Valley Bank & Trust Co. v. Holyoke Community Federal Credit Union

Citations: 121 P.3d 358; 2005 Colo. App. LEXIS 1347; 2005 WL 2046225Docket: No. 04CA0200

Court: Colorado Court of Appeals; August 25, 2005; Colorado; State Appellate Court

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In the appeal regarding the priority of security interests, the court reversed the trial court's summary judgment favoring Valley Bank and Trust Company (Bank) against Holyoke Community Federal Credit Union (Credit Union). The Bank had provided financing to an automobile dealership starting in April 2000, securing a perfected interest in the dealership’s motor vehicle inventory by filing a UCC-1 financing statement in May 2000. In contrast, Credit Union funded three vehicles in early 2001 and perfected its interest through security agreements in June 2001. The Bank later discovered that the dealership sold vehicles without remitting the proceeds. The Bank retained possession of the certificates of origin for these vehicles and allowed Credit Union to facilitate customer registration, later demanding the return of the certificates. Credit Union refused, asserting it had received them for value. The Bank filed for conversion and sought a declaratory judgment, leading to the trial court's summary judgment in its favor, awarding $47,658.89. The court held that neither the vehicle purchasers nor Credit Union had acquired an interest without title delivery, thus not qualifying as "buyers in the ordinary course of business," and found no misleading actions by the Bank. Credit Union's appeal argued that the Bank's security interest had terminated due to authorized disposition of the inventory, which the court agreed with, referencing Colorado law that states a security interest continues unless the secured party has authorized the disposition.

The floor plan line of credit agreement between the dealership and the Bank stipulates that upon the sale or disposal of financed inventory items, the Borrower must account for and deliver the proceeds to the Bank, which retains a security interest in those proceeds. The Bank argues that under the Colorado Certificate of Title Act, third-party lenders must obtain the title to a vehicle to secure an interest in it. However, this position is contested, referencing the case Guy Martin Buick, Inc. v. Colorado Springs National Bank, which established that the Title Act's purpose is to clarify the ownership status of vehicles for buyers and lenders. In that case, the Colorado Supreme Court ruled that until titles are delivered, a purchaser has no rights to the vehicles. Nonetheless, the court acknowledged that a bank’s security interest attached when the titles were delivered. The current case differs as it does not involve a transaction between dealers and considers the implications of a secured party's interest in proceeds. Numerous Colorado cases indicate that not delivering a title does not prevent the acquisition of ownership rights between parties. Furthermore, the Bank cites provisions from sections 42-6-109(1) and 42-6-120, arguing that its lien supersedes any interest held by Credit Union. Section 42-6-109(1) mandates that a vehicle cannot be sold without delivering a title, with the purchaser acquiring no rights until the title is transferred. Section 42-6-113 requires dealers to provide a bill of sale and the manufacturer’s certificate of origin upon selling a new vehicle.

Under 42-6-120(1), C.R.S. 2004, UCC provisions regarding chattel mortgages do not apply to motor vehicles, but 42-6-120(2) states that these provisions do not apply to vehicles held for sale or lease as inventory. Instead, UCC Article 9 governs security interests in such inventory, allowing the Bank's security interest in the dealership’s inventory to be perfected. Upon the sale of a vehicle from the inventory, the Bank's security interest was extinguished in favor of a security interest in the sale proceeds. 

Despite the Bank perfecting its interest in May 2000, the dealership's failure to remit proceeds prevented the Credit Union and purchasers from obtaining vehicle titles. The Bank only provided titles after surrendering certificates of origin under a stipulation, but it lost its security interest by authorizing collateral sales without notifying buyers of its retained rights. Consequently, the Credit Union's interest in the vehicles prevails, as it qualifies as a buyer in the ordinary course of business, which under 4-9-320(a) takes free of any security interest, even if perfected and known.

A "buyer in ordinary course of business" is defined as someone who purchases goods in good faith, without knowledge of any rights violation, and in a manner consistent with customary business practices. The Credit Union's customers met these criteria, establishing Credit Union's enforceable right as a purchaser for value. Relevant UCC definitions encompass lenders taking security interests, supporting the conclusion that Credit Union takes free of the Bank's security interest, consistent with decisions from other jurisdictions.

In Cunningham v. Camelot Motors, Inc., the court established that a purchaser can be considered a buyer in ordinary course despite the lender retaining the manufacturer’s statement of origin. The court emphasized that the intent of UCC 9-307(1) is to safeguard bona fide purchasers acquiring goods from a merchant’s inventory, allowing them to take free of any floor plan lender’s security interest in vehicles. In Stroman v. Orlando Bank, Trust Co., it was determined that a purchaser from a dealer can obtain valid title even without a title certificate, provided they act in good faith and rely on the dealer to secure proper documentation. Correria v. Orlando Bank similarly held that failure to obtain a title certificate does not prevent the transfer of title from seller to buyer, with the bank's interest being extinguished upon the dealer's sale of the vehicle. Other cases, including Rome Bank, Trust Co. v. Bradshaw and Hampton Bank v. River City Yachts, Inc., further supported the notion that vehicles in a dealer's inventory could be sold free of prior security interests, regardless of the certificate of title status. The judgment in this case was reversed, with the court not addressing additional arguments from the Credit Union regarding the trial court's findings on title possession, conversion, damage valuation, or equitable estoppel. Judges Hawthorne and Hume concurred with the reversal.