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10.11 Business Ethics Contract Sales and Lease Contracts: Formation, title and Risk

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715 P.2d 381 Page 1
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

sequent purchasers qualified as “buyers in ordinary

course” for purposes of entrustment statute.
Supreme Court of Kansas.
EXECUTIVE FINANCIAL SERVICES, INC., Ap- Affirmed.
pellant,
v. West Headnotes
Donald H. PAGEL, Henry D. Pagel, d/b/a Pagel
[1] Secured Transactions 349A 10
and Sons, a partnership; the John Deere Company;
Gene R. Mohr, James B. Loyd, d/b/a Mohr-Loyd 349A Secured Transactions
Leasing; and Dennison State Bank, Appellees. 349AI Nature, Requisites, and Validity
EXECUTIVE FINANCIAL SERVICES, INC., Ap- 349AI(A) Nature and Essentials
pellant, 349Ak10 k. Other Transactions Distin-
v. guished. Most Cited Cases
Paul S. MORSE, Ted R. Morse, and Fred S. Morse, Document denominated “lease” may be construed
d/b/a Riverview Farms; Marvin Allen, Jr.; James B. to create “security interest” where terms and con-
Loyd and Gene R. Mohr, d/b/a Mohr-Loyd Leasing; tents thereof are more consistent with security in-
First National Bank of Olathe; terest than lease.
and
Northeast Kansas Production Credit Association, [2] Secured Transactions 349A 10
Appellees,
v. 349A Secured Transactions
JOHN DEERE COMPANY, Third-party Defend- 349AI Nature, Requisites, and Validity
ant-Appellee. 349AI(A) Nature and Essentials
Nos. 58045, 58046. 349Ak10 k. Other Transactions Distin-
guished. Most Cited Cases
Feb. 21, 1986. Leaseback agreements, whereby buyer purchased
equipment from farm equipment dealer and sub-
Buyer of tractors, who subsequently leased equip- sequently leased equipment back to related partner-
ment to partnership comprised of officers of corpor- ship, was really security agreement governed by
ate seller, sued parties who purchased tractors from article 9 of UCC, where partnership had option of
seller. The Jackson District Court, Tracy D. Kling- purchasing equipment at end of rental period at
insmith, J., and the Johnson District Court, Janette price which was nominal compared to equipment's
Howard, J., entered judgments against buyer-lessor, anticipated fair-market value. K.S.A. 84-1-201(37).
and appeal was taken. Consolidating the cases, the
Supreme Court, Herd, J., held that: (1) leaseback [3] Secured Transactions 349A 141
agreement, was really security agreement subject to
article 9 of UCC; (2) UCC provision, that “buyers 349A Secured Transactions
in ordinary course” purchased free of security in- 349AIII Construction and Operation
terest created by their seller, did not protect parties 349AIII(B) Rights as to Third Parties and
who subsequently repurchased tractor; (3) buyer- Priorities
lessor “entrusted” equipment to seller, for purposes 349Ak141 k. Buyers of Goods, Protection
of statute providing that entrustor may lose rights Against Perfected Security Interests. Most Cited
and equipment when equipment is subsequently Cases
resold to buyers in ordinary course; and (4) sub- UCC provision, that buyer in ordinary course of

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715 P.2d 381 Page 2
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

business purchases free of security interest created tion in General

by “his seller” [K.S.A. 84-9-307(1)], did not protect 343k234(7) k. Property Held by Seller
farmers who purchased equipment from farm in Fiduciary Capacity. Most Cited Cases
equipment dealer, where dealer had previously sold Reason that buyer left purchased equipment with
equipment to other party, where party had sub- seller is immaterial, for purposes of deciding
sequently leased equipment to partnership related to whether buyer has “entrusted” equipment to seller
dealer, and where security interest was created by under K.S.A. 84-2-403(2), providing that entrustor
partnership, not dealer. may lose rights to equipment when equipment is
subsequently sold to buyer in ordinary course of
[4] Secured Transactions 349A 141 business.

349A Secured Transactions [7] Sales 343 234(7)

349AIII Construction and Operation
349AIII(B) Rights as to Third Parties and 343 Sales
Priorities 343V Operation and Effect
349Ak141 k. Buyers of Goods, Protection 343V(D) Bona Fide Purchasers
Against Perfected Security Interests. Most Cited 343k234 Nature and Grounds of Protec-
Cases tion in General
Buyer in ordinary course may take free of compet- 343k234(7) k. Property Held by Seller
ing security interest, though interest was not created in Fiduciary Capacity. Most Cited Cases
by seller so as to provide protection to buyer under Buyer of tractors, who left equipment with farm
K.S.A. 84-9-307(1), where goods were “entrusted” equipment dealer without segregating it or other-
to seller for purposes of K.S.A. 84-2-403(2). wise manifesting any sign of ownership,
“entrusted” equipment to dealer for purposes of
[5] Sales 343 234(7) K.S.A. 84-2-403(2), providing that entrustor may
lose rights when equipment is subsequently resold
343 Sales
to buyers in ordinary course of business, though
343V Operation and Effect
buyer immediately leased equipment to partnership
343V(D) Bona Fide Purchasers
related to dealer and filed security agreement.
343k234 Nature and Grounds of Protec-
tion in General [8] Sales 343 234(7)
343k234(7) k. Property Held by Seller
in Fiduciary Capacity. Most Cited Cases 343 Sales
For entrustment doctrine to apply, so as to defeat 343V Operation and Effect
entrustor's right to equipment subsequently sold to 343V(D) Bona Fide Purchasers
third party, there must be: entrustment of goods to 343k234 Nature and Grounds of Protec-
merchant who deals in goods of that kind followed tion in General
by sale by merchant to buyer in ordinary course of 343k234(7) k. Property Held by Seller
business. K.S.A. 84-2-403(2). in Fiduciary Capacity. Most Cited Cases
Buyer of tractor from farm implement dealer was
[6] Sales 343 234(7) “buyer in ordinary course of business,” for pur-
poses of statute providing that “buyers in ordinary
343 Sales
course of business” purchase free of interest of
343V Operation and Effect
parties “entrusting” equipment to dealer [K.S.A.
343V(D) Bona Fide Purchasers
84-2-403(2)], where buyer had no actual knowledge
343k234 Nature and Grounds of Protec-
of entrustor's interest, and where buyer purchased

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715 P.2d 381 Page 3
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

tractor in even exchange for other equipment. Sons.

**382 *809 Syllabus by the Court Martin R. Ufford of Redmond, Redmond, O'Brien
& Nazar, Wichita, was on brief, for appellee North-
1. A document denominated a “lease” may be con- east Kan. Production Credit Ass'n.
strued to create a “security interest” if the terms and
contents thereof are more consistent with a security
interest than a lease. HERD, Justice:

2. The entrustment doctrine, codified at K.S.A. These are consolidated actions by Executive Finan-
84-2-403(2) and (3), provides that the entrustment cial Services (EFS) for possession of three tractors
of goods to a merchant who deals in goods of that and for a determination that it is the owner of the
kind accords to the merchant power to transfer all tractors or, in the alternative, that its security in-
the entrustor's rights in the goods to a buyer in or- terest therein be adjudged prior to the rights of de-
dinary course of business. fendants. The district courts granted summary judg-
ment to the defendants and these appeals followed.
3. The entrustment doctrine operates on the as- These actions arise out of the same facts as those
sumption that both the entruster and the buyer have set out in Executive Financial Services, Inc. v.
been equally harmed by the dishonesty of the mer- Loyd, 238 Kan. 663, 715 P.2d 376, this day de-
chant-dealer, and resolves the issue in favor of the cided, which are repeated here for convenient ana-
buyer. lysis.

4. A buyer in ordinary course may prevail on an en- EFS purchased three tractors from Tri-County Farm
trustment theory under K.S.A. 84-2-403(2) and (3) Equipment Company (Tri-County), a John Deere
even though the buyer cannot prevail under K.S.A. dealership owned by James Loyd and Gene Mohr.
84-9-307(1). EFS then leased the tractors to Mohr-Loyd Leasing,
a partnership between Mohr and Loyd. The first
5. For K.S.A. 84-2-403(2) to be applicable, three transaction involved John Deere Tractor model No.
steps are required: (1) an entrustment of goods to 8640. On July 19, 1982, on behalf of Tri-County,
(2) a merchant who deals in goods of that kind fol- James Loyd sold the No. 8640 tractor to EFS for
lowed by a sale by such merchant to (3) a buyer in $48,000. At the same time, EFS leased the tractor
ordinary course of business. to Mohr-Loyd Leasing. Tri-County gave a corpor-
ate guarantee of the lease as authorized by a corpor-
6. A buyer of goods from a merchant in ordinary
ate resolution furnished by Loyd. It was later
course of business takes the goods free of a security
learned that James Loyd deposited the EFS check to
interest where the goods are entrusted to the mer-
his personal business account.
chant by the secured party pursuant to K.S.A.
84-2-403(2). Similar transactions occurred with regard to two
*810 Michael E. Whitsitt, Overland Park, argued other John Deere tractors. The second sale and
the cause and was on briefs, for appellant. lease was completed on August 30, 1982, for
$19,000. The third transaction involved a purchase
John L. Vratil of Lathrop, Koontz, Righter, Clagett
price of $38,000 and was completed on November
& Norquist, Overland Park, argued the cause and
3, 1982.
Gordon E. Wells, Jr., and Daniel M. Dibble, Kansas
City, Mo., were with him on brief, for appellees Within two months Loyd sold all three tractors to
John **383 Deere Co., Marvin Allen, Jr., and Don- third parties and Mohr-Loyd Leasing and Tri-
ald H. Pagel and Henry D. Pagel d/b/a Pagel and County defaulted on the leases. This default was the

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715 P.2d 381 Page 4
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

subject of another action wherein EFS obtained a 1982, by filing a financing statement with the re-
judgment against Mohr, Loyd, Mohr-Loyd and Tri- gister of deeds' office.
*811 County for breach of contract. See Executive
Financial Services, Inc. v. Loyd, 238 Kan. 663, 715 Appellees Paul, Ted and Fred Morse, doing busi-
P.2d 376, this day decided. That judgment is still ness as Riverview Farms, acquired the model No.
unsatisfied, making recovery of the tractors import- 8640 tractor from Tri-County in October of 1982.
ant to EFS. Deere, at one time, claimed a purchase money se-
curity interest in the same tractor by virtue of a fin-
It is important to note that EFS did not take physic- ancing statement filed on October 26, 1982. North-
al possession of the three tractors. Nor did EFS east Kansas Production Credit Association (PCA)
mark or segregate the tractors from other tractors had a security interest in “all farm and ranch ma-
offered for sale by Tri-County to show that either chinery and equipment” of Riverview *812 Farms,
EFS or Mohr-Loyd claimed an interest in them. which was perfected as of March 17, 1981. PCA
and Deere stipulated to the fact that Deere failed to
EFS filed financing statements on each of the three file a financing statement within ten days following
tractors with the Johnson County Register of Deeds delivery of the No. 8640 tractor as required by
and the Kansas Secretary of State's office. The K.S.A. 84-9-301(2). Therefore, the trial court found
statements listed “James B. Loyd and Gene R. PCA's security interest in the tractor was prior and
Mohr d/b/a Mohr-Loyd Leasing” as the debtor, EFS superior to the security interest of John Deere.
as a secured party, and each tractor as “equipment
leased.” The financing statements were filed on Ju- When Tri-County sold the three tractors to third
ly 28, 1982 (tractor model No. 8640); September parties, Mohr-Loyd defaulted on the respective
10, 1982 (tractor model No. 2940); and November leases with EFS. EFS then filed the present action.
12, 1982 (tractor model No. 4440).
In granting summary judgment, the district court of
Tri-County sold the model No. 2940 tractor to Johnson County found Allen and Riverview Farms
Thompson Implement Company of Holton, Kansas, were buyers in ordinary course of business from
on September 24, 1982, in the ordinary course of Tri-County and pursuant to K.S.A. 84-2-403(2)
business. Thompson is a merchant engaged in the took free and clear of the security interest of EFS.
business of selling farm equipment and machinery. The district court of Jackson County made a similar
Thompson later sold the model No. 2940 tractor to finding with respect to the tractor sold to Thompson
appellees Donald and Henry Pagel doing business Implement Company and later to Pagel and Sons
as Pagel and Sons (Pagel). On January 27, 1983, and found EFS impliedly consented to the sale of
Pagel executed a variable rate loan contract-secur- the tractor by Tri-County to Thompson Implement
ity agreement which granted appellee John Deere Company. EFS appeals from both judgments.
Company (Deere) a purchase money security in-
terest in the No. 2940 tractor. Deere perfected its There are two theories under the UCC which may
security interest in the tractor by filing a financing entitle the buyers of the tractors to prevail in this
statement with the register of deeds' office. case. The trial court found the “entrustment the-
ory,” codified at K.S.A. 84-2-403(2), applicable.
Appellee, Marvin Allen, Jr., purchased the model Appellees argue that even if the trial court erred in
No. 4440 tractor from Tri-County on November 12, applying the entrustment theory, the buyers took
1982. Allen also executed a variable rate loan con- free of any security interest of EFS under K.S.A.
tract-security agreement granting Deere a purchase 84-9-307(1).
money security interest in the No. 4440 tractor.
Deere perfected its interest on November **384 17, Our first concern, however, is whether the transac-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

715 P.2d 381 Page 5
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

tion between EFS and Mohr-Loyd Leasing is er than a person buying farm products from a per-
covered by the UCC as a secured transaction since son engaged in farming operations takes free of a
EFS “leased” the tractors to Mohr-Loyd and lease security**385 interest created by his seller even
transactions are excluded from Article 9. though the security interest is perfected and even
though the buyer knows of its existence.”
[1] This issue was addressed in Atlas Industries, (Emphasis added.)
Inc. v. National Cash Register Co., 216 Kan. 213,
531 P.2d 41 (1975), where we stated in Syllabus ¶ Under this section, if Allen, Riverview Farms,
3: Thompson and Pagel were “buyers in ordinary
course of business” they would take free of any se-
“A document denominated a ‘lease’ may be curity interest created “by the seller,” which is Tri-
construed to create a ‘security interest’ if the County. However, K.S.A. 84-9-307(1) is inapplic-
terms and contents thereof ... are more consistent able to the facts in this case because Mohr-Loyd
with a security interest than a lease.” created the security interest in question-not Tri-
County. A buyer in ordinary course can only take
K.S.A. 84-1-201(37) provides that whether a lease
free of a security interest created “by his seller.”
is intended as security is to be determined by the
Since the seller of the tractors, Tri-County, did not
facts of each case. That section also provides,
create the security interest, the buyers cannot take
where the parties have agreed that upon compliance
free of that interest under 84-9-307(1).
with the terms of the lease the lessee shall become
or has the option to become the owner of the prop- We next consider whether, as a matter of law, EFS
erty for no *813 additional consideration or for entrusted the three tractors to Tri-County and, un-
nominal consideration, the lease is intended for se- der K.S.A. 84-2-403(2), thereby lost any interest it
curity. had in them.

EFS admits in its brief on appeal the option price The entrustment doctrine is codified at K.S.A.
for the tractors is nominal as compared to their anti- 84-2-403(2):
cipated fair market value at the end of the lease
term and that the lease agreement creates a security “Any entrusting of possession of goods to a
interest in each tractor in favor of EFS. This finding merchant who deals in goods of that kind gives
is also supported by the fact that EFS filed UCC him power to transfer all rights of the entruster to
financing statements on the three tractors, EFS was a buyer in ordinary course of business.”
not a manufacturer or dealer in like equipment and
EFS never took physical possession of the tractors. “Entrusting” is defined in K.S.A. 84-2-403(3):

[2] We hold the transaction between EFS and “ ‘Entrusting’ includes any delivery and any
Mohr-Loyd Leasing was essentially a financing acquiescence in retention of *814 possession re-
transaction whereby EFS acquired a security in- gardless of any condition expressed between the
terest in the three tractors. The transaction is there- parties to the delivery or acquiescence and re-
fore subject to the UCC. gardless of whether the procurement of the en-
trusting or the possessor's disposition of the
[3] Having so determined, we turn to the issue of goods have been such as to be larcenous under
whether the buyers of the tractors took free of the criminal law.”
EFS's security interest pursuant to K.S.A.
84-9-307(1), which provides: Since this statute has not been considered by the
court in an analogous fact situation, some general
“A buyer in ordinary course of business ... oth- background regarding its purpose and effect is help-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

715 P.2d 381 Page 6
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

ful. in entrusting her goods to the dishonest dealer,

but, by the same token, the buyer may not have
The Kansas Comment 1983 to K.S.A. 84-2-403 been prudent in buying from him. On the assump-
briefly describes the purpose of the provisions in tion that both the entruster and buyer have been
question: equally victimized by the dishonesty of the mer-
chant-dealer, section 2-403(2) resolves the issue
“Subsections (2) and (3) extend prior law in
so as **386 to free the marketplace, rather than
protecting buyers in ordinary course of business
protect the original owner's property rights. The
from hidden entrusting arrangements with mer-
rule, however, is an absolute one and does not de-
chant-sellers who deal in goods of the kind. Un-
pend in its operation on any balancing of equities
der these subsections, an owner who entrusts
or notions of comparative negligence.” p. 612.
goods to a merchant who deals in goods of the
kind may lose his rights as against a buyer in or- Entrusting typically falls into one of four fact pat-
dinary course of business. Under prior law, such terns. These *815 patterns are illustrated in White
good faith purchasers were protected only under and Summers, Uniform Commercial Code § 3-11,
the doctrines of estoppel and the like.” p. 143 (2d ed. 1980):

At common law, the mere entrustment of goods to a “First, Ernie Entruster turns his car over to Dave
merchant who deals in goods of a kind did not es- Dealer so that Dave can sell it for Ernie. A buyer
top the owner from recovering them from a bona in ordinary course takes free of Ernie's ownership
fide purchaser for value. This common law rule has rights. Second, a wholesaler gives Dealer the
been reversed by UCC § 2-403(2), which provides goods ‘on consignment’ or under a ‘floor plan-
that any entrusting of possession of goods to a mer- ning’ agreement. A buyer in ordinary course from
chant who deals in goods of that kind accords the Dealer is not bound by any ‘title retention’ agree-
merchant power to transfer all the entruster's rights ment between Dealer and the wholesaler as to
to a buyer in ordinary course of business. Hawk- passage of title. Third, George leaves goods to be
land, UCC Series § 2-403:07, p. 611 (1984). repaired with Dealer who resells them to a buyer
in ordinary course. Finally, Edgar buys goods
The entrustment doctrine operates on the assump-
from Dealer but leaves the goods in Dealer's
tion that both the entruster and the buyer have been
hands. A buyer in ordinary course cuts off
equally harmed by the dishonesty of the merchant-
Edgar's interest.”
dealer, and resolves the issue in favor of the buyer.
This result is explained in Hawkland, UCC Series § The last example is similar to the fact pattern in the
2-403:07, as follows: present case. EFS purchased three tractors from
Tri-County, but left the tractors on Tri-County's lot.
“In a broad sense, section 2-402(2) exemplifies
Tri-County later resold the tractors to third parties
one effort to ‘modernize the law governing com-
in ordinary course of business. The situation is
mercial transactions' in keeping with the underly-
made more complicated, however, by the fact that
ing philosophy of the UCC. Accordingly, when a
prior to the resale by Tri-County, EFS leased the
housewife takes her vacuum cleaner for repairs to
tractors to Mohr-Loyd Leasing, which operated
a merchant who also is in the business of selling
from the same business premises as Tri-County.
vacuum cleaners new and old, the sale by him to
Furthermore, EFS obtained a security interest in the
a buyer in the ordinary course of business passes
tractors from Mohr-Loyd Leasing.
a good title to the latter. In this case, the equities
of the housewife and the buyer may be said to be Prior to applying K.S.A. 84-2-403(2) to the facts of
equal. The housewife may not have been prudent the instant case, we must consider its potential con-

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715 P.2d 381 Page 7
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

flict with our previous application of 84-9-307(1). owner. The court determined that the ultimate
buyer could prevail on an entrustment theory un-
[4] Appellant contends that if a buyer does not der §§ 2-403(2) and 2-403(3). Those subsections
qualify for the preferred treatment of K.S.A. provide that a person who ‘entrusts' the posses-
84-9-307(1) because the competing security interest sion of goods to a dealer loses title to a buyer in
is not created by the seller, the buyer cannot then ordinary course from the dealer. In the usual
argue it took free of the security interest under the case, the outright owner entrusts the goods to the
entrustment theory of 84-2-403(2). This argument dealer for repair. In this case, it was the bank
has received support among some courts and com- with its prior perfected security interest which
mentators. did the entrusting.**387 Certainly there is noth-
ing in the language of § 2-403 that would limit
White and Summers argue that priority disputes
that provision to outright owners as entrusters.
between secured creditors and subsequent pur-
The Woods case makes the important point that a
chasers must be governed exclusively by Article 9
prior secured party may do sufficient ‘entrusting’
and that a subsequent purchaser who is disappoin-
so that its security interest is lost, even though
ted under 84-9-307 cannot fall back on 84-2-403
the security interest was not created by the dealer
and argue that it renders him superior to a prior se-
to which the goods were entrusted. The court in
curity interest. They point to the language of
Woods suggested yet another theory to protect the
84-9-306(2) which states:
ordinary course buyer: Insofar as the prior se-
“Except where this article otherwise provides, cured party permitted the collateral to be de-
a security interest continues in collateral notwith- livered to the dealer, it authorized the sale free of
standing sale, exchange or other disposition its security interest under § 9-306(2). Finally, un-
thereof unless the disposition was authorized by der either alternative theory, the ultimate buyer
the secured party in the security agreement or was protected even though it knew of the bank's
otherwise....” (Emphasis added.) prior perfected security interest; the court cor-
rectly concluded that, in order for the secured
See White and Summers, Uniform Commercial party to prevail, it would have to show that the
Code § 25-15, pp. 1073-74 (2d ed.1980). ordinary course buyer knew that the sale was in
violation of the prior security interest.”
There is also authority, however, for applying the
entrustment *816 theory where a buyer is unable to The facts here, as in In re Woods, 25 B.R. 924
prevail under 84-9-307(1). In his treatise, The Law (Bankr.Tenn.1982), are distinguishable from the
of Secured Transactions Under the Uniform Com- usual case. Typically, the entruster and the holder
mercial Code ¶ 3.4[3] (1985 Cum.Supp. No. 3), of the security interest are separate entities with the
Professor Barkley Clark recognizes that an entrust- security holder not involved in the entrustment. In
ment theory may be applicable, even when such a case the security interest would continue in
84-9-307(1) is not applicable: the goods because under K.S.A. 84-2-403(2) only
the “rights of the entruster” would be transferred.
“But even if the buyer in ordinary course loses Here, however, the security holder is the entruster
his protection under § 9-307(1) because the se- and its rights as such are transferred to the buyer.
curity interest was created further up the line, he
may be able to prevail on a different theory. This [5] For K.S.A. 84-2-403(2) to be applicable, three
is what happened in In re Woods, where the buy- steps are required: (1) An entrustment of goods to
er discovered that a bank had a perfected security (2) a merchant who deals in goods of that kind fol-
interest in the collateral created by a previous lowed by a sale by such merchant to (3) a buyer in

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

715 P.2d 381 Page 8
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

ordinary course of business. that the tractors would remain in the Tri-County lot.
The fact that EFS expected Mohr-Loyd to eventu-
Neither party argues Tri-County is not a “merchant ally lease the tractors to farmers is immaterial. We
who deals in goods of that kind,” but they disagree conclude the tractors were entrusted to Tri-County
as to whether EFS entrusted the tractors to Tri- by EFS.
County and whether one of the transferees was a
buyer in the ordinary course of business. EFS next contends that even if an entrustment oc-
curred, the Johnson County District Court improp-
*817 The first question for our consideration is erly applied K.S.A. 84-2-403(2) to the transaction
whether EFS entrusted the goods to Tri-County. As involving Riverview Farms because Riverview
noted earlier, “entrusting” is defined at K.S.A. Farms **388 was not a buyer in ordinary course of
84-2-403(3) and includes “any delivery and any ac- business. There is no dispute that Allen and
quiescence in retention of possession.” Thompson Implement were buyers in ordinary
course of business.
In support of their theory of entrustment, appellees
point out that although EFS purchased the tractors [8] K.S.A. 84-1-201(9) defines “buyer in ordinary
from Tri-County, it did not take possession of them. course of business”:
Nor did EFS segregate the tractors from Tri-
County's other inventory, identify the tractors in “ ‘Buyer in ordinary course of business' means
any way as EFS's property, or otherwise manifest a person who in good faith and *818 without
any sign of ownership which would be evidence to knowledge that the sale to him is in violation of
a subsequent purchaser. Appellees contend that by the ownership rights or security interest of a third
its lack of action, EFS acquiesced in Tri-County's party in the goods buys in ordinary course from a
retention of possession of the tractors. person in the business of selling goods of that
kind.... ‘Buying’ may be for cash or by exchange
On the other hand, EFS argues that the mere fact of other property or on secured or unsecured
that EFS did not take possession of the tractors credit and includes receiving goods or documents
does not justify the conclusion that EFS acquiesced of title under a preexisting contract for sale but
in the retention of possession of the tractors by Tri- does not include a transfer in bulk or as security
County. EFS contends that once it leased the tract- [for] or in total or partial satisfaction of a money
ors to Mohr-Loyd Leasing with the understanding debt.”
and representation by Mohr-Loyd that the tractors
would be leased out to farmers, it became im- “Good faith” is defined at K.S.A. 84-1-201(19): “
possible for EFS to acquiesce in the retention of ‘Good faith’ means honesty in fact in the conduct
possession of the tractors by Tri-County. or transaction concerned.”

[6] The reason possession was left with the mer- First, EFS argues the model No. 8640 tractor was
chant-seller is immaterial under the Code. 3 Ander- not acquired by Riverview Farms for cash or other
son, Uniform Commercial Code § 2-403:42, pp. valid consideration. Rather, EFS contends the tract-
592-93. The entrustment definition specifically or was acquired by utilizing $30,000 of credit owed
provides that an entrustment can occur “regardless to Riverview Farms by Tri-County. This contention
of any condition expressed between the parties to is based on the fact that in March of 1982, River-
the delivery or acquiescence....” K.S.A. view Farms received two checks from Tri-County
84-2-403(3). totalling nearly $30,000. Ted Morse, one of the
partners in Riverview Farms, was unable to explain
[7] Thus, the key factor here is EFS's knowledge why the checks were given to Riverview Farms. A

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

715 P.2d 381 Page 9
238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42 UCC Rep.Serv. 1185
(Cite as: 238 Kan. 809, 715 P.2d 381)

few months later in August 1982, Riverview Farms EFS may be estopped from claiming any interest in
delivered a model No. 8630 tractor to Tri-County to the tractors. We need not discuss this issue since
be sold by Tri-County. the case is resolved by our application of the en-
trustment provisions of K.S.A. 84-2-403(2) and (3).
Appellees argue Riverview Farms acquired the
model No. 8640 tractor in an even exchange for the The judgments of the trial courts are affirmed.
No. 8630 tractor. They concede Tri-County initially
offered to sell the No. 8640 tractor to Riverview Kan.,1986.
Farms for a trade-in of the No. 8630 tractor plus Executive Financial Services, Inc. v. Pagel
$10,000. Later, however, Tri-County agreed to ac- 238 Kan. 809, 715 P.2d 381, 59 A.L.R.4th 553, 42
cept the No. 8630 tractor in an even exchange for UCC Rep.Serv. 1185
the No. 8640 tractor. Appellees explained the
END OF DOCUMENT
$30,000 payment to Riverview Farms as credit re-
ceived when Tri-County sold a No. 7020 tractor
and disc which Riverview Farms had traded to Tri-
County.

K.S.A. 84-1-201(9) specifically provides that a

transfer in total or partial satisfaction of a money
debt does not give the purchaser the status of a
“buyer in ordinary course.” Thus, if Riverview
Farms acquired the No. 8640 tractor as the result of
a credit obtained initially for the model No. 8630
tractor and the extinguishment of a money debt, it
did not have “buyer in ordinary course” status.
However, if Riverview Farms acquired the No.
8640 tractor in an even exchange for the No. 8630,
it did have buyer in ordinary course status since
84-1-201(9) includes an exchange within the defini-
tion of “buying.”

The Johnson County District Court made specific

findings that Riverview Farms had no actual notice
that Mohr-Loyd Leasing existed, that Mohr-Loyd
leased the No. 8640 tractor from EFS, or *819 that
EFS claimed any interest in the tractor. We con-
clude the facts justify the district court's ruling that
Riverview Farms, like Thompson, Pagel and Allen,
was a buyer in ordinary course of business.

We hold all three tractors were entrusted to Tri-

County, a merchant who deals in tractors, by EFS
and then sold to Allen, Thompson Implement and
Riverview Farms in ordinary course of business.

A final issue presented by this appeal is whether

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.