J. A. Thompson & Son, Inc., In re

Decision Date11 January 1982
Docket NumberNo. 79-3180,79-3180
Parties33 UCC Rep.Serv. 356 In re J. A. THOMPSON & SON, INC., Debtor. Ralph AOKI, Receiver, Plaintiff/Appellee, v. SHEPHERD MACHINERY CO., Defendant/Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Isaac M. Pachulski, Stutman, Treister & Glatt, P. C., Los Angeles, Cal., for defendant/appellant.

J. Randolph Huston, Walker, Wright, Tyler & Ward, Los Angeles, Cal., for plaintiff/appellee.

Appeal from the United States District Court for the Central District of California.

Before WALLACE and PREGERSON, Circuit Judges, and SCHWARTZ, * District Judge.

MILTON L. SCHWARTZ, District Judge:

Shepherd Machinery Company ("Shepherd"), appellee herein, is a California corporation engaged in the business of selling and leasing heavy construction equipment in Southern California. J. A. Thompson & Son, Inc. ("Thompson") was, at the time here in question, a California corporation engaged in construction work. On April 6, 1973 Thompson entered into two agreements with Shepherd, each entitled "Machinery Lease," whereby Thompson leased two compactors and two bulldozers for a term of one year, the term being automatically renewed until termination of the lease either by Thompson by way of written notice to Shepherd or by Shepherd upon the default of Thompson. In conjunction with the leases Thompson acquired an option to purchase the compactors and bulldozers for a price determined pursuant to a formula whereby Thompson received full credit against the option purchase price for all rentals paid.

At the time the leases and option to purchase were executed, Thompson was engaged in construction activities in California and Hawaii and maintained offices in both states. Shepherd did not file financing statements covering the equipment in either state. However, about one year prior to the execution of the leases, Shepherd had filed a financing statement in California which named Thompson as debtor and which covered "after acquired" property.

Thompson utilized the construction equipment leased from Shepherd on two construction sites in Southern California. By January 24, 1974 Thompson was in serious default on its lease payments. On that date between 4:30 and 4:35 p. m., Pacific Standard Time, Shepherd attempted to repossess the compactors and bulldozers. However, because employees of Thompson had drained the fuel lines and removed the fuel regulators from the equipment and had barricaded the equipment with other heavy equipment, Shepherd was unable to remove the compactors and bulldozers from the two construction sites. Shepherd was, however, able to place several 41/2 X 6 bright red stickers on the equipment. These stickers announced that the heavy equipment was the property of Shepherd and warned all unauthorized persons against tampering therewith.

Approximately twenty minutes after Shepherd placed the stickers on the equipment, Thompson filed a petition for relief under Chapter XI of the Bankruptcy Act. 1 Two days later, Shepherd removed the heavy equipment from the Thompson construction sites.

In the subsequent Chapter XI proceedings, Shepherd filed a proof of claim for $55,807.20, the amount allegedly owed by Thompson to Shepherd under the equipment leases. Thompson's receiver, Ralph Aoki, appellant herein, responded by filing a "Complaint re Objection to Claim and Counterclaim" wherein he alleged that Shepherd's repossession of the equipment was either a voidable preference or conversion of property belonging to the estate of the debtor. The receiver thereafter moved for summary judgment.

The bankruptcy judge granted the motion in part, ruling that as a matter of law Shepherd had only a security interest, rather than a lessor's reversionary interest, in the heavy equipment. With respect to the issue of perfection of Shepherd's security interest, either by way of filing or possession, the bankruptcy judge ordered that the matter proceed to trial. At the close of trial the bankruptcy court ruled that pursuant to Calif.Comm.Code § 9103, as in effect at the time of Thompson's Chapter XI filing (" § 9103"), 2 perfection by filing required the filing of a financial statement in the State of Hawaii. Thus, Shepherd's previous filing in California was deemed inadequate. The bankruptcy court also ruled that Shepherd's placement of the red stickers on the construction equipment was insufficient to establish possession for purposes of perfection under Calif.Comm.Code § 9305 (" § 9305"). 3

Shepherd appealed to the district court. The district court upheld the ruling of the bankruptcy court with respect to the nature of Shepherd's interest in the compactors and bulldozers. However, on the grounds that the bankruptcy court had misapplied both § 9103 and § 9305, the district court reversed the rulings of the bankruptcy court on the issues of perfection.

Aoki now appeals from the rulings of the district court reversing the bankruptcy court on the issues of perfection. Shepherd challenges the conclusion of both the district court and the bankruptcy court that it has only a security interest, rather than a lessor's reversionary interest, in the construction equipment. 4 We affirm.

Reversionary Interest or Security Interest

The threshold question in this appeal is whether Shepherd has a lessor's reversionary interest or merely a creditor's security interest in the construction equipment. Neither Shepherd nor Aoki disputes the fact that should the lease agreements be construed to be "true" leases, Shepherd would retain a lessor's reversionary interest in the heavy equipment and would be entitled to prevail. On the other hand, if the lease agreements are determined to be merely security devices, Shepherd can prevail only if it perfected its security interests. See Calif.Comm.Code § 9301.

When the leases were executed, Shepherd granted Thompson a written option to purchase the compactors and bulldozers for the value specified in the option, and noted in the leases, with full credit of rental payments toward the purchase price. If rent payments covered the value of the equipment, the only additional charges would be certain taxes and an add-on charge of 51/2% per annum from the date of the lease. Both the lower courts ruled that this purchase option transformed the leases, as a matter of law, into agreements "intended as security" pursuant to Calif.Comm.Code § 1201(37). 5 Shepherd maintains that the lower courts erred in so ruling.

The lower courts interpreted subsection (b) of § 1201(37) as establishing conclusively that irrespective of any other facts concerning the transaction, a lease agreement is intended for security and, thus, subject to the provisions of Article 9 of the Uniform Commercial Code, if it contains an option to purchase "for no additional consideration or for nominal consideration." Calif.Comm.Code § 1201(37)(b). A considerable number of courts are in accord. 6 The construction given § 1201(37) by these courts and by the lower courts in the instant case was aptly outlined by the Supreme Court of Oregon:

At first glance the provisions of the above section (U.C.C. § 1201(37)) may be somewhat confusing, probably because they are stated in the inverse order of importance. However, upon a careful reading of the entire section it is clear that the first question to be answered is that posed by clause (b)-whether the lessee may obtain the property for no additional consideration or for a nominal consideration. If so, the lease is intended for security. If not, it is then necessary to determine "by the facts of each case" whether the lease is intended as security and, in making that determination, the fact that the lease contains an option to purchase "does not (of itself) make the lease one intended for security."

The cases construing the above section have uniformly held that if the lessee, upon compliance with the lease, has the option to purchase the property for no additional consideration, or for a nominal consideration, the lease is a security interest as a matter of law....

Peco, Inc. v. Hartbauer Tool & Die Co., 262 Or. 573, 500 P.2d 708, 709-10 (1972).

Shepherd argues that subsection (b) of § 1201(37) should not be so interpreted, and that in every case whether a lease is intended as a security device must be determined by considering all of the salient facts. A very few courts have adopted this approach. See, e. g., In re Cedar Valley Bandag, Inc., 29 U.C.C.Rep. 984 (N.D.Ga.1980) (Bankruptcy Judge); In re Samoset Associates, 24 U.C.C.Rep. 510 (D.Minn.1978) (Bankruptcy Judge); Computer Sciences Corp. v. Sci-Tek, Inc., 21 U.C.C.Rep. 859 (Del.Super.Ct.1976). 7

We are not convinced by Shepherd's argument. Section 1201(37) makes it clear that the question whether a lease was "intended as security" is determined by reference to the intention of the parties at the time the transaction was consummated. In general, this intention is to be inferred from the facts of each case. In subsections (a) and (b), however, two plain rules of construction are set out. While a purchase option does not in itself make a lease one intended for security (§ 1201(37)(a)), a purchase option exercisable for no or nominal additional consideration "does make" the lease one intended for security (§ 1201(37)(b)). We conclude from this that subsection (b) provides an exception to the general rule, whereby one fact in a given case takes on determinative significance. Thus, if a lease contains an option to purchase "for no additional consideration or for nominal consideration," it is conclusively presumed to be "intended as security," without reference to other facts from which the opposite inference might be drawn.

The written option granted to Thompson permitted it to purchase the compactors and bulldozers for little additional consideration. In fact, the add-on charge is really no more than a carrying or finance charge. Subsection (b) of §...

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