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TOYOTA MOTOR CREDIT CORP. v. C.L. HYMAN AUTO WHOLESALE, INC.


TOYOTA MOTOR CREDIT CORP., v.
C.L. HYMAN AUTO WHOLESALE, INC.


September 18, 1998
Record No. 972212

TOYOTA MOTOR CREDIT CORPORATION

v.

C.L. HYMAN AUTO WHOLESALE, INC.

OPINION BY JUSTICE ELIZABETH B. LACY
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge

Present: All the Justices

In this appeal, we determine whether a lienholder whose lien was
omitted from a duplicate certificate of title of an automobile
because of the fraud of the owner can enforce that lien against a
subsequent bona fide purchaser of the automobile.
The facts are not in dispute. In February 1996, Traci Bowden
purchased a Toyota vehicle pursuant to a retail installment
contract. The contract was assigned to Toyota Motor Credit
Corporation (TMCC) for value. TMCC’s security interest was noted
on the certificate of title issued by the Virginia Department of
Motor Vehicles (DMV). TMCC retained possession of the certificate
of title.
In July 1996, Bowden applied for a duplicate certificate of title
from DMV, representing that TMCC’s lien had been satisfied and
released. Bowden’s application was accompanied by a letter
purportedly from TMCC releasing its lien. This letter was a
forgery. Based on these fraudulent representations, DMV issued a
duplicate certificate of title showing "no liens"
against the vehicle. Bowden then sold the vehicle to C.L. Hyman
Auto Wholesale, Inc. (Hyman).
When Bowden fell behind in her payments on the Retail Installment
Agreement, TMCC began efforts to bring the account current or to
recover the vehicle. Eventually, TMCC discovered
Bowden’s fraud and that she had sold the vehicle to Hyman. TMCC
asked Hyman to return the vehicle. When Hyman refused, TMCC filed
a motion for judgment in detinue against Hyman. Following a
hearing, the trial court found that Hyman was a bona fide
purchaser for value without notice of the fraud, was
"entitled to rely on the certificate issued by the DMV,"
and was not subject to TMCC’s lien. The trial court dismissed the
motion for judgment. We awarded TMCC an appeal.
As the trial court recognized, both parties in this litigation
are innocent victims of the fraudulent acts of a third party:
"Each has followed the law and done everything which could
reasonably be expected in order to protect its
interests . . . . However, the case is here,
and, like it or not, the loss must fall on one of these two
innocent parties." In determining where the loss falls, the
trial court concluded that the motor vehicle titling statutes,
as interpreted by this Court, require a decision in favor
of Hyman. We agree and will affirm the judgment of the trial
court.
The motor vehicle titling statutes, Title 42, Chapter 6, were
enacted to protect the public by providing for the issuance of
certificates of title as evidence of ownership of motor vehicles
and to provide potential buyers and creditors with a
single place where information about the status of motor vehicles
could be found. Maryland Credit Fin. Corp. v. Franklin Credit
Fin. Corp.
, 164 Va. 579, 583, 180 S.E. 408, 409-10 (1935).
These statutes, originally enacted in 1924, eliminated any
requirement that a lien against a motor vehicle be recorded in
the county or city where the purchaser or debtor resides or in
any other manner available for recording a security interest in
personal property, but imposed the new condition that a security
interest in a motor vehicle would not be perfected "as to
third parties" unless shown on the certificate of title.
Code ? 46.2-638; Bain v. Commonwealth, 215 Va. 89,
91, 205 S.E.2d 641, 643 (1974).
Code ? 46.2-638 specifically provides that a certificate of
title showing a security interest "shall be adequate notice
to the Commonwealth, creditors, and purchasers that a security
interest in the motor vehicle exists." We have recognized
that the converse is also true.
[W]hen a certificate of title is issued which fails to show a
lien or encumbrance, it is notice to the world that the property
is free from any lien or encumbrance, and if transferred to a bona
fide purchaser the latter would obtain a good title.

Maryland Credit, 164 Va. at 582-83, 180 S.E. at 409. To
hold otherwise would eliminate the ability of potential buyers
and lenders to rely on the information contained in certificates
of title.
Inevitably, there will be occasions when the information
regarding the status of liens contained in a certificate of title
will be in error. If the erroneous information is a notation that
no liens exist against the vehicle, the interest of the bona
fide purchaser for value prevails over the interest of the
creditor with a security interest in the motor vehicle. Id.
This rule applies whether the error was the result of an innocent
mistake or, as in this case, of fraudulent acts by the owner. A
rule which allowed reliance on the absence of lien notations on a
certificate of title if such absence resulted from an innocent
mistake or clerical error but not if such absence resulted from
fraud would negate any ability to rely on the certificate of
title. Under such a rule, a potential purchaser or lender would
always have to conduct an independent search to determine if, in
fact, there are no liens against the vehicle, thus defeating the
intent of the General Assembly in creating a single repository
for recording liens against motor vehicles. In this case,
therefore, Hyman was entitled to rely on the absence of any lien
notations on the certificate of title, and TMCC cannot enforce
its security interest against Hyman.
TMCC asserts that this conclusion is in conflict with established
principles underlying the law relating to title expressed in First
Nat’l Bank of Waynesboro v. Johnson
, 183 Va. 227, 31 S.E.2d
581 (1944), and Code ? 8.2-403(1), as well as
specific cases decided by this Court in which a lienholder was
allowed to enforce its lien against a good faith purchaser for
value without notice, Rudolph v. Farmers’ Supply Co., Inc.,
131 Va. 305, 108 S.E. 638 (1921), and McQuay v. Mount Vernon
Bank and Trust Co.
, 200 Va. 776, 108 S.E.2d 251 (1959). Close
examination of these cases shows, however, that the conclusion we
reach today is not contrary to the authority cited by TMCC.[1]
Longstanding Virginia law provides that one who does not have
title to goods cannot transfer title to a buyer, even a bona
fide purchaser for value without notice. Johnson,
183 Va. at 236, 31 S.E.2d at 585. Thus, a thief cannot
pass title to stolen goods even to an innocent purchaser who pays
for the stolen goods. However, Virginia law has also recognized
that a person who purchases goods from one possessing only
voidable title can nevertheless receive good title to the goods
purchased. Oberdorfer v. Meyer, 88 Va. 384, 386, 13 S.E.
756, 756-57 (1891); Old Dominion Steamship Co. v. Burckhardt,
72 Va. (31 Gratt.) 664, 668 (1879). These principles have been
implicitly recognized in Code ? 8.2-403(1). That subsection
states, in pertinent part:
A purchaser of goods acquires all title which his transferor had
or had the power to transfer . . . . A person with
voidable title has power to transfer a good title to a good faith
purchaser for value. When goods have been delivered under a
transaction of purchase the purchaser has such power even though
. . .
(d) the delivery was procured through fraud punishable as
larcenous under the criminal law.

Citing the principles embodied in Code ? 8.2-403, TMCC
argues that Bowden could not pass "greater" title in
the automobile than she owned. Since her title was subject to the
encumbrance of TMCC’s lien, Hyman’s title must also be subject to
the lien.
TMCC’s argument, however, misinterprets the purpose and
applicability of Code ? 8.2-403. The statute deals with the
power of an owner with void or voidable title to pass good title
to a bona fide purchaser for value. It does not
apply to the "rights . . . of lien
creditors." Code ? 8.2-403(4). In this case, Bowden
had a "good" title to the automobile, and she passed a
good title to Hyman. She was not a stranger to title, and her
title was not made "void" or "voidable" by
TMCC’s security interest. Code ? 8.2-403 and the principle
described in Johnson, therefore, simply do not apply.
Finally, the two Virginia cases cited by TMCC in which an
innocent lienholder has prevailed over a bona fide
purchaser do not require a different result in this case. Both of
these cases involve sales to bona fide purchasers
for value by motor vehicle dealers and the application of the
doctrine of estoppel based on the likelihood that the secured
motor vehicle would be put into the stream of commerce. In
neither case did the Court consider the impact of the motor
vehicle titling statutes or the extent to which potential
purchasers are entitled to rely upon a certificate of title which
failed to note an existing lien.
Rudolph v. Farmers’ Supply Co., as TMCC notes, was decided
prior to the enactment of the motor vehicle titling statutes in
1924. Rudolph, therefore, did not consider the effect of a
certificate of title issued by DMV showing no liens on the motor
vehicle, because the General Assembly had not yet
authorized its issuance. Consequently, the decision in Rudolph
is not controlling in this case.
The second Virginia case relied on by TMCC, McQuay v. Mount
Vernon Bank and Trust Co.
, was decided after the enactment of
the titling statutes. However, it is not clear whether the bona
fide purchaser in that case, McQuay, ever saw or received
any title certificate from the seller or DMV and he did not assert
a defense based on reliance on a certificate of title issued by
DMV showing no liens on the vehicle. The ability to rely on a
certificate of title issued with no notations of liens,
therefore, was not at issue, and thus the holding in McQuay
does not control the case before us.
For the above reasons, we conclude that the trial court properly
held that TMCC was not entitled to enforce its lien against Hyman
because Hyman, a bona fide purchaser for value
without notice of the lien, was entitled to rely on a certificate
of title which did not contain a notation of the lien.
Affirmed.

FOOTNOTES:

[1] TMCC also argues that DMV can
only release a lien pursuant to the procedures set out in Code
? 46.2-642. However, this case does not involve the release
of a lien but its enforceability under certain circumstances.

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