In re Teel

• Decision Date: 05 February 1981
• Docket Number: Bankruptcy No. 780-00027,Adv. No. 780-0021.
• Citation: 9 BR 85
• Parties: In re Wayne Estes TEEL, d/b/a Teel Music Co., Debtor. BORG-WARNER ACCEPTANCE CORPORATION, Plaintiff, v. James DUGGER, Trustee, Morgan Leasing Company, Southwest National Bank, U.S. Small Business Administration, Kimball Piano Company, and Conn Music Co., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

9 B.R. 85 (1981)

In re Wayne Estes TEEL, d/b/a Teel Music Co., Debtor BORG-WARNER ACCEPTANCE CORPORATION, Plaintiff, v. James DUGGER, Trustee, Morgan Leasing Company, Southwest National Bank, U.S. Small Business Administration, Kimball Piano Company, and Conn Music Co., Defendants.

Bankruptcy No. 780-00027, Adv. No. 780-0021.

United States Bankruptcy Court, N.D. Texas, Wichita Falls Division.

February 5, 1981.

Roger Lee, Wichita Falls, Tex., for plaintiff.

John D. Copeland, James W. Dugger, Wichita Falls, Tex., for defendants.

JOHN C. FORD, Bankruptcy Judge.

OPINION OF THE COURT

Borg-Warner Acceptance Co. (hereinafter Borg-Warner) commenced this proceeding to establish that its security interest is superior to the interest of Morgan Leasing Company (hereinafter Morgan Leasing) with respect to twenty-two Kimball organs in the possession of the debtor. The debtor was engaged in two music related enterprises in Wichita Falls, Texas. On January 20, 1977, the debtor granted Borg-Warner a security interest in all existing and after-acquired inventory of the debtor at 252 Sikes Center, Wichita Falls. The security interest was duly recorded and perfected on August 31, 1977. On or about May 11, 1978, the debtor purchased the twenty-two Kimball organs along with other organs of the same model that are not the subject of this proceeding. The organs purchased in May 1978 became part of the debtor's inventory and consequently were subject to Borg-Warner's floating lien.

The debtor subsequently transferred the twenty-two disputed organs to his Video School of Music on Seymour Highway in Wichita Falls. At the school, the organs were used as equipment upon which the debtor provided organ lessons.

On or about March 1, 1979, the debtor and Morgan Leasing engaged in several contemporaneous transactions. Morgan Leasing purchased the twenty-two organs at a price of $19,690 from the debtor. The debtor and Morgan Leasing then entered into a lease agreement under which the debtor agreed to lease the organs from Morgan Leasing for an initial thirty-six month rental period. During the initial term the debtor was to pay $622.41/month. After the initial term had run, the debtor could renew the lease for the remaining useful life of the organs at a rent of $4,000 per annum.

The parties further agreed that the debtor could terminate the lease prior to the end of the initial lease term. However, in the event of premature termination, the debtor agreed to bear any loss or receive any gain resulting from the premature disposition of the organs. The gain or loss on such premature termination was stated to be "the difference between the highest available cash offer received and the Depreciated value ($7,700) plus the product of the Premature Termination Factor ($399.66) times the number of months from the effective date of termination to the end of the lease term."

The debtor closed the Video School of Music in March, 1980, and moved the twenty-two organs back to his retail warehouse at 252 Sikes Center. The debtor testified that even though the music school had failed, he continued to retain possession of the organs and pay the rentals because of the potential liability arising from premature termination. The debtor believed that he would ultimately own the organs as the lessor had told him, "I don't want to be in the piano and organ business."

The debtor filed his original petition for relief on August 4, 1980. On that date, the twenty-two organs that are the subject of this proceeding had been commingled for at least four months with general inventory that was held for sale at the debtor's warehouse.

Morgan Leasing contends that it is the true owner of the twenty-two organs, and alleges that it paid the debtor the full value of the organs. Morgan Leasing argues that the debtor retained possession pursuant to a "bona-fide" lease. Morgan Leasing contends that the debtor has acquired no equity in the leased organs, and therefore, has no property interest upon which Borg-Warner's inventory lien can attach. Borg-Warner seeks to subordinate Morgan Leasing's rights under the following theories.

I.

§ 2.403(b) of the Texas Business and Commerce Code (U.C.C.) provides: "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business." Borg-Warner asserts that Morgan Leasing acquiesced in the debtor's retention of the organs in inventory for the four month period preceding bankruptcy. As the debtor was a dealer in musical instruments, Borg-Warner contends that the debtor could transfer the rights on the entruster-lessor to a buyer in ordinary course of business. Borg-Warner then argues that it is a buyer in ordinary course citing as authority, In the Matter of Samuels and Company, Inc., Bankruptcy, 526 F.2d 1238 (5th Circuit, 1976).

In Samuels, a secured creditor that held a floating lien on the debtor's inventory was determined to be a good faith purchaser for value. The Samuels decision involves the application of § 2.403(a) Texas Business and Commerce Code with respect to a good faith purchaser for value. However, § 2.403(b) Texas Business and Commerce Code applies to purchasers who are buyers in the ordinary course of business.

I find no authority for the proposition that a "good faith purchaser for value" is equivalent to a "buyer in ordinary course of business." The statutory definition of "buyer in ordinary course" precludes creditors from asserting such status: "`Buying' may be for cash or by exchange of other property or on secured or unsecured credit . . . but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt." § 1.201(9) Texas Business and Commerce Code, see also Sherman v. Roger Kresge, Inc., 9 UCCRS 858, 67 Misc.2d 178, 323 N.Y.S.2d 804 (1971). As Borg-Warner, a preexisting secured creditor, is precluded from buyer in ordinary course status with respect to property in the debtor's inventory, it is unnecessary to decide whether Morgan Leasing entrusted the organs to the debtor within the meaning of § 2.403(b) Texas Business and Commerce Code.

II.

Borg-Warner's second contention is that the Morgan Leasing transaction is in fact a disguised financing arrangement. Under this scenario, the purported sale of the organs was in reality a loan and the contemporaneous lease agreement was nothing more than a security device.

The principal authority on whether a lease is intended as security is § 1.201(37) Texas Business and Commerce Code, which provides in pertinent part:

"Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. Unless a lease or consignment is intended as security, reservation of title thereunder is not a "security interest." 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 lessor 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.

Using the above definition for guidance, the Court in In re Peacock, 6 B.R. 922 (Bkrtcy., N.D.Tex.1980), applied a three tier analysis to a lease alleged to be a security device. Under the first tier of analysis, a court is to inquire whether the lease contains a definite obligation to pay rentals during the lease term totaling an amount substantially equivalent to the fair market value of the lease property plus a financing factor as viewed at the time the property is transferred to the lessee. A finding of such an obligation as a precondition to holding...