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Opinion No. 5232

October 10, 1977


Purchase of school buses by creation of a security interest


Purchase of school buses by creation of a security interest

The board of education of a school district may purchase a school bus without paying the full purchase price at the time of acquisition and execute a security interest, either in the form of a title retaining contract or a chattel mortgage, as security for repayment of the obligation.

Honorable Jerome T. Hart

State Senator

The Capitol

Lansing, Michigan

You have asked for my opinion as to whether a school district may purchase a school bus by creating a security interest therein as security for the balance of the unpaid purchase price.

Section 1341 of the School Code of 1976, 1976 PA 451, Sec. 1341; MCLA 380.1341; MSA 15.41341, authorizes school districts that furnish transportation to 'purchase buses on title-retaining contracts or by the issuance of obligations of the district therefor, pledging in payment general funds or state school aid.' 1 OAG, 1955-1956, No 2373, p 759 (December 19, 1955) ruled, under a comparable provision of the School Code of 1955, (1) that a school district was not authorized to issue a chattel mortgage to secure the unpaid balance of the purchase price of a school bus.

Michigan has adopted the Uniform Commercial Code (2) pursuant to which chattel mortgages and title-retaining contracts are both designated as 'security interests' and, as such, are given identical treatment.

Prior to the adoption of the Uniform Commercial Code, a legal difference between a chattel mortgage and a title-retaining contract was recognized, although both types of instruments were issued for the same purpose; i.e., to secure the payment of a debt by using tangible chattels as collateral. The difference was summarized in Burroughs Adding Machine Co v Wieselberg, 230 Mich 15, 19; 203 NW 160, 162 (1925), as follows:

'. . . If an instrument presents a case of security in the nature of a chattel mortgage, then it is to be held, when rights of third parties intervene, to come within the law relating to the recording of such an instrument. . . . The pure conditional sale gives possession of chattels with the right to ownership upon payment of the agreed price, retaining title in the seller with right of reclamation in case of default or the alternative of passing the title by suit for the purchase price. The right to retake the property, ratain payments made, estimate wear and tear, compute damage and look to the buyer for deficiency in the agreed price is consonant only with remedies under instruments providing for security in the nature of a chattel mortgage; for in such a case the security is but an incident of a debt absolutely due from the buyer to the seller. . . .'

Prior to the Uniform Commercial Code, the difference between a chattel mortgage and a title-retaining contract, insofar as it related to an installment seller's remedy, had been eliminated in the case of motor vehicles. 1939 PA 305. (3) Under the provisions of the Michigan Vehicle Code, 1949 PA 300, Sec. 37; MCLA 257.37; MSA 9.1837, a conditional sale vendee with the right to possession is deemed to be the owner of the motor vehicle. Thus, for all practical purposes in the case of the sale of a motor vehicle with the seller retaining an interest therein for security purposes, there was no difference between a chattel mortgage and a title-retaining contract as between the parties, and the one difference, the requirement of recording in the case of a chattel mortgage, had significance only where the interests of third parties were involved. Trailmobile, Inc v Wiseman, 244 F2d 76 (CA 6, 1957).

At the time of the writing of OAG, No 2373, supra, a title-retaining contract was recognized as a distinct form of security device from a chattel mortgage. Thus, when the Attorney General ruled in OAG, No 2373, supra, that the term title-retaining contract did not mean a chattel mortgage, he properly interpreted the statutory language in the frame of reference then existing.

The frame of reference, however, now has changed. Under the Uniform Commercial Code, there is one form of security device to create a secured obligation in personal property, and this security device is known as a 'security interest.' (4) The question, then, is one of legislative intent. The 'recourse is to ascribe to the Legislature what we believe to be its most probable and reasonable intention.' Board of Education of Oakland Schools v Superintendent of Public Instruction, 392 Mich 613, 619; 221 NW2d 345, 348 (1974).

It is clear that the legislature intended to authorize school districts to purchase buses by securing payment of the purchase price by a security device. Under the provisions of the Uniform Commercial Code, the only security device recognized is a 'security interest.' It is my opinion, therefore, that 1976 PA 451, Sec. 1341, supra, authorizes a school district to purchase a bus by the use of a security interest, that is, by granting to the seller a security interest in the purchased buses to secure the payment of the purchase price.

Frank J. Kelley

Attorney General

(1) 1955 PA 269, Sec. 594.

(2) 1962 PA 174, MCLA 440.1101 et seq; MSA 19.1101 et seq.

(3) This act was repealed by the Uniform Commercial Code.

(4) E.g., Uniform Commercial Code, Secs. 1201(37) and 9102 and the Commissioners' comments following Sec. 9101. See also, Nickell v Lambrecht, 29 Mich App 191, 199-200; 185 NW2d 155, 159-169 (1970).