Midway Auto Sales, Inc. v. Clarkson
45 U.C.C. Rep. Serv. 2d (West) 1062, 71 Ark. App. 316, 29 S.W.3d 788 (2000)
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Rule of Law:
A person who obtains goods through a fraudulent transaction of purchase acquires voidable title and has the power to transfer good title to a good-faith purchaser for value. Consequently, a seller who is a good-faith purchaser does not breach the warranty of title when reselling the goods, as they are conveying good title.
Facts:
- Jimmy Haddock purchased a 1986 Corvette from its original seller using a computer-generated check drawn on a nonexistent bank account.
- On April 1, 1998, Haddock sold the Corvette to Larry Bowen in exchange for a pickup truck, a camper trailer, and $1,000 cash.
- Before completing the purchase, Bowen contacted the Oklahoma licensing agency and was informed that the vehicle's title was free of any encumbrances.
- Bowen received the Corvette with an open title and did not register the vehicle in his name.
- On June 11, 1998, Bowen sold the Corvette for $5,500 to Mike Clarkson, also transferring the same open Oklahoma title.
- Clarkson also did not register the vehicle in his own name.
- On July 18, 1998, Clarkson sold the Corvette for $6,000 to Midway Auto Sales, Inc., again using the open title.
- On July 24, 1998, the Washington County Sheriff’s office confiscated the Corvette from Midway as a stolen vehicle and returned it to the original seller.
Procedural Posture:
- Midway Auto Sales, Inc. sued Mike Clarkson in an Arkansas circuit court (trial court) for breach of warranty of title.
- Clarkson filed a third-party complaint against Larry Bowen, from whom he had purchased the vehicle.
- Following a bench trial, the circuit court judge found in favor of Clarkson, holding that Clarkson and Bowen were bona fide purchasers, and issued an order of dismissal.
- Midway Auto Sales, Inc., as appellant, appealed the dismissal to the Arkansas Court of Appeals.
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Issue:
Does a seller of a vehicle, who purchased it in good faith from a previous good-faith purchaser, breach the warranty of title if the vehicle was originally procured from its owner with a fraudulent check?
Opinions:
Majority - Chief Judge Robbins
No, a seller who is a good-faith purchaser does not breach the warranty of title because they have the power to convey good title, even if the goods were originally acquired through fraud. The court distinguished between void title, which a thief acquires and cannot pass, and voidable title, which a person who procures goods through fraud acquires under Ark. Code Ann. § 4-2-403. Haddock obtained voidable title by using a bad check in a voluntary transaction. He therefore had the power to transfer good title to a good-faith purchaser. The central issue was whether Bowen and Clarkson were good-faith purchasers, which is a question of fact defined as 'honesty in fact.' The trial court's finding that they were good-faith purchasers was not clearly erroneous, as Bowen had checked the title's status before his purchase. The argument that failing to register the vehicle defeats good-faith status was rejected for lack of supporting legal authority. Because Clarkson was a good-faith purchaser who received good title, he conveyed good title to Midway and thus did not breach the warranty of title.
Concurring - Judge Bird
Yes, I agree with the majority's conclusion, but only because it is mandated by existing precedent distinguishing between fraudulent acquisition (voidable title) and theft (void title). However, the law is outmoded as it applies to motor vehicles. State laws requiring vehicle registration and payment of sales tax are routinely circumvented through the use of 'open titles.' The law should be changed to provide that, with limited exceptions for authorized dealers, any purchaser acquiring a motor vehicle on an open title is not a bona fide purchaser and cannot acquire or transfer good title. Such a rule would better reflect the legal requirements of vehicle transfers and prevent purchasers from claiming innocent status when they know registration and tax laws are being ignored.
Analysis:
This decision reinforces the UCC § 2-403 distinction between void and voidable title, protecting bona fide purchasers in the chain of commerce. It clarifies that a buyer's failure to register a vehicle or their use of an 'open title' does not, by itself, negate their status as a good-faith purchaser under Arkansas law. The case places the primary risk of loss on the original seller who accepts a fraudulent payment, as they may be unable to recover the goods from a subsequent innocent purchaser. The concurrence, however, signals judicial concern over this rule's application to vehicle sales and suggests a potential for future legislative or judicial changes in this area.
