Opinion
NOT FOR PUBLICATION
Submitted at Pasadena, California March 16, 2011
Appeal from the United States Bankruptcy Court for the District of Idaho. Bk. No. 09-04065, Adv. No. 10-06006. Honorable Jim D. Pappas, Bankruptcy Judge, Presiding.
John R. Hammond, Jr., Esq., Batt, Fisher, Pusch & Alderman, LLP argued for Appellants Froerer Farms, Inc. and Chase Froerer
Before: JURY, HOLLOWELL, and MARKELL Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Appellants Froerer Farms, Inc. (" FFI") and Chase Froerer (" Froerer") (collectively, " Defendants") appeal the bankruptcy court's order granting summary judgment in favor of the chapter 7 trustee, Jeremy Gugino, and denying Defendants' cross motion for summary judgment in an avoidance action under § 544(a)(1).
The trustee did not participate in this appeal.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
We REVERSE.
I. FACTS
On July 2, 2009, debtors Jason and Kasondra Mayer sold their 100% unencumbered interest in a 2004 Mastercraft X2 boat to FFI for $24,000. On the same day, debtors assigned the Idaho certificate of title for the boat to FFI and Froerer transported the boat to Nysaa, Oregon. FFI is an Oregon limited liability company and Froerer, FFI's agent, is a resident of Oregon.
On July 14, 2009, debtors executed a " release of liability" form for the boat which they delivered to the Idaho Department of Transportation.
In November 2009, FFI transported the boat back to Idaho for minor repairs. Within a few days, the boat was returned to Oregon where it has remained ever since.
Since the date of purchase, FFI has provided and paid for insurance coverage for the boat. FFI also placed a state of Oregon dealer plate on the boat. FFI was a purchaser of vehicles and the record indicates that FFI never intended to obtain an Idaho certificate of title for the boat because its affiliate, M and W Auto, had an Oregon dealer's license in Oregon and resold the vehicles and equipment that FFI purchased.
It is unclear whether FFI was formed for the purpose of purchasing vehicles for resale. Froerer provides no further explanation in his declaration other than FFI purchases vehicles and equipment which it sells through its " affiliate, " M and W Auto.
On December 23, 2009, debtors filed their chapter 7 bankruptcy petition. As of the date of the filing, the boat was still titled under an Idaho certificate of title in the name of " Jason R. Mayer."
On January 15, 2010, unaware of debtors' filing, FFI applied for a boat title with the Oregon State Marine Board.
On January 16, 2010, the trustee filed an adversary proceeding against Defendants, seeking to avoid FFI's ownership interest in the boat under § 544(a)(1) and compel turnover under § 542(a). Thereafter, the trustee moved for summary judgment, asking the bankruptcy court to conclude, as a matter of law, that Idaho law should apply to the dispute. Under Idaho law, the certificate of title was dispositive on the ownership issue.
The trustee also included a claim for relief under § 549(a). The bankruptcy court did not rule on that claim. Based on the parties' stipulation, the court entered judgment for the trustee on this claim on October 6, 2010, causing all issues raised in the adversary proceeding to be finally resolved. This procedure raises a jurisdictional concern. If the § 549 claim were unresolved, the appeal would be interlocutory, and not final. The stipulation, however, states that the parties' resolution of the § 549 claim is " subject to the pending appeal." This type of reservation undermines the finality of the order, and signals potentially manufactured jurisdiction. See Am. States Ins. Co. v. Dastar Corp., 318 F.3d 881, 885-92 (9th Cir. 2003); Dannenberg v. Software Toolworks, Inc., 16 F.3d 1073, 1075-78 (9th Cir. 1994). In this case, to the extent that the reservation destroys finality, we grant leave to appeal, thus removing any jurisdictional issue.
Defendants filed an opposition and cross motion for summary judgment, contending that Oregon had the more significant relationship to the transaction and the parties. Under Oregon law, the certificate of title was not conclusive evidence of ownership. In that event, Defendants alleged that the undisputed facts showed they were the owners of the boat.
On July 19, 2010, the bankruptcy court issued a Memorandum Decision ruling in favor of the trustee on the parties' cross motions for summary judgment and entered an order on the same day. Utilizing the federal common law choice of law rules and analysis set forth in Hopkins v. Shradley (In re Shradley), 03.1 I.B.C.R. 7, 9 (Bankr. D. Idaho 2003), the bankruptcy court determined that the state of Idaho had the most significant relationship to the transaction and the parties. As a result, the certificate of title in the name of " Jason R. Mayer" was dispositive as to the ownership issue. Therefore, the trustee could avoid Defendants' unrecorded interest in the boat under § 544(a)(1).
Except for the application of federal choice of law rules, Shradley is factually distinguishable from the instant case.
Defendants timely filed this appeal.
II. JURISDICTION
The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. § § 1334 and 157(b)(2)(A) and (E). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUES
A. Whether the bankruptcy court erred in its application of the choice of law rules; and if the bankruptcy court did err, B. Whether the undisputed facts showed that Defendants had an equitable ownership interest in the boat superior to the rights of a judicial lien creditor under Oregon law.
IV. STANDARD OF REVIEW
In reviewing the bankruptcy court's decision on a motion for summary judgment, we apply the same standards as the bankruptcy court. Accordingly, our review is de novo. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1221-22 (9th Cir. 2010).
V. DISCUSSION
Under § 544(a)(1), the bankruptcy trustee obtains the rights and powers of a hypothetical creditor who obtained a judicial lien on all of the property in the estate at the time of the commencement of the bankruptcy case. The trustee's rights and powers as a judicial lien creditor are based upon state law. Thus, if under state law, an actual judicial lien creditor without knowledge could obtain a superior interest to that of Defendants' unrecorded ownership interest in the boat, Defendants would be relegated to the status of unsecured creditors in debtors' estate.
A. Choice of Law Rules
The first question we must resolve is whether the trustee's rights and powers as a judicial lien creditor are based on Idaho or Oregon law. Which state's substantive law governs an issue is a question of law. Downing v. Abercrombie & Fitch, 265 F.3d 994, 1005 (9th Cir. 2001). However, determining which state has the most significant relationship to the dispute at issue involves a factual determination. Id . (" In reviewing the factual findings that underlie the choice of law determination, the court must apply the clearly erroneous standard.").
On appeal, Defendants do not contend there was a genuine issue of material fact that prevented entry of summary judgment for the trustee. Instead, Defendants contend that the bankruptcy court made an error of law by giving certain factors in its choice of law analysis little or no weight. Therefore, the choice of law issue before us is purely a question of law over which we exercise free review.
Defendants concede that if Idaho law applies, the certificate of title bearing Jason's name is dispositive on the ownership issue. Idaho Code § 49-503 states:
In general, the vehicle titling laws of Idaho and Oregon serve as a simple and effective means for ascertaining the title to, and interests in, motor vehicles whether for liability or other purposes. Although the basic policies of Idaho and Oregon behind their certificate of title laws are the same, there is a genuine conflict between the laws insofar as the outcome of this appeal is concerned. Further, both Idaho and Oregon have a legitimate interest in the enforcement of their vehicle titling statutes to establish ownership for liability and other purposes. Therefore, a choice of law analysis is appropriate.
The Ninth Circuit generally looks to federal choice of law rules under federal statutes. Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1069 (9th Cir. 2002); Lindsay v. Beneficial Reinsurance Co. (In re Lindsay), 59 F.3d 942, 948 (9th Cir. 1995) (" In federal question cases with exclusive jurisdiction in federal court, such as bankruptcy, the court should apply federal, not forum state, choice of law rules."). However, cases outside of this circuit specifically construe § 544(a)(1) to require application of the conflicts of law rules of the state in which the bankruptcy was filed. Krigel v. Mercedes-Benz Credit Corp. (In re Stanley), 249 B.R. 509 (W.D. Mo. 2000); Huisinga v. Greater Quad City Auto Auction (In re Hocken), 360 B.R. 282 (Bankr. N.D. Iowa 2007). Although this potentially could cause a conflicts of law problem, that is not the case here. Both federal law and Idaho law look to the Restatement (Second) of Conflicts of Law (1971) (the " Restatement") for the choice of law rules. This is thus a case of " false" conflicts as contemplated by conflicts scholars. Peter Hay, Patrick J. Borchers & Symeon C. Symeonides, Conflict of Laws § 2.9 n.15 (5th ed. 2010) (" False conflicts . . . include cases in which the laws of the involved states are identical, or different, but produce identical results."). We therefore apply the Restatement to determine the source of the trustee's § 544(a)(1) avoiding powers in this case.
Section 6(2) of the Restatement lists several factors relevant to a choice of law analysis:
(a) the needs of the interstate and international systems; (b) the relevant policies of the forum; (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue; (d) the protection of justified expectations; (e) the basic policies underlying the particular field of law; (f) certainty, predictability and uniformity of result; and (g) ease in the determination and application of the law to be applied.
Comment (c) to § 6(2) of the Restatement illustrates what approach should be taken in evaluating these factors: The factors listed are not exclusive nor are they listed in any order of importance. The comment further provides that " [v]arying weight will be given to a particular factor, or to a group of factors, in different areas of choice of law." Restatement § 6 cmt. c.
These directives demonstrate that the Restatement is designed to avoid a formulaic approach. Rather, courts must evaluate how much weight should be allotted to each of the factors given the specific facts of the case. Furthermore, " a particular state's contacts are measured on a qualitative rather than a quantitative basis. Thus, more than a mere 'counting' of the contacts is required." Buffalo Molded Plastics, Inc. v. Plastic Mold Tech., Inc. (In re Buffalo Molded Plastics, Inc.), 354 B.R. 731, 752 (Bankr. W. D. Pa. 2006).
Although § 6(2) of the Restatement states general principles for resolving conflict of law issues, there are other areas of the Restatement that provide further guidance for the weighing of specific factors related to the issue at hand. Here, the trustee's avoidance action raises the issue of competing interests in the boat. Therefore, the best characterization for choice of law purposes is that a property issue is implicated.
Section 222 of the Restatement states the overall principle for determining conflict of law issues as to property. This section provides:
The interests of the parties in a thing are determined, depending upon the circumstances, either by the 'law' or by the 'local law' of the state which, with respect to the particular issue, has the most significant relationship to the thing and the parties under the principles stated in § 6.
Comment (b) to § 222 of the Restatement states that protection of the justified expectations of the parties is of considerable importance in the field of property.
Parties enter into property transactions with forethought and are likely to consult a lawyer before doing so. They will expect certain legal consequences to ensue from a given transaction and, in the absence of strong countervailing considerations, their expectations should not be disappointed. The relative importance of a person's expectations will vary with the circumstances. When transfers of interests in things are based upon consideration, such as in the case of the sale of land or of chattels, the expectations of the transferor and of the transferee are of equal importance . . . . The need for protecting the expectations of the parties gives importance in turn to the values of certainty, predictability and uniformity of result. For, unless these values are attained, the expectations of the parties are likely to be disappointed.
Section § 244 of the Restatement is also relevant to the conveyance at issue. This section provides:
(1) The validity and effect of a conveyance of an interest in a chattel as between the parties to the conveyance are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties, the chattel and the conveyance under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties, greater weight will usually be given to the location of the chattel, or group of chattels, at the time of the conveyance than to any other contact in determining the state of the applicable law.
Comment (f) of this section provides in relevant part:
The importance of a chattel's location at the time of the conveyance in the choice of the applicable law depends somewhat upon the intended permanence of this location. If the parties intended that the chattel should remain in this location more or less permanently, the state of the chattel's location will in all probability be the state of most significant relationship and thus the state of the applicable law. The situation is different when it is understood that the chattel will be kept only temporarily in the state where it was located at the time of the conveyance. Here it is more likely that, with respect to the particular issue, some other state will have the most significant relationship to the parties, the chattel and the conveyance and be the state of the applicable law.
Defendants contend that the bankruptcy court erred in applying the above referenced choice of law rules by giving little or no weight to the factors listed in § § 222 and 244 of the Restatement. Under the former, the protection of the justified expectations of the parties factor is of considerable importance in the field of property. Section 244(2) of the Restatement instructs that when the parties to a conveyance do not intend a chattel to remain in the state where it is located at the time of conveyance, the weight to be given to the location of the chattel at the time of conveyance is significantly lessened.
B. Choice of Law Analysis: Application of § § 6 (2), 222 and 244 of the Restatement
In the first step of its choice of law analysis, the bankruptcy court considered the factual contacts with the states of Idaho and Oregon. The court observed that the sale transaction took place in Idaho, the boat was physically in Idaho at the time of the sale and it was owned by Idaho residents. The court further noted that Defendants traveled to Idaho to complete the sale, the purchase money changed hands in Idaho, and Defendants returned the boat to Idaho to have it repaired and improved. In contrast, the court found that the contacts with Oregon were relatively minimal. In that regard, the court observed that the boat was taken to Oregon after purchase by its Oregon-resident new owner. Based on these findings, the court concluded that the contacts with Idaho arising from the transaction were significant.
However, the contacts of the transactions and the parties with either jurisdiction are to be weighed in light of the guiding policy concerns. Here, the bankruptcy court recognized the significance of the change in the location of the boat immediately after the purchase, but gave that factor little weight. Indeed, while the transaction and purchase took place in Idaho, the record shows that FFI never intended to keep the boat in Idaho and, in fact, immediately moved the boat to Oregon after the purchase. This makes sense since FFI was an Oregon corporation with its place of business in Oregon.
In cases involving personal property, the Restatement instructs when it is understood that the chattel will be kept only temporarily in the state where it was located at the time of the conveyance, it is more likely that, with respect to the particular issue, some other state will have the most significant relationship to the parties, the chattel and the conveyance, and be the state of the applicable law. Thus, because the boat was immediately moved to Oregon, Idaho's interest in the transaction was greatly diminished. See Restatement § 244; Compliance Marine, Inc. v. Campbell (In re Merritt Dredging Co., Inc.), 839 F.2d 203, 207-08 (4th Cir. 1988); Schoeps v. Museum of Modern Art, 594 F.Supp.2d 461, 468 (S.D.N.Y. 2009). Accordingly, as between Idaho and Oregon, we conclude that under factor (c) of § 6(2) of the Restatement -- the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue -- the interests of Oregon outweigh those of Idaho under these circumstances. Oregon would have a significant interest in protecting a corporation which maintains its place of business in Oregon and has assets located within the state.
The bankruptcy court also considered factor (d) of § 6(2) of the Restatement -- the protection of the justified expectation factor -- in conjunction with factor (f) -- the certainty, predictability, and uniformity of result factor. The court recognized that the expectations of the parties pointed to application of Oregon law.
Without question, the expectations of both the Defendants and Debtors were that when the Boat was sold, ownership passed from Debtors to FFI, with Defendants to have immediate possession of the Boat. Arguably, this should lead the court to favor application of the laws of Defendants' home state, and not the sellers' state.
However, the court further concluded:
[W]ere the court to give strict heed to the parties' expectations, the certainty and uniformity promoted by application of the Idaho vehicle titling law to a Boat located in this state would be undermined. The Court has previously commented on the legislative policy promoted by Idaho's titling statute . . . .
In this regard, the bankruptcy court cited Hopkins v. Brasseaux (In re Saunders), 08.1 I.B.C.R. 16, 17, (Bankr. D. Idaho 2008), where the court found that the policy promoted by the Idaho motor vehicle title system, as implemented by the case law, protects those who rely upon the certificate of title to determine ownership or other rights in a vehicle. However, it is unlikely that a judicial lien creditor would actually rely on a certificate of title. Rather, the judicial lien creditor's rights arise without any reliance.
The bankruptcy court concluded that predictability, certainty and uniformity should weigh more heavily in this context than mechanical obedience to the parties' expectations.
The court's statements lead us to conclude that it made the relevant policies of Idaho the predominant factor in its choice of law analysis. Indeed, the court's discussion overlooked comment (b) to § 222 of the Restatement, which provides that protection of the justified expectations of the parties is of considerable importance in the field of property. Protecting the parties' expectations, in turn, gives importance to the values of " certainty, predictability and uniformity of result." Restatement § 222; Buffalo Molded Plastics, Inc., 354 B.R. at 755.
Admittedly, the expectations of the transferors, the debtors in this case, is of little import in this avoidance action because it is the trustee, as a judicial lien creditor, who is seeking the avoidance on behalf of the unsecured creditors. Nonetheless, we cannot totally ignore Defendants' expectations when they took the steps to immediately move the boat to Oregon after the sale and, as a result, Idaho's substantive connection with the transaction was lessened. Under these circumstances, we conclude that greater predictability and uniformity can be achieved by placing emphasis on Defendants' expectations as directed by comment (b) to § 222 of the Restatement. Accordingly, we conclude that factors (d) and (f) of § 6(2) of the Restatement point to the application of Oregon's certificate of title law.
In reality, the motor vehicle titling laws in general probably work against uniformity due to the fifty states having diverse vehicle codes.
The bankruptcy court also considered factor (g) of § 6(2) of the Restatement -- the ease of determination and application of law to be applied. In doing so, the court concluded that it " was very familiar with Idaho's vehicle titling law, and has applied it on numerous occasions. The Court has no reported experience with the Oregon title laws." To some degree it is easier for a bankruptcy court in Idaho to apply Idaho law. However, bankruptcy courts frequently look to the law of other states. In any event, we conclude that this factor has little significance because the vehicle titling laws in either Idaho or Oregon are easy to determine and apply.
The bankruptcy court did not specifically mention factor (a) -- the needs of interstate and international systems. As discussed above, Oregon has the dominant interest in this case because the boat was transported to Oregon, had Oregon dealer plates on it and was purchased by an Oregon corporation. In short, Oregon's vehicle titling law is not so abnormal that its application would disrupt interstate systems. Therefore, factor (a) provides some support for the application of Oregon law, but this factor is not determinative.
Comment (d) " Needs of the interstate and international systems" states:
In sum, based solely on a qualitative analysis, the factors set forth in § § 222 and 244 of the Restatement weigh heavily in favor of the application of Oregon law. The factors regarding the parties' expectations and the removal of the boat from Idaho immediately after the transaction in essence dictate a more significant relationship with Oregon in the context of this dispute. Other factors in § 6(2) of the Restatement also support the application of Oregon law as discussed above.
C. Ownership Of The Boat Under Oregon Law
Having determined that Oregon law should apply to the avoidance action under a conflicts analysis, the second issue we must decide is whether the undisputed facts conclusively demonstrate that Defendants are the beneficial owners of the boat. We conclude that they do.
In Oregon, although the certificate of title is prima facie evidence of ownership, it is not unimpeachable or conclusive evidence of ownership.
Or. Rev. Stat. § 802.240 provides in relevant part:
[T]he content and design of the Oregon Vehicle Code demonstrate that the legislature did not intend those statutes to define terms (such as 'own') for purposes of contracts between private parties generally, much less for purposes of auto liability policies particularly. Rather, the legislature's express intent in the vehicle code in general, and in the 'provisions . . . relating to the registration and titling of vehicles' specifically, ORS 801.020(1)(c), was 'to provide a comprehensive system for the regulation of all motor and other vehicles in this state, ' ORS 801.020(1). Moreover, the definitions in the vehicle code, including the code's definition of 'owner, ' ORS 801.375, purport to govern only the construction of the code itself. See ORS 801.100.
Farmers Ins. Exch. v. Crutchfield, 200 Ore.App. 146, 113 P.3d 972, 981 (Or. Ct. App. 2005), rev. den., 339 Ore. 609, 127 P.3d 650 (2005). Accordingly, under Oregon law, equitable title, coupled with the actual possession of the property, bears with it all the incidents of legal title. Id . at 981. Moreover, control and dominion are important aspects of ownership and the buyer's complete performance under the contract also supports a conclusion that the buyer owns the item purchased. Id.
The undisputed facts in the record show that after paying the purchase price, Defendants took possession of the boat and had complete control over it. They paid for the insurance and performed the necessary repairs. Accordingly, we conclude as a matter of law, that Defendants, not debtors, were the owners of the boat under Oregon authorities.
We also consider whether Defendants' unrecorded interest in the boat was superior to that of a judicial lien creditor under Oregon law. Although there is no Oregon case law on point addressing the priorities between a bona fide purchaser of a vehicle and a judicial lien creditor, generally, the lien of a judgment creditor attaches only to property actually owned by the judgment debtor. " A lien will not attach to property that has previously been conveyed to an innocent purchaser for value, even if that prior interest is unrecorded." Certified Mortg. Co. v. Shepherd, 115 Ore.App. 228, 838 P.2d 1082, 1085 (Or. Ct. App. 1992); Thompson v. Hendricks, 118 Ore. 39, 245 P. 724 (1926) (the lien of a judgment creditor attaches only to property actually owned by the judgment debtor); see also 50 C.J.S. Judgments § 784 (2011) (" A judgment does not attach as a lien on property which formerly belonged to the judgment debtor but which, before rendition of the judgment, had been sold or aliened in good faith."); 7 C.J.S. Attachment § 238 (2011) (" In the absence of a contrary statute, or special circumstances such as fraud, the attaching creditor secures only such rights in the property as the debtor had at the time of attachment.").
Accordingly, the trustee, as a judicial lien creditor, could attach only the interest of debtors in the boat as of the commencement of debtors' case. At the time debtors filed their petition, they no longer had an interest in the boat that could be attached because it was sold to Defendants. Therefore, the trustee's rights as a judicial lien creditor would not be superior to that of Defendants who were good faith purchasers.
VI. CONCLUSION
For the reasons stated above, we REVERSE.
[N]o person acquiring a vehicle from the owner . . . shall acquire any right, title, claim or interest in or to the vehicle until he had issued to him a certificate of title to that vehicle, nor shall any waiver or estoppel operate in favor of that person against a person having possession of a certificate of title or an assignment of the certificate of the vehicle for a valuable consideration. Idaho bankruptcy and state courts have interpreted this provision strictly. See Gugino v. Knezevich (In re Pegram), 395 B.R. 692 (Bankr. D. Idaho 2008); Northland Ins. Co. v. Boise's Best Autos & Repairs, 132 Idaho 228, 970 P.2d 21 (Idaho Ct. App. 1997), rev'd on other grounds, 131 Idaho 432, 958 P.2d 589 (Idaho 1998).
Probably the most important function of choice-of-law rules is to make the interstate and international systems work well. Choice-of-law rules, among other things, should seek to further harmonious relations between states and to facilitate commercial intercourse between them. In formulating rules of choice of law, a state should have regard for the needs and policies of other states and of the community of states. Rules of choice of law formulated with regard for such needs and policies are likely to commend themselves to other states and to be adopted by these states. Adoption of the same choice-of-law rules by many states will further the needs of the interstate and international systems and likewise the values of certainty, predictability and uniformity of result.
In all actions, suits or criminal proceedings when the title to, or right of possession of, any vehicle is involved, the record of title, as it appears in the files and records of the Department of Transportation, is prima facie evidence of ownership or right to possession of the vehicle.