Western Enterprises, Inc. v. Arctic Office Machines, Inc., 6851
| Citation | 667 P.2d 1232 |
| Decision Date | 29 July 1983 |
| Docket Number | No. 6851,6851 |
| Parties | 36 UCC Rep.Serv. 1331 WESTERN ENTERPRISES, INC., Appellant, v. ARCTIC OFFICE MACHINES, INC., Appellee. |
| Court | Supreme Court of Alaska (US) |
Paul W. Waggoner, Anchorage, for appellant.
Peter J. Maassen, Burr, Pease & Kurtz, Anchorage, for appellee.
Before BURKE, C.J., RABINOWITZ, and COMPTON, JJ., and ROWLAND, Superior Court Judge. *
Arctic Office Machines, Inc. ("Arctic") transferred possession to Alyeska Engineers ("Alyeska") of business furnishings valued at $10,000.00. On March 1, 1979, Arctic and Alyeska executed an agreement entitled "Lease [of] Personal Property." The agreement states in part as follows:
[Alyeska] hereby agree to use for the term of 3 years and months, at the agreed rental of Three Hundred [and] Fifty Two & 80/100 Dollars ($352.80) for said term, payable as follows, to wit: $1,058.40 upon execution of this agreement, the receipt of which payment is hereby acknowledged, and the said sum of $352.80 on the first day of each and every month hereafter until the said sum of $12,700.80 shall have been fully paid .... [A]t end of lease period furniture may be purchased for [$]1,008.00. [Underlined portions were typed in the blanks of form agreement used.]
Alyeska used the furniture in business premises that it rented from Western Enterprises, Inc. ("Western"). After three months, Alyeska defaulted on its payments to both Arctic and Western. Western seized the furniture and, over the course of the next two years, sold it for $7,450.50. The net proceeds recovered by Western after deducting commissions amounted to $5,506.40.
In September of 1979, Arctic brought suit against Western for conversion of the furniture, contending that its interest as owner of the leased furniture was superior to Western's interest and that Western had had no right to seize and sell the furniture. Western defended the suit, contending that Arctic's transaction with Alyeska was not the lease it purported to be, but was instead actually a sale and retention of a security interest in the furniture. Western contended that as lessor of the real property used by Alyeska, it also had an interest in the furniture. Western argued that its interest was superior to Arctic's because Western had perfected its security interest by taking possession of the furniture, while Arctic had done nothing to perfect its interest. Western thus concluded that it had acted properly in seizing and selling the furniture.
Following a non-jury trial, the superior court found that the transaction entered into between Alyeska and Arctic constituted a lease, rather than a sale of the furniture. The court concluded that Arctic's interest as owner and lessor of the furniture prevailed over Western's interest as lessor of the real property. Judgment was accordingly entered against Western.
Western appeals, contending that the superior court erred in finding that the purported lease was not in fact an agreement for the purchase of the furniture. As we have previously indicated, the labels used by a party to characterize its transaction are not determinative; it is the substance of the transaction and the intent of the parties that controls. Stanley v. Fabricators, Inc., 459 P.2d 467, 469 (Alaska 1969). Thus, the mere fact that Alyeska and Arctic labeled their transaction a "lease" does not necessarily make it so.
This is recognized by the Uniform Commercial Code ("UCC"), which addresses the problem in terms of whether a security interest, consistent with a purchase and sale agreement, was created by the purported lease. AS 45.01.201(37), setting forth the relevant section of the UCC as adopted in this state, provides in part as follows:
"[S]ecurity interest" means an interest in personal property or fixtures which secures payment or performance of an obligation ... [. U]nless a lease ... is intended as security, reservation of title under the lease ... is not a "security interest" ... [. W]hether 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. [Emphasis added.]
We previously acknowledged three different tests to determine whether the purchase price specified in the option is "nominal" within the meaning of this section. The first test was to compare the price specified in the option with the value of the property at the time the option is to be exercised; the second test was to compare the price with the value of the property at the time the transaction was entered into; and the third was the "economic compulsion" test, in which a determination is made as to whether exercising the purchase option is the only sensible economic course for the holder of the option to pursue. McGalliard v. Liberty Leasing Co., 534 P.2d 528, 532 & n. 13 (Alaska 1975). It had been the hope of this court that the three tests would complement each other and be viewed as different ways of approaching the same problem. It would appear, however, that the tests lend themselves instead to improperly providing three separate opportunities for sellers to look like lessors. We therefore find it necessary to overrule our pronouncement in McGalliard and return to using only the first test, which was set forth in Stanley v. Fabricators, Inc., 459 P.2d 467, 469-70 (Alaska 1969). Accordingly, the nominality of an option price is to be determined only by comparing the price specified in the option with the value of the property at the time the option is to be exercised.
Contrary to the suggestion of Western, we hold that the nominality of the option price is a factual determination that "shall not be set aside unless clearly erroneous." Alaska R.Civ.P. 52(a). See McGalliard v. Liberty Leasing Co., 534 P.2d at 534 n. 19. Anticipating this ruling, Western contends that the superior court's finding that the option price was not nominal is clearly...
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