No. 83-353
IN THE SUPREME COURT OF THE STATE OF MONTANA
1984
TAYLOR RENTAL CORPORATION
Plaintiff and Appellant,
TED GODWIN LEASING, INC.,
FIRST BANK BILLINGS,
Defendants and Respondents.
APPEAL FR0P.I: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable Robert 11. Wilson, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Calton & Hammon; Rodd A. Hamman, Billings, Montana
For Respondents:
R. P. Ryan, Billings, Montana
Submitted on Briefs: November 3, 1983
Decided: April 5, 1984
Filed: \?I( 3 !984
Clerk
Mr. Justice Fred J. Weber delivered the Opinion of the Court.
Plaintiff Taylor Rental Corporation appeals and
defendant Ted Godwin Leasing, Inc. cross-appeals from the
judgment of the Thirteenth Judicial District Court,
Yellowstone County. The District Court granted Godwin's
motion for summary judgment, holding that Taylor had no
security interest in certain rental equipment and that Godwin
was entitled to the equipment. The Court aw'arded Godwin
$1,273.30 on its counterclaim for rental under an oral lease
agreement. We reverse in part, affirm in part and remand for
further proceedings.
The issues are:
1. Was the lease of equipment by Godwin to Cederholm
intended as security and therefore subject to the priority
rules of the Montana Uniform Commercial Code?
2. Does Taylor have a prior perfected security interest
in the rental equipment which entitles it to possession as a
secured creditor?
3. Did the District Court err in granting Godwin two
months rent on the equipment?
Taylor Rental Corporation (Taylor) is a franchisor of
Taylor Rental Centers located throughout the United States.
In 1978, Taylor entered into a franchise agreement with Mr.
Glen Cederholm (Cederholm) for a Taylor Rental Center in
Billings, Montana. Taylor extended financing to Cederholm so
that the Billings franchise could obtain a rental inventory.
At various times throughout the operation of the Billings
Taylor Rental Center, Taylor extended additional financing.
As security for this financing, Cederholm granted Taylor a
security interest in all machinery, equipment, vehicles and
rental inventory held or later acquired by Cederholm for use
at the Taylor Rental Center. Five security agreements were
executed by Taylor and Cederholm from May 22, 1-978 to January
20, 1980. Taylor filed financing statements with the Montana
Secretary of State's office with respect to each security
agreement.
Late in 1978, Cederholm contacted Taylor regarding
acquisition of a U-Cart concrete system for the Billings
franchise. The U-Cart system is designed to allow sale of
small amounts of concrete to customers who transport the
concrete to the place of use in trailers. The system
consists of a mixer, a "hopper" and four one-yard trailers.
Cederholm also wished to acquire a Lahman loader and trailer
for use with the U-Cart system. Taylor advised Cederholm
that although the U-Cart system was usually a good income
item for franchisees, Taylor was not prepared to finance a
system for Cederholm. Taylor advised Cederholm to contact
U-Cart or a leasing or financing company to arrange
financing.
Eventually, financing was arranged through Ted Godwin
Leasing, Inc. (Godwin) . The equipment was purchased by
Godwin through a loan from First Bank Billings and leased to
Cederholm. First Bank filed lien receipts covering the
U-Cart trailers with the Montana Registrar of Motor Vehicles.
The lien receipts named Godwin as owner and First Bank as
secured party. No filings were made with respect to the
mixer, hopper or Lahman loader and trailer. Further, the
present record contains no specific evidence of a security
agreement between First Bank and Godwin. After commencement
of this action, Godwin repaid the loan to First Bank and
First Bank is no longer a party to this action.
The cost of the U-Cart System was $20,586.00, including
$790.00 freight. The cost of the Lahman loader and trailer
was $6,025.00. The lease agreements provided for initial
payments of $2,029.25 on the U-Cart system and $296.00 on the
Lahman loader and trailer. The U-Cart system lease provided
for 55 consecutive monthly payments of $488.65 and stated the
total amount payable by the lessee was $29,319.00. The
Lahman loader and trailer lease provided for 34 consecutive
monthly payments of $148.00 and stated the total amount
payable by the lessee was $5,328.00 The lease agreements
provided that all taxes, insurance, maintenance and license
costs were to be paid by Cederholm.
The agreements also provided that the termination value
at the end of the lease term would be the "depreciated
value," which was specifically set forth in the agreements as
$2,100.00 for the U-Cart system and $1,379.00 for the Lahman
loader and trailer. If the leases were terminated before the
end of the lease term, the termination value would be the
depreciated value plus an additional amount for each month
remaining before the end of the term.
In the fall of 1980, Cederholm began having financial
difficulties in the Billings operation. In November of 1980,
Taylor requested that its franchise salesman, Donald Miller,
stop in Billings to discuss with Cederholm the future of the
franchise. Cederholm indicated he wished to sell the
Billings Taylor Rental Center. Accordingly, Walter
Wyszynski, Taylor's employee in charge of repossessions, went
to Billings around December 15, 1980 to take possession of
the store and prepare the business for sale to another Taylor
franchisee. Wyszynski began negotiations with Cederholm to
arrange a voluntary surrender of the business and to arrange
for Taylor to operate the business until sold. As part of
these negotiations, Taylor offered to pay Cederholm's monthly
payments while Taylor operated the business prior to sale.
Rut Taylor refused to assume underlying obligations, either
leases or purchases, and Cederholm therefore refused to
agree. The negotiations ceased and Cederholm closed the
business.
Taylor filed an action to foreclose on its security
agreement and took possession of the rental center as a
secured creditor, continuing operation of the business to
maintain its resale value. Because Cederholm refused the
voluntary surrender of the business, Taylor did not make
Cederholm's monthly payments.
Godwin's employee in charge of repossessions, Eldor
Baisch, went to the rental center around December 30, 1980
and met with Wyszynski. The District Court found that at
that meeting, Wyszynski agreed on behalf of Taylor that
Taylor would make monthly payments of $636.35, the total of
both lease payments, if Godwin would forego repossession of
the equipment and allow Taylor to retain possession so as to
enhance the attractiveness of the business. Baisch agreed
on behalf of Godwin. The Court further found that Taylor
terminated this agreement with Godwin on February 19, 1981 by
filing suit for possession of the equipment.
When Cederholm failed to make several payments to
Godwin, Godwin threatened repossession. Taylor retained
possession of the equipment until December 1, 1981, when it
was seized and delivered to Godwin by the Yellowstone County
Sheriff, pursuant to a writ of possession issued by the
District Court.
Taylor filed this action for declaratory judgment to
determine priority of creditors with respect to the U-Cart
system and the Lahman loader and trailer. Taylor claimed a
prior security interest in the equipment which entitled it to
possession. Godwin alleged that Taylor's security interest
did not apply to the equipment in question and that Cederholm
held the equipment under lease. Godwin filed a counterclaim
against Taylor, alleging Taylor had agreed to make payments
on Cederholm's behalf pending sale of the business. Godwin
moved for summary judgment on Taylor's claim, contending tha.t
Taylor had no security interest in the equipment and trial on
the counterclaim was reserved pending resolution of Taylor's
claim. Taylor also moved for summary judgment, claiming the
leases were intended as security and therefore subject to the
priority rules of the Montana Uniform Commercial Code, that
Taylor's security interest was superior to any Godwin might
have, and that Taylor was entitled to possession as a matter
of law.
After hearing, the District Court granted Godwin's
motion and denied Taylor's motion on August 13, 1981. The
District Court certified that there was no reason for delay
in entry of partial final judgment. The judgment, opinion
and order were filed and Notice of Entry of Partial Judgment
was entered on September 25, 1981. Taylor moved the District
Court to reconsider its decision and after no action was
taken, appealed. After the appeal was filed, the District
Court issued a writ of possession and the equipment was
seized by the Yellowstone County Sheriff and thereafter
possessed by Godwin. On review of the case, this Court found.
the certification for appeal inadequate and dismissed the
appeal without prejudice. See Taylor Rental Corporation v.
Ted Godwin Leasing, Inc. (Mont. 1982), 648 P.2d 1168, 39
St.Rep. 1358.
On remand, Godwin's counterclaim was tried and the
District Court awarded Godwin two months rent on the
equipment in the amount of $1,273.30, based upon its finding
that Taylor a-greed to pay rental pending sale of the business
if Godwin would forego repossession. Taylor appeals the
judgment in its entirety. Godwin cross-appeals on the rental
award, claiming the District Court should have awarded
$7,003.15 in rental for the 11 months Taylor kept possession
of the equipment.
The first issue is whether the "leases" of equipment by
Godwin to Cederholm were intended as security and therefore
subject to the priority rules of the Montana Uniform
Commercial Code (UCC). Because the District Court concluded
that Taylor had no security interest in the equipment, it
concluded it was unnecessary to address this issue. However,
it is impossible to determine whether Cederholm had
sufficient rights in the collateral to grant Taylor a
security interest without first determining the nature of the
transaction between Godwin and Cederholm. Further, if the
"leases" were intended as security, Godwin's interests must
compete for priority according to the rules and requirements
of Article Nine of the UCC. We conclude that the District
Court erred in failing to address this issue and direct the
court to address it on remand. For the District Court's
guidance, we will comment briefly on the issue.
If the leases in question were not intended as security,
Godwin's interest as a lessor is not subject to the UCC
priority rules. White and Summers, Uniform Commercial Code
S22-3 (2d ed. 1980) (hereinafter referred to as White and
Summers). However, the fact that the agreements were
entitled "leases" rather than installment sales contracts
does not mean that Godwin's interest is not subject to the
UCC. Sections 30-9-102 (2) and 30-1-201 (37), MCA (1979) (some
sections of the UCC were amended by the 1983 Legislature, but
those amendments are inapplicable to this case); Fire Supply
and Service, Lnc. v. Chico Hot Springs (1982), 196 Mont. 435,
Section 30-9-102 defines the scope of the UCC provisions
on secured transactions:
" (1) ...this chapter applies so far as concerns
any personal property and fixtures within the
jurisdiction of this state:
"(a) to any transaction (regardless of its form)
which is intended to create a security interest in
personal property or fixtures . . ..
" (2) This chapter applies to security interests
created by ...
lease . . .."
Section 30-1-201 (37) sets forth the test for determining
whether a lease is intended as security and therefore subject
to the UCC:
"Whether a lease is intended as security is to be
determined by the facts of each case; however, (a)
the inclusion of an option to purchase does not of
itself make the lease one intended for security,
and (b) an agreement that upon compliance with the
terms of the lease the lessee shall become or has
the option to become the owner of the property for
no additional consideration or for a nominal
consideration does make the lease one intended for
security."
Under this section, the District Court concludes that
Cederholm would become the owner or would have an option to
become the owner of the equipment for a nominal
consideration, it must find that the lease was intended for
security and is therefore subject the UCC. Then the question
is whether Godwin or Taylor has the superior security
interest under the UCC. If Cederholm would not have such an
option, it must be determined according to the facts of the
case as a whole whether the lease is intended as security.
Peco, Inc. v. Hartbauer Tool and Die Co. (Or. 1972), 500 ~ . 2 d
There is substantial case law which identifies the
significant factors in these determinations. As to whether
an option to purchase is exercisable at a nominal
consideration, courts often use an "economic realities" test.
That is, "if at the end of the lease term the only sensible
course economically for the lessee would be for him to
exercise his option, the courts generally hold that the
transaction is really a secured installment sale and Article
Nine applies." White and Summers S22-3 at 881. In applying
the economic rea.lities test, some courts state that if the
amount the lessee must pay to exercise his option is roughly
equal to the fair market value of the asset at tha.t time,
then the transaction is not a secured sale. Further, some
courts analyze the problem in terms of percentages, comparing
the option price to the total list price. White and Summers
522-3 at 881. These approaches appear appropriate to the
determination.
In analyzing the facts of the case as a whole to
determine whether the leases were intended as security,
significant factors include, but are not limited to: (1)
whether the lessee acquires any equity in the property; (2)
whether the lessee is required to bear the risk of loss; (3)
whether the lessee is responsible for all charges and taxes;
(4) whether the rent may be accelerated; (5) whether the
equipment was purchased specially for lease to this lessee;
(6) whether the lessee must provide insurance; and (7)
whether the lessor disclaims all warranties. U C Leasing,
Inc. v. Laughlin (Nev. 1980), 606 P.2d 167, 170; All-States
Leasing Co. v. Ochs (Or. 1979), 600 P.2d 899, 904. These and
other relevant factors should be considered by the District
Court.
On remand, the District Court is directed to apply
section 30-1-201 (37), MCA and relevant case law to determine
whether the leases of equipment from Godwin to Cederholm were
intended as security and are therefore subject to the
priority rules of the UCC.
I1
The next issue is whether Taylor has a prior perfected
security interest in the rental equipment which entitles it
to possession as a secured creditor. Taylor argues that the
District Court erred in concluding that Taylor's security
interest was not intended to cover this equipment and
therefore Taylor had no security interest. In so concluding,
the court relied upon the fact that Taylor did not finance
the equipment. The court concluded without explanation that
the "very generic" language of the after-acquired property
clause was insufficient to create a security interest.
Taylor contends the court ignored the applicable provisions
of the UCC and the plain language of the security agreements
and financing statements. We agree.
Section 30-1-201(37), MCA defines a security interest as
an interest in personal property or fixtures which secures
payment or performance of an obligation. A security
agreement may provide that collateral, whenever acquired,
shall secure all obligations covered by the security
agreement. Section 30-9-204 (3), MCA (1979). Security
interests in after-acquired property are legitimate security
devices under the UCC. Sturdevant v. First Security Bank of
Deer Lodge (1980), 186 Mont. 91, 94-95, 606 P.2d 525, 527;
White and Summers S23-4.
Sections 30-9-203 and -204, MCA (1977) set forth the
steps required to create a security interest. Once these
steps are taken, the security interest comes into existence
or "attaches." White and Summers 523-1. To obtain a valid
security interest in Cederholm's after-acquired property,
Taylor had to satisfy these requirements. Section 204(1),
MCA requires that the parties have a security agreement, that
the secured party give value, and that the debtor has rights
in the collateral. First Westside National Bank of Great
Falls v. Llera (1978), 176 Mont. 481, 485-86, 580 P.2d 100,
103. Section 203(1), MCA requires that, unless collateral is
j-n possession of the secured party, the debtor has signed a
security agreement which contains a description of the
collateral.
Cederholm signed five security agreements granting
Taylor a security interest in:
"All goods used or useful in the operation of
Debtor's Taylor Rental Center or Centers including
but not limited to all machinery and equipment,
vehicles, furniture and fixtures, all inventory
held for sale and all inventory held for rent and
further including but not limited to all items
listed on any schedule attached hereto, but
excluding any trucks and other motor vehicles now
owned by Debtor and heretofore separately financed
by or through [Tayl-or] and further excluding any
such motor vehicles hereafter acquired by Debtor
which at date of acquisition are separately
financed by or through [Taylor], whether now
existing or hereafter acquired or arising and any
and all attachments, additions, replacements,
substitutions, accessions, leases, rental
agreements and proceeds thereto or thereof (all of
the same being hereinafter called the 'Collateral')
to secure payment and performance of all the
obligations of the Debtor . . .."
These five agreements were executed in May 1978, September
1978, April 1979, June 1979 and January 1980. The
instruments granting Taylor a security interest are security
agreements within the meaning of section 38-9-105 (1)(h), MCA
(1979), which defines "security agreement" as "an agreement
which creates or provides for a security interest." The
agreements are signed by the debtor, Cederholdm, as required
by section 30-9-203 (1)(b). A financing statement was filed
for each security agreement. Each financing statement
contained similar descriptions of the collateral. The
financing statements named Cederholm as debtor and Taylor as
secured party and were signed by Cederholm and a Taylor
- .*
representative.
Each agreement contains a description of the collateral
which expressly includes after-acquired property used in the
operation of Cederholm's business or held for rent. Section
30-9-110, MCA (1979) provides that "any description of
personal property or real estate is sufficient whether or not
it is specific if it reasonably identifies what is
described." An even broader description of collateral was
approved in Sturdevant, 186 Mont. at 94-95, 606 P.2d at 527.
The District Court's conclusion that a general description is
insufficient is erroneous. The description in the agreements
clearly includes the U-Cart trailers, mixer and hopper and
the Lahman loader and trailer, all of which were acquired
between execution of the second and third security agreements
and were held for use in or rental by Cederholm's Taylor
Rental Center. Taylor and. Cederholm were parties to a valid
security agreement which applies to the collateral in
question.
The District Court's conclusion that Taylor has no
security interest in the equipment because it did not finance
the equipment is also erroneous. There is no requirement
that one must finance the purchase of property to qualify as
a secured party with respect to that property. In
Sturdevant, we upheld the repossession of property which was
not purchased by funds from the loan on which debtor was in
default. Sturdevant, 186 Mont. at 95-96, 606 P.2d at 528.
No financing requirement appears in the UCC. There is no
evidence in the record which contradicts the clear and
unambiguous language of the security agreements executed by
Cederholm and Taylor. We reverse the holding that Taylor did
not intend to have a security interest in this equipment.
Section 30-9-204(1) also requires that the secured party
give "value" to create a security interest. Section
30-1-201 (44)(a) provides that a person gives "value" for
rights if he acquires them "in return for a binding
commitment to extend credit or for the extension of
immediately available credit whether or not drawn
upon . . .." Here, Taylor extended financing to allow
Cederholm to obtain a rental inventory. This satisfies the
value requirement.
Section 30-9-204(1) requires that the debtor acquire
"rights in the collateral." Because the District Court has
not yet determined whether the leases executed by Godwin and
Cederholm are true leases or are in fact disguised
installment sales, we cannot determine if or when Cederholm
acquired sufficient rights in the collateral to trigger
attachment of Taylor's security interest. This issue must be
addressed on remand if the leases are found to have been
intended as security, necessitating a comparison of Godwin's
and Taylor's interests under the UCC.
Godwin presents additional challenges to Taylor's
alleged security interest. Godwin argues that the discussion
between Taylor and Cederholm regarding financing of the
equipment constitutes a subsequently executed oral agreement
which modified the existing security agreements so as to
exclude the equipment from coverage. However, there is no
evidence of any agreement between Cederholm and Taylor to
modify the security agreements. Indeed, after Cederholm
acquired the equipment, Taylor and Cederholm executed three
identical security agreements.
Godwin further argues that Taylor agreed to subordinate
its interest to Godwin's, as allowed by section 30-9-316,
MCA. However, there is no evidence in the record of any
subordination agreement. Godwin argues that Taylor waived
its rights in some unspecified manner under the provisions of
section 30-2-209, MCA. However, this statute is contained in
the article on sales and is inapplicable to this case.
Further, Taylor executed no written release of its security
interest, a prerequisite to release of a security agreement
under section 30-9-406, MCA.
We note that whether Godwin's leases are true leases or
leases intended as security, the UCC provides a method by
which Godwin could have further protected his interest. The
UCC provides for perfection by the financer of the collateral
of a "purchase money security interest," which is superior to
other security interests. Sections 30-9-107 and -312(3), MCA
(1979). Thus, even though it may at first seem unfair that
Taylor could obtain possession of the equipment financed by
Godwin, Godwin had opportunity to protect his interest by
following the simple procedures set forth in the statutes.
If the District Court concludes that the leases were
intended as security and that Taylor has a security interest
in the equipment, it must determine the relative priority of
the competing interests according to the rules of the UCC.
Godwin must then come forth with evidence establishing the
security interest and method of perfection it relies upon.
Further, the separate items of equipment must be treated
separately, because the statutes require different methods of
perfection for different categories of collateral. Sections
30-9-302 (3) (b); 30-9-401 (1); 61-3-103 (1), MCA (1979). The
use of the mixer, hopper and loader in conjunction with motor
vehicles does not make them motor vehicles as suggested by
the findings of the District Court and they should not be
treated as motor vehicles.
The final issue is whether the District Court erred in
granting Godwin two months rent on the equipment. The
District Court found that:
"On or about the 30th day of December, 1980, Mr.
Baisch [Godwin's employee] went to the Billings
Taylor Rental Center and met with Walter Wyszynski.
At that meeting, Mr. Wyszynski on behalf of Taylor
Rental Corporation agreed that Taylor would make
the payments under the lease agreements if Ted
Godwin Leasing, Inc., would forego repossession and
allow Taylor to keep the U-Cart System in place in
the business for the purpose of making the business
more attractive to a subsequent purchaser or
take-over franchisee. Mr. Baisch, acting for Ted
Godwin Leasing, Inc., agreed to this offer."
The District Court further found that this oral
month-to-month lease was terminated when Taylor filed this
action in February 1981, so that Taylor was liable to Godwin
for two months rent, or $1,273.30.
Taylor argues that if it was legally entitled to
possession of the equipment under the UCC, it could as a
matter of law have no obligation to make lease payments to
Godwin. Godwin argues that Taylor promised to make the
payments and that Taylor should be held liable for those
payments for the full eleven months during which Taylor kept
possession of the equipment.
The District Court did not base its rental award on who
was entitled to possession. Rather, the court found that
Taylor expressly promised to make Cederholm's rent payments.
Even if Taylor was entitled to possession, nothing precluded
Taylor from agreeing with Godwin to make those payments. We
therefore find no error in the court's award of rental.
Further we find no error in the court's conclusion that
Taylor terminated the at-will agreement by filing suit. This
finding is supported by substantial evidence.
We therefore affirm the judgment of the District Court
with respect to Godwin's counterclaim for rental payments and
remand the cause to the District Court for further
proceedings consistent with this opinion.
We concur:
P
Justic s