U.S. for Use and Ben. of Eddies Sales and Leasing, Inc. v. Federal Ins. Co.

• Citation: 634 F.2d 1050
• Decision Date: 01 December 1980
• Docket Number: No. 79-2199,79-2199
• Parties: 28 Cont.Cas.Fed. (CCH) 80,872, 30 UCC Rep.Serv. 713 UNITED STATES of America for the Use and Benefit of EDDIES SALES AND LEASING, INC., d/b/a Eddies White Truck Sales, Plaintiff-Appellee, v. FEDERAL INSURANCE COMPANY, Chubb Group of Insurance Companies, and Utility Contractors, Inc., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1050

634 F.2d 1050

28 Cont.Cas.Fed. (CCH) 80,872, 30 UCC Rep.Serv. 713

UNITED STATES of America for the Use and Benefit of EDDIES

SALES AND LEASING, INC., d/b/a Eddies White Truck

Sales, Plaintiff-Appellee, v. FEDERAL INSURANCE COMPANY, Chubb Group of Insurance

Companies, and Utility Contractors, Inc.,

Defendants-Appellants.

No. 79-2199.

United States Court of Appeals, Tenth Circuit.

Submitted July 1, 1980.

Decided Dec. 1, 1980.

Jay C. Baker of Baker & Baker, Tulsa, Okl., and Patrick L. Dougherty, Wichita, Kan., for defendants-appellants.

Robert L. Varilek, Rapid City, S. D., W. Bland Williamson and Kevin M. Abel, of Pray, Walker, Jackman, Williamson & Marlar, Tulsa, Okl., for plaintiff-appellee.

Before McKAY, LOGAN and SEYMOUR, Circuit Judges.

SEYMOUR, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir. R. 10(e). The cause is therefore ordered submitted without oral argument.

In February 1978, Utility Contractors, Inc. contracted with the United States Corps of Engineers to construct channel improvements on Joe Creek in Tulsa, Oklahoma. As required by the terms of their contract and by the Miller Act, 40 U.S.C. § 270a, Utility provided a payment bond through Federal Insurance Company, the surety, to afford protection to persons supplying labor or materials to Utility or its subcontractors for use on the Joe Creek project.

Utility entered into a subcontract agreement with Mid-States Construction Company of Derby, Inc. under which Mid-States agreed to perform excavation work on the project. Mid-States had insufficient equipment to meet the demands of this undertaking and negotiated with Eddies Sales and Leasing, Inc. to procure additional trucks and trailers. Specifically to meet the needs of Mid-States, Eddies purchased sixteen used trucks and trailers with approximately $300,000 of its own funds and had them delivered to Mid-States at the Joe Creek project site. Eddies and Mid-States executed an agreement obligating the latter to pay the following amounts for the equipment: $20,000 on June 10, 1978; $30,000 on June 19, 1978; $15,000 on July 1, 1978; and $12,000 a month for twenty-four months thereafter, amounting to total payments of $353,000.

When Mid-States failed to pay an insurance premium covering the equipment, Eddies repossessed the trucks and trailers on June 23, 1978. By that time, Mid-States had defaulted on its two June payments to Eddies by tendering checks totaling $50,000 which were returned due to insufficient funds.

Eddies sold the repossessed equipment and brought suit on the payment bond against Mid-States, Utility, and Federal Insurance Company under the Miller Act to recover the contract amount that Mid-States had failed to pay. At trial, the primary dispute was whether the transaction between Eddies and Mid-States constituted a lease, which is covered by the Miller Act, or a sale, which is not. After a non-jury trial, the district court held the agreement to be a lease ¹ and awarded Eddies $50,000 plus interest, representing the unpaid installments of June 10 and 19.

Utility and Federal Insurance Company ² appeal the judgment in favor of Eddies, contending the district court erred in finding that the equipment was leased to Mid-States. It is their contention that the equipment was furnished pursuant to a capital acquisition contract and that the Miller Act is inapplicable. We agree and reverse the judgment.

The Miller Act requires a contractor to post a surety bond "for the protection of all persons supplying labor and material in the prosecution of the work provided for" in any government contract exceeding $25,000 in value. 40 U.S.C. § 270a(a)(2). A fair rental charge for the use of earth-moving equipment at a federal channel improvement project is within the purview of the Miller Act bond because the value of the lease payment is substantially consumed in the project. See Tom Growney Equipment, Inc. v. Fisher, 457 F.2d 1298 (10th Cir. 1972); Roane v. United States Fidelity & Guaranty Co., 378 F.2d 40, 43 (10th Cir. 1967). On the other hand, a purchase of such equipment is not covered because the seller is not supplying materials to be consumed on the bonded project. Continental Casualty Co. v. Clarence L. Boyd Co., 140 F.2d 115 (10th Cir. 1944).

In deciding whether the transaction in this case is a lease or a sale, an initial question arises as to what law governs the determination. "The Miller Act provides a federal cause of action, and the scope of the remedy as well as the substance of the rights created thereby are matters of federal not state law." F. D. Rich Co. v. Industrial Lumber Co., 417 U.S. 116, 127, 94 S.Ct. 2157, 2164, 40 L.Ed.2d 703 (1974). There is a conflict in the circuits, however, whether federal or state law governs the construction of a subcontract to which the United States is not a party in a case arising under the Miller Act. See Burgess Construction Co. v. M. Morrin & Son Co., 526 F.2d 108, 114 n. 2 (10th Cir. 1975). As in Burgess Construction Co., we need not decide that issue because we find no conflict between the conclusion we reach here and the laws of Oklahoma, where the contract was performed. ³ See id.

The terms of the transaction are undisputed. The parties attempted to transform a printed "Retail Installment Contract-Security Agreement" form into a lease agreement by changing the form title to "Installment Lease- Security Agreement" and by typing the words "lease", "lessee", and "lessor" over some of the printed words "purchase", "purchaser", and "seller". Despite the interlineation of leasing terminology, the parties' agreement provides for rights and duties more commonly found in a contract of sale. For example, Eddie Rypkema, the president of Eddies, testified that the total amount due under the lease was calculated to achieve a net pay-out of the equipment over the term of the lease. Most significantly, there was an oral understanding that the equipment was to be owned by the "lessee" at the termination of the lease with no more than the nominal payment of $1.00. The Oklahoma Uniform Commercial Code addresses such an option:

"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."

12A Okl.Stat. § 1-201(37) (emphasis added). We applied this provision of Oklahoma law in Percival Construction Co. v. Miller & Miller Auctioneers, Inc., 532 F.2d 166 (10th Cir. 1976), and concluded that the "lease" there was actually an installment sale. "(W)here the terms of the lease and option to purchase are such that the only sensible course of action for the lessee at the end of the term is to exercise that option and become owner of the goods, then the lease becomes one intended to create a security interest." Id. at 172. See Meyer v. World Concrete, Inc., 431 P.2d 403 (Okl.1967). See generally Annot., Equipment Leases as Security Interest Within Uniform Commercial Code § 1-201(37), 76 A.L.R.3d 11 (1977).

Other factors generally considered to indicate that an agreement is in substance a secured installment sale clothed in lease terminology include

"such factors as whether the lessee is required to insure the goods in favor of the lessor for a value equal to the total rental payments; the risk of loss or damage is on the lessee; the lessee is to pay for taxes, repairs and maintenance; there are default provisions governing acceleration and resale; a substantial non-refundable deposit is required; the goods are to be selected from a third party by the lessee; ...."

J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code § 22-3, at 882 (2d ed. 1980). All of these factors are present here. Mid-States was required to insure the equipment in favor of Eddies, the risk of loss or damage was on Mid-States and it was required to pay for taxes, repairs and maintenance, and the agreement contained default provisions governing acceleration and resale. Each of these provisions was part of the Retail Installment Contract-Security Agreement form used by the parties and none of them was crossed out when the form was "converted" to a "lease" agreement. In addition, the agreement provided for prepayment of the obligations. Although a substantial, nonrefundable deposit was not required, Eddie Rypkema testified the high front end payments on the agreement were required in part because there was not the customary advance payment. The parties also testified that an officer and employee of Mid-States went to Kansas City to select suitable equipment to be purchased from a third party by Eddies.

The district court found that the parties "intended" a lease agreement rather than a purchase...