FOR THE NORTHERN DISTRICT OF CALIFORNIA
ROYAL CATHAY TRADING COMPANY, No. 92-30444LK
ROYAL CATHAY TRADING COMPANY,
v. A.P. No. 92-3321
CROWN CREDIT COMPANY,
Memorandum of Decision
In 1990, debtor Royal Cathay Trading Company ("RCTC") entered into an agreement
whereby it would lease certain lift trucks and other equipment from defendant Crown Credit
Company ("Crown") for a period of sixty months. The lease provided that at the conclusion
of the sixty month lease period RCTC could purchase the equipment for one dollar. It also
provided that either side could terminate the lease on 30 days notice to the other. Crown did
file a UCC-1 financing statement to protect itself in the event the lease was found to be an
installment sale, but identified RCTC only as "Royal Cathay."
RCTC filed a Chapter 11 petition in 1992 and remains in possession of its estate as debtor
in possession. By this adversary proceeding, it seeks to have the court declare that the lease is
in fact an installment sale and that Crown's security interest is junior to the estate's interest
pursuant to section 544(a)(1) because Crown's interest was not validly perfected. The lease
provides that Ohio law is applicable.
II. Validity of UCC-1
There is no doubt that the UCC-1 does not effectively identify the debtor. In a city like San
Francisco with a large Asian population, "Royal Cathay" by itself is no more descriptive than
"Great American." It could refer to a trading company, or a bank, or a restaurant or anything
else. It is not sufficient to perfect a security interest.
III. Applicable Law
In 1990 when the lease was signed, Ohio law made a lease a security transaction if the lessee
could acquire the leased property for a nominal sum. In 1992, Ohio amended its law to adopt
the 1987 revised version of the UCC. This version makes it clear that nominal payment to
acquire title is not the sole dispositive issue, especially where the lease may be terminated
without penalty before its full term. If the termination provision is irrelevant under applicable
Ohio law, then RCTC must prevail.
It is clear that Ohio law does not permit the revised statute to apply to the contract at issue
here. However, even before Ohio revised its law, its courts did not consider an option to
purchase for nominal value to be a dispositive issue, but only a factor which "will usually tip
the balance of analysis" in favor of finding a security transaction. Celebrezze v.
, 601 N.E.2d 234, 240 (Ohio 1990). That court went on to
specifically note that "[i]t is a nearly universal view that where an agreement creates an optional
power in the possessor of the goods to terminate the agreement without penalty, then the
agreement can only be construed as a true lease." 601 N.E.2d at 241.
As RCTC notes, the holding in Celebrezze
is distinguishable because in that case there was
no option. However, in a case like this a federal court must consider Celebrezze
because its job
is to apply Ohio law in the same manner as an Ohio court. Since Cellebreze
assists this court
in determining how an Ohio court would rule, this court may consider it even if the facts are
not the same.
Common sense and equity dictate that if something looks like a duck and quacks like a duck,
it should be treated as a duck by the courts. In essence, RCTC's argument is that under Ohio
law anything with a webbed foot is conclusively a duck, even if it also has hair. Even prior to
the 1992 amendments, however, it does not appear that Ohio courts interpreted its statutes so
The court finds that an agreement giving a lessee of equipment the right to cancel the lease
without penalty on 30 days notice is so wholly inconsistent with an installment purchase that
the lease cannot be considered as a disguised installment purchase. The court further finds that
Ohio law in effect at the time the lease was signed did not compel the finding of a disguised
installment sale just because the lessee had a right to purchase for a nominal sum at the end of
the lease if it elected to complete the lease.
Crown's motion for summary judgment shall be granted. RCTC shall take nothing by its
complaint and Crown shall receive a declaration of the court, effective against all parties to this
adversary proceeding, that the lease in question is a true lease. Crown shall recover its costs
of suit from RCTC.
Counsel for Crown shall submit an appropriate form of order granting its motion and an
appropriate form of judgment. This memorandum constitutes the court's findings and
conclusions pursuant to FRCP 52(a) and FRBP 7052.
Dated: March 14, 1993 _____________________