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Scenario:

John Doe goes to a car dealership and arranges to buy a car. He pays with a personal check, and the dealership accepts payment and signs over ownership to Mr. Doe.

Mr. Doe goes a few miles to another dealership and uses his authentic paperwork to sell the car for cash. This new dealership in turn moves the car several hundred miles and resells it. The car eventually winds up in the possession of Joe Smith, who has paid a local dealership for it..

Unfortunately, that personal check that John Doe wrote bounces. The dealership contacts the police, who eventually trace the car to Joe Smith.

Can the dealership recover the car from Joe Smith on the basis that it was stolen property and no one else ever had ownership? Or is their only claim one of fraud against John Doe, since they did sign over the ownership?

I would be most interested in the law in Canada, and major US states...

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tl;dr: No, the dealership generally won't be able to recover the car if its act of parting with the car involved "entrusting" it to someone. That said, it can pursue Doe for fraud.

U.S. Background

First off, when the dealership gets swindled the situation is distinctly different from one where the car is stolen from the dealership. If stolen, we'd expect the dealership to be able to recover the car, as in O'Keeffe v. Snyder, 416 A.2d 862, 83 N.J. 478 (1980). If swindled, we'd expect the dealership to be out of luck, as in Phelps v. McQuade, 220 N.Y. 232 (N.Y. 1917).

Why the different result? It comes down to the idea that when the car gets moved on to an unsuspecting buyer, either the innocent buyer or the dealership is going to get hurt by the bad act. This is because only one party (buyer or dealer) is going to get to keep the car, and the other is going to be upset. The court has to essentially choose who is going to get hurt.

The way it does this is by looking at how the car left the dealer's lot. In cases of swindling, the dealer at least had some say in the matter: it "entrusted" the car to the swindler by what's called a "voidable" title. This is enshrined in the UCC:

§ 2-403. Power to Transfer; Good Faith Purchase of Goods; "Entrusting".

(1) A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. 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

(a) the transferor was deceived as to the identity of the purchaser, or

(b) the delivery was in exchange for a check which is later dishonored, or

(c) it was agreed that the transaction was to be a "cash sale", or

(d) the delivery was procured through fraud punishable as larcenous under the criminal law.

(2) Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyerin ordinary course of business.

(3) "Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goodshave been such as to be larcenous under the criminal law.

There's an old saying: "title, like a stream, only rises as high as its source."

  • In the case of a theft, the thief didn't have title in the first place and thus can't transfer it. So we'd expect the dealer to get the car back (buyer gets hurt)
  • In your case, the swindler's bogus check falls under UCC §2-403(1)(b). Thus the swindler gets a voidable title and then has the power to transfer the car to an unsuspecting buyer. So we'd expect the buyer to keep the car (dealer gets hurt).

Note: the title is "voidable" because, if the dealer realizes the check is dishonored, it can void the title.

  • 1
    Looks like a great answer! But I don't understand the significance of a "voidable title." Is the idea that if the dealer catches the fraud in time it can void the title, rendering it (and the car) untransferrable by the fraudster? But as soon as the voidable title has been transferred to another party it becomes "voidable?" – feetwet Oct 18 '15 at 15:28
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    @feetwet Yep, where the dealer got duped, the idea is to protect a good faith purchaser. The UCC creates a voidable title to do this. Under it, the dealer transferred title to Doe, who then has the power to transfer it to a good faith purchaser (who is now protected). However, if the dealer catches the deception before Doe resells the car, it can void the title, as you say, so Doe can't pass it on. So it's basically voidable as long as Doe hasn't yet sold it. After reading your comment, I came across this YouTube video on voidable title – Pat W. Oct 18 '15 at 15:50
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    Quite a while ago I read about a court case in the UK with very similar details (a hire purchase where you buy the car but pay so much every month, with the buyer using the identity of a business man who had money in the bank, but no connection to the whole case otherwise), and the exact same argument (a voidable contract that was not (yet) voided) was used to let the innocent buyer keep the car. – gnasher729 Oct 19 '15 at 22:39
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Yes, if you do not have good title (because for ex. you have paid with a dud cheque)' you cannot pass on good title.

  • Not a high quality answer, and far from your best. – Libra Feb 19 '16 at 20:11

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