Schultz v. Bank of the West, C.B.C.

934 P.2d 421, 325 Or. 81, 32 U.C.C. Rep. Serv. 2d (West) 379, 1997 Ore. LEXIS 25

• Court: Oregon Supreme Court
• Decided: March 27, 1997
• Docket: CC 93CV0201; CA A85556; SC S42658
• Status: Published

Opinions

GILLETTE, J.

The issue in this case is whether a consumer, who purchases a used motor home from a dealer who was selling the motor home on consignment, acquires that vehicle free of a creditor’s prior perfected security interest in it. For the reasons that follow, we hold that the consumer does take the motor home free of the security interest.

The facts are undisputed. In 1987, defendants (the Muirs) bought a motor home. In 1988, the Muirs created, and defendant Bank of the West (the Bank) acquired and perfected, a security interest in the motor home. In 1992, the Muirs entered into an agreement with Gateleys’ Fairway Motors (Gateleys) by which Gateleys would sell the motor home on consignment. Gateleys was in the business of selling motor homes. Gateleys sold the motor home to plaintiffs, the Schultzes. Plaintiffs did not know that the motor home was being sold on consignment or that a security interest was attached to it. Gateleys failed to remit any of the sale money to the Muirs and, subsequently, filed for bankruptcy.

After learning of the Bank’s security interest, plaintiffs brought the present action, seeking a declaration that they owned the motor home free of the security interest. The trial court granted summary judgment in plaintiffs’ favor. The Bank appealed, and the Court of Appeals reversed the trial court, holding that the Bank’s security interest remained in force. Schultz v. Bank of the West, 135 Or App 359, 897 P2d 1204 (1995). We allowed plaintiffs’ petition for review and now reverse the decision of the Court of Appeals.

Whether or not a buyer takes goods free of a prior perfected security interest is governed by Article 9 of the Uniform Commercial Code (the UCC), as codified in ORS chapter 79. The specific question for decision here is whether plaintiffs are entitled to the special protection afforded to consumers by UCC § 9-307 (codified as ORS 79.3070(1)). That section provides, in part:

“A buyer in ordinary course of business as defined in ORS 71.2010(9) * * * takes free of a security interest created by the seller even though the security interest is perfected * *

The cross-referenced section, ORS 71.2010(9), defines “buyer in ordinary course.” It provides:

“ ‘Buyer in ordinary course of business’ means a person who in good faith and without knowledge that the sale to the person is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker.”

If plaintiffs can show that they come within the terms of ORS 79.3070(1), they own the motor home free of the Bank’s security interest. To do so, the parties here agree that plaintiffs must show two things: (1) They were a “buyer in ordinary course” when they bought the motor home from Gateleys, and (2) the seller of the motor home was the one who created the security interest. Plaintiffs argue that they qualify as “buyers in ordinary course,” because they bought the motor home from the Muirs’ agent, Gateleys, and Gateleys was in the business of selling used motor homes. Plaintiffs also argue that, as “buyers in ordinary course,” they take free of the Bank’s security interest that was created by the Muirs, whom plaintiffs claim were the seller. The trial court adopted this position in granting summary judgment in plaintiffs’ favor.

The Bank argues that both ORS 79.3070(1) and 71.2010(9) require a “seller” and that the seller must be the same party under both provisions. The Bank argues that, if Gateleys qualified as the “seller,” then, although plaintiffs would be “buyers in the ordinary course,” they could not take free of the Bank’s security interest, because Gateleys (as the seller, for the purposes of ORS 71.2010(9)) did not create the security interest — the Muirs did — and ORS 79.3070(1) requires that, for it to apply, the “seller” must have created the security interest. Alternatively, the Bank argues that, if the Muirs qualify as the “seller” (for the purposes of ORS 79.3070(1)), then plaintiffs could not qualify as buyers in the ordinary course, because the Muirs were not in the business of selling used motor homes as is required under ORS 71.2010(9).

This case brings to mind the military adage that all battles are fought at the corner of two maps. It requires us to interpret both ORS 79.3070(1) and 71.2010(9) and to explain how those two statutes work together. Because plaintiffs cannot attempt to invoke the protection of ORS 79.3070(1) unless they first can show that they qualify as “buyers in ordinary course,” we begin with the text of ORS 71.2010(9).

1. Were plaintiffs buyers in the ordinary course of business?

As always, in construing an Oregon statute, this court’s task is to discern the intent of the legislature. PGE v. Bureau of Labor and Industries, 317 Or 606, 610, 859 P2d 1143 (1993). In doing so, this court looks first to the text and context of the statute. Ibid.

Here, the relevant text from ORS 71.2010(9) states that a buyer in ordinary course “buys * * * from a person in the business of selling goods of that kind.” (Emphasis added.) Clearly, the plaintiffs bought from Gateleys, which was in the business of selling goods of that kind. But does the text require that the “person in the business of selling goods” have title to the specific goods that the buyer buys, i.e., be the “seller” of the goods.¹ This inquiry is important, because Gateleys disposed of the Muirs’ motor home on consignment — it did not have title.

The text does not require that the “person” from whom the goods are purchased have title. This is clear, first, from the text itself. Use of the word, “person,” instead of “seller” in a law as carefully crafted as the UCC is a conscious choice. That choice recognizes that there will be those who hold out goods for sale who do not have title, e.g., consignees such as Gateleys, in circumstances in which the stability of the marketplace would be undermined if good faith purchases from those parties were not valid. This point is made even more clear by the textual exclusion of “pawnbroker” — a special kind of consignee — from the definition. Finally, the text of ORS 71.2010(9) recognizes that a sale to a buyer in ordinary course may be “in violation of the ownership rights * * * of a third party.” Any ownership rights in a third party would mean that the “person in the business” did not have title to the goods. Thus, the text of ORS 71.2010(9) indicates that “person” does not mean “seller.”

If there were any doubt about the foregoing conclusion, the UCC provides other contextual clues to flesh out the concept of a buyer in ordinary course for the purposes of ORS 71.2010(9). ORS 72.4030(3), which is a part of the “sales” chapter of the UCC, provides that “[a]ny entrusting of possession of goods to a merchant who deals in goods of that kind gives the merchant power to transfer all rights of the entruster to a buyer in ordinary course of business.” (Emphasis added.) And, as already noted, another section in that chapter, ORS 72.1060(1), defines a “sale” as “the passing of title from the seller to the buyer for a price.” When those two sections are read together, it becomes clear that the UCC presumes that a buyer can qualify as a buyer in the ordinary course when the buyer purchases goods from a dealer who only possesses, but does not have legal title to, those goods.²

Moreover, in examining context, we also look to the UCC commentary and to the decisions of other jurisdictions. See Security Bank v. Chiapuzio, 304 Or 438, 445 n 6, 747 P2d 335 (1987) (so stating).³ The UCC commentary does not address explicitly the question whether a buyer who buys from a consignment dealer qualifies as a buyer in the ordinary course. However, the commentary apparently presumes that such a buyer can so qualify. Most jurisdictions similarly have presumed that buyers who buy from consignment dealers can qualify as buyers in the ordinary course. See, e.g., Martin v. Nager, 192 NJ Super 189, 469 A2d 519 (1983); American Lease Plans, Inc. v. R.C. Jacobs Plumbing, Heating & Air Conditioning, Inc., 274 SC 28, 260 SE2d 712 (1979); Williams v. Western Sur. Co., 6 Wash App 300, 492 P2d 596 (1972); Kranich & Bach v. Miller, 3 UCC Rep Serv 449 (NY Sup Ct 1966); Al’s Auto Sales v. Moskowitz, 203 Okla 611, 224 P2d 588 (1950) (illustrating proposition).⁴

The Court of Appeals concluded that plaintiffs were not buyers in the ordinary course for purposes of ORS 79.3070(1). However, in so concluding, the Court of Appeals defined “buyer in ordinary course” by reference to the terms of ORS 79.3070(1) itself, rather than by reference to the definition in ORS 71.2010(9). That approach was erroneous. ORS 79.3070(1) does not define buyer in ordinary course, nor does it have any effect on whether a buyer buys in ordinary course. To the contrary, ORS 79.3070(1) requires as a precondition that there already have been a finding that buyers bought in ordinary course “as defined in ORS 71.2010(9) ,”⁵ (Emphasis added.)

The text and context of ORS 71.2010(9) demonstrate that a buyer of consignment goods who buys from a consignment dealer can be a buyer in ordinary course for the purposes of that statute. There is no dispute here that plaintiffs meet the other requirements for being buyers in ordinary course. Consequently, we conclude that plaintiffs were buyers in ordinary course when they bought the consigned motor home at Gateleys.

2. Was the security interest created by the seller?

We now turn to ORS 79.3070(1). It provides that “[a] buyer in ordinary course of business * * * takes free of a security interest created by the seller even though the security interest is perfected and even though the buyer knows of its existence.” (Emphasis added.) Here, the Muirs created the security interest, but plaintiffs’ dealings were with Gateleys. In order to prevail, plaintiffs must show that, in spite of the fact that they dealt with Gateleys, the Muirs were “the seller” for the purposes of this provision. In our view, that issue turns on whether the seller is the party whose title to the goods was transferred.⁶

On its face, the text is not decisive, because it does not say whether, for the purpose of the provision, the concept of “seller” is limited to the party with legal title to the goods or whether, instead, the seller is simply the party that physically performs the exchange of goods for money with the buyer. Context, however, answers the question. As we have noted elsewhere, ORS 72.1060(1) provides that “[a] ‘sale’ consists in the passing of title from the seller to the buyer for a price.” (Emphasis added.) Nothing in ORS 79.3070(1) suggests that this definition, which specifically states that it is the seller who transfers title, is inapplicable. We hold that “seller,” as that term is used in ORS 79.3070(1), refers to the legal owner of the goods purchased by a buyer in ordinary course. Gateleys, with whom plaintiffs dealt, did not itself transfer title to the goods. Thus, it was not the “seller,” for the purposes of ORS 79.3070(1). The true seller of the motor home was the party that ultimately parted with title — the Muirs. And, because the Muirs created the security interest, plaintiffs took the motor home free of the Bank’s security interest.⁷

The dissent objects that, for UCC purposes, the concept of “seller” should be unitary throughout the code provisions that we address here. That may be true, but our opinion does no violence to that concept. We simply hold that, under our construction of the pertinent statutes, a buyer in ordinary course is not required to buy directly from the “seller.” Instead, a buyer may buy in ordinary course, so long as the person who holds out the goods for sale is one who is in the business of selling goods of that kind. It is not necessary that the person holding the goods out for sale have actual title to the goods; as in this case, the seller may entrust the goods to the person. But, when it comes to the security interest, ORS 79.3070(1) requires that the “seller” — i.e., the person who had title — be the one who “created” the security interest. Here, that is precisely what the titleholders (the Muirs) did. Our conclusion thus respects the wording of both ORS 71.2010(9) and 79.3070(1).

We hold that plaintiffs are entitled to the protection of ORS 79.3070(1), because they were buyers in the ordinary course of business and the seller created the security interest. The Court of Appeals erred in reaching a contrary result.

The decision of the Court of Appeals is reversed, and the judgment of the circuit court is affirmed.

1 ORS 72.1060(1) defines “sale” as “the passing of title from the seller to the buyer for a price.”

2 A commentator on the Oregon Uniform Commercial Code concludes that a buyer qualifies as a buyer in the ordinary course of business when he or she buys from a merchant who has been entrusted with goods by the owner of the goods. Henry J. Bailey, 1 The Oregon Uniform Commercial Code § 1.23, 40-41 (2d ed 1990).

3 Reliance on decisions from other jurisdictions and on the commentary to the UCC is based on the fact that the Oregon legislature adopted the UCC with little debate and, at least in part, intended to further the goal of uniform treatment of commercial matters covered by the code. Security Bank, 304 Or at 445 n 6.

4 Even the case on which the Court of Appeals relied to conclude that plaintiffs were not buyers in the ordinary course — -for purposes of ORS 79.3070(1) — acknowledged that a buyer of consignment goods who was unaware of the consignment arrangement qualifies as a buyer in the ordinary course of business. See Kusler v. Cipriotti, 221 NJ Super 654, 535 A2d 567, 568-69 (1987) (so stating) (citing Martin v. Nager, 192 NJ Super 189, 469 A2d 519 (1983)).

5 The Court of Appeals recognized that principle when it rejected plaintiffs’ reliance on another statute on the ground that that “statute does not create buyers in the ordinary course of business, but applies only to buyers in the ordinary course of business.” 135 Or App at 365 n 8 (emphasis in original). Similar reasoning applies here.

6 We are not presented with a somewhat similar situation that has been addressed by both commentary to the UCC and by case law in other jurisdictions, viz., that in which the owner of the goods who created the security interest has sold (not consigned) the goods to another party, who in turn sells the goods to a buyer in the ordinary course. One commentary asserts that a buyer does not take free of the security interest in that situation, because he or she does not buy from a seller who created the security interest. White and Summers, 4 Uniform Commercial Code § 33-13, 356-57 (4th ed 1995). Remarkably, however, jurisdictions are split over whether, even in those circumstances (i.e., where the person in the business of selling goods of that kind actually had and transferred title to the goods), the buyer takes free of the security interest. See, e.g., National Shawmut Bank of Boston v. Jones, 236 A2d 484, 108 NH 386 (1967); Martin Bros. Implement Co. v. Diepholz, 109 Ill App 3d 283, 440 NE2d 320 (1982) (accepting the interpretation of the commentary); contra, C&J Leasing II Ltd. v. Swanson, 439 NW2d 210 (Iowa 1989); Adams v. City Nat. Bank & Trust Co. of Norman, 565 P2d 26 (Okla 1977) (rejecting the commentators’ interpretation). It is important to note that, in the situation described in this footnote, legal ownership has been transferred from the original owner, who created the security interest, to a subsequent owner who did not. In that situation, it cannot be gainsaid that the original owner plays no role in the sale of the goods between the subsequent owner and the buyer.

7 The same result would obtain under the theory that plaintiffs argued below, viz., that Gateleys became the Muirs’ agent when the Muirs consigned their motor home to Gateleys. As a consequence of that agency relationship, plaintiffs argued, the two parties became one for the purposes of ORS 79.3070(1). For purposes of this decision, we need not define that relationship or its legal effects.