Thomas Fred Wallace and Norma May Wallace, Husband and Wife, Appellants, v. Employers Casualty Company, Appellee, 418 F.2d 1323 (9th Cir. 1969)

Harold Goldman (argued), Phoenix, Ariz., for appellants.

Ralph E. Hunsaker (argued), of O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, Phoenix, Ariz., for appellee.

Before DUNIWAY and HUFSTEDLER, Circuit Judges, and PENCE, District Judge.^* 

PENCE, District Judge:

Thomas Wallace and Norma Wallace, plaintiffs below, appeal from a judgment granting the defendant's motion for summary judgment. The parties agree as to the facts of this case, so the propriety of proceeding by way of summary judgment is therefore not at issue.

The facts are as follows: Olson Motors, of Williams, Arizona, sold a new car to a Jack Dent, and took in trade a 1957 Chevrolet. No question arises as to the validity of this transaction. On July 30, 1964, Olson Motors sold the 1957 Chevrolet to a Douglas Ezell, manager of the Potts Motor Company, of Phoenix, Arizona, and received $650 in full payment. Four days later, on August 3, 1964 Kenneth Lewis, an employee of Ezell, picked up the car at Olson Motors in order to drive it to Potts Motor. Later on in the day, that car, while being driven by Lewis in the scope of his employment and on his way to Phoenix, collided with a car in which the Wallaces were driver and passenger. As of the day of the accident the certificate of registration and title to the Chevrolet had not been signed over to Ezell by Olson Motors, as required by A.R.S. § 28-314, subsec. A.¹ 

The Wallaces brought suit in the Maricopa County, Arizona, Superior Court against Lewis, Ezell, and Potts Motor Company. Olson Motors was not named as a defendant, although its liability insurer, Employers Casualty Company, was notified by plaintiffs' attorney that the action was being brought and that demand would be made upon Employers Casualty Company for payment of any judgment obtained against Lewis, Ezell and/or Potts Motor. On January 25, 1967, the Wallaces obtained a $50,000 judgment against the above mentioned defendants. Thereafter the Wallaces brought this suit in the United States District Court to recover from Employers Casualty the unpaid balance of the state court judgment.² 

Both at the time of sale and accident, Olson Motors was insured by Employers Casualty under an automobile dealer or garage liability policy. As required by Arizona law, A.R.S. § 28-1170, subsec. B, par. 2,³  that policy contains an "omnibus clause", which states that the policy insures the named insured and all persons using the motor vehicle with its express or implied authority against liability "arising out of the ownership, maintenance, or use of the motor vehicle." Plaintiffs maintain that, at the time of the accident, Olson Motors was the owner and Lewis was a permitted user within the meaning of this insurance provision. Plaintiffs admit that Olson Motors had, prior to the accident, "* * * sold [the 1957 Chevrolet] to * * * Ezell, receiving payment and delivering possession. * * *"⁴  They contend however, that Olson Motors nevertheless remained the owner thereof for liability purposes because Olson Motors failed to sign over the documents of title as required by A.R.S. § 28-314.

The court below held, as a matter of Arizona law, that a vendor who fails to comply with § 28-314 does not remain the owner for liability purposes; accordingly, the vendor's insurer was held not to be liable for injuries to third persons caused by the negligent operation of the vehicle by an agent of the vendee, and the court granted defendant's motion for summary judgment. We agree.

On its face, § 28-314 does not purport to determine ownership, for liability purposes or otherwise; the statute deals with the much narrower topic of transfers of title, and the Arizona courts have consistently held that ownership of a vehicle in no wise depends upon prior compliance with the transfer of title provisions of A.R.S. § 28-314.⁵  In Price (see n. 5), the contention that Arizona automobile transactions in which there was failure to comply with § 28-314 were void was explicitly rejected. The Arizona Supreme Court said:

"Appellant also argues that ownership of an automobile can be transferred only by compliance with the statutes of the State of Arizona, and can be established only through the documentary evidence prescribed thereby. He construes Pacific Finance Company v. Gherna * * * [36 Ariz. 509, 287 P. 304] to mean that a certificate of title must be transferred and assigned, to effect a valid sale, and that therefore the sales of the automobiles in the instant case were `void ab initio.'

"The trial court found that it was the custom for automobile dealers in Phoenix to handle the paper work and forward title certificates to the Motor Vehicle Division for transfer. If appellant's argument is correct, then nearly all of the sales of cars in Phoenix are `void ab initio.' We do not so construe Gherna, supra, in which we said:

"` [I]t was the duty of the [seller] at the time it sold the car * * * to also deliver him a properly assigned Arizona certificate of title. Having failed to do that, it was in default on its contract * * *.'

This is certainly not language describing a contract that is void ab initio — on the contrary, the language indicates that the contract is valid and that the seller owes a duty to deliver the title certificate to the buyer.

"Appellant's argument is even more clearly refuted by Associates Discount Corp. v. Hardesty, 74 App.D.C. 44, 122 F.2d 18, decided by the United States Court of Appeals for the District of Columbia, where the statute is similar to ours. In that case the court said:

"`The only sanction in the District of Columbia laws * * * is that the purchaser cannot use the automobile on the highways * * *. The statute provides only that the "owner" shall first obtain a certificate. But it nowhere provides that he is any less the owner because he fails to do so.'" 427 P.2d at 924.

Plaintiffs' contention, however, is that even if § 28-314 has been construed as but regulating transfers of titles, nevertheless a failure to comply with its provisions by the owner-transferor of a motor vehicle should subject the transferor to civil liability for the operation of the vehicle thereafter by another. Plaintiffs predicate this theory upon the fact that it is so held in California. The analogous California statute, California Vehicle Code, § 5602, however, specifically states that until the owner-transferor "has made proper endorsement and delivery of the certificate of ownership and delivered the certificate of registration as provided in this code", and has either delivered or mailed to the motor vehicle department either the notice of transfer or appropriate documents for registration of the vehicle pursuant to the sale or transfer, he shall "be deemed the owner of the vehicle so as to be subject to civil liability for the operation of the vehicle thereafter by another."

The Arizona statute, however, does not indicate any penalty, much less the severe one proposed by the plaintiffs, for noncompliance with its provisions. In this respect it differs markedly from like statutes in several other states as well as California, which declare that non-complying transactions are ineffective to transfer ownership.⁶  As was said in Patterson Motors, Inc. v. Cortez, 2 Ariz.App. 298, 408 P.2d 231 at 233: "It is significant that the Arizona reregistration statute does not impose any penalty for noncompliance."

Plaintiffs concede the validity in Arizona of the above rule as between the parties to the transaction but insist that when the rights of parties injured by the operation of a motor vehicle intervene and the point at issue is the scope of transferor's insurance coverage, Arizona's "liberal construction" policy should prevail.⁷ 

This court has had numerous opportunities to pass upon the application which should be given to this "omnibus clause" of automobile liability contracts under the Arizona Financial Responsibility Act,⁸  and recognizes that in Sandoval, supra, n. 7, the Arizona Supreme Court made it clear that all automobile liability contracts were to be read in conformity with A.R.S. § 28-1170 and that it is applicable to all such policies.

In each of the above Arizona decisions, as well as our Ninth Circuit opinions, the question of ownership of the vehicle was not in issue. In each case the insurance carrier attempted to avoid liability because the owner of the vehicle had violated some provision of the policy or a person authorized to drive the vehicle by the owner was excluded from coverage by some provision thereof. As the Arizona court said in Sandoval, "the holding of Jenkins v. Mayflower Ins. Exchange [93 Ariz. 287, 380 P.2d 145] that a restrictive endorsement negating coverage could not be relied on by the insurer where it conflicted with the coverage required by the omnibus clause [is] read into every (italicized in original) automobile liability policy by the Financial Responsibility Act", and continued: "The result [of Jenkins v. Mayflower] is just and equitable, as it alleviates to a large degree the suffering and injustice rendered an innocent injured party by the assertion of an insurer's defense based on a technicality (emphasis added) over which he had no control." 428 P.2d at 100-101.