Unpublished Disposition, 889 F.2d 1096 (9th Cir. 1982)

MEMORANDUM^* 

This appeal concerns the rights of Debtor-Appellant Roberts Holiday Lines, Inc. ("Debtor") and Appellees Roberts Tours and Transportation, Inc. and Roberts Hawaii, Inc. ("Tours/Hawaii"), under an "Equipment Lease Agreement" ("1980 Agreement") involving the rental of five buses for a five-year term commencing on October 10, 1980, at $1,700 per bus per month. The 1980 Agreement contained an option clause, permitting the Debtor to purchase each bus for a $20,000 option price upon the satisfaction of several conditions precedent: (1) all rents were paid, (2) sixty days written notice was given prior to the expiration of the 1980 Agreement, and (3) the total purchase price was tendered thirty days prior to the termination of the 1980 Agreement.

In this chapter 11 proceeding, the Debtor's "Motion to Exercise Rights Under Security Agreement and Tender Purchase Price" was denied by the bankruptcy court. The bankruptcy court found that sixty days written notice was untimely, the option purchase price for the five buses was refused because it was also tendered late, and the 1980 Agreement was a lease and not a security agreement. The Bankruptcy Appellate Panel ("BAP") affirmed, denying the Debtor's argument (1) that the 1980 Agreement was a security agreement, and (2) that a course of dealing and course of performance was established requiring Tours/Hawaii to accept the late option payment. We affirm.

STANDARD OF REVIEW AND JURISDICTION

Decisions of the BAP are reviewed de novo. In re Windmill Farms, Inc., 841 F.2d 1467, 1469 (9th Cir. 1988). Findings of fact of the bankruptcy court are reviewed under the clearly erroneous standard. Id. The bankruptcy court's conclusions of law are reviewed de novo. Id.

We have jurisdiction under 28 U.S.C. §§ 158(d), 1291.

DISCUSSION

I. Course of Dealing and Course of Performance

Under the Uniform Commercial Code in Hawaii,¹  an agreement consists of the express terms and any "course of dealing," "course of performance," and "usage of trade" which may properly "supplement or qualify" the terms of the agreement. Haw.Rev.Stat. Sec. 490:1-205; see also id. Secs. 490:1-201(3), 2-208; accord Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772, 794-95 (9th Cir. 1981). This supplementation and qualification of the express terms requires that any course of dealing or course of performance construction be reasonable and consistent with the express terms. Haw.Rev.Stat. Secs. 490:1-205(4), 490:2-208(2).

Course of dealing is defined as "a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." Haw.Rev.Stat. Sec. 490:1-205(1). While course of dealing concerns conduct before the agreement is entered, course of performance involves the parties' conduct after entry under the agreement. See 1 J. White & R. Summers, Uniform Commercial Code Sec. 3-3, at 133 (3d ed. 1988). As the statute provides:

Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.

Haw.Rev.Stat. Sec. 490:2-208(1).

The Debtor argues that the bankruptcy court erred in excluding testimony of Robert McKeehan, an officer of the Debtor, concerning the exercise of the option under two 1976 Agreements.²  The trial court excluded the testimony on this issue because it found that evidence of the exercise of only one prior option did not establish a course of dealing. The court also distinguished the many late monthly rental payments from the one option payment. In support of its argument, the Debtor relies on Nanakuli, 664 F.2d at 795, a case involving the Hawaii U.C.C., where the Ninth Circuit noted that evidence of "prior dealings are important to be admitted always."

The trial court correctly excluded the evidence of a single prior transaction, which cannot be "a sequence of previous conduct between the parties," as required under Haw.Rev.Stat. Sec. 490:1-205(1), or "repeated occasions for performance," under Haw.Rev.Stat. Sec. 490:1-2-208(1). See Kern Oil & Refining Co. v. Tenneco Oil Co., 792 F.2d 1380, 1385 (9th Cir. 1986) (affirming exclusion of "course of dealing" evidence under Texas U.C.C. where the evidence "related to the negotiation of a single prior contract") (emphasis added), cert. denied, 480 U.S. 906, 107 S. Ct. 1349, 94 L. Ed. 2d 520 (1987); 1 J. White & R. Summers, Uniform Commercial Code Sec. 3-3, at 131 (3d ed. 1988) (noting that "a single occasion cannot constitute a sequence and therefore cannot be a course of dealing") (emphasis in original); Nanakuli, 664 F.2d at 794 (" [O]ne instance does not constitute a course of performance."); 1 J. White & R. Summers, Uniform Commercial Code Sec. 1-6, at 68 (3d ed. 1988) (noting a course of performance requires " 'repeated occasions for performance', not merely a single instance"). The record does not reveal any offer of proof by the Debtor which would otherwise properly establish a course of dealing or course of performance between these parties on any other option payments.

C. Other Course of Dealing and Course of Performance Evidence

The Debtor argues that the history of late monthly bus rental payments accepted by Tours/Hawaii established a course of dealing and course of performance which contractually obligated Tours/Hawaii to accept the Debtor's late option payment. The Debtor concedes that this argument relies on a critical assumption: "that [the] late option payment [ ] would be accepted in the same manner as would late monthly [rental ] payments." Appellant's Opening Brief, at 28 (emphasis added).

The central question is whether the acceptance of late monthly rental payments under the 1976 and 1980 Agreements constitutes "repeated occasions," Haw.Rev.Stat. Sec. 490:2-208(1), or a "sequence," id. Sec. 490:1-205(1), to establish either a course of performance or course of dealing requiring the acceptance of the late option payment in the 1980 Agreement. The evidence of the late rental payments is a May 4, 1982 letter from David Goya, the vice president of finance for Roberts Hawaii, Inc., to Robert Fawcett, President of Debtor, which states in pertinent part: "Your payments have always been consistently late." This letter references late monthly payments under both the 1976 and 1980 Agreements.

The rental and option payments were sufficiently distinct so as not to permit an inference of either a course of dealing or performance. The rental and option obligations arise under separate provisions of the 1980 Agreement. Moreover, the exercise of the option can only be properly accomplished upon the satisfaction of express conditions precedent. Further, even if the late rental payments were found to be a course of dealing or a course of performance for the late option payment, the Debtor still failed to satisfy the condition precedent of timely written notice. For these reasons, we deny the Debtor's argument.

We find other arguments presented by the Debtor under this issue unpersuasive.

The bankruptcy court found the 1980 Agreement was a lease agreement and not a security agreement under Haw.Rev.Stat. Sec. 490:1-201(37). As discussed above, we agree with BAP that regardless of whether the arrangement may be characterized as a security agreement or lease, the Debtor failed to satisfy the conditions precedent under the purchase option. At oral argument, counsel for Tours Hawaii suggested that resolution of whether the 1980 Agreement was a lease or security agreement would be necessary for determining whether the use of buses at the expiration of the contract is an administrative expense or an unsecured claim.

Assuming that it may be necessary to resolve this question for that purpose, we conclude that the bankruptcy court's determination that the transaction was a lease is affirmed. The touchstone of the Uniform Commercial Code provision adopted by Hawaii in section 490:1-201(37) is the intent of the parties. The bankruptcy court carefully reviewed the transaction in light of factors enumerated primarily in In re Pacific Express, Inc., 780 F.2d 1482, 1485 (9th Cir. 1986), and found that the parties intended the transaction to be a lease. This finding is not clearly erroneous.

CONCLUSION

We agree with the BAP that the judgment of the bankruptcy court should be affirmed.

AFFIRMED.