Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 12

FACTS In 1989, Michael Heinrich retained James Wilson to purchase a new Ford pickup truck for him. Wilson had held himself out as a dealer/broker, but unbeknownst to Heinrich, Wilson had lost his vehicle dealer license. Wilson negotiated with Titus-Will Ford Sales, Inc. (Titus-Will) to purchase the truck for Heinrich. Titus-Will had dealt with Wilson as a dealer before but also did not know that he had lost his dealer license. All payments for the truck went through Wilson, and the purchase order indicated that the truck was being sold to Wilson as a dealer for resale. Wilson agreed to deliver the truck to Heinrich at Titus-Will on Saturday, October 21, 1989. Wilson delivered to a clerk at Titus-Will a postdated check for the balance of the purchase price, which the clerk accepted, and in return delivered to Wilson a packet containing the keys to the truck, the owner's manual, an odometer disclosure statement, and the warranty card. The odometer statement showed that Wilson was the transferor and Titus-Will did not fill out the warranty card as the sale appeared to be dealer to dealer. Wilson's check, however, did not clear, and Titus-Will demanded the return of the truck. On November 6, Wilson picked up the truck from Heinrich, telling him he would have Titus-Will make certain repairs under the warranty, and returned the truck to Titus-Will. On November 9, 1989, Wilson admitted to Heinrich that he did not have funds to cover his check and that Titus-Will would not release the truck without payment. Heinrich then asked Titus-Will for the truck but was refused. Heinrich sued Titus-Will and Wilson, seeking return of the truck and damages for his loss of use. By pretrial arrangement, Heinrich regained possession of, but not clear title to, the truck. Heinrich also obtained a default order against Wilson. After a bench trial, the court awarded Heinrich title to the truck and $3,050 in damages for loss of its use. Titus-Will appeals.
DECISION Judgment affirmed.
OPINION Seinfeld, J.
THE ENTRUSTMENT DOCTRINE [UCC] 2-403(2) and (3) contain the entrustment provisions of the Uniform Commercial Code (UCC).
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To prevail under this statute, Heinrich must show (1) Titus-Will ''entrusted'' the truck to Wilson and, thus, empowered Wilson subsequently to transfer all rights of Titus-Will in the truck to Heinrich; (2) Wilson was a merchant dealing in automobiles; and (3) Heinrich bought the truck from Wilson as a ''buyer in ordinary course of business.'' [Citations.]
Three general policies support [§]2-403(2), the UCC provision placing the risk of loss on the entruster. First, it protects the innocent buyer who, based on his observation of goods in the possession of a merchant of those goods, believes that the merchant has legal title to the goods and can, therefore, pass title in the goods to another. [Citation.] ***
Secondly, the entrustment clause reflects the idea that the entruster is in a better position than the innocent buyer to protect against the risk that an intermediary merchant will not pay for or not deliver the goods. [Citations.]
Thirdly, the entrustment clause facilitates the flow of commerce by allowing purchasers to rely on a merchant's apparent legal right to sell the goods. [Citations.]
Without the safeguards of the entrustment provision, a prudent buyer would have to delay the finalization of any sizeable sales transaction for the time necessary to research the merchant's ownership rights to the goods.
A. ENTRUSTING
The UCC *** declares that ''any delivery and any acquiescence in retention of possession'' constitutes entrustment. 2-403(3). A person can entrust goods to a merchant by a variety of methods, such as consigning them, creating a bailment, taking a security interest in inventory, leaving them with the merchant after purchase, and delivering them for purposes of repair. [Citations.] A sale can also constitute an entrustment when some aspect of the transaction remains incomplete. [Citations.]
Titus-Will properly concedes that it entrusted the truck to Wilson. However, it argues Wilson was not a merchant and Heinrich was not a buyer in ordinary course. Further, Titus-Will contends that the timing of the entrusting deprived Wilson of the power to transfer its rights.
B. MERCHANT
Titus-Will argues that Wilson was not a merchant because he had no inventory. However, it is not necessary to possess an inventory to fit within the broad statutory definition of merchant. Article 2 of the UCC defines (in part) ''merchant'' as ''a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.'' 2-104(1). Wilson was a merchant who dealt in automobiles; he held himself out as a dealer in automobiles and appeared to be a dealer in automobiles. Both parties treated him as one. Titus-Will processed all the documents as it would for a dealer and understood that Wilson was buying the truck for resale.
Titus-Will also argues that Wilson was not a merchant because he did not have a vehicle dealer license. However, the UCC does not require proper state licensing for merchant status. 2-104(1), 2-403(2). ***
C. BUYER IN ORDINARY COURSE
There is also substantial evidence that Heinrich was a ''buyer in ordinary course of business'' although the trial court referred to him as a ''good faith purchaser for value.'' A buyer in ordinary course of business is
a person who in good faith and without knowledge that the sale to him 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[.] 1-201(9). ''Buying'' includes receiving goods *** under a preexisting contract for sale.'' 1-201(9). Good faith is ''honesty in fact in the conduct or transaction concerned.'' 1-201(19).
The amount of the consideration is significant as evidence of good faith. [Citation.] Heinrich gave substantial value for the truck, more than Wilson agreed to pay Titus- Will. Nor did Heinrich know or have a basis to believe
that Wilson's sale and delivery of the truck to him violated Titus-Will's ownership or security interest rights. There was no showing that Heinrich acted other than in good faith. *** Wilson's illegal and fraudulent activity does not taint Heinrich's status as a buyer under 2-403(2). ***
D. TIMING OF ENTRUSTMENT
Titus-Will also argues that the UCC entrustment provisions should not apply because it entrusted the truck to Wilson after Heinrich had completely paid Wilson. This is an issue of first impression in this jurisdiction.
Before the completion of the Wilson-Heinrich sales transaction, Titus-Will entrusted Wilson not only with the truck, but also with the signed odometer disclosure statement, the owner's manual, the warranty card, and the keys. By doing so, Titus-Will clothed Wilson with additional indicia of ownership and with the apparent authority to transfer an ownership interest in the truck. It also enabled Wilson to complete the sales transaction. 2- 401(2) (''Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods''). In addition, the entrustment allowed Wilson to continue to deceive Heinrich from October 21, 1989, the date of delivery of possession, to November 9, 1989, when Wilson finally admitted the truth. We believe that under these circumstances, application of the entrustment doctrine, 2-403(2), furthers the policy of protecting the buyer who relies on the merchant's apparent legal ability to sell goods in the merchant's possession.
The second rationale for the entrustment doctrine also supports its application here. Titus-Will, in the business of selling cars, was in a better position than Heinrich to protect itself against another dealer/broker who might fail to pay for the goods. It could have insured against the loss, and it could have adopted preventive procedures. ***
The third rationale for the entrustment doctrine focuses on the flow of commerce. Here we consider the potential impact on commercial transactions of requiring purchasers to research their dealer/broker's legal title before accepting possession of the goods. Although the record contains no evidence on this issue, it seems obvious that this requirement would inevitably cause some delay. [Citation.]
Requiring the entruster to retain the burden of risk, even when the entrustment occurs after a third party purchaser gives value, supports the policies underlying the entrustment doctrine. ***
INTERPRETATION A buyer in the ordinary course of business acquires good title when buying from a merchant seller who was entrusted with possession of the goods.
CRITICAL THINKING QUESTION Should Titus-Will be held responsible in this situation? Explain.