Honda City Triumph, Inc. v. First National Bank

Wilner, J., delivered the opinion of the Court. On January 17, 1980, Richard Rueb agreed to purchase a 1980 Honda Accord from appellant Honda City-Triumph, a licensed automobile dealer. The purchase order signed by the parties described the vehicle, showed the purchase price to be $6,817, recited a $100 deposit (apparently charged on a VISA card), and called for the balance of $6,717 to be paid in cash at time of delivery. The next day, with purchase order in hand, Mr. Rueb applied for and received a loan from appellee First National Bank of Southern Maryland in order to pay for the car.

The gross amount of the loan was $6,277, payable in forty-eight monthly installments of $130.78, but after deducting interest over that period and certain other charges, the net proceeds of the loan came to $5,037. Rueb signed a security agreement purporting to grant the bank a security interest in the automobile, and the bank issued two checks. The first, representing the loan proceeds of $5,037, was made payable to Rueb and "Honda City, Inc.”; the second, to cover the cost of recording a lien with the Motor Vehicle Administration (MVA), was for $12 and was made payable to Rueb and the State Department of Transportation (of which MVA is a part). Prior to delivery of the $5,037 check, the bank typed on the back of it the following statement: "LIEN The proceeds of this check represent a loan of $6,277.44 on a 1980 Honda Accord and in consideration thereof the undersigned agrees to register and/or record a lien in said amount on the title thereto in favor of the First National Bank of Southern Maryland, Upper Marlboro, Md. as evidenced by Chattel Mortgage dated January 18, 1980.

Serial #SMK 2035383” Rueb returned to the dealer on January 19, endorsed the ⁵⁴² bank check over to it by signing his name directly below the aforequoted typed statement, and took delivery of the car. In derogation of that statement, however, Rueb told appellant’s assistant manager (who had sold him the car) that no lien was to be placed on the car, and he did not turn over the $12 check. Appellant accepted the $5,037 check toward the purchase price of the car, endorsed the check underneath Rueb’s signature, and promptly deposited it. Appellant took no steps, however, to see that the bank’s lien was duly recorded with MVA or to notify the bank that its lien was not being so recorded.

About a month after the transaction, the $12 check, which had not been negotiated, was returned to the bank by Rueb. No inquiry was made at that time as to why the check had not been negotiated. Rueb made his regular monthly payments on the loan through May, 1980. In July, the loan fell into default, and the matter was turned over to the bank’s collection department.

The collection manager soon learned that appellant had failed to record the lien. He also learned, to his dismay, that Rueb had moved to Alabama, sold the Honda, and filed a petition in bankruptcy. It was later confirmed that Rueb had received a discharge in bankruptcy, and the bank was left with a balance of $5,053 unpaid on the automobile loan. Having no further recourse against Rueb, the bank sued appellant in the Circuit Court for Anne Arundel County, claiming both a breach of contract and conversion.

After a non-jury trial, the court found that the typed statement on the back of the $5,037 check constituted a contract which appellant had breached; and, on that basis, it awarded the bank a judgment in the amount of $5,053. Aggrieved by that determination, appellant turns to us with the questions: "1. Did the Court err in finding the existence of a contract between the Bank and Honda City which was breached by Honda City? [and] ⁵⁴³ 2. Is the Bank limited to nominal damages for failure to mitigate damages?” We shall answer both questions in the negative, and thus shall affirm the judgment entered by the circuit court.

(1) Liability The situation presented in this appeal has essentially three elements: (1) a lending institution (bank) agrees to lend a customer money to buy a car, intending that its loan be secured by a lien on the car; (2) the bank, which may or may not have had prior dealings with the automobile dealer, relies on the dealer to see to it that a lien is properly recorded with the State MVA; and (3) it manifests that reliance by language on the check for the loan proceeds issued to the customer (jointly with the dealer) and by tendering the cost of recording the lien. This is not an uncommon practice in financing the retail purchase of automobiles; and occasionally, as here, it happens that the dealer neglects to record the lien, the buyer/borrower later defaults on the loan, and the bank ends up suffering some loss by not having the car as collateral. There have been a number of cases around the country in which banks placed in that position have sought recompense from the dealer, and they have usually been successful. See, for example, the line of Illinois cases beginning with Westlake Finance Company v. Oak Park Motors, Inc., 166 N.E.2d 23 (Ill. 1960), and continuing with Aurora National Bank v. Ed Fanning Chevrolet, Inc., 229 N.E.2d 2 (Ill.App. 1967), and South Division Credit Union v. Deluxe Motors, Inc., 355 N.E.2d 715 (Ill.App. 1976). 1 Also Oroweat Emp.

Credit Union v. Stroupe, 269 S.E.2d 211 (N.C.App. 1980); United, Etc. v. Dick Herriman Ford, Inc., 210 S.E.2d 158 (Va. 1974); White Truck Sales v. Shelby Nat. Bank, 420 ⁵⁴⁴ N.E.2d 1266 (Ind.App. 1981); Connecticut B. & T. Co. v. Stephen Pontiac-Cadillac, 257 A.2d 510 (Conn.App. 1968); Rebsamen Cos., Inc. v. Arkansas St. Hosp. Emp. F.C.U., 522 S.W.2d 845 (Ark. 1975); Atlanta Motorcycle Sales, Inc. v. Fulton National Bank, 248 S.E.2d 558 (Ga. 1978); and cf. Don Lorenz, Inc. v. Northampton National Bank, 381 N.E.2d 1108 (Mass.App. 1978), and Federal Employees Cr.

U. v. Capital Automobile Co., 183 S.E.2d 39 (Ga.App. 1971). Two theories have been developed in support of the dealer’s liability: (1) that the statement placed on the back of the bank’s check represents a contract with the dealer — the agreement of the bank to facilitate the sale of the car by making the loan, in return for the dealer’s commitment to protect the bank by seeing to it that the bank’s security interest is perfected; and (2) a statutory obligation of the dealer to include notice of the lien in the submissions required to be made to the State MVA. The two theories to some extent interrelate; i.e., the relationships among the parties — buyer, seller, and bank — are to a degree influenced by certain statutory requirements. It is well, therefore, to begin with the statutory framework.

There was a time, before 1971, when liens on motor vehicles were perfected in the same manner as liens on other chattels — by filing the chattel mortgage (or, after adoption of the Uniform Commercial Code, a financing statement) with the appropriate county recording officer. Notwithstanding requirements in the motor vehicle code that both applications for certificates of title and the certificates themselves contain a statement of all liens and encumbrances on the automobile (see former Md. Code (1967 Repl. Vol.), art. 66V2 §§ 24 and 28(c)), the rights of a secured lender were governed by the terms of his security agreement and its recording in the required manner, and not by whether the lien was noted on the certificate of title. See Huettner v. Sav.

Bank of Balto., 242 Md. 477 (1966). As the result of enactments in 1971 (Acts of 1971, ch. 398) and 1973 (Acts of 1973, ch. 688), however, that is no longer ⁵⁴⁵ the case. Current Maryland law provides a special way of perfecting a security interest in motor vehicles; compliance with the normal rules set forth in the Uniform Commercial Code (Md. Code., Comm. Law art., title 9) is not enough.

The new ground rules are set out in Transp. art., § 13-202. Section 13-202 (a) provides, with exceptions not relevant here, that "a security interest in a vehicle is not valid against any creditor of the owner or any subsequent transferee or secured party unless the security interest is perfected as provided in this subtitle.” Section 13-202 (b) then states: "(1) A security interest [in a motor vehicle] is perfected by: (i) Delivery to [MVA] of every existing certificate of title of the vehicle and an application for certificate of title on the form and containing the information about the security interest that the [MVA] requires; and (ii) Payment of a filing fee of $12, which is in addition to any other fees that apply under the Maryland Vehicle Law. (2) The security interest is perfected at the time of its creation, if the delivery and payment to the [MVA] are completed within 10 days of the date of its creation. Otherwise, the security interest is perfected at the time of the delivery and payment.” Section 13-207 confirms the exclusivity of this method with the flat statement that "[t]he method provided in this subtitle of perfecting and giving notice of security interests is exclusive.” See also Md. Code, Comm.

Law art., § 9-302 (3), both prior to and after the changes made by Acts of 1980, ch. 824. The scheme envisioned by this special procedure is that (1) MVA would be a central repository for all liens on motor vehicles