No. 83-353 INTHE SUPREME COURTOF THE STATEOF MONTANA 1984

TAYLORRENTAL CORPORATION PlaintiffandAppellant,

TED GODWIN LEASING, INC., FIRST BANK BILLINGS, Defendants and Respondents.

APPEAL FR0P.I: District Courtof the Thirteenth Judicial District, In and for the County of Yellowstone, TheHonorableRobert 11. Wilson,Judgepresiding.

COUNSELOF RECORD: ForAppellant: Calton & Hammon;Rodd A. Hamman,Billings, Montana

ForRespondents: R. P. Ryan,Billings, Montana

Submitted on Briefs: November 3, 1983 Decided: April 5,1984

Filed: \?I( 3 

### !984

ClerkMr. JusticeFred 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 equipmentand thatGodwin

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 inpart 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 rulesof theMontana Uniform Commercial Code? 2. Does Taylorhave aprior perfected security interest in the rental equipment which entitles it topossession 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 toCederholm 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 agreementswereexecutedby Taylorand Cederholm fromMay 22, 1-978to January 20, 1980. Taylor filed financing statements with theMontana 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 trailerswith the Montana Registrar ofMotorVehicles. 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 FirstBank isno longer aparty to this action. The cost of the U-Cart Systemwas $20,586.00, including $790.00 freight. The cost of the Lahman loader and trailer

was $6,025.00. The lease agreements provided for initialpayments of $2,029.25 on theU-Cart systemand $296.00 on the Lahman loader and trailer. The U-Cart system lease provided for 55 consecutivemonthly 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 costswere 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," whichwas specifically set forth in the agreementsas $2,100.00 for the U-Cart system and $1,379.00 for the Lahman loader and trailer. If the leaseswere 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 storeand prepare thebusiness for sale to anotherTaylor franchisee. Wyszynski began negotiations with Cederholm to arrange a voluntary surrenderof the business and to arrange for Taylor to operate the business until sold. As part of these negotiations, Taylor offered topay Cederholm's monthly payments while Taylor operated the business prior to sale. Rut Taylor refused to assume underlying obligations, eitherleases 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'smonthly 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 agreementwith Godwin on February 19, 1981by filing suit forpossessionof 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 Godwinby the Yellowstone County Sheriff, pursuant to a writ of possession issued by the DistrictCourt. 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 Cederholmheld 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 judgmentonTaylor's claim,contending tha.t Taylorhad no security interest in the equipmentand trial on the counterclaimwas reserved pending resolution of Taylor's claim. Taylor alsomoved for summary judgment, claiming the leaseswere intended as securityand therefore subjectto the priority rules of the Montana Uniform Commercial Code, that Taylor's security interestwas superior to any Godwin might have, and that Taylorwas entitled to possession as amatter 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. Taylormoved theDistrict 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 reviewof 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 thatTaylora-greedtopay rentalpending saleof thebusiness if Godwin would forego repossession. Taylor appeals thejudgment in its entirety. Godwin cross-appealson the rental award, claiming the District Court should have awarded $7,003.15 in rental for the 11 months Taylor keptpossession of the equipment.

The first issue is whether the "leases"of equipmentby 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 itwas unnecessary to address this issue. However, it is impossible to determine whether Cederholm had sufficient rights in the collateral to grant Taylor a security interestwithout firstdetermining the nature of the transaction between Godwin and Cederholm. Further, if the "leases" were intended as security, Godwin's interestsmust 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,wewill commentbriefly on the issue. If the leases in questionwere 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 sectionsof theUCCwere amendedby the 1983Legislature, but those amendments are inapplicable to this case); Fire Supplyand Service,Lnc. v. Chico Hot Springs (1982),196Mont. 435,

Section 30-9-102defines the scopeof the UCC provisions

on secured transactions: 

### "(1)

# ... this chapter applies so far as concerns any personal property and fixtures within the jurisdictionof this state:

"(a) to any transaction (regardlessof its form) which is intended to create a security interest in personal property or fixtures

# . .

# .. "(2) This chapter applies to security interests createdby

# . . . lease

# ...." Section 30-1-201(37) sets forth the test for determining whether a lease is intended as security and therefore subject to theUCC: "Whether a lease is intended as security is to be determined by the facts of each case;however, (a) the inclusion of an option topurchase 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 theproperty for no additional consideration or for a nominal consideration does make the lease one intended for security." Under this section, the DistrictCourt concludes that Cederholm would become the owner orwould have an option to become the owner of the equipment for a nominal consideration, it must find that the lease was intended for securityand is therefore subject theUCC. Then thequestion is whether Godwin or Taylor has the superior security interest under the UCC. If Cederholmwould 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. HartbauerTooland DieCo. (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 nominalconsideration, courts oftenuse 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.litiestest, some courts state that if the amount the lesseemust pay to exercise his option is roughly equal to the fair market value of the asset at tha.ttime, then the transaction is not a secured sale. Further, some courtsanalyze theproblem in termsofpercentages, comparing the optionprice to the total listprice. 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 leasesof equipment fromGodwin toCederholm wereintended 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 Taylorhad no security interest. In so concluding, the court relied upon the fact that Taylor did not finance the equipment. The court concludedwithout 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 interestas

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. Sturdevantv. 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 thepartieshave a securityagreement,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 requiresthat,unless collateral is j-npossession 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 obligationsof 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 interestare 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 statementwas filed for each security agreement. Each financing statement contained similar descriptions of the collateral. The financing statements named Cederholm as debtor and Taylor assecured 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 realestate is sufficient whether ornot it is specific if it reasonably identifies what is described." An even broader description of collateral was approved in Sturdevant, 186Mont. at 94-95, 606 P.2d at 527. TheDistrictCourt'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 executionof the second and third securityagreements and were held for use in or rental by Cederholm's Taylor Rental Center. Taylor and.Cederholmwere 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 itdid not finance the equipment is also erroneous. There is no requirement that one must finance the purchase ofproperty to qualify as

a secured party with respect to that property. In Sturdevant,we upheld the repossessionofproperty 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 theholding that Taylordid not intend to have a security interest in this equipment.Section 30-9-204(1) also requires that the securedparty 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 executedby 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 attachmentofTaylor'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. Godwinargues 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 anysubordination agreement. Godwin argues that Taylor waived its rights in someunspecified manner under theprovisions 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 UCCprovides for perfection by the financerof the collateral of a "purchasemoney security interest," which is superior to other security interests. Sections 30-9-107and -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 relativepriority 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 asmotor vehicles.The final issue is whether the District Court erred in granting Godwin two months rent on the equipment. The DistrictCourt found that: "On or about the 30th day of December, 1980, Mr. Baisch [Godwin's employee] went to the Billings TaylorRental Center andmet with WalterWyszynski. At thatmeeting,Mr. Wyszynski on behalf of Taylor Rental Corporation agreed that Taylor would make the payments under the lease agreements if Ted GodwinLeasing, Inc., would forego repossessionand allow Taylor to keep the U-Cart System inplace in the business for thepurpose ofmaking thebusiness 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 Taylorwas 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 duringwhich Taylor kept possession of the equipment. The District Court did not base its rental award onwho

was entitled to possession. Rather, the court found that Taylor expressly promised to make Cederholm's rentpayments. Even if Taylorwas entitled to possession, nothing precluded Taylor from agreeingwith Godwin tomake 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 agreementby filing suit. This finding is supportedby substantialevidence.We therefore affirm the judgment of the District Court with respect toGodwin's counterclaim for rental payments and remand the cause to the District Court for further proceedings consistentwith this opinion.

We concur:Justic s 

# P