Davis Bros. v. Misco Leasing, Inc.

• Decision Date: 19 February 1974
• Docket Number: No. 8407,8407
• Citation: 76 A.L.R.3d 1,14 UCCRep.Serv. 173,508 S.W.2d 908
• Parties: , 14 UCC Rep.Serv. 173 DAVIS BROTHERS, Appellants, v. MISCO LEASING, INC., Appellee.
• Court: Texas Court of Appeals

Page 908

508 S.W.2d 908

76 A.L.R.3d 1, 14 UCC Rep.Serv. 173

DAVIS BROTHERS, Appellants, v. MISCO LEASING, INC., Appellee.

No. 8407.

Court of Civil Appeals of Texas Amarillo.

Feb. 19, 1974.

Gordon Treadaway, Lubbock, for appellants .

Grenshaw, Dupree & Milam (William J. Wade), Lubbock, for appellee.

ELLIS, Chief Justice.

In this suit on an agreement designated as a lease covering certain irrigation equipment, the trial court entered judgment in favor of Misco Leasing, Inc., lessor, against Davis Brothers, lessees, and Plains Supply Company, the supplier and guarantor, for the recovery of a deficiency after repossession and sale of the equipment. A default judgment was taken against Plains Supply Company. S. E. Davis and D. D. Davis, herein known as Davis Brothers, brought this appeal.

At the time of the execution of the equipment lease by Misco Leasing, Inc., herein known as 'Misco,' the Davis Brothers were engaged in a farming operation in Lubbock County, Texas, on land leased by D. D. Davis from Edwin L. Forrest. The farm lease contained a requirement that the lessee provide a minimum of two irrigation sprinkler systems on the land. In order to comply with the farm lease provisions, the Davis Brothers contacted Dale Brown of Plains Supply Company in Lubbock, whereupon Brown placed two such irrigation systems on the leased premises. At the time the systems were placed on the land, the Davis Brothers made no arrangements with Brown to pay for equipment. Dale Brown was requested by D. D. Davis, and Brown agreed, to arrange for financing of the purchase price of the equipment. Brown agreed that if he was unable to arrange for financing, Plains Supply would finance the purchase. These particular sprinkler systems were the first of a line and Dale Brown was interested in placing them on the land leased by the Davis Brothers in order to have a working system available for display to potential customers.

The leasing arrangement involved here is the method Dale Brown chose to finance the transaction. Misco had previously furnished lease application forms to Plains Supply which, in this instance, were filled out by Dale Brown. E. R. McGee, Misco's representative in Lubbock, picked up the application from Brown and forwarded it to the Wichita, Kansas office of Misco Leasing, Inc.

The normal procedure in such a leasing arrangement is for the lessee to select the equipment of his choice from a supplier. A lease application is then sent to the lessor, who runs a credit check on the applicant to determine whether the transaction is feasible. If the lessor desires to enter into the arrangement, it then purchases the equipment from the supplier and executes a lease agreement with the lessee.

In the instant case, when Misco received the application from E. R . McGee, it initially determined that it would not be feasible to enter into the arrangement with the Davis Brothers. However, upon execution of a written guaranty agreement between Plains Supply and Misco, whereby Plains Supply guaranteed the payment of the Davis Brothers' obligations thereunder, Misco decided to enter into the lease agreement.

On April 12, 1968, D. D. Davis and S. E. Davis signed the agreement. It is undisputed that neither of them read the instrument before or after they signed it. The terms of the lease indicated that the equipment, with a total cost of $15,000, was being leased to Davis Brothers for an initial term of sixty months. It provided for twenty quarterly payments of $1,023.75 plus a security deposit of $3,071.25. The lease could be renewed at the end of the initial term for a renewal premium of $450 per year.

The agreement was signed by a representative of Misco on April 18, 1968 and on May 2, 1968, an executed copy thereof was mailed to the Davis Brothers, along with a letter, signed by Melvin Pankratz, credit manager of Misco, which contained the following language:

'This agreement includes a clause providing for renwal (sic) of the lease after its initial term, at an annual rental of $450.00, payable each year in advance on its anniversary date. In the event you should wish to purchase this Irrigation System, however, you may do so for its fair market value at that time, but not to exceed ten percent of its original total price.'

Misco then sent a check for $15,000 to Plains Supply in payment for the equipment. Prior to this, however, Dale Brown had sent to Misco a check in the total sum of.$4,095, representing the required security deposit of $3,071.25 plus the first quarterly rental of $1,023.75. The Davis Brothers knew nothing of this payment, but Melvin Pankratz testified that such procedure was not uncommon. Dale Brown testified that the purpose of this payment was to compensate the Davis Brothers for the inconvenience in the event Brown had to interrupt their watering cycle to show the system to prospective customers.

The Davis Brothers used the equipment for two years, whereupon they lost their lease on the Forrest land, left the sprinkler systems on the land, and ceased making payments to Misco. Thereafter, at the direction of Misco, Dale Brown had a notice of private sale printed in a Lubbock newspaper, stating that bids for the purchase of the systems would be accepted at the Wichita, Kansas office of Misco no later than April 12, 1970, and that the sale would be held on April 15, 1970. A single bid of $4,000 was received from, and the equipment was sold to, Dean Chenoweth of Haviland, Kansas.

This suit was brought by Misco to recover the amount of the deficiency claimed to be owing under the agreement. Plaintiff's petition alleged a total debt of $21,975, with allowable credits in the total sum of $10,142.50, consisting of $6,142.50 in lease payments received by Misco, plus $4,000 received from the sale of the equipment to Chenoweth, leaving a deficit of $10,332.50. After trial without a jury, judgment was awarded to Misco for the sum of such deficit, interest in the amount of $3,960.80, attorney's fees in the amount of $2,000, together with legal interest on such judgment from the date thereof. From such judgment Davis Brothers have brought this appeal asserting eleven points of error.

Basically, an examination of the trial court's judgment and the findings of fact and conclusions of law reveals that the trial court regarded the transaction strictly as a lease, rather than a security interest subject to the Texas Business and Commerce Code (UCC). We have examined all of appellants' assignments of error, including the various aspects of their complaints and objections regarding the trial court's findings of fact and conclusions of law and the refusal of the court to make appellant's requested findings concerning the 'lease--security interest' questions, as well as their contentions that this transaction is subject to the provisions of the UCC, the state usury laws and prohibitions against unauthorized penalties and forfeitures. We have concluded that the focal issue in this appeal is whether there is adequate evidentiary support for the court's judgment impliedly finding that the agreement and transaction forming the basis of this suit was a lease that did not create a security interest subject to the provisions of the Uniform Commercial Code. Specific challenges of the evidentiary support for the court's judgment are found in appellants' seventh point of error wherein they urge that the trial court erred in its conclusion of law that 'BASED UPON THE EVIDENCE PRESENTED' the plaintiff was entitled to the specific judgment entered against Davis Brothers for the reasons that the judgment is not supported by proper findings of fact, and that there is no evidence and there is insufficient evidence to support the findings of fact upon which the conclusion of law is based. Also, the appellee takes the basic position that the transaction was a lease not subject to the UCC and that the appellants' complaints regarding the application of the UCC and usury laws need not be reached.

In appellants' points of error one and two, it is contended that the trial court erred in refusing defendant's request for conclusions of law (1) that the option to purchase after the lease term was for a nominal consideration, and thereby created a security interest as a matter of law under the Texas Business and Commerce Code (UCC) and (2) that under the facts of this case the parties intended the lease to be 'as security' under the Uniform Commercial Code. Implicit in these points of error is the complaint that the trial court erred in its implied finding that the consideration for the option to purchase was not nominal and that the parties did not intend that lease 'as security.' Thus, the basic issue was joined. The appellants challenged the judgment based on the court's implied finding and legal conclusion that under the evidence the transaction was a lease not subject to the UCC by urging, in negation thereof, their counter contentions that the evidence supports a conclusion that the agreement was one intended to create a security interest, thereby coming within the meaning of Article 9 of the Texas Business and Commerce Code, V.T.C.A.

Appellants rely on Tex.Bus. & Commerce Code § 1.201(37) in support of their proposition that Article 9 of the Code (UCC) applies here. The pertinent portions of that section are:

"Security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation. . . . 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.'

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