Court Opinion

ID: 9632830
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:26:01.449934+00
Date Added: 2024-06-11T18:08:23.071931
License: Public Domain

McInturff, C.J.
(dissenting)—As correctly stated by the majority, a security agreement containing an after-acquired property clause was executed by Tonasket in favor of Rainier. The appropriate financing statement was properly filed. Subsequently, Tonasket and Inland executed a rental agreement with option to purchase. Tonasket took possession of the machine in November 1978. On February 5, 1979, Inland signed and mailed a conditional sales contract and security agreement to Tonasket, who signed the documents on February 26, 1979. Inland filed a financing statement on March 5, 1979. The central issue is whether a security interest arises upon possession of goods or upon signature of a security agreement.
I respectfully dissent from the majority opinion for three reasons.
First, in part one, the majority creates an ambiguity in the lease-option agreement where none exists.
The uncontroverted facts are:
1. On November 13, 1978, Tonasket and Inland entered into a lease-option agreement which specified with particularity'the terms of a "potential sale". Possession passed to Tonasket and it was obligated to make payments to Inland.
2. The agreement provided that Tonasket had to give written notice of exercise of the option before March 13, 1979.
3. The lease portion of the agreement provided that it converted to a contract March 12, 1979.
4. The only written notice of the exercise of the option contained in the present record is No. 3, above.
5. Tonasket made only one monthly payment under the lease-option agreement, yet a credit memo for two fictitious monthly payments was issued by Inland on February 5, *7411979, the date of the contract and security agreement which Inland subsequently assigned to Seattle-First National Bank.
6. The sale price in the lease-option was for a new piece of equipment upon which Tonasket was required to provide insurance coverage.
7. The use tax that was allegedly paid the state for each month's rental before the exercise of the option was credited against the price and applicable sales tax; and
8. The monthly charge for keeping the lease-option operative (which agreement was unquestionably in default after December 13) was 1 percent of the sales price—the highest rate of interest on a purchase allowable at that time (12 percent per annum).
These uncontroverted facts, as a matter of law, describe a financing subterfuge to "create" a down payment to acquire financing for the purchase of the equipment.11 The face of the machine rental agreement obligated Tonasket to purchase the Caterpillar tractor.
Second, the factors cited by the majority in part two to aid the Superior Court in its determination of whether the lease-option agreement is a disguised security agreement *742are misleading. The nominal consideration inquiry is inapplicable because the purpose of the lease-option agreement was patently to "create" the down payment required by Inland's bank while at the same time protecting Inland's interest in the equipment. Hence, the trial court's inquiry should be directed to whether, under the lease-option agreement, the lessee has agreed to pay an amount substantially equal to the value of the equipment on which it has the option to become the owner. 1A U.C.C. Serv. § 4A-155 (Bender 1980). That inquiry has already been made and determined adversely to the appellant.
Third, part three of the majority's opinion equates a security interest with a security agreement, thereby assuming at the outset there is no distinction between a security agreement and a security interest. This is in contravention of the distinction between the two recognized in RCW 62A.9-203 and .9-204. In the former section the preexistence of a security interest is assumed because its enforceability arises through possession of the collateral by the secured party, or the execution of a security agreement when the collateral is in possession of the debtor. In .9-204, the security interest's preexistence is assumed, but its attachment to the collateral, as far as enforceability is concerned, does not arise until execution of the agreement. Even though there was no article 9 security agreement without Tonasket's signature, there was an article 2 security interest12 that arose upon Tonasket's exercise of the *743option so as to make the tractor collateral in the possession of a debtor.13 Retention or reservation of title to goods by a seller, notwithstanding delivery of the goods to the buyer, constitutes the reservation of a security interest. See also RCW 62A.1-201(37).
In the instant case, the parties at the time they entered into the lease-option agreement established the parameters of their potential debtor-creditor relationship should Tonasket exercise the option to purchase. Implicit in the majority opinion, Tonasket exercised the option on or immediately before February 5, 1979, the date Inland mailed to Tonasket the contract and security agreement memorializing the terms set forth in the lease-option; then the relationship of the parties changed, i.e., Inland's offer to sell was accepted. At that point in time a sale occurred and title to the equipment passed to Tonasket. The lease represented a retention of "paper title" until a written contract was executed. As such, the lease was indicative of an article 2 security interest that had to be perfected pursuant to article 9. See RCW 62A.2-401(1), supra. In other words, Tonasket became a debtor-buyer (see RCW 62A.2-201(2) and (3)) and the equipment became "collateral" for the resulting inchoate article 2 security interest of Inland recognized by RCW 62A.1-210(37) and RCW 62A.2-401. Hence, Inland under RCW 62A.9-312(4) had only 10 days within which to effectuate its claimed purchase money *744security interest priority. It failed to do so.14
The approach taken by the majority hampers the purpose for which RCW 62A.9-101 et seq. was promulgated, i.e., to make the process of perfecting a security interest easy, simple and certain—to look to substance rather than form. See James Talcott, Inc. v. Franklin Nat'l Bank, 292 Minn. 277, 194 N.W.2d 775 (1972); North Platte State Bank v. Production Credit Ass'n, 189 Neb. 44, 200 N.W.2d 1 (1972); James Talcott, Inc. v. Associates Capital Co., 491 F.2d 879 (6th Cir. 1974).
I would, therefore, affirm the Superior Court.
Reconsideration denied August 4, 1981.
Review denied by Supreme Court October 16,1981.

A lease intended as security is a security interest and therefore subject to the code. ROW 62A.l-201(37)(b).
A "lease" is a security interest under the code if the transaction is in reality a sale which the parties clothe in lease terminology. See Bell v. Itek Leasing Corp., 262 Ark. 22, 555 S.W.2d 1, 4 (1977); United Rental Equip. Co. v. Potts & Callahan Contracting Co., 231 Md. 552, 191 A.2d 570, 573 (1963); U C Leasing, Inc. v. Laughlin, 96 Nev. 157, 606 P.2d 167, 170 (1980); In re Jim Wilson, Inc., 17 U.C.C. Rep. Serv. 1104, 1106-07 (E.D. Tenn. 1975); Uniroyal, Inc. v. Michigan Bank, N.A., 12 U.C.C. Rep. Serv. 745, 752 (Mich. Cir. Ct. 1972); In re Dennis Mitchell Indus., Inc., 4 U.C.C. Rep. Serv. 1082, 1083-84 (E.D. Pa. 1967).
As stated in In re Gehrke Enterprises, Inc., 28 U.C.C. Rep. Serv. 794, 798 (Bankr. Ct. W.D. Wis. 1979):
the distinction between a true lease and a security lease is that by a true lease the lessor seeks to dispose of the use of the subject property while retaining incidents of ownership and by a security lease the lessor seeks to dispose of most or all of the incidents of ownership of the property, while retaining only sufficient interest in the property to assure payment of the contract obligation.
See also In re Atlanta Times, Inc., 259 F. Supp. 820, 826-27 (N.D. Ga. 1966); In re Wheatland Elec. Prods. Co., 237 F. Supp. 820, 822 (W.D. Pa. 1964).

RCW 62A.2-401(1) states in part:
Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the Article on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.
The following hypothetical is illustrative:
Calamity strikes during harvest season. A farmer becomes in dire need to purchase a replacement combine. After investigating the market he approaches a local dealer on a Friday afternoon. The dealer is unable to locate the necessary forms to close the transaction but because time is of the essence and because of past dealings with the farmer, he allows him to take possession of the machine *743with the understanding the written installment sales contract and security agreement will be executed in the near future. Two weeks later the dealer drives to the farmer's home to execute the required documents. Under the majority opinion the combine does not become collateral and the farmer not a debtor in possession until the security agreement is executed. Because this seems illogical, and impractical, I submit that under RCW 62A.2-401(1) the dealer has a valid security interest (albeit unenforceable under article 9) in the combine possessed by the farmer during the 2-week interval; and consequently, if not properly perfected, is subject to loss of priority to any other perfected article 9 security interest.

dditionally, RCW 62A.9-113 states:
"A security interest arising solely under the Article on Sales (Article 2) is subject to the provisions of this Article except . . . [for provisions not applicable here]."

The prime purpose of the Uniform Commercial Code is to require all persons holding a security interest in any property to publicly reveal such interest by filing a short, simple but concise financing statement. To allow one to avoid provisions of the Washington code by devised nomenclature would defeat that purpose.