Metro Plan, Inc. v. Kotcher-Turner, Inc. , 296 Mich. 400 ( 1941 )

This is an action for conversion of an automobile. The facts are before us by stipulation of counsel. Plaintiff is a New York corporation engaged in the business of financing automobile sales on chattel mortgage security, with its principal place of business in the city of New York. Defendant is a Delaware corporation engaged in the sale of new automobiles in Detroit. On or about March 18, 1938, one Vincente Maestre, a resident of Toms River, N.J., but regularly employed in the city of New York, purchased a new high-grade automobile from a dealer in New York for the list price of $1,385, f. o. b. factory at Detroit, exclusive of taxes or license fees. Payment was made in part from his own funds, and the sum of $960 was borrowed from plaintiff. To secure the loan, he executed a chattel mortgage on the automobile on March 18, 1938, which mortgage provided for payment of the loan in 12 monthly instalments of $80 each, beginning April 29, 1938. The mortgage stipulated that the automobile was to be stored in the garage at the rear of the mortgagor's home when not in actual use. Another clause provided:

"The mortgagor agrees not to use the property for any illegal purposes, nor to remove or cause or permit the property to be removed from said (New York) county (except in the ordinary use thereof by the mortgagor), nor to sell, convey, assign, hire out or sublet the same to or in any manner whatsoever, without first obtaining the written consent of the mortgagee."

The mortgagee granted permission to store the automobile in the garage at the mortgagor's residence at Toms River, New Jersey, and to use the car in commuting daily to his place of employment in New York. The mortgage was properly recorded in New York and New Jersey according to the laws of these respective States, but there has never been any attempt to comply with the Michigan statutes providing for the filing of chattel mortgages (3 Comp. Laws 1929, § 13424^* [Comp. Laws Supp. 1940, § 13424, Stat. Ann. § 26.929]). The purchaser registered the automobile under the laws of New York and obtained New York license plates; the registration certificate which conformed to New York law did not indicate that there were any liens or incumbrances on the title. Defendant had no actual knowledge of plaintiff's chattel mortgage.

On April 27, 1938, about 40 days after the purchase, the mortgagor drove to defendant's place of business in Detroit, and expressed his desire to trade the car for a new 1939 automobile when the new models would be ready for delivery later in the year. He represented to defendant's officer in charge of the business that he owned the automobile and had an unencumbered title thereto. A trade-in deal was made whereby the car was turned over to defendant with a bill of sale and an assignment of the New York registration certificate for $450 in cash and a credit memorandum for $450 which represented a partial payment on the new model; a few days later defendant sold the car to a used-car dealer in Detroit. Defendant presented the bill of sale and assignment of registration certificate to the proper Michigan authorities and obtained a Michigan certificate of title on May 6, 1938, and this certificate was assigned to the dealer who purchased the car from defendant.

The original purchaser made monthly payments on the debt for April, May, June and July, which payments reduced the balance to $640. On July 22, 1938, he wrote defendant that he had sold and assigned the $450 credit memorandum to a resident of New York and requested defendant's consent to the transfer; on August 25, 1938, defendant informed the assignee that it consented to the transfer. The assignee has requested that defendant deliver to him a new automobile with an allowance for the credit memorandum, but, according to the stipulation, as defendant has failed to comply with this request, the credit is still outstanding.

Defendant contended in the court below that plaintiff was not entitled to recover because defendant had no knowledge of any foreign lien or encumbrance on the car traded in, and because plaintiff's chattel mortgage was not recorded in Michigan. The trial court ruled that defendant was not a bona fide purchaser because the circumstances surrounding the transaction led to the "irresistible" conclusion that defendant "had notice abundantly sufficient to arouse suspicion of an ordinarily prudent man, and cause him to make inquiry as to the purpose to [for?] which such transfer was being made." The trial court also observed that defendant possibly relied too much on Michigan law which gives no extra-territorial effect to foreign chattel mortgages. Judgment was entered for plaintiff for the balance of the debt owing it from the original purchaser. Defendant contends in this court that the facts set forth in the stipulation do not warrant a finding that defendant was not a good-faith purchaser, and that the mortgage executed in another State, but not recorded in Michigan, could not preserve plaintiff's rights as a chattel mortgagee not in possession, citing Montgomery v. Wight, 8 Mich. 143; Boydson v. Goodrich,49 Mich. 65; Corbett v. Littlefield, 84 Mich. 30 (11 L.R.A. 95, 22 Am. St. Rep. 681); Allison v. Teeters, 176 Mich. 216. See, also, Enterprise Optical Manfg. Co. v. Timmer (C.C.A.),71 Fed. (2d) 295.

For purposes of this opinion, we shall assume that defendant was a bona fide purchaser. The main question for our determination is whether the lien valid in another State is lost by failure to record in Michigan when the property is moved here without the knowledge or consent of the chattel mortgagee. The problem has not been before this court sinceAllison v. Teeters, supra, was decided in 1913. This case involved a horse on which a chattel mortgage was executed and recorded in Indiana, and then the animal was brought to Michigan and sold to a bona fide purchaser, who, it was held, took free of the foreign lien not recorded here. That decision followed the rule laid down in earlier cases herebefore cited, holding that the recording of a chattel mortgage in another jurisdiction had no extraterritorial effect to give notice of the lien in Michigan. "If the mortgagees desire to be protected where no notice can be made effectual," said JUSTICE CAMPBELL in Montgomery v. Wight, supra, 150, "they must take possession, and not allow the mortgagor to take the property where third parties have no means of ascertaining its title." The Supreme Court of the United States (Bank of the United States v.Lee, 38 U.S. [13 Pet.] 107 [10 L.Ed. 81; Hervey v. Rhode IslandLocomotive Works, 93 U.S. 664 [23 L.Ed. 1003]) and the highest courts of the far greater number of the States have taken the view that the local recording statutes are inapplicable to mortgages executed outside of the State on property located abroad at the time of the execution of the mortgage and subsequently removed without the knowledge or consent of the mortgagee. See 2 Beale, Conflict of Laws, § 265.1 to § 270.1; Beale, "Jurisdiction over Title of Absent Owner in a Chattel," 40 Harvard Law Review, 805; Griffin, "The Effect of Foreign Chattel Mortgages upon the Rights of Subsequent Purchasers and Creditors," 4 Michigan Law Review, 358; Beall Beall v. Williamson, 14 Ala. 55; Wray Bros. v. H.A. White Auto Co., 155 Ark. 153 (244 S.W. 18); Creelman LumberCo. v. Lesh Co., 73 Ark. 16 (83 S.W. 320, 3 Ann. Cas. 108);Davis v. Standard Accident Ins. Co., 35 Ariz. 392 (278 Pac. 384); Mercantile Acceptance Co. v. Frank, 203 Cal. 483 (265 Pac. 190, 57 A.L.R. 696); Mosko v. Matthews, 87 Col. 55 (284 Pac. 1021); General Credit Corp. v. Rohde,122 Conn. 100 (187 A. 676); In re Shannahan Wrightson HardwareCo., 32 Del. (2 W. W. Harr.) 37 (118 A. 599); Smith'sTransfer Storage Co. v. Reliable Stores Corp.,61 App. D.C. 106 (58 Fed. [2d] 511); Hopkins v. Hemsley, 53 Idaho, 120 (22 Pac. [2d] 138); Mumford v. Canty, 50 Ill. 370 (99 Am. Dec. 525); National Bond Investment Co. v. Larsh, 262 Ill. App.? 363; Ames Iron Works v. Warren, 76 Ind. 512 (40 Am.Rep. 258); First National Bank v. Ripley, 204 Iowa, 590 (215 N.W. 647); Willys-Overland Co. v. Evans,104 Kan. 632 (180 P. 235); Perkins v. National Bond Investment Co.,224 Ky. 65 (5 S.W. [2d] 475); General Motors Acceptance Corp. v. Nuss, 195 La. 209 (196 So. 323); Langworthy v. Little, 12 Cush. (66 Mass.) 109; Wilson Co. v. Carson Co.,12 Md. 54; Silver v. McDonald, 172 Minn. 458 (215 N.W. 844);Mason City Production Credit Ass'n v. Sig Ellingson Co.,205 Minn. 537 (286 N.W. 713, certiorari denied, 308 U.S. 599 [60 Sup. Ct. 130, 84 L.Ed. 501]); National Bank of Commerce v.Morris, 114 Mo. 255 (21 S.W. 511, 19 L.R.A. 463, 35 Am. St. Rep. 754); Farmers Merchants State Bank v.Sutherlin, 93 Neb. 707 (141 N.W. 827, 46 L.R.A. [N. S.] 95, Ann. Cas. 1914B, 1250); Cleveland Machine Works v. Lang,67 N.H. 348 (31 A. 20,68 Am. St. Rep. 675); Parr v. Brady,37 N.J. Law, 201; Hart v. Thompson, 37 N.M. 267 (21 Pac. [2d] 96, 87 A.L.R. 962); Goetschius v. Brightman, 245 N.Y. 186 (156 N.E. 660); Hornthal v. Burwell, 109 N.C. 10 (13 S.E. 721, 13 L.R.A. 740, 26 Am. St. Rep. 556); Wilson v. Rustad,7 N.D. 330 (75 N.W. 260, 66 Am. St. Rep. 649); Kanaga v. Taylor,7 Ohio St. 134 (70 Am. Dec. 62); Kerfoot v. State Bank ofWaterloo, 14 Okla. 104 (77 P. 46); Emerson-BrantinghamImplement Co. v. Ainslie, 38 S.D. 472 (161 N.W. 1001); Bankers'Finance Corp. v. Locke Massey Motor Co., 170 Tenn. 28 (91 S.W. [2d] 297); Taylor v. Boardman, 25 Vt. 581;Craig v. Williams, 90 Va. 500 (180 S.W. 899, 44 Am. St. Rep. 934, but see Virginia Code of 1919, § 5197^* and Smith MotorSales, Inc., v. Lay, 173 Va. 117 [3 S.E.2d 1901);Cunningham v. Donelson, 110 W. Va. 331 (158 S.E. 705); cf.Southern Finance Co. v. Zegar, 120 W. Va. 420 (198 S.E. 875);Yund v. First National Bank, 14 Wyo. 81 (82 P. 6);Shapard v. Hynes (C.C.A.), 104 Fed. 449 (52 L.R.A. 675). See, also, 64 L.R.A. 353; 35 L.R.A. (N.S.) 385; L.R.A. 1917D, 942; 57 A.L.R. 702; 87 A.L.R. 973.

The general rule is stated in American Law Institute, Restatement, Conflict of Laws, § 268(1):

"If, after a chattel is validly mortgaged, it is taken into another State without the consent of the mortgagee, the interest of the mortgagee is not divested as a result of any dealings with the chattel in the second State."

Comment c:

"Under the rule stated in this section, the interest of the mortgagee is not divested by any dealings with the chattel in the second State whether such dealings consist of a sale by the mortgagor to a purchaser for value and without notice, or of an attachment or execution levied by a creditor of the mortgagor. It is immaterial that the mortgage has not been recorded in the second State."

The minority principle finds recognition today only in Texas (Farmer v. Evans, 111 Tex. 283 [233 S.W. 101]; General MotorsAcceptance Corp. v. Fowler [Tex. Civ. App.], 36 S.W. [2d] 589) and Pennsylvania (see Kaufmann Baer v. Monroe MotorLine Transportation, Inc., 124 Pa. Super. 27 [187 A. 296]); and even in the latter jurisdiction the question appears not to have been passed on by the highest court in the State. In Tennessee, a step toward the minority rule (Snyder v. Yates,112 Tenn. 309 [79 S.W. 796, 64 L.R.A. 353, 105 Am. St. Rep. 941]) was subsequently retracted (Newsum v. Hoffman,124 Tenn. 369 [137 S.W. 490]; Bankers' Finance Corp. v. Locke MasseyMotor Co., supra. Louisiana, long stated by courts and textwriters to be a follower of the minority rule, recently construed its chattel mortgage statute in harmony with the majority rule. General Motors Acceptance Corp. v. Nuss, supra (April, 1940), reversing 192 So. 248 (La.App.).

The rule heretofore followed in Michigan has had the severe criticism of courts and textwriters. See Beale, op. cit., 40 Harvard Law Review, 805; Griffin, op. cit., 4 Michigan Law Review, 358. In Newsum v. Hoffman, supra, at p. 374, it was said:

"Still, on further consideration, we yield to the great weight of authority on the general question, with the qualification concerning the effect of the consent of the mortgagee above indicated. It seems a churlish and ungracious course, if not an example of improvident judgment, to hold out against the general comity of the many States which recognize the rule of interstate courtesy upon this subject."

In Mercantile Acceptance Co. v. Frank, supra, 489, the supreme court of California approvingly quoted the following from the opinion in Motor Investment Co. v.Breslauer, 64 Cal.App. 230 (221 P. 700):

"The rule, however, appears to be founded upon the principles of equity and natural justice As applied to cases of the character of the one before us, it can produce no harsh or unjust results. The principle underlying it may be analogized to that upon which the owner of the property stolen from him and taken or transported to another State may follow the thief into the latter State and reclaim or take possession of the pilfered goods or chattels wherever found. A State may, it is true, refuse to recognize the rule of comity in such cases, but should it do so, it would become a party to every such fraudulent transaction. It is not going too far to say and to hold that it is preferable and more desirable that an innocent purchaser or encumbrancer of personal property brought into a State under such circumstances as those characterizing the transaction with which we are here concerned should suffer loss, which possibly his own improvidence or want of diligence has brought to him, than that the State should assume and maintain an attitude towards such transaction which would necessarily stigmatize it as an accessory after the fact to the fraud inhering therein."

We think the analogy with the case of stolen property more nearly fits the case today than to regard the mortgagee as allowing the mortgagor "to take the property where third persons have no means of ascertaining its title." An innocent purchaser always runs some risk that crime in the chain of transfers may bar his rights as against the owner. The removal of mortgaged property from the State without the consent of the mortgagee is a crime in Michigan (Act No. 328, § 417, Pub. Acts 1931 [Comp. Laws Supp. 1940, § 17115-417, Stat. Ann. § 28.649]) and other jurisdictions (e. g., Penal Code, Texas, 1925, Art. 1558^*; New Mexico Statutes, 1929 Comp. § 21-111), and in New York, the sale, assignment, exchange, secretion, or disposition of the mortgaged property with intent to defraud the mortgagee is a misdemeanor. New York Penal Law, § 940. The suggestion of Justice CAMPBELL in Montgomery v. Wight, supra, that the mortgagee must take possession to protect his lien does not conform to present day business practices in the financing of automobiles and other chattels; mortgagees of chattels perform a demanded service and should have reasonable protection in so doing when the subject of their security is surreptitiously removed from the State where the lien arose, not only in violation of the terms of the debtor's agreement, but also in violation of penal laws. While an occasional bona fide purchaser must suffer, under the majority rule, we do a greater good in protecting the financing of chattels where the mortgagee has done everything in his power to protect his security; in doing so, if the observation of Professor Beale is correct (op. cit., 40 Harvard Law Review, 805, 810), Michigan will not "doubtless continue full of willing bona fide buyers." A uniform mutual comity between States seems more in accord with fair dealing and modern business practice than the nullification of a lien valid elsewhere when the chattel is unlawfully brought into our jurisdiction and dealt with here without knowledge, consent or other inconsistent conduct on the part of the mortgagee. Our earlier cases, to the extent that they are inconsistent herewith, should be overruled.

Defendant contends that the judgment cannot stand because there was no evidence of the value of the automobile at the time of the conversion and no evidence of the value of plaintiff's interest therein. The extent of recovery by the mortgagee for conversion of the security is the value of the goods at the time of the conversion, limited by the unpaid balance of the debt.Huellmantel v. Vinton, 112 Mich. 47; Showman v. Lee, 79 Mich. 653, and 86 Mich. 556; Worthington v. Hanna, 23 Mich. 530. The stipulation reveals that about 40 days before the conversion the automobile had a list price at Detroit of $1,385, that at about the time of the conversion defendant paid $450 in cash and allowed a credit toward another purchase to the extent of $450. It is further stipulated that the balance of the debt is $640. There was ample data before the trial court to support a judgment for $640.

The judgment is affirmed, with costs to plaintiff.

BUSHNELL, CHANDLER, and McALLISTER, JJ., concurred with BUTZEL, J.

^* As amended by Act No. 18, Pub. Acts 1934 (1st Ex. Sess.), and Act No. 129, Pub. Acts 1935. — REPORTER.

^* Same section, Code of 1930. — REPORTER.

^* Amended 1929, 2d Sess., chap. 48, p. 85, § 1; see Penal Code, Vernon's Texas Statutes, 1936, § 1558. — REPORTER.