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 ~.2d 

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: 
Justic s P