General Electric Credit Corp. v. Tenna Corp. (In re Tenna Corp.)
Docket: Bankruptcy, No. B 79-2521; Adv. No. B 80-0226
Court: United States Bankruptcy Court, N.D. Ohio; January 28, 1981; Us Bankruptcy; United States Bankruptcy Court
General Electric Credit Corporation (GECC) filed a complaint against Tenna Corporation (TENNA) following TENNA’s Chapter 11 bankruptcy filing, seeking reclamation or relief related to manufacturing equipment transactions. TENNA counterclaimed, asserting that GECC is not entitled to relief because the transactions violated the Ohio Retail Installment Sales Act (ORISA). The court must determine whether the agreements labeled as 'Lease Agreements' are actually loans, as GECC contends, or sales subject to ORISA penalties, as claimed by TENNA.
The facts, agreed upon by both parties, indicate that GECC offered various financing structures, and TENNA chose a lease with an option to purchase. Relevant documents include two chattel lease agreements, promissory notes, purchase agreements, and financing statements. GECC fully paid the manufacturers for the equipment delivered to TENNA, while TENNA made partial payments to GECC, including sales tax, but no further payments were made after the initial sums related to the first lease agreement. The court has attached all stipulated documents for reference.
Tenna was required to include Ohio Sales or Use taxes at a rate of 5.5% on monthly installments related to Exhibit 'S-1', totaling thirty-two installments of $302.67 each and a final installment of $303.67, amounting to $319.32 monthly for thirty-two months and $320.37 for the last payment. If the transaction was categorized as a lease, the total Ohio Sales or Use tax would be $599.45; if classified as a sale, the tax would be $497.20. Tenna did not make further payments related to Exhibit 'S-5' after an initial payment of $13,693.80. Had payments continued, they would have amounted to eighty-two installments of $2,375.35 and a final payment of $2,376.76, exclusive of Ohio Sales or Use Taxes, which Tenna claimed to be exempt from due to manufacturing use. If not exempt, the total tax on these payments would be $11,597.18 as a lease and $7,531.59 as a sale.
The document also outlines finance charge computations for Exhibit 'S-1' based on a 33-month amortization schedule with a cash price of $9,040.00, resulting in a total time price of $10,888.09, indicating a discrepancy of $3.03 over the finance and service charges. For Exhibit 'S-5', based on an 83-month amortization schedule, the cash price was $136,938.00, leading to a total time price of $205,281.01 and a discrepancy of $5,562.25 over the finance and service charges. Additionally, the calculations for Exhibit 'S-9' included interest charges without adjusting the principal related to the initial payment of $13,693.80.
Predicated on Exhibit 'S-9', without the Plaintiff admitting that the transaction in Exhibit 'S-5' qualifies as a Retail Installment Sale, the financial components include a Cash Price of $136,938.00, Down Payment of $13,693.80, Unpaid Balance of $123,244.20, Official Fees of $6.00, Finance Charge of $69,015.75, Service Charge of $147.00, and a Total Time Price of $206,100.75. The Time Balance is stated to be $819.74 higher than previously noted in paragraph 17, with an interest rate of 8.096% add-on, and an 8% add-on rate if payments extended to 84 months. The parties are in disagreement over whether Exhibit 'S-9' corrects an alleged overcharge and whether the additional Ohio Sales and Use Taxes apply to leases or sales, potentially constituting a 'wilful overcharge' under Ohio Revised Code Section 1317.08.
The Proof of Claim (Exhibit 'S-10') asserts a principal balance related to transactions in Exhibits 'S-5' and 'S-1', deducting previous payments. Financing Statements for security interests in the chattel equipment were properly filed. GECC waives the right to collect interest exceeding 8% per annum post-maturity. All transactions are acknowledged as extensions of credit governed by Ohio law. The parties agree that the stipulated facts are comprehensive and waive the right to a jury trial or additional evidence unless requested by the Court. Key issues include whether the transactions are classified as loans or sales, if they are retail installment sales under ORISA, and whether GECC violated the statute. The focus is primarily on determining the classification of the transactions.
TENNA ordered equipment from manufacturers, leading to agreements for a Reader-Printer and a Conveyer Buffing Machine, along with a Stud Driving Machine. GECC paid the manufacturers in full upon delivery and subsequently entered into two 'Chattel Lease' agreements with TENNA, which included options to purchase the equipment for $1.00 at lease expiration. TENNA made a total of $1,210.68 in payments for the Reader-Printer and a $13,693.80 down payment for the other machines but made no further payments. TENNA filed for Chapter 11 on December 5, 1979, listing a debt of $206,842.30 owed to GECC.
The discussion highlights a lack of clear legal precedent in Ohio regarding ORISA (Ohio Revised Code, Section 1317.01) and emphasizes that ORISA pertains only to retail installment sales. The statute aims to delineate the interests of retail sellers from financing institutions, indicating that GECC, as a financing agent, is not subject to ORISA provisions. The statute limits the relationship between retail sellers and buyers and does not impact a buyer's dealings with financiers.
To ascertain whether GECC acted as a seller or a financing agent, the intent of the parties and the circumstances at the time of the agreements must be examined. Evidence suggests GECC had no direct dealings with manufacturers beyond payment for equipment ordered by TENNA. Both parties agree that the transactions represent security interests. OR.C. Section 1301.01 (KK) states that whether a lease is intended as security depends on the specific case facts, noting that an option to purchase does not automatically qualify a lease as a security interest. GECC's security interest alone does not invoke ORISA unless a retail sale occurred. The definition of a retail installment sale under ORISA encompasses contracts to sell goods with installment payment options, necessitating a determination of whether GECC sold the equipment to TENNA or merely financed the purchase.
The terms "contract for sale" and "sale" as defined in the Ohio Commercial Code apply equally to the context of ORISA. A "contract for sale" encompasses both immediate sales and future sales agreements, where a sale is characterized by the transfer of title from seller to buyer for a price. However, if a transaction is intended solely as a security transaction, it is not considered a sales agreement. In the case of GECC-TENNA transactions, they are identified as purchase money loans with retained security rather than sales. TENNA selected and ordered the merchandise, receiving it directly from the manufacturers, while GECC funded these purchases and secured a loan interest in the equipment.
Despite the appearance of a sale, GECC's intent was to act as a financing agent rather than a seller. Legal precedents indicate that similar transactions have been classified as loans rather than leases or sales contracts. Courts have determined that if the burdens of ownership rest on the lessee, despite the lessor holding legal title, the agreement may be deemed a loan. In this instance, TENNA is responsible for insurance, taxes, and any losses related to the equipment, while GECC's role is limited to ensuring repayment of the funds advanced. GECC does not engage in selling equipment, maintain an inventory, or advertise sales, reinforcing the conclusion that the transactions were loans for commercial equipment, with the actual sales occurring between TENNA and the manufacturers. GECC's involvement was strictly as a financial facilitator, having no contact with the manufacturers beyond funding the purchase.
ORISA does not apply to the GECC-TENNA agreements because they pertain to purchase money loans in commercial transactions rather than retail installment sales, and there is no evidence that GECC acted as a financing agent in sales between TENNA and manufacturers. Even if the transactions were considered sales, ORISA's purpose is to protect inexperienced retail buyers, not commercial transactions involving manufacturing equipment. The regulation aims to alleviate the economic burdens on low-income consumers misled by aggressive advertising tactics. The court distinguishes the context of the case In re Sloan, which pertains to consumer sales, from the commercial nature of the GECC-TENNA agreements. The court concludes that the transactions are loans for the purchase of commercial equipment, rendering ORISA inapplicable and making related issues moot. Additionally, the Revised Code clarifies that sections 1302.01 to 1302.98 apply only to transactions in goods and do not affect regulations governing sales to specific buyer categories.
