In re Otasco, Inc., Bankruptcy No. 88-03410-W

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Northern District of Oklahoma
Citation111 BR 976
Docket NumberBankruptcy No. 88-03410-W,Adv. No. 89-0204-W.
PartiesIn re OTASCO, INC., Debtor. WHEELS, INC., Plaintiff, v. OTASCO, INC., a Nevada corporation, Defendant.
Decision Date27 March 1990

111 B.R. 976 (1990)

In re OTASCO, INC., Debtor.
WHEELS, INC., Plaintiff,
OTASCO, INC., a Nevada corporation, Defendant.

Bankruptcy No. 88-03410-W, Adv. No. 89-0204-W.

United States Bankruptcy Court, N.D. Oklahoma.

March 27, 1990.

111 BR 977

Brian J. Rayment, Joyce and Pollard, Tulsa, Okl., for plaintiff; Kevin T. Keating and James D. Harrington, McDermott, Will & Emery, Chicago, Ill., of counsel.

Sam Bratton, II, Doerner, Stuart, Saunders, Daniel & Anderson, Tulsa, Okl., for defendant.


MICKEY DAN WILSON, Bankruptcy Judge.

Wheels, Inc. brought an adversary proceeding for declaratory judgment against Otasco, Inc. to determine priority of conflicting interests in certain motor vehicles or their proceeds. The issue is whether a written agreement concerning these vehicles and purporting to be a lease, should be treated as an unperfected security agreement. The matter has been submitted for decision on stipulations, briefs and oral argument. Upon consideration thereof, the Court finds, concludes and orders as follows.


Wheels, Inc. ("Wheels") "is an Illinois corporation with its principal place of business in Des Plaines, Illinois. Wheels is in the business of leasing automobiles to businesses," Pre-trial Order p. 2, ¶ II(1).

Otasco, Inc. ("Otasco") "is a Nevada corporation with its principal place of business in Tulsa, Oklahoma. Otasco is in the business of retail sales of tires, accessories, and other goods," Pre-trial Order p. 2, ¶ II(2).

"On February 2, 1984, Wheels entered into an agreement with Otasco (the `Agreement'), which governed the terms under which Otasco, from time to time, would obtain motor vehicles from Wheels," Pre-trial Order p. 3, ¶ II(6). A copy of the Agreement is admitted as exhibit 1 appended to the pre-trial order.

The Agreement is designated "Lease" and identifies Wheels as "Lessor" and Otasco as "Lessee." ¶ 14 of the "Lease" is entitled "Ownership" and recites in pertinent part as follows: "It is expressly agreed that the Lessee by virtue of this lease acquires no ownership, title, property, right, interest, (or any option therefor) in any leased motor vehicle save as herein provided. . . ."

The Agreement provides that "Lessee hereby leases one motor vehicle for delivery as specified by Lessee and other motor vehicles as may hereafter be ordered by Lessee . . . with the Lessee to have possession and right to use said motor vehicles . . .," Agreement ¶ 1, subject to minimal use restrictions, Agreement ¶ 4. The Agreement imposes all burdens and expenses of licensing, registration, taxes, fees, fines and penalties, maintenance and replacement, insurance, and liability for use in connection with the operation of leased vehicles on the Lessee, ¶¶ 4, 5, 7, 8, 11. Lessee may mark the vehicles with its own insignia, Agreement ¶ 9. The Agreement imposes no duties on Lessor except delivery of each vehicle at the inception of the lease, and acceptance, disposition and accounting of and for each vehicle at termination of the lease, as discussed below.

The Agreement provides that "each motor vehicle shall be leased for an initial term of 12 months from the date of the delivery of such vehicle to Lessee and thereafter for successive 12 month renewal terms; provided that Lessee shall have the right to cancel any vehicle at any time after the end of the first 12 months of the initial lease term for such vehicle by giving written notice of such cancellation to the Lessor . . .," Agreement ¶ 12. No provision in the Agreement permits the Lessor to cancel once a vehicle has been leased; but "either Lessee or Lessor may terminate the obligation to lease additional or replacement vehicles at any time upon written notice to the other party," Agreement ¶ 12. The parties expected continuation beyond the initial 12-month term (as admitted in oral argument). There is no express limit to the possible number of "successive 12 month renewal terms," Agreement ¶ 12; nor is there any express option to purchase at any particular time.

The Agreement provides that "The monthly rental for each motor vehicle shall

111 BR 978
be computed on the basis of the rider hereto attached marked `Rental Schedule' and made a part hereof, and is intended to include the Reserve accrued for the estimated depreciation of the leased vehicle," Agreement ¶ 2. The "Rental Schedule" reads in its entirety as follows
(Rider attached to and made a part of this lease.)
The monthly payment for each vehicle shall be computed as follows:
The rental shall be computed on the stipulated cost of the vehicle at the rates shown below for the period of rental indicated:

 1st-12th Month ........... 2.9928%
                 13th-24th Month ........... 2.7428%
                 25th-36th Month ........... 2.4629%
                 37th-48th Month ........... 2.2329%
                 49th-50th Month ........... 2.0987%
Provided, however, that at no time will the rental be less than a minimum of $3.00 per month.
2.00% per month of the stipulated cost of each vehicle for the duration of the contract for such vehicle or until a total of 100% of the stipulated cost shall have been paid, whichever occurs first.
It is anticipated that at the end of the maximum term herein prescribed, the vehicle will have only scrap value and if for any reason the Lessee desires to continue to operate the vehicle the Lessee agrees to pay to the Lessor a monthly rental of $3.00 during such extended period.
The rental hereinabove specified may be changed on notice from the Lessor to the Lessee but only as it affects vehicles delivered after the effective date of change cited in said notice.

The Agreement further provides as follows:

3. LESSEE ACCOUNT. The Lessor, upon receipt of a leased motor vehicle from the Lessee after the termination of the lease of said motor vehicle, will proceed to sell said motor vehicle at wholesale on the best terms available for cash, in the discretion of the Lessor (the net amount received from the sale of the motor vehicle to the Lessor to the final completion of the sale thereof being called the "Net Proceeds"). If the Net Proceeds plus the amount accrued for the Reserve for said motor vehicle (the "Total Recovery") is in excess of the "stipulated cost" of the motor vehicle, then the amount of such excess shall be promptly credited to the Lessee by the Lessor. If the Total Recovery is less than the "stipulated cost" of the motor vehicle, then the Lessee shall promptly pay such deficiency to the Lessor; provided that in the event of any such sale the Lessor shall guaranty to Lessee that the Net Proceeds shall at least equal (a) the following percentages of the fair value of the vehicle as of the beginning of the 12 month period during which the date of termination occurs:

                Initial 12 month period of lease ..... 20%
                Each subsequent 12 month period ...... 30%
less, in any case, (b) the amount of any loss or damage to be insured or borne by Lessee under Section 5 or 11 hereof. As an alternate to sale of the vehicle by the Lessor, the Lessee may, at its option, on 30 days written notice to the Lessor, arrange for the sale of the vehicle for the account of the Lessee (but not to the Lessee), without the services of the Lessor, providing payment is first made to the Lessor by or on behalf of the Lessee of the remaining book balance for said vehicle, and any charges accrued to the Lessor on said vehicle to said date.

It is stipulated that "The `amount accrued for the Reserve of said motor vehicle' referred to in Paragraph 3 of the Agreement is calculated on the Rental Schedule under the heading `Amortization Account,'" Pre-trial Order p. 5, ¶ II(11).

The "stipulated cost" referred to above is not expressly defined anywhere in the agreement. However, the Agreement provides that "at the beginning of each

111 BR 979
month, the Lessor shall render a monthly invoice to the Lessee for all payments due to the Lessor for all motor vehicles theretofore delivered to the Lessee, and the Lessee agrees to make prompt payment thereof. The Lessor will also render to the Lessee details of the `stipulated cost' together with the term of the lease thereof, the rental rate and charges of all motor vehicles delivered to the Lessee," Agreement ¶ 2

At the end of the lease term, "the Lessor will render efficient service in sale or disposal of the leased motor vehicle to obtain the largest net return for the Lessee," Agreement ¶ 6.

On November 6, 1988, Otasco filed its petition for relief under 11 U.S.C. Chapter 11. "Otasco is operating its business and remains in possession of its property as debtor and debtor in possession," Pre-trial Order p. 2, ¶ II(3).

On July 11, 1989, Wheels filed its complaint herein seeking declaratory judgment that the Agreement is a true lease which Otasco must assume or reject; or, in the alternative, that Wheels has a perfected security interest in the "leased" vehicles. Otasco answered, and asserts that the Agreement is not a true lease, is intended as security, and that Wheels' security interest has not been perfected.

The matter was set for trial on December 11, 1989. However, on that date, the parties filed their "Agreed Pre-Trial Order," reciting stipulated facts, stating that "no other facts are in dispute" and no further evidence would be offered, and announcing that "the parties intend to file cross-motions for summary judgment on the legal issues involved," Pre-trial Order p. 7, ¶ IV. The Court thereupon ordered that briefs, if any, must be filed on or before December 18, 1989, and scheduled oral argument for December 19, 1989.

"As of the date of the Pre-Trial Order, Otasco had in its possession 21 motor vehicles which it obtained from Wheels. These 21 motor vehicles and the States of origin of their respective certificates of title "as are follows:

Vehicle I.D. # Year Make State of
                2G2AF19X1G9274515 1986 Pontiac Oklahoma
                1G2AF19X3GT246689 1986 Pontiac

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