Balon v. Cadillac Automobile Co.
12 U.C.C. Rep. Serv. (West) 397, 113 N.H. 108, 303 A.2d 194 (1973)
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Rule of Law:
Under UCC § 9-307(2), a buyer of consumer goods takes title free of a perfected but unfiled security interest if the buyer purchases in good faith, for value, for personal use, and without knowledge of the security interest, from a seller who also held the goods as consumer goods.
Facts:
- Russell Saia used fraudulent identities ('Peter J. Russell' and 'Joseph P. DeLuca') to purchase two 1965 Cadillac convertibles from Cadillac Automobile.
- Each car was purchased with a $1000 down payment, with the remaining balance financed through a conditional sale agreement (a security interest).
- Cadillac Automobile treated the sales as being to individual consumers for personal use and, following its policy for such sales, did not file a financing statement to publicly record its security interest.
- An intermediary, Arthur Freije, told John Balon and his stepfather, Stanley Gibert, that his 'friend' Russell Saia could get them a good deal on Cadillacs.
- Balon and Gibert each purchased one of the convertibles from Saia for $4300 cash.
- Before purchasing, Balon and Gibert made inquiries and determined the price was plausible for cars being sold late in the model year.
- Saia failed to make payments on the conditional sale agreements to Cadillac Automobile.
- Upon discovering the fraud and default, Cadillac Automobile located and repossessed the vehicles from Balon and Gibert.
Procedural Posture:
- John Balon sued Cadillac Automobile in a trial court action for conversion to recover damages for the repossession of his car.
- Cadillac Automobile filed a separate action of replevin in the same trial court against Stanley Gibert to recover the second car.
- The two cases were tried together before a judge.
- The trial court found for Balon in the amount of $4300 and for Gibert (as defendant in the replevin action) in the same amount, effectively ruling they were the rightful owners.
- Cadillac Automobile's motions for nonsuit, directed verdict, and to set aside the verdicts were denied by the trial court.
- Cadillac Automobile (the appellant) appealed the trial court's rulings to the New Hampshire Supreme Court.
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Issue:
Does a good faith purchaser for value, who buys consumer goods for personal use without knowledge of an unfiled security interest, take title free from that security interest when the seller, who acquired the goods fraudulently, was also treated as a consumer by the original creditor?
Opinions:
Majority - Lampron, J.
Yes, a good faith purchaser for value takes free of such a security interest. Under UCC § 9-307(2), a buyer is protected from an unfiled security interest if the goods are consumer goods in the hands of both the seller and the buyer. The court reasoned that the cars' classification as 'consumer goods' was established when Cadillac Automobile sold them to Saia, treating him as a consumer purchaser for personal use. This classification remained unchanged when Saia, a 'dishonest consumer purchaser,' sold the cars to Balon and Gibert. Balon and Gibert were good faith purchasers because the UCC employs a subjective 'honesty in fact' standard. Despite the favorable price, evidence showed they genuinely believed the transaction was legitimate, had no actual knowledge of Cadillac's security interest, paid value, and bought the cars for personal use. Because Cadillac Automobile failed to file a financing statement, it bore the risk of its security interest being cut off by a subsequent good faith consumer purchaser.
Analysis:
This case clarifies the application of the 'consumer-to-consumer' sale exception under UCC § 9-307(2), establishing that the characterization of goods as 'consumer goods' at the time the security interest is created is determinative for subsequent transactions. It strongly affirms that the 'good faith' standard for a buyer is subjective ('honesty in fact'), protecting buyers who are genuinely unaware of defects, even if a more cautious person might have been suspicious. The decision places the burden on creditors to perfect security interests by filing if they wish to protect themselves against subsequent good faith purchasers, even in consumer transactions.
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