Whitworth v. Krueger

• Decision Date: 28 December 1976
• Docket Number: No. 12041,12041
• Citation: 98 Idaho 65,558 P.2d 1026
• Parties: , 99 A.L.R.3d 1046, 20 UCC Rep.Serv. 1368 Francis M. WHITWORTH et al., Plaintiff-Respondents, v. Harman W. KRUEGER et al., Defendant-Appellants.
• Court: Idaho Supreme Court

Page 1026

558 P.2d 1026

98 Idaho 65, 99 A.L.R.3d 1046, 20 UCC Rep.Serv. 1368

Francis M. WHITWORTH et al., Plaintiff-Respondents, v. Harman W. KRUEGER et al., Defendant-Appellants.

No. 12041.

Supreme Court of Idaho.

Dec. 28, 1976.

Clark Gasser, Ralph H. Jones, Jr. of Jones, Pomeroy & Jones, Pocatello, for defendant-appellants.

John K. Looze of Dial & Looze, Pocatello, for plaintiff-respondents.

SCOGGIN, District Judge (Retired).

This appeal involves two conflicting claims to the proceeds from the sale of a bankrupt's cattle. The district court held that the plaintiffs, who had sold cattle to the bankrupt and had filed a financing statement perfecting their security interest in the cattle sold and all cattle thereafter acquired as replacement for the cattle sold, had superior rights in the proceeds of the sale than did the defendants, who had placed 55 cows in the bankrupt's possession pursuant to an agreement which they had characterized as a 'lease', but for which they had not filed a financing statement covering the cattle. We affirm the trial court's ruling that the plaintiffs' rights in the proceeds are superior to those of the defendants, but remand the case to the district court to conduct further proceedings to determine the extent of the plaintiffs' rights in the proceeds and to dispose of the proceeds in excess of the plaintiffs' claim to the bankruptcy court or the trustee in bankruptcy.

THE STIPULATED FACTS

The parties submitted this matter to the district court sitting without a jury upon stipulated facts. The stipulations were to the following effect.

On February 3, 1969, the plaintiff respondents Francis M. and Wanda Whitworth, husband and wife, and Edgar L. and Lucina G. Whitworth, husband and wife, entered into an agreement with Del Mar and Elaine Cammack, husband and wife. The Whitworths sold the Cammacks 98 head of milk cows and some dairy equipment under a contract calling for a $5,000.00 down payment and semi-monthly installments of the remaining $39,500.00 to be paid over the following seven years. The contract of sale also provided that the Whitworths would have a lien upon the property sold and upon any replacements for these cattle that the Cammacks might later acquire. On February 6, 1969, the Whitworths filed a financing statement covering their security interest in the dairy equipment and the cows.

On June 3, 1971, the defendant respondents Herman W. and Josie Krueger, husband and wife, entered into an agreement with the Cammacks. This agreement, which the parties denominated a 'lease', called for the Kruegers to turn over possession of approximately 55 head of dairy cattle to the Cammacks. These cattle bore the Kruegers' registered brand. The agreement called for the Cammacks to pay the Kruegers $450.00 a month for a five year term. At the expiration of this five year term, the Cammacks had an option to purchase the 55 head for $10.00. The market value of the 55 head was approximately $450.00 per head at the time the Cammacks and the Kruegers entered into their agreement. Barring unforeseeable calamity, the parties anticipated that the market value of the animals at the end of the five year period would have been no less than $200.00 per head. The Kruegers did not file a financing statement pursuant to the requirements of Art. 9 of the Uniform Commercial Code. They did, however, record the agreement.

The Cammacks defaulted upon their obligations to the Whitworths and to the Kruegers. On January 22, 1973, Del Mar Cammack was adjudicated a bankrupt. On April 11, 1973, the referee in bankruptcy granted the Whitworths' petition to reclaim 98 dairy cows from Cammack's estate. According to the complaint, only three of the cows that the Whitworths had sold to the Cammacks were still in their possession to be reclaimed, but at least 31 (34 according to the respondents' brief) of the reclaimed cows had been put in the Cammacks' possession by the Kruegers. (This information does not appear in the stipulation.)

The reclaimed cows were sold, but the state brand inspector refused to turn over the proceeds from the sale of the 'leased' cattle to anyone but the registered owners, the Kruegers, without their permission or without court order. The proceeds were then deposited with the clerk of the district court pending the court's determination of the Whitworths' interest in them.

The Whitworths maintain that they are entitled to $11,058.28 plus interest of the proceeds from the sale of these cattle, whereas the Kruegers maintain that they are entitled to the entire $14,850.00 proceeds. The Whitworths argue that they have priority to the proceeds because both of the parties' agreements with the cammacks created security interests subject to the provisions of the Uniform Commercial Code and the Whitworths had perfected their security interest in the cattle by a proper filing under the Code, but the Kruegers had not. The Kruegers, on the other hand, argue that their 'lease' was not subject to the terms of the Uniform Commercial Code and that they had protected their interest in the cattle by recording their agreement with the Cammacks and by branding the cattle with their registered brand. The district court entered judgment that the Whitworths were entitled to satisfy their claim against the Cammacks from the proceeds from the sale and that the Kruegers were entitled to the excess. The Kruegers appealed.

THE PRIORITY OF THE CREDITORS' INTERESTS

Both parties agree that the Whitworths had a perfected security interest in the cattle with a priority from the time of filing pursuant to the requirements of Art. 9, §§ 28-9-101 to -9-503, of the Uniform Commercial Code, I.C. §§ 28-1-101 to -10-104. The question presented is whether the Kruegers were reguired to file a financing statement pursuant to Art. 9 of the Uniform Commercial Code in order to protect their interest in the cattle.

Under the Uniform Commercial Code, if the Kruegers' agreement with the Cammacks was an installment sales contract, the Kruegers could have perfected a security interest in the goods with a priority superior to that of the Whitworths by filing within ten days after possession passed to the Cammacks. I.C. § 28-9-312(4). However, having parted with possession of the goods and not having perfected a security interest in the goods by filing, the Kruegers' interest in the goods would be subordinate to the Whitworths'. I.C. §§ 28-1-201(37), 28-2-401(1), 28-9-113, 28-9-312. But the fact that the Kruegers' agreement was entitled a 'lease' rather than an 'installment sale contract' does not mean that the Kruegers were not subject to these provisions of the UCC. In circumstances where the 'lease' gives the 'lessee' the option to acquire the 'leased' goods at the expiration of the 'lease' term without additional consideration or for nominal consideration, i. e., where the 'lease' is commercially indistinguishable from an installment sales contract, I.C. § 28-1-201(37) provides that a 'lessor's' interest in 'leased' goods in a security interest:

"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, . . . (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.'

In this case the Cammacks had the option at the expiration of the 'lease' term to purchase for the sum of $10.00 cattle which the parties had anticipated at the beginning of the term would be worth over $10,000.00 at the end of the term. This is clearly nominal consideration; therefore, under I.C. § 28-1-201(37), the agreement between the Kruegers and the Cammacks was one intended for security and the Kruegers' interest in the cattle was a security interest. Peco, inc. v. Hartbauer Tool & Die Co., 262 Or. 573, 500 P.2d 708 (1972). Accordingly, because the Kruegers' interest in the cattle was a security interest, by failing to perfect that interest the Kruegers' interest became subordinate to the Whitworths' perfected interest.

The Kruegers argue, however, that these sections of the Uniform Commercial Code do not apply to their agreement because there is another section of the Idaho Code, I.C. § 25-2001, which specifically deals with leases of livestock, and this section, rather than sections found in the Uniform Commercial Code, should control. This section provides:

'25-2001. Leases to be in writing and recorded.-All leases of more than ten (10) head of livestock must be in writing and must be acknowledged in like manner as grants of real property, and filed of record in the same county recorder's office or offices, and within the same time and manner, and for the same fee, as are chattel mortgages; and the failure to comply with the provisions of this section renders the interest of the lessor in the property subject and subsequent to the claims of creditors of the lessee . . ..'

The Kruegers argue that they protected their interest in the cattle by recording pursuant to the requirements of this section. We do not believe that the Kruegers' recording protected their interest in the cattle as against the Whitworths. The Kruegers' agreement falls under the filing provisions of the Uniform Commercial Code because I.C. § 28-1-201(37) brings under its terms all agreements, regardless of their title, which are commercially indistinguishable from installment sales contracts. The Kruegers' agreement was a 'lease' of this kind, not an agreement in which the parties' reasonable business expectations were that the cattle would be returned to the Kruegers at the expiration of the...