Oral argument — BMW Financial Services, NA v. Auto Showcase, Inc

The Auto Showcase, Inc. experiences a disavowal of Showcase and Carrollton, and is now a plaintiff's client. The argument will be kept with the attorney, Mr. Vincent C. Mancini, where we gather the evidence. Thank you. Mr. Mancini, on behalf of the appellate and the prosecutor, sit. Good morning. Good morning. May it please the Court. This Court is tasked with evaluating two competing interests related to the right to legal possession of an automobile under element of law. It triggers both the UCC and the Vehicle Code. This Court, like the Circuit Court, is faced with a difficult decision since both parties in this case can be termed as innocent. Without going into the factual background, neither of these parties was a participant in a fraud that resulted in the title being issued, the title which released BMW Police. At the time BMW initiated the lawsuit, the subject vehicle had been sold to a third party, Attorney Richard Police. Is there an issue? There's no issue in this case that BMW originally had a perfected lien, correct? Correct. They're not arguing that that's not the case? Correct. All right. However, when the third party purchaser, as a bonafide purchaser, taking for value without notice of a lien, the position being that that then conveyed the property to him, Mr. Police, and it did so and released the lien. Did Auto Showcase run a check with the Secretary of State's records to see if any liens came up? Yeah, under the stipulated facts found at the record C-2262, excuse me, the party stipulated that Auto Showcase ran both a title check through the Secretary of State computer website for auto dealers and a vehicle registration check through the OMI Secretary of State, which both turned up no liens. Of course, they're going to argue, what do you want us to do? We operated in good faith, we did our due diligence, and everything came out clear, except, as I understand it, and maybe I'll have to ask him this question, and a duplicate title, isn't there some language that says you may take subject to rights of other people? I mean, there is a little bit of a notice there, is there not? I think it's a right. Like, almost beware, there could be something lurking there? I think it's a right, Aaron, because the actual language is this, subject to the rights of a person under the original certificate. If you look back at what that means, that means, let me take a step back. If you apply for a duplicate certificate because the original would be lost, stolen, and mutilated, so there may be some issue as to ownership of that vehicle by a prior owner if you issue another one. So if I come in and say, no, I'm the owner of the vehicle, but it's lost, the title's lost, and they issue a certificate of title to me, Vince, and all of a sudden it comes out that, in fact, Vince and his wife, Shelby, owned the vehicle years ago. And Shelby, in the divorce proceeding, says, hey, I'm entitled to that. That's what that notice is designed to protect. It says nothing about me in the notice. Well, I mean, that would have arguably helped you, wouldn't it? Because part of it is they're going to argue they took this car in good faith, right? Auto Showcase took it in good faith, yes. We did. And I think what they're going to argue, Judge, is that, in fact, that language somehow put us on notice. Well, if our divorce analysis doesn't look at notice, it looks at knowledge. The relevant inquiry is whether we had knowledge of a prior lien interest, and that's really undisputed. We did not have knowledge of a prior lien interest because the original owner, Mr. Grant, committed a fraud against the Secretary of State. Okay, so let's talk about that. You acknowledge they have a perfected security interest. They never executed a lien letter or in any way released their lien, correct? That's correct. The problem was the result of the fraud, of unilateral fraud, of the original buyer of the car, correct? So is there an overarching issue of public policy here? You're going to argue your side, but you could probably say, how can a finance company or lender ever protect itself if they can lose a legitimate lien due to the fraud of a third party? And what's your response to that? I think it's very simple. They chose to transact business with Mr. Grant by entering into a retail installment contract with him. They still have that mechanism as a basis by which they can recover their damages. Well, does you have that same remedy? I mean, they had the legitimate lien, so shouldn't they get their car back and then you, who were a victim of fraud against this individual, can go after him? He did not submit a fraudulent document to us. He didn't? He did not. He submitted a document issued by the only Secretary of State that indicated fraudulent. The defraudulent you represented to them. So I'm one step removed from the fraud as a purchaser in this transaction of the vehicle. I'm not a direct recipient of the fraud. I don't believe it would be a very difficult pleading to establish that he directly frauded our showcase. He didn't. He presented a legitimate document. Now, did he make some representation about the legitimacy of that documentation? I don't know, but I don't think I'd have to jump through that hurdle when I didn't choose, again, to do business with a fraudulent perpetrator. Dad, talk about splitting hairs. Don't let your kids hear you make that argument. Well, I think that's what this case comes down to. Because, again, both parties are innocent. They've both been defrauded to some extent. They have. And what I'm saying is that under the UCC's overarching principle, all provisions of the UCC seek to hold the party who's closest to the fraudster most responsible. There's some issues of first impression here, isn't there? I believe there is because of the fact Secretary of State issued a clean title. Right, and that's what I'm going to have to ask you, and maybe the answer is no. Do you have any case law that says issuance of a duplicate certificate of title under these circumstances renders the original title and its lien invalid? I don't have case law, but I have a section of UCC called 337. Section 337 talks about a title issued in a foreign jurisdiction with a lien on it that then gets brought to Illinois, and for some reason the Illinois Secretary of State issues a clean title. And what 337 says is that the buyer in due course takes free of that legal security. And if that applied here, this would be an easy case, but I'm sure he's going to argue that I have to, is the plain language refers to out of state. If the legislature wanted to have that provide, apply to title issues in this state, why didn't they do it, would be my question. My frank answer would be I don't think the legislature understands the UCC. But the reality of the issue. Can I put that in a decision? It wouldn't be unreasonable. Wasn't there a comment made by the legislature under 9303 that kind of illuminated the UCC indicating that any, only one certificate of title is outstanding with respect to goods. In fact, it goes on, and then it says this situation results from defects in certificate of title laws and the interstate coordination of those laws, not from deficiencies in this article. And basically, clearly, they're talking about innocent parties from another state, and they're talking about intent. I think, I mean, I sometimes, I don't disagree with you. Sometimes the legislature can't always, doesn't always understand anything, but I think they discerned a need to afford special protection against hidden lien interests arising out of laws other than in our state. They felt that there was a need to do that, and which is why they enacted 337. Isn't that correct? I think that is the basis for 337, in addition to the fact of consistency. I don't think anything in the UCC establishes that once the security interest is no longer perfected, that the buyer in due course can't take free and clear. And in this case, the security interest was no longer perfected when the Secretary of State removed the lien. That's the true issue of this case. And that is consistent with 337, in that if the Secretary of State doesn't put the lien on from a foreign jurisdiction, again, the buyer in due course takes free and clear. Well, here the Secretary of State, to be blunt, removed the lien, correct? They did. Okay. So can an error again deprive, you know, an innocent party of their lien? That seems to be, when you break it down with simplest terms, that's what we'd have to hold. I think that's correct, and I think that's what is, in fact, within the UCC. I think it says that. When you incorporate the entire section of Article 9, the 300s, it's always protecting the buyer in due course, overarching any other little minor exception. In this instance, it doesn't fit that minor exception. You know, if you look at the Milledgeville case, that was a minor exception because in that case no one did the title search. They sold a vehicle to a third party without looking back to see if there was a lien from the credit union. And then all of a sudden the lien shows up and the credit union says, hey, give us a cutback. Yeah, that makes sense. The buyer in due course shouldn't take because there is a basis for them to somehow determine whether or not. How do you respond to this? I mean, and I agree with you on the point that there are some overarching public policy issues, but they apply to both sides, arguably. How would you respond to this? If we were to accede to the correctness of your position and hold that BMW lost its perfected lien, wouldn't we sort of be opening the floodgates and encouraging people to defraud the Secretary of State because then they're going to be able to get rid of their lien? And if it can happen, how could any lien holder ever protect their interest? I think the converse is true is how could we ever know that we can transact business in the State of Illinois and rely on the Secretary of State? They were first in time, arguably first in right. They got a lien that they perfected before anything happened. And the argument still comes back to they didn't do anything to cause themselves to lose that lien. It was lost due to either the combination of the fraud of the third party and the Secretary of State not being aware, obviously responding to a fraudulent lien letter. So how are the equities against them? They can seek remedies against the Illinois Secretary of State under the vehicle program. Can't you? I can't. I'm not a party to that transaction. I never owned a vehicle. I never was defrauded by my alleged purchaser. So no. Well, you could sue Grant, couldn't you, if you found him? As we discussed earlier, he didn't defraud us directly by presenting a fraudulent certificate of title. He presented a legitimate certificate of title with a lien. But knowing that was what was obtained, though, fraudulently. You could still sue him. I think it's a much more difficult case in that regard because for whatever reason, again, it's a fraud case. It's not a contract case. It's not an installment loan contract. We're still in a worse position than BMW is in this instance. In fact, I think BMW is in a better position, frankly, because not only did they get the car, but they could sue under the installment loan for the balance that they're owed under the note. So BMW has all of the winnings, so to speak, in this type of analysis if we're playing poker. And that's why I think the code takes a look at the buyer in the ordinary course to protect that individual in circumstance where a perfected lien is no longer perfected. And we come back to that issue. And that's the issue we have. But what do you think they were talking about if perfected lien is no longer perfected? Based on fraud? Who is that? I'm sorry. The statute. Well, the perfected lien interest is no longer perfected because it's not a title. It's really just that simple. Whatever circumstance it results in. Oh, so the circumstance doesn't matter. It shouldn't because if it's an error by the Secretary of State, the owner of the vehicle or the lien holder has a cause of action against the Secretary of State. So it shouldn't matter because it wouldn't encourage people then to defraud the Secretary of State then. You might have a car for $100,000. That's a lot of money. You can get out from under $100,000. No, it doesn't. You don't think that there would be any encouragement for people to do this? I think that exists to this day. I don't think that it matters one way or the other. Mr. Grant did it. So at least when you come to court, you have to put the stamp of approval in it. No, not at all. But the issue is Congress also in terms of, yes, the Secretary of State has a high burden. Not a high burden, but an important job on this. And they failed in doing that in this one instance. Now, does that mean they're going to continue to fail to do that? I doubt it. This probably goes on every day or every week where somebody's trying to get a lien off of their car or say somebody died in the column. I'm sure it goes on a lot. Having experience in that area, it does. But what this is is an overarching principle of e-commerce. If somebody presents a valid, clean title and we do everything we can to determine whether, in fact, that's a valid, clean title and it comes back that it is, are we going to just stop commerce and say, well, you really shouldn't sell or buy those vehicles? Because in 60 days, a financier may come along and say, hey, we got con. Bring us our car back. You can't run a state car business doing that. And I think that's what makes this entire case very unique from all the other prior cases, which Justice Hudson, you pointed out, that we have a clean title that was presented. And getting back, again, to the vehicle code, the longstanding proposition is that a certificate title issued by the Secretary of State is prima facie evidence of the facts appearing thereof. In a summary judgment proceeding at the circuit court level, we, our clients, established prima facie evidence of clean title. Nothing whatsoever countered that at the time the transaction was placed with Grant. There's nothing to show Auto Showcase should have, could have, would have done something or anything different had it been presented with the facts of this case. It's an impossible situation you place Auto Showcase in under these facts. That's why, in fact, there needs to be a reversal of the circuit court's rank. Thank you very much, Mr. Minton. You may proceed. Thank you. And actually, I want to do a quick identification. I am actually Nelson Minton on behalf of the appellees. I did sign in, but Mr. Antman is our counsel here in Chicago. I'm actually from St. Louis. And I'll be arguing today. So the role of Mr. Antman will be played by? Yes. Mr. Minton. Mr. Minton, yes, today. I want to point out and discuss a few points that were made by counsel in the argument before I first go into some of the positions I would like to indicate. First is their reading of 625 ILCS 5-3-111, which concerns loss of duplicate titles. I do not believe the language concerning what is put on a duplicate title is as narrow as what he indicated. It expressly states, this is a duplicate certificate and may be subject to the rights of a person, rights of a person under the original certificate. And so I don't believe it would put them on notice of a potential leave holder, right? Not only that, and it's not limited to just the owner. It says rights of a person under the original certificate. Security interests are clearly indicated on certificates of title. Therefore, it is, the security interest is a right of a person under the original certificate. So I don't believe that this language does not apply to those with security interests. The second aspect is I do want to point out, and I'll argue a little bit more later, is section 9-337, which they rely upon. What they, they quote the entire section in their brief, and they include this language which says 337 does not apply when the title certificate contains a statement that they may be subject to security interests not shown on the certificate. 337 expressly states that if you put that language on the certificate, you're on notice. That's what it says. Their bona fide purchaser under 1 and 2 does not come into play when that language is on the certificate of title. Does 337 apply here? I don't believe so. Isn't that under another jurisdiction? Yes, it is. I believe the reason that was argued to some degree, the two cases that were relied upon by the trial court for by analogy, the Swenger case as well as the commercial credit versus FATS case, both of them, or older cases, technically pre-code cases. Well, you can certainly make the argument that they should apply in both circumstances, and that's a legitimate argument to make. But you're saying that from the very face of it, it doesn't apply. Correct. A. And B, even if it did, the purpose of the purpose of making that notice on there goes beyond the mere original bio. Exactly. And actually, the two subdivisions do not apply also in 337. The two other reasons, which I again articulate in your brief, was that subsection 1 especially states it only applies to a buyer who is not in the business of selling goods of that kind. Clearly, on the showcase, he's in the business of selling cars. So that again doesn't apply. And if you want to look at the definition of that, it's an 810 ILCS 5-1-201B9. And that expressly talks about the definition of business seller. And then it furthermore goes on, which is a point you made, Justice Hudson, about notice. It says, without knowledge of the security interest. Now, it does require knowledge in this sense, but knowledge under the code basically a person has notice under the code, and that's again 5-1-202A3. It says, from all the facts and circumstances known to the person at the time in question, he has reason to know that he exists. I want to get into the next point in terms of what they did in this case. All they did was contact the Secretary of State. Well, clearly, the Secretary of State somehow thought BMW's lien had been released. Otherwise, it would not have released a duplicate title with it. But that puts them on notice to go more beyond what the Secretary of State. Pick up the phone and call BMW. There's absolutely no evidence that they ever even attempted to do that. Who? Auto Showcase. I mean, that's what I'm saying is this whole putting this on the title basically puts them on notice. You've got to go beyond the Secretary of State's office because we presume that the Secretary of State will act in accordance with the documentation submitted to it. But this particular notice puts them on as if we didn't get the original title back. We're supposed to get the original title back. The original title is going to have information that should be contained. So, therefore, the documents we get, which are not all the documents we normally require, don't have all the information that we need. Therefore, we're going to put this notice on there, and you are taking this duplicate title subject to claims that may exist on the original title. Well, would the duplicate title indicate that BMW previously had a lien? How do they know to call BMW? Well, when we call the Secretary of State, the Secretary of State would indicate BMW is in the changed title. I see. Let me ask you this. Mr. Mancini and Mr. Williams in their briefs relied upon Carroll v. Curry. How do you distinguish that case? Carroll v. Curry. I'm sorry. I do not recall, Judge. I apologize. I'm pretty sure that that case dealt with. Well, Carroll v. Curry was standard on summary judgment. It says the plaintiff bears the burden of alleged credit that he was lawfully entitled. Well, I believe we have established that we were lawfully entitled to the vehicle. We established that we had a perfected lien, that we never released at any time, and that because we had the security interest in it, the customer went into fault, we are therefore entitled to the vehicle. That is a normal course of action that a security creditor engages in on almost a daily basis in the courts of this state. If we looked at this case equitably through equity, why is it that we would rule in favor of BMW versus the bona fide purchaser? Well, as discussed in the Midgeville case as well as the other cases relied upon the trial court, to a large degree the burden goes on the buyer under these circumstances. They are the ones, as pointed out in Midgeville, in best position to basically look at these facts, especially when there's something on the title that puts them on notice. There might be something wrong with this title here. And then they can go through, contact the Secretary of State, find out this information, contact the prior holders of liens or owners of the vehicle, and then find out if there's a problem with this title. So what you're saying is they realize you're on notice immediately that this is not the original title. Correct. It could be subject to somebody doing something nefarious, as apparently is what happened here. Yes. So then they should check further just to pin it down, to make sure that they're not missing something. Correct. Like I said, it's not like this is a big issue. Pick up the phone and call BMW. Call the prior owner under certain circumstances. Find out if there is an issue here. And I do want to allude to the fact they said sue the Secretary of State. I represent a number of secure creditors. I can't find a statute that allows me to sue the Secretary of State under these circumstances, because we do encounter this more often than you think. Well, in this case, in going back to that Carroll case, which talks about equity, equitable settlements, in that case, they think they didn't rule for the bonafide purchaser because ruling the other way would have sanctioned the fraud. If the court had granted, not granted, someone judgment for you, BMW didn't commit a fraud, correct? BMW didn't commit a fraud. None of the parties have committed a fraud. Correct. Both of us, to a large degree, standing as innocent here. Correct. Would it be your position that were we to rule in favor of auto, the auto dealer, that we would sanction a fraud? I believe ultimately, yes, you would. And as Justice Hudson said, we would kind of give free rein to people to go out to the Secretary of State and get rid of any. I believe so, Judge, because that's basically what happened here. Well, in Carroll, I mean, they're saying that they held that to allow recovery would have sanctioned fraudulent conduct. Here, you're going to argue that to deny your perspective security interest would basically favor fraudulent conduct on the other side. Correct. Okay. I mean, again, who's in the best position to basically find out about fraud in these circumstances? We file our lien. We perfect our lien. We're not notified by the Secretary of State when somebody makes application for a duplicate title under these circumstances. The Secretary of State doesn't inform us. That's the reason they put this language on the title, as best I can tell. And it's actually completed in the code, as I indicated. It's recognized under 337, and there are other provisions. And when a lien is released like that with the Secretary of State, normally there's no communication back to the lien holder from SOS? No. There is normally no communication back from the Secretary of State. Documents are submitted to the Secretary of State. Showing a release of the lien. Pardon? Documents showing a release of the lien. Correct. And this one was that he had doctored up a notice from BMW, then put a release of lien language. I will say, if you even read the release, you would probably notice it's probably not valid. But again, the Secretary of State, I believe, just takes the documents. If they're on their face, valid. They then issue the new title. And in this instance, they issued the duplicate title. And I think they relied upon this language basically to protect the ultimate secured party, which I believe is statutory regimen. What is there again, you said, why is a section, a part of section 9-337 that you alluded to allegedly defeated his argument about a showcase being a bona fide purchaser for value? Why? Well, there are three positions, Judge. And one, and I'm not sure we made all of them as clear. The first one is the language of 337 right at the introductory paragraph before you get to the subsections. This is talking about another jurisdiction. Yeah, it's talking about another jurisdiction. Like I said, I think the reason it was done is because the trial court relied upon that. And to some degree, there is kind of an equal analogy, I can understand that. But at the bottom, the very last phrase in the introductory paragraph says, and it goes into all sorts of things, or contain a statement that they may be subject to security interests not shown on the certificate. Basically, we're talking about if you get a title from another state or something like that, and it appears to be clean, but it also does not contain this language, then you can become a bona fide purchaser under 337. But what this language pretty much does is if the title has this language, 337 doesn't apply. All right. Thank you very much. Thank you very much. Mr. Mitnick. Oh, we have the correct name. Mr. Mancini, you may respond. Thank you. Can you address that last point hanging in the air? Yeah. So the language on a duplicate certificate title, you have to presume is purposeful. And if a Secretary of State's office wanted to protect a lien holder, a lien holder whom they always protect and know well about in relation to certificates of title, the language would say that, subject to the rights of a lien holder under the original certificate. It doesn't say that. So to your point earlier, Justice Hudson, if, in fact, the legislature wants to say something, they can say it. Or if the Secretary of State wants to say something, they can say it and they didn't. And that is not what this language is designed to protect. And the reason we also know that is because the vehicle code says that if there's an original lien holder and a new duplicate certificate of title is issued by the Secretary of State, it's sent to the lien holder. It's not sent to the person applying for it in front of the Secretary of State. So when he comes to auto showcase with the actual duplicate certificate of title, not only does it not say that there's a lien on the title, but he shouldn't even be in possession of it if, in fact, there's a lien on the title. So you're almost leaving the question. He's in possession of it. Why and how? Presumably through fraud in the Secretary of State's office. But I don't think this Court is sanctioning a fraud. Mr. Grant is still culpable for the fraud he committed. You're not letting him off the hook. Nothing in this decision is going to say, well, Mr. Grant, you need to walk free. No. We were saying a fraud would be the proximate cause of them losing their lien. It would be. Just like in any other case where, you know, I have a breach of contract where somebody commits a fraud and I sue them for breach of contract. It's not any different than what goes on in civil practice today. They have a contract with a person. He violated the contract. What about the fact that the UCC essentially protects a buyer in due course, a guy like you and me who goes out to buy the new car, as opposed to a car dealer, somebody who's in the trades, somebody who sees this over and over and over again and maybe should know? Actually, Justice Spence, I'd like to point that out because I think it's an attempt by BMW to reconfigure their claim. They filed a case against a third-party bonafide purchaser. They didn't file a case against Auto Showcase. Because he had the car in his hand. Right. And so we don't go back in time and evaluate in which step could we argue that title was not properly transferred. The buyer in due ordinary course says, whatever happens in the past, if I'm a buyer in the ordinary course, a third party, and I purchase this vehicle, I get free and clear. So the only reason Auto Showcase is out there arguing this on behalf of police is because they bought him out of the vehicle at that point. It's been stipulated. That's very nice. In speaking of stipulated facts, let's recall, the parties stipulated that Auto Showcase engaged in all reasonable commercial standards to investigate the title. And the concept that, by the way, this was a Porsche. This wasn't even a BMW. The concept that Auto Showcase is supposed to look at a title for a vehicle and contact every manufacturer who may have either possessed the vehicle, owned the vehicle, built the vehicle, or any finance company that up and down the chain of title is ridiculous. That was my question, Mr. Manci. That's why I asked that question. And when I asked the question, Mr. Minton said you could go to the Secretary of State and they would pull up the previous title, which would show a name. I don't believe that's true. I've never seen any evidence submitted to the court that that's true. I believe they cleaned BMW's name off of the title at that point. So there would be no representation or no other previous title there? I don't know specifically the answer. It's not been presented as a fact to this case. And my recollection is the Secretary of State doesn't keep those records. Once they issue clean title, it's clean. You can't go back 20 years and say did Ford Motor Company. Anyway, it's fair to say that that's not an evidence here. We couldn't hang our head on that fact because we don't know. I would agree. So getting to the last position on equitable principles, and that's where really Section 337 I think plays a role. You're sanctioning a different treatment of a vehicle, whether it was issued, the title was originally issued in a foreign jurisdiction or in the state of Illinois. Play this out in equal scenarios. Kentucky issues the title with a BMW lean on it. It comes to Illinois. Illinois washes it. Or Illinois issues a title with a lean and then a duplicate gets issued without the lean. Remember, either scenario, those cars have to be treated the same way. We can't be treating them differently. Well, we're treating the car. We're not treating the title. As Justice Shostak alluded to, which was a legitimate point, maybe one of the reasons we have that language, and, again, you have to presume there was some reason for putting it in there. Otherwise, why not just make all cars subject to the same rules? Illinois may feel that we don't know how they scrutinize things in other transactions in other jurisdictions. So we're not going to put the stamp of approval on a procedure that we don't control. So we are going to make a legitimate distinction between out-of-state titles and our titles. Why isn't that a fair way to handle it? It's not equitable in the relation of commerce because as an auto dealer, it's impossible for us to know when somebody comes in with an Illinois title, where that original title, where that title originated. It's impossible. We know that. You might be right on that, but it talks about public policy. Can't the legislature look to different things? Does the legislature and the Secretary of State always have to be concerned about commerce? Or maybe they're concerned about the legalities and titles and lien interests. Well, you're talking about vehicle code versus UCC in my mind, and from a business standpoint, I think the UCC is the one that should govern and should be consistently applied. If the legislature wants to bend those rules or somehow make that express, I guess we have to rely on that. But just getting to the point, this Court back in 1981 said, when you're looking at competing security interests, generally speaking, the UCC should govern, not the vehicle code. So that's why I think 337 needs to be applied consistently across the board. All right. Any other questions? All right. Thank you very much, Mr. Mancini. Thank you. I'd like to thank both counsel for the quality of your arguments here this morning. The matter will, of course, be taken under advisement. Written decision will issue in due course. We are adjourned for the moment to prepare for the next case. Thank you.