk sold the 17 vehicles to individual customers, and each customer financed his or
her purchase through a conditional sales contract. Mohawk then sold the conditional
sales contracts to Mullen, a finance company. (Ibid.) Quartz paid its selling dealers for
all 17 vehicles and received title certificates to each one. When Quartz notified Mohawk
that payment was due for the 17 vehicles, it discovered that Mohawk had gone out of
business, leaving a debt to Quartz of $94,720. Quartz refused to release the title
certificates until Mullen, as the finance company purchasing the conditional sales
contracts, paid Quartz on Mohawk’s behalf. Mullen refused. (Ibid.) Subsequently,
Quartz agreed to release title certificates to each consumer who paid off his or her
indebtedness under the conditional sales contracts, but Quartz preserved its right to
pursue a remedy against Mullen. (Id. at p. 905.) We note that although Quartz possessed
the title certificates, it did not perfect a security interest in the vehicles. (Id. at p. 909.)
In the trial of declaratory relief claims on the question of whether Mullen had to
pay Quartz for the title certificates, the trial court held that, as between Quartz and
Mullen, Quartz was the lawful owner or holder of the title certificates, but the trial court
refused to require Mullen to pay Quartz for the certificates. Both parties appealed.
(Quartz, supra, 151 Cal.App.4th at pp. 904–906.) The Court of Appeal affirmed the trial
court’s holding that Quartz was the lawful owner of the title certificates (id. at p. 904) but
reversed the portion of the judgment failing to award money to Quartz, holding “[t]he
trial court erred in failing to order Mullen to purchase the titles from Quartz for transfer
to the consumer buyers.” (Id. at p. 911.) The case was remanded to the trial court to
18.
determine the amount Mullen owed Quartz as payment for the title certificates. (Id. at
p. 912.)
In reaching this result, the Court of Appeal in Quartz first addressed Mullen’s
contentions that Quartz’s rights, if any, as holder of the title certificates were eclipsed or
cut-off under provisions of the Uniform Commercial Code relating to (i) the passage of
title with respect to the sale and delivery of the “goods” to Mohawk and then to the
purchasing consumers, and (ii) Mullen’s purported status as a secured party because of its
purchase from Mohawk of the conditional sales contracts. (Quartz, supra, 151
Cal.App.4th at pp. 906–908; see also p. 909 [noting Mullen was not a purchaser of the
vehicles themselves, but only of the conditional sales contracts].) Quartz rejected these
contentions because the Vehicle Code’s title and record requirements for effectuating title
transfers and perfecting security interests in motor vehicles governed, not the Uniform
Commercial Code. (Quartz, supra, 151 Cal.App.4th at pp. 906–908, citing Veh. Code,
§§ 5600 & 6300.) Neither Mohawk nor Mullen had complied with the Vehicle Code
title/registration requirements with respect to title transfers or perfection of security
interests in the sold vehicles, and therefore Mullen’s claims were without merit. Thus, as
between Quartz and Mullen, it was held that “Quartz holds title to the vehicles
unimpaired by any security interests.” (Id. at p. 910.)
Next, the Court of Appeal in Quartz proceeded to address Quartz’s claim that
Mullen had to pay it for the title certificates. (Quartz, supra, 151 Cal.App.4th at p. 910.)
In concluding the trial court had erred in not providing Quartz a remedy against Mullen,
Quartz considered the policies of the Uniform Commercial Code and found that such
policies “would be best served by requiring Mullen to pay [Quartz] for the titles to the
vehicles.” (Ibid.) The decision explained the relevant statutory policies as follows:
“ ‘[T]he ultimate goal of the California Uniform Commercial Code is to set forth rules of
law that promote the optimal allocation of society’s resources, i.e., promote economic
efficiency. In the context of the used car industry, the goal can be restated as making
19.
vehicles available to consumers as efficiently as possible.’ [Citation.]” (Quartz, supra,
at p. 910.) An important aspect of this goal is to facilitate such commerce “ ‘ “primarily
by guiding and making predictable the consequences of behavior,” ’ ” and only
secondarily to apportion fault. (Ibid.) Thus, for the most part the Uniform Commercial
Code “ ‘ “places responsibility on the party which ordinarily would be in the best
position to prevent the loss. [Citations.] …” [Citation.]’ [Citation.]” (Ibid., italics
added.) In applying this statutory policy, Quartz found that Mullen, the finance
company, was “in the better position to prevent the loss caused by Mohawk while
minimizing the disruption of the efficient flow of used vehicles from dealers to
consumers,” and also agreed with the trial court that “Mullen did not act in a
commercially reasonable manner when it failed to verify Mohawk’s title before
purchasing the sale contracts because a financing company could easily verify that a
dealer had title, or it could ascertain who held the title and how much was owed to obtain
it.” (Id. at pp. 910–911.)
Quartz went on to explain another reason that Mullen should bear the loss of
Mohawk’s default: In purchasing the conditional sales contracts, Mullen was Mohawk’s
assignee and stepped into Mohawk’s (the dealer’s) shoes, which carried with it certain
responsibilities. (Quartz, supra, 151 Cal.App.4th at p. 911.) The parties conceded that
Mohawk, as the dealer, had a duty to register the vehicles with the DMV reflecting the
consumers as registered owners and Mullen as lienholder, which required the acquisition
of the certificates of title. Mohawk’s sale of the conditional sales contracts to Mullen
meant that Mohawk’s performance of that obligation was assigned or delegated to
Mullen. (Ibid.) That is, Mullen was required to meet the dealer’s (Mohawk’s) obligation
to furnish the title documentation with respect to the consumer’s conditional sales
contracts by completing the transfer of ownership records necessary pursuant to Vehicle
Code sections 5600 and 6300, and to do so it had to acquire the title certificates. Quartz
further explained that, under the Uniform Commercial Code, an assignment of a contract
20.
ordinarily includes a delegation of the performance of duties the assignor had to the nonassigning
original party, and acceptance by the assignee constitutes a promise by him or
her to perform those duties. (Quartz, supra, at p. 911.) In rejecting Mullen’s argument
that only the buyers of the used cars could enforce Mullen’s performance of Mohawk’s
duties under the conditional sales contracts, the court responded: “But the buyers are not
parties to this action. The trial court ruled that as between Quartz and Mullen, Quartz is
the legal owner of the title certificates. The court erred in failing to order Mullen to
purchase the titles from Quartz for transfer to the consumer buyers.” (Ibid.)
B. Applicability of Quartz
Plaintiff argues that Quartz is applicable to the present case because defendant, as
the finance company purchasing the conditional sales contracts, was in the last and best
position to prevent loss by simply requiring production of title certificates from the
dealerships or at least verifying who held the title certificates and how much was owed to
obtain them. Because defendant failed to do so, plaintiff argues defendant should be
required to pay plaintiff for the certificates of title as was required in Quartz. We agree.
The parallels between Quartz and the present case are substantial. Here, as in Quartz,
(i) plaintiff is in rightful possession of the title certificates to the vehicles that were sold
by the dealerships to consumers under conditional sales contracts, (ii) the dealerships
went out of business without paying what was owed to plaintiff concerning said vehicles,
and (iii) defendant as finance lender took assignment of the conditional sales contracts
without requiring production of the title certificates or ascertaining who held title and
how much was owed to obtain it. Moreover, the statutory policy grounds relied on in
Quartz of placing responsibility on the party that would be in the best position to prevent
loss is as compelling here as it was in Quartz, as is the fact that defendant, as assignee of
the conditional sales contracts, stepped into the dealerships’ shoes regarding the
obligation to provide completed title and registration documentation to the buyers under
the conditional sales contracts. Finally, here we have another significant factor
21.
supporting the application of Quartz: Namely, plaintiff’s UCC-1 financing statements
put defendant on notice that the vehicles in question were potentially subject to security
interests held by plaintiff and that reasonable inquiry should be made before proceeding
with the purchase of the conditional sales contracts.
For all these reasons, we conclude that Quartz is applicable, and, accordingly,
defendant is required to pay plaintiff for the title certificates.
In so holding, we briefly note defendant’s counterargument, which was adopted by
the trial court. Defendant contends that Quartz is distinguishable because plaintiff here
was merely a flooring lender, not a seller of the vehicles as was the case in Quartz. In
other words, as an actual wholesaler/seller, Quartz was or could have been placed on the
title certificates as an owner of the vehicles. We are not persuaded that this fact, by itself,
presents a material difference. Instead, the circumstances in common with Quartz would
appear to be far more significant. That is, both plaintiff and Quartz were owed money by
the automobile dealers, the money owed was with respect to particular cars held by the
automobile dealers as inventory, and both plaintiff and Quartz retained the title
certificates to those cars. Thus, the circumstances of the plaintiffs in the two cases are
closely analogous. In light of these substantial parallels, whatever differences may
otherwise have existed between plaintiff (as holder of title certificates to vehicles as a
flooring lender to a car dealer) and Quartz (as holder of title certificates to vehicles as a
wholesaler selling to a car dealer), they do not appear to diminish the force of the
compelling rationale set forth in Quartz. We therefore reject defendant’s attempt to
distinguish Quartz.
Finally, having rejected defendant’s argument that plaintiff could not qualify as a
Quartz plaintiff, we conclude by emphasizing that defendant in the instant case was
plainly a Quartz defendant. As the finance lender purchasing the conditional sales
contracts, defendant was essentially in the identical position as the defendant in Quartz.
In both instances, the defendant/finance lender was the party in the best position to
22.
prevent loss by obtaining the title certificates or making reasonable inquiry about the
status and location of title prior to completing the purchase of the conditional sales
contracts. Accordingly, as between plaintiff and defendant, we conclude that plaintiff is
in rightful possession of the title certificates and, under all the circumstances, defendant
is required to pay plaintiff to obtain them.

Outcome: The judgment is reversed, and the matter is remanded to the trial court to
determine the precise amount of money defendant must pay plaintiff for the title
certificates to the vehicles in question, after which a new judgment shall be entered in favor of plaintiff. Costs on appeal are awarded to plaintiff.

Plaintiff's Experts:

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