Woodson v. Tom Bell Leasing (In Re Breece)

Citations: 58 B.R. 379; 1 U.C.C. Rep. Serv. 2d (West) 516; 1986 Bankr. LEXIS 6590Docket: 19-10418

Court: United States Bankruptcy Court, N.D. Oklahoma; March 4, 1986; Us Bankruptcy; United States Bankruptcy Court

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In the case of *In re Patricia Ruth Breece*, the United States Bankruptcy Court for the Northern District of Oklahoma addressed a dispute between Fred W. Woodson, the Trustee, and Tom Bell Leasing regarding the priority of interests in three motor vehicles owned by the debtor, Patricia Ruth Breece. The central issue was whether the agreements for the vehicles, which Tom Bell Leasing characterized as leases, should be considered unperfected security agreements due to the lack of filed financing statements in Oklahoma.

The debtor filed for Chapter 7 bankruptcy on July 17, 1980, at which point she possessed a 1978 GMC van, a 1978 Chevrolet pickup, and a 1979 Pontiac Bonneville, all acquired from Tom Bell Leasing through agreements dated in 1978. The Trustee, who was appointed to manage the bankruptcy estate, objected to Tom Bell Leasing's claim of a perfected security interest in these vehicles, asserting that it should be treated as unsecured due to the absence of any recorded security interest.

Tom Bell Leasing had filed a secured claim for $14,265.59, citing these vehicles as collateral. However, the Trustee sold the vehicles for $9,200, deducting storage and auction costs before retaining the remaining funds pending the outcome of the dispute. The parties entered a stipulation of facts and issues, and the Trustee subsequently filed a motion for summary judgment, which was responded to by Tom Bell Leasing. The court would determine the matter based on stipulated facts and undisputed records, with the written agreements attached to the stipulation being complex and primarily uniform apart from completed details.

The "Lease Agreement" between Tom Bell Leasing (Lessor) and Tailored Tuff Ornamental Iron (Lessee), represented by Patricia Ruth Breece, stipulates that the title remains with the Lessor and grants the Lessee no rights beyond those defined in the lease. The agreement explicitly prohibits any option to purchase the vehicle. Insurance responsibilities can be assigned to either party, but in all three agreements, the Lessee is responsible for obtaining insurance. The Lessee must indemnify the Lessor for losses related to vehicle operation, cover all maintenance and repair costs, and pay all associated licenses, taxes, and fees, though sales tax is not specifically mentioned.

The lease includes a mileage charge for exceeding a designated allowance and has fixed terms with monthly payments labeled "Fixed Monthly Rental." Payments primarily reduce a "Cash Value," with any remaining "maximum amount of liability of the Lessee" applicable if the vehicle is sold after the lease term. Specific agreements detail terms for three vehicles, including "Cash Value," monthly rental amounts, and the total credits over the lease duration.

The lease can be terminated early with Lessor's consent, requiring the Lessee to cover accrued rental and any shortfall if the sale proceeds do not meet the "Cash Value." A motion for summary judgment may proceed if there are no disputed facts and the moving party is entitled to judgment. The parties agree there are no disputes regarding the lease terms, raising the question of whether these terms justify the Trustee's request for judgment. Prior to July 1, 1979, a security interest in such vehicles under Oklahoma law was perfected through a financing statement as per the Oklahoma Uniform Commercial Code.

After July 1, 1979, a security interest can only be perfected in Oklahoma through the delivery of a lien entry form to the Oklahoma Tax Commission or its agents, according to 12A O.S.A. 9-302(3) and (4) and 47 O.S.A. 23.2b(A). A security interest properly perfected before this date remains effective or can be re-perfected by lien entry, as stated in 47 O.S.A. 23.2b(D) and 12A O.S.A. 9-403(3). Tom Bell Leasing has not perfected any security interest in vehicles involved in this case, making its claim inferior to that of the Trustee under 11 U.S.C. 544 and 12A O.S.A. 9-301(1)(b). However, since an owner-lessor is not required to perfect an interest in its own property, any vehicles owned by Tom Bell Leasing are excluded from the bankruptcy estate.

The crux of the matter is whether the agreements transferring possession and use of these vehicles indicate that Tom Bell Leasing retained a lessor's ownership interest or merely a security interest. Although labeled as a "Lease," the court must determine if this agreement was intended to create a security interest, considering the form and substance of the transaction. The court will rely on the facts of each case, as determined by the objective nature of the transaction rather than the subjective intent of the parties. The Court of Appeals has established a "four-step approach" for assessing whether a lease is intended as security, which ultimately simplifies to a two-part test: (1) the presence of a purchase option allowing the lessee to acquire ownership for nominal consideration; or (2) other facts revealing economic realities indicative of a secured transfer of ownership. In this case, as there is no purchase option, the evaluation will focus on the second aspect, determining whether the lease terms alone suggest a secured transfer of ownership.

In the case of In re Tulsa Port Warehouse Co. Inc., a dispute arose over the nature of four agreements between the Debtor and Chuck Naiman Buick Co. and General Motors Acceptance Corp. regarding vehicle possession. The Trustee claimed these agreements constituted purchases with an unperfected security interest, while the other parties argued they were merely leases. The Court examined whether the agreements, labeled as "Non-Maintenance Lease Agreements," were true leases or disguised sales, applying the second test from In re Fashion Optical, Ltd. 

The Court concluded that the agreements were, in fact, sales disguised as leases since the economic realities indicated a secured transfer of ownership. Key factors leading to this determination included: (1) the lessee assumed all ownership responsibilities and risks associated with the vehicles, holding all incidents of ownership aside from legal title; (2) the lease's termination provisions eliminated any reversionary interest for the lessor, granting the lessee an equity interest in the vehicles; and (3) the overall economic structure of the transactions resembled secured sales rather than traditional leases. A minor factor that suggested a true lease was deemed insignificant. The legal implications of these findings were pivotal for determining the applicability of the Tulsa Port precedent to the current case.

Lessee's financial responsibilities extend beyond periodic rental payments to include a significant lump-sum payment after the lease term ends. Upon termination, the lessee must return the vehicle to the lessor, who is obligated to sell it. The proceeds from the sale will be applied against the lessee's outstanding liability, with any shortfall to be covered by the lessee and any surplus returned to the lessee. The lessee has the option to terminate the lease early, but the same selling provisions apply, with the residual liability calculated using the "Rule of 78s." The lease structure indicates that the lessor forfeited any future control over the vehicle and its proceeds, which are only accessible to cover the lessee's obligations. This arrangement shifts the risk of loss and potential gain to the lessee. The legal precedent established in *In re Tillery* indicates that such termination clauses create an equity interest for the lessee, suggesting the transaction resembles a sale rather than a lease. Ultimately, under the "open-end" provisions of the Tulsa Port leases, the lessor can only recover and manage the vehicle to the extent necessary to fulfill the lessee's financial obligations, reflecting a security interest rather than ownership. Additionally, the economic terms of the lease involve a complex calculation that includes the original vehicle value, agreed depreciation, and the total fixed monthly rentals, determining how any sale proceeds are allocated between the parties.

Monthly Rental is determined by adding "Total Rentals To Be Credited" and "Total Rentals NOT To Be Credited," then dividing by the number of months in the lease term. Contrary to typical lease agreements, the lease structure guarantees the lessor specific amounts: the "Agreed Depreciated Value," "Total Rentals To Be Credited," and "Total Rentals NOT To Be Credited," which together equate to the "Original Value." The lessor's expectations consist of the Original Value and the Total Rentals NOT To Be Credited, which represents undisclosed ordinary interest. The lease terms indicate that these figures are fixed and not derived from other elements. The court found that the Original Value correlates with the retail value and that the Total Rentals NOT To Be Credited reflects interest, determined through the "Rule of 78s" for finance charge adjustments. Thus, the lessor's total expectation and lessee's maximum obligation amount to the retail value plus interest. 

The court concluded that the lessee's payment obligation resembles a note for the retail value plus financing charges, paid in monthly installments with a balloon payment at the end. The arrangement effectively mirrors a purchase and subsequent sale of the vehicle, with no economic distinction between this lease structure and a secured property transfer, as acknowledged by the defendants. This led to the conclusion that the lease agreements function as an elaborate fiction akin to a retail automotive sale. 

In contrast, the Tulsa Port agreements imposed an "Excess Mileage Charge," but there was no evidence of its application, making its relevance unclear. The current agreements place significant ownership responsibilities on the lessee, including insurance and maintenance, similarly to those in the Tulsa Port case.

Tom Bell Leasing is given the benefit of the doubt regarding the non-payment of sales tax on transactions. The court assumes no sales tax was paid by either party, which may affect the legal interpretation of the transactions compared to prior cases, specifically Tulsa Port. In Tulsa Port, sales tax was discussed in relation to ownership incidents rather than as an admission of sale; thus, the absence of sales tax does not exclude this case from the Tulsa Port ruling. 

The agreements stipulate that vehicles are to be returned to the lessor upon termination, with an obligatory sale of the vehicles and allocation of proceeds against the lessee's residual liability. This structure indicates that the lessor has no reversionary interest in the vehicles and that the lessee has equity in them, suggesting the agreements function more like secured sales rather than true leases.

Regarding economic equivalence to a sale, the current agreements must demonstrate elements comparable to those in Tulsa Port for the motion for summary judgment to be granted. The terms "Cash Value" and "Total Rental, not to be credited against cash value" in the current agreements are deemed analogous to "Original Value" and "Total Rental NOT Credited Against Original Value" from Tulsa Port. However, unlike Tulsa Port, the current agreements lack definitive terms that clarify what "Cash Value" represents. Additionally, the absence of extrinsic evidence—such as retail prices of comparable vehicles—further complicates establishing the necessary economic equivalence. The previous case also indicated that interest was associated with rental credits, a detail not present here.

No giveaway is evident in the agreements under review. In Tulsa Port, trial evidence included finance charges from comparable retail sales, but such evidence is absent in the current motion for summary judgment. The motion can only proceed if the differences in available facts are not legally significant. The central issue is whether the amount owed by the lessee to the lessor in Tulsa Port could be less than the retail price plus interest, despite the absence of certain lease terms and external evidence.

The Tulsa Port agreements established a framework of rights and obligations where all ownership incidents, except bare legal title, were assigned to the lessee. The lessor's profit and the lessee's liability were predetermined, and the lessor was required to dispose of the chattel under "open-end" termination, while the lessee bore the risk of loss and potential gain. This raises the question of whether the amount due could logically be anything other than the retail price plus interest. If it were less, the lessor would effectively sell the car for less than its value, while if it were more, the lessee would incur expenses without ownership benefits, leading to commercially nonsensical outcomes.

The established rights and obligations in the Tulsa Port agreements serve as evidence that the monetary values involved equate to retail price plus interest. Other corroborative evidence, such as suggestive terms in the agreements or comparative sales data, is seen as redundant. Judge Rutledge allowed a trial to reinforce an already supported conclusion based on the agreements themselves. The current agreements mirror the Tulsa Port agreements in terms of rights and obligations, indicating an economic equivalence to sales, thus shifting the burden of proof to the opposing party regarding the summary judgment.

Additionally, the current agreements include provisions for excess mileage charges, which were deemed "inexplicable" in Tulsa Port and can similarly be disregarded here. Defendant Tom Bell Leasing argues that this case can be distinguished from Tulsa Port, claiming it represents a true lease transaction.

Tom Bell Leasing argues that the agreements in question should be classified as leases based on their characteristics, including being labeled "Lease," lacking a purchase option, and stipulating that the lessee holds no rights beyond leasing. The agreements also allow for early termination and require comprehensive insurance, placing the risk of loss on the lessee. However, these features are similar to those in the Tulsa Port agreements, which the court finds relevant. The court concludes that the arguments presented fail to distinguish this case from the Tulsa Port precedent, which dictates that the agreements should be viewed as security transactions rather than true leases. Consequently, the agreements are deemed not legally distinguishable from those in Tulsa Port, despite the absence of explicit sales tax payment provisions and certain suggestive language. The ruling aligns with the doctrine of stare decisis, confirming that these agreements were intended as sales, not leases, and were not perfected as security interests. The Trustee is thus granted summary judgment in their favor.