Contrary to what you might think, pawnbrokers don’t loan money. They purchase tangible personal property (jewelry, musical instruments, televisions, bicycles, etc.) and give the seller a right to buy the property back within a certain period of time and at a fixed price (which, of course, is higher than the price they originally paid for the goods).

Under the Colorado statute regulating this process, pawnbrokers must keep detailed records of what they buy and who they buy it from, and sellers must certify that they own the goods being sold and provide a history of their ownership. Law enforcement agencies are entitled to this information on a weekly basis. The right-to-buy-back period must be at least 30 days and the pawnbroker is allowed to add up to 20% of the original purchase price to the buy-back price for each month between the original purchase date and the expiration of the buy-back period. (Astute readers will note that this produces an annual return of 240%.)

The Colorado statute encourages agencies of local government to regulate pawnbrokers, and most cities, including Colorado Springs, have chosen to do so. To be a pawnbroker in Colorado Springs, you need a city-issued license, you must post a bond, and you must agree to supply your weekly information to the Police Department in a digital format. Under the city ordinance, law enforcement officers can, without a warrant, enter the pawnbroker’s premises at any time to inspect records or property.

Back in June, the Colorado Court of Appeals found itself dealing with an interesting case wherein a pawnshop — Luxury Asset Capital, LLC — purchased a 2015 Rolls Royce automobile and, when the seller didn’t buy the car back in the time allowed, the pawnshop sold it to a man named Robert Mortensen. Mortensen paid $127,000 for the vehicle and had it shipped to Utah, where he lived. When he went to title and register the vehicle in Utah, he discovered the identification numbers on the vehicle had been altered and it had been reported as stolen. Mortensen thereupon sued the pawnshop, claiming a breach of the warranty of good title that goes with every sale of goods under the Uniform Commercial Code.

The pawnshop argued that this warranty had been disclaimed because the bill of sale for the vehicle said it was sold “AS IS.” But, the trial court and the Court of Appeals both ruled this disclaimer only related to the physical condition of the vehicle — brakes, struts, power windows, air conditioner — and not its ownership.

The pawnshop also argued the warranty of title wasn’t applicable to this transaction because the section of the Uniform Commercial Code in question says the warranty can be avoided if there is “specific language” or “circumstances which give the buyer reason to know that the person selling … is purporting to sell only such right or title as he may have.” The trial court also rejected this argument and granted Mortensen’s motion for summary judgment, meaning the pawnshop would have to give Mortensen his money back.

However, the Court of Appeals decided there were issues of fact to be resolved concerning the circumstances of Mortensen’s purchase such that summary judgment (which is applicable only when there are no issues of fact) was not appropriate. So, the case is now back at the trial court for a trial intended to pin down the fact issues running around in this unusual sale transaction. Or maybe the parties will settle once they realize what a trial is likely to cost them.

Jim Flynn is a business columnist. He is of counsel with the Colorado Springs firm Flynn & Wright LLC. He can be contacted at moneylaw@jtflynn.com.

Money and the Law columnist Jim Flynn