84-1-203. Lease distinguished from security interest. (a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
(b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
(1) The original term of the lease is equal to or greater than the remaining economic life of the goods;
(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
(c) A transaction in the form of a lease does not create a security interest merely because:
(1) The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
(2) the lessee assumes risk of loss of the goods;
(3) the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
(4) the lessee has an option to renew the lease or to become the owner of the goods;
(5) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
(6) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
(d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
(1) When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
(2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
(e) The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.
History: L. 2007, ch. 89, § 11; July 1, 2008.
KANSAS COMMENT, 1996
1. This section, for the first time in a statute, imposes the obligation of good faith in every contract under the Code. It has proven to be one of the most far-reaching sections in the entire Code. Restatement (Second) Contracts § 205 (1981) has adopted this rule for all contracts. Note the specific definitions of "good faith" for Article 3 (84-3-103(a)(3)) and for Article 4 (84-4-104(c)).
2. The obligation of good faith has been a part of commercial transactions in the past. However, most discussion of good faith was found in cases dealing with such commercial settings as good faith purchase and holder in due course. See 84-2-403(1) and 84-3-302; see also Iola State Bank v. Bolan, 235 K. 175, 679 P.2d 720 (1984); Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 K. 41, 708 P.2d 494 (1985) . In these settings, the question whether a purchaser or holder took in good faith was frequently wrapped up with the question of notice. See, for example, Kaw Valley State Bank & Trust Co. v. Riddle, 219 K. 550, 547 P.2d 927 (1976). Under the Code much more is involved, and the obligation of good faith is imposed in all types of commercial contracts. The courts have applied this provision in diverse settings, including sales contracts under Article 2, see Wendling v. Puls, 227 K. 780, 610 P.2d 580 (1980), and security agreements under Article 9, see Pedi Bares, Inc. v. First Nat'l Bank of Neodesha, 223 K. 477, 575 P.2d 507 (1978).
3. This section speaks of good faith only in the "performance or enforcement" of a contract. Thus, the obligation of good faith does not extend to matters of contract formation. E.g., Meyer v. Sandhills Beef, Inc., 211 Neb. 388, 318 N.W.2d 863 (1982). Courts have, however, construed what constitutes the "performance and enforcement" of a contract generously and applied the good faith obligation broadly under the Code. The duty of good faith applies to negotiating a final contract after agreeing in a letter agreement to negotiate toward a final contract, see Kansas Mun. Gas Agency v. Vesta Energy Co., 843 F. Supp. 1401 (D. Kan. 1994); modification of ongoing contracts, see A&G Constr. Co., Inc. v. Reid Bros. Logging Co., Inc., 547 P.2d 1207 (Alaska 1976); the exercise of Code remedies, see Scherman v. Kansas City Aviation Center, 1994 U.S. Dist. LEXIS 17346 (D. Kan. 1994), aff'd mem., 83 F.3d 433 (10 th Cir. 1996); warranty disclaimers and remedy limitations, see Schroeder v. Fageol Motors, Inc., 80 Wash.2d 256, 544 P.2d 20 (1975); termination of sales contracts, see Baker v. Ratzlaff, 1 K.A.2d 285, 564 P.2d 153 (1977); reclamation of goods from an insolvent buyer, see In re Creative Bldgs., Inc., 498 F.2d 1 (7 th Cir. 1974); warehousing transactions, see Mitchell v. Bailey & Selover, Inc., 605 P.2d 1138 (Nev. 1980); the enforcement and priority of security agreements, see Thompson v. U.S., 408 F.2d 1075 (8 th Cir. 1969); repossession and care of collateral, see Farmers State Bank in Afton v. Ballew, 626 P.2d 337 (Okla. App. 1981); and a bank's duty under a letter of credit, see Lustrelon, Inc. v. Prutscher, 178 N.J. Super. 128, 428 A.2d 518 (1981).
4. The term "good faith" is defined in 84-1-201(19), and means "honesty in fact in the conduct or transaction concerned," a subjective standard. See Kansas Comment 1996 to 84-1-201(19). In cases under Article 2 when merchants are involved, there is a higher, objective standard of good faith. See 84-2-103(1)(b) (imposing on merchants the duty to observe reasonable commercial standards of fair dealing in the trade); see also Kansas Comment 1996 number 3 to 84-2-103.
5. Under 84-1-102(3), the obligation of good faith may not be disclaimed by agreement; however, the parties may, by agreement, determine the standards by which good faith is to be measured as long as the standards are not manifestly unreasonable.
Revisor's Note:
Former section 84-1-203 was repealed by L. 2007, ch. 89, § 49 and the number reassigned to the current text.
Law Review and Bar Journal References:
"Secured Transactions in Kansas: The New Look," J. Eugene Balloun, 5 W.L.J. 192, 194, 198 (1966).
1963-65 survey of secured transactions, J. Eugene Balloun, 14 K.L.R. 359, 360 (1965).
Applicability as "good faith" limitation on K.S.A. 84-9-308 questioned, Charles H. Oldfather, 14 K.L.R. 571, 581 (1966).
"URLTA, Kansas, and the Common Law," Michael J. Davis, 21 K.L.R. 387, 393 (1973).
"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 311 (1979).
"Uniform Commercial Code: Aspects of a Commercially Reasonable Sale of Repossessed Property," Jon D. Graves, 19 W.L.J. 123, 124 (1979).
"Punitive Damages in Contract Actions—Are the Exceptions Swallowing the Rule?" Randy L. Sassaman, 20 W.L.J. 86, 96 (1980).
"Too Much Good Faith in Real Estate Purchase Agreements? Give Me an Option," Harvey L. Temkin, 34 K.L.R. 43, 54 (1985).
"Commercial Law—Commercially Unreasonable Foreclosure Sales in the Context of a Surety Relationship—United States v. Lattauzio," John S. Clifford, 34 K.L.R. 175, 181 (1985).
"Lender Liability: A Survey of Theories, Thoughts and Trends," Troy H. Gott and William L. Townsley III, 28 W.L.J. 238, 241, 272 (1988).
CASE ANNOTATIONS
Annotation to former K.S.A. 52-502:
1. Clerical error did not prevent intended endorsee from being holder in due course. Swanson v. Fuline Corporation, 248 F. Supp. 364, 365, 370.
Annotations to K.S.A. 84-1-203:
2. Duty of payor bank, where check presented for payment and drawer has insufficient funds on deposit, to give timely notice of dishonor just once to party presenting check for payment. Leaderbrand v. Central State Bank of Wichita, 202Kan. App. 2d450, 459, 450P.2d 1.
3. Defendant breached good faith; termination of contract is "performance" or "enforcement" of contract. Baker v. Ratzlaff, 1 Kan. App. 2d 285, 288, 289, 564P.2d 153.
4. Applied in determining that summary judgment would not stand; issues of fact to be resolved. Pedi Bares, Inc. v. First National Bank, 223Kan. App. 2d477, 482, 575 P.2d 507.
5. Every duty in U.C.C. imposes obligation of good faith in performance. Wendling v. Puls, 227Kan. App. 2d780, 784, 610 P.2d 580.
6. Cited by dissent where court found no breach of contract between general contractor and subcontractor on highway project. Meier's Trucking Co. v. United Constr. Co., 237Kan. App. 2d692, 699, 704 P.2d 2 (1985).
7. Where no duty exists to give notice, failure to do so cannot be construed as bad faith. Utility Trailers of Wichita, Inc. v. Citizens Nat'l Bank & Tr. Co., 11 Kan. App. 2d 421, 424, 726 P.2d 282 (1986).
8. Cited; breach of good faith and fair dealing noted where supplier entered into contract by bribing manufacturer's employee. NL Industries, Inc. v. Gulf & Western Industries, 650 F. Supp. 1115, 1133 (1986).
9. Cited; implied covenant of good faith and fair dealing in area of termination of employment contracts examined. Morriss v. Coleman Co., 241Kan. App. 2d501, 514, 738 P.2d 841 (1987).
10. Cited; circumstances indicative of duty to exercise good faith examined. Riley State Bank v. Spillman, 242Kan. App. 2d696, 705, 750 P.2d 1024 (1988).
11. Implied duty of good faith in performance or enforcement of contracts does not override express contract terms. General Aviation, Inc. v. Cessna Aircraft Co., 703 F. Supp. 637, 643 (W.D. Mich. 1988).
12. Mentioned in discussion regarding whether breach of duty of good faith is a duplicative claim. Rupe v. Triton Oil and Gas Corp., 806 F. Supp. 1495, 1504 (1992).
13. Whether issue of breach of duty of good faith by supplier in negotiating final contract precluded summary judgment examined. Kansas Mun. Gas Agency v. Vesta Energy Co., Inc., 840 F. Supp. 814, 820 (1993).
14. Whether bank's position customer was liable for checks forged by customer's employees violated good faith duty examined. In re Mid-American Clean Water Systems, Inc., 159 B.R. 941, 946 (1993).
15. Whether proof of dishonesty on part of secured party precluded summary judgment in good faith breach claim examined. Gillenwater v. Mid-American Bank & Tr. Co., 19 Kan. App. 2d 420, 426, 870 P.2d 700 (1994).
1. Lessee's furniture and television leases were leases rather than security interests, as leases could be cancelled any time without penalty by surrendering or returning the property. In re Wade, 501 B.R. 870 (Bkrtcy. D. Kan. 2013).
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