Garcia v. Dealers Auto

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

DIANA PIMENTEL GARCIA, et al., Plaintiffs/Appellants,

v.

DEALERS AUTO AUCTION OF THE SOUTHWEST, LLC,
Defendant/Appellee.

No. 1 CA-CV 23-0171
FILED 12-21-2023

Appeal from the Superior Court in Maricopa County
No. CV2021-091953
The Honorable Stephen M. Hopkins, Judge (Retired)
The Honorable Roger E. Brodman, Judge (Retired)

REVERSED AND REMANDED

COUNSEL

Choi & Fabian, PLC, Chandler
By Hyung S. Choi, Veronika Fabian
Counsel for Plaintiffs/Appellants

Wilenchik & Bartness, P.C., Phoenix
By Dennis I. Wilenchik, John D. Wilenchik, Karl M. Worthington
Counsel for Defendant/Appellee
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MEMORANDUM DECISION

Judge Maria Elena Cruz delivered the decision of the Court, in which
Presiding Judge David D. Weinzweig and Judge Michael S. Catlett joined.

C R U Z, Judge:

¶1 Diana Pimentel Garcia, Abraham Martin Castro Ramos,
Biahanca Luz Garcia Perez, Jose Martinez, Mark Anthony Wunderly, Josue
Parra Bojorquez, Jason S. Carlyle, Fredy Perez Vargas, Arely Lopez,
Brandon Castillo, and Federico Lopez Santos (collectively “Consumers”)
appeal the superior court’s grant of summary judgment to Dealers Auto
Auction of the Southwest, LLC (“Auto Auction”) on their conversion claims
and the court’s denial of their cross-motion for partial summary judgment.
For the following reasons, we reverse the superior court’s grant of summary
judgment to Auto Auction and remand for further proceedings consistent
with this decision.

FACTUAL AND PROCEDURAL HISTORY

¶2 The material facts are not in dispute. Auto Auction had a
business auctioning vehicles primarily from one automobile dealer to
another. A dealer selling a vehicle at auction was required to provide Auto
Auction with the title to that vehicle within thirty days of the auction. Once
Auto Auction received the title from the selling dealer, Auto Auction paid
the selling dealer for the vehicle and notified the purchasing dealer it had
forty-eight hours to pay Auto Auction. Auto Auction allowed certain
purchasing dealers it had a relationship with, including used car dealer
Arizona Road Trip Auto (“Road Trip”), to take vehicles the dealer won at
auction to its own car lot without paying for the vehicle. Auto Auction did
not list itself as lienholder on the title to the vehicles. After the purchasing
dealer made payment, Auto Auction would give it the physical title with
the reassignment section on the back completed.

¶3 Consumers each purchased a vehicle from Road Trip with
cash in late 2020 or early 2021. Road Trip had acquired each of Consumers’
vehicles from Auto Auction without paying for them or receiving the
vehicles’ titles. Road Trip issued Consumers temporary registration
permits for the vehicles. Road Trip failed to pay Auto Auction for the
vehicles and never obtained the vehicles’ titles from Auto Auction. In

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February and March 2021, after Consumers purchased the vehicles, Auto
Auction had each of the vehicles titled in its name.

¶4 In late March 2021, the Arizona Department of Transportation
(“ADOT”) received a phone call from an Auto Auction manager
complaining about Road Trip’s failure to pay Auto Auction for sold
vehicles. The manager asked an ADOT detective whether Auto Auction
could repossess the vehicles. The detective told the manager that Auto
Auction could only repossess vehicles from Road Trip’s sales lot and
advised Auto Auction “not to repossess cars from customers who bought
from [Road Trip] in good faith.” About a week later, Auto Auction
repossessed nine of the Consumer’s vehicles from their residences and sold
them shortly thereafter.1

¶5 In April and May 2021, Consumers filed a class action
complaint and amended class action complaint against Auto Auction
alleging conversion. Auto Auction moved to dismiss the complaint. The
superior court denied the motion to dismiss and denied Consumers’
request to proceed as a class action. In October 2021, Consumers filed a
second amended complaint.

¶6 Auto Auction moved for summary judgment in April 2022.
Consumers responded and cross-moved for partial summary judgment.
After oral argument, the superior court granted summary judgment to
Auto Auction and denied Consumers’ cross-motion for summary
judgment, finding that Consumers were not good faith purchasers because
they had constructive notice that Auto Auction owned the vehicles.
Consumers moved for reconsideration, and the superior court summarily
denied the motion. Consumers timely appealed, and we have jurisdiction
pursuant to Arizona Revised Statutes (“A.R.S.”) section 12-2101(A)(1).

1 Auto Auction did not repossess Brandon Castillo’s and Federico
Lopez Santos’ vehicles, but the temporary registration permits expired and
Auto Auction refused to release titles to Castillo and Santos.

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DISCUSSION

¶7 We review a grant of summary judgment de novo, viewing
the evidence and reasonable inferences in the light most favorable to the
non-moving party. Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement
Masons Loc. No. 395 Pension Tr. Fund, 201 Ariz. 474, 482, ¶ 13 (2002).
“Summary judgment is appropriate only if no genuine issues of material
fact exist and the moving party is entitled to judgment as a matter of law.”
Id. at ¶ 14 (citing Ariz. R. Civ. P. 56(a); Orme Sch. v. Reeves, 166 Ariz. 301, 309
(1990)). We review de novo the superior court’s interpretation of statutes.
Hohokam Irrigation & Drainage Dist. v. Ariz. Pub. Serv. Co., 204 Ariz. 394, 397,
¶ 5 (2003).

¶8 Section 28-4409(A)(2) requires licensed motor vehicle dealers
to have title to used vehicles before selling them. Road Trip violated that
statute when it sold the vehicles to Consumers, but that does not answer
the question of who owns the vehicles—Consumers or Auto Auction.

¶9 “Conversion is . . . an act of wrongful dominion or control
over personal property in denial of or inconsistent with the rights of
another.” Case Corp. v. Gehrke, 208 Ariz. 140, 143, ¶ 11 (App. 2004) (citation
and internal quotation marks omitted). “To maintain an action for
conversion, a plaintiff must have had the right to immediate possession of
the personal property at the time of the alleged conversion.” Id. Consumers
argue they were entitled to immediate possession of the vehicles because
they were legal owners of the vehicles under Article 2-403(2) of the Arizona
Uniform Commercial Code commonly known as “the entrustment
principle.” See A.R.S. § 47-2403(B).

¶10 Section 47-2403(B), which correlates to U.C.C. § 2-403(2),
provides that “[a]ny entrusting of possession of goods to a merchant who
deals in goods of that kind gives him power to transfer all rights of the
entruster to a buyer in ordinary course of business.” (Emphasis added.)
Under A.R.S. § 47-2403(C), “’[e]ntrusting’ includes any delivery and any
acquiescence in retention of possession regardless of any condition
expressed between the parties to the delivery or acquiescence and
regardless of whether the procurement of the entrusting or the possessor’s
disposition of the goods have been such as to be larcenous under the
criminal law.” Section 47-1201(B)(9) provides, in relevant part:

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“Buyer in the ordinary course of business” means a person
that buys goods in good faith, without knowledge that the
sale violates the rights of another person in the goods, and
in the ordinary course from a person . . . in the business of
selling goods of that kind. A person buys goods in the
ordinary course if the sale to the person comports with the
usual or customary practices in the kind of business in which
the seller is engaged or with the seller’s usual or customary
practices. . . . Only a buyer that takes possession of the goods
or has a right to recover the goods from the seller under
chapter 2 of this title may be a buyer in ordinary course of
business.

(Emphasis added.)

¶11 Section 28-2133(B), a provision in Title 28 (Transportation)
(“constructive notice provision”) provides that “the filing and issuance of a
new certificate of title as provided in this article is constructive notice to
creditors of the owner or to subsequent purchasers of all liens and
encumbrances against the vehicle described in the certificate of title,
except those that are authorized by law and that are dependent on
possession.” (Emphasis added.)

¶12 Consumers contend they were buyers in the ordinary course
of business entitled to U.C.C. protection because Auto Auction, a merchant
in motor vehicles, entrusted the vehicles to Road Trip, also a merchant in
motor vehicles. Auto Auction argues that Consumers were not “buyers in
the ordinary course of business” because under A.R.S. § 28-2133(B) they had
constructive notice that Road Trip did not own the vehicles. But under the
U.C.C., “[k]nowledge means actual knowledge.” A.R.S. § 47-1202(B).
Constructive knowledge is not the same as actual knowledge. Main I Ltd.
P’ship v. Venture Cap. Constr. & Dev. Corp., 154 Ariz. 256, 259 (App. 1987)
(“Constructive notice is neither notice nor knowledge but is a policy
determination that under certain circumstances a person should be treated
as if he had actual notice.”) (citations and internal quotation marks
omitted). Auto Auction does not argue that Consumers had actual notice
that anyone other than Road Trip had any rights in the vehicles.

¶13 By its express terms, Title 28’s constructive notice provision
gives notice to subsequent purchasers with respect to liens and
encumbrances after a secured creditor’s lien is reflected on the title. It
regulates the perfection of security interests, not sales to consumers and it
does not operate to provide constructive notice of ownership. Here, when

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Consumers purchased their vehicles from Road Trip, none of the vehicles
had an Arizona title reflecting a lienholder. Thus, the constructive notice
provision is inapplicable.

¶14 Auto Auction argues it had the right to repossess the vehicles
because its name was on the titles at the time of the repossessions. Section
28-101(59)(A) defines “owner” as “a person who holds legal title of a
vehicle.” But “ownership exists independent of a certificate of title,” and
“a purchaser or transferee of a vehicle may hold ‘legal title’ and be the
‘owner’ of the vehicle even if he has not applied for a certificate of title from
the MVD and is therefore not the ‘owner of record.’” Reinke v. Alliance
Towing, 207 Ariz. 542, 545-46, ¶¶ 16, 20 (App. 2004). See also Price v.
Universal C.I.T. Credit Corp., 102 Ariz. 227, 229-32 (1967) (ownership of
automobiles does not necessarily depend upon compliance with Arizona’s
certificate of title statutes—innocent purchasers of automobiles in the
ordinary course of business obtained good title even though they failed to
consult public records or ask to see title certificates).

¶15 Auto Auction argues in the alternative that it held a security
interest in the vehicles because it retained the vehicles’ titles and therefore
had the right to repossess the vehicles upon Road Trip’s default. “The
retention or reservation of title by a seller of goods notwithstanding
shipment or delivery to the buyer under § 47-2401 is limited in effect to a
reservation of a security interest.” A.R.S. § 47-1201(B)(35). “A security
interest is no more than the right of a creditor to attach and perfect an
interest in the property superior to the interest of any other.” First Nat. Bank
of Ariz. v. Carbajal, 132 Ariz. 263, 268 (1982). A security interest attaches to
collateral only when it becomes enforceable against the debtor. A.R.S. § 47-
9203(A). Section 47-9203(B) provides, in relevant part:

[A] security interest is enforceable against the debtor and
third parties with respect to the collateral only if:

1. Value has been given;

2. The debtor has rights in the collateral or the power to
transfer rights in the collateral to a secured party; and

3. One of the following conditions is met:

(a) The debtor has authenticated a security agreement
that provides a description of the collateral . . . .

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Here, there was no signed security agreement between Auto Auction and
Road Trip. Therefore, Auto Auction’s security interest did not attach, and
it was an unsecured creditor of Road Trip. Auto Auction cites A.R.S. § 47-
9110(A)(1) for the proposition that no security agreement was necessary.
That provision is inapplicable here because it applies only “until the debtor
obtains possession of the goods,” and Auto Auction no longer had
possession of the vehicles after allowing Road Trip to take them to its lot
and sell them to Consumers. See A.R.S. § 47-9110(A)(1).

¶16 Basic goals of the U.C.C. include protecting good faith
purchasers and facilitating the merchantability of property. Sears Consumer
Fin. Corp. v. Thunderbird Prods., 166 Ariz. 333, 338 (App. 1990) (when secured
party entrusted possession of a boat to a boat dealer, it unwittingly gave the
dealer the power to transfer its rights in the boat to a good faith purchaser
under U.C.C. § 2-403(2) and secured party’s repossession of the boat
constituted conversion).

¶17 A holding that a purchaser is presumed to know the contents
of a title certificate for the vehicle the purchaser is buying from a licensed
auto dealer would be onerous to the consumer and substantially impede
commercial transactions. See 1 James J. White, Robert S. Summers, & Robert
A. Hillman, Uniform Commercial Code § 4:34 (6th ed.) (“An individual
buying a product from an apparent dealer in such goods expects to get good
title. This expectation facilitates exchange. One cannot ascertain the seller’s
title without slowing commerce.”).

¶18 Here, Road Trip was a merchant that dealt in the sale of used
vehicles. When Auto Auction delivered possession of the vehicles to Road
Trip, it entrusted Road Trip with the power to transfer Auto Auction’s
rights to the vehicles to buyers in the ordinary course of business such as
Consumers. Accordingly, the superior court erred by granting summary
judgment in favor of Auto Auction.

¶19 Consumers request that we remand to the superior court with
instructions to enter partial summary judgment in their favor on the
liability portion of their conversion claims. Because the superior court is in
the best position to determine in the first instance whether Consumers are
entitled to summary judgment, we decline Consumers’ request and instead
remand for further proceedings consistent with our decision.

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¶20 Consumers and Auto Auction both request attorneys’ fees
under A.R.S. § 12-341.01. Each party, therefore, agrees that the fee-shifting
provision contained therein applies. As the prevailing parties, Consumers
are entitled to costs. We award Consumers their reasonable attorneys’ fees
upon compliance with ARCAP 21.

CONCLUSION

¶21 For the foregoing reasons, we reverse and remand for further
proceedings consistent with this decision.

AMY M. WOOD • Clerk of the Court
FILED: AA

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