Court: United States Bankruptcy Court, S.D. Georgia; December 1, 2000; Us Bankruptcy; United States Bankruptcy Court
Coastal Bank initiated a lawsuit against various defendants, including Case Credit Corporation, to ascertain the validity and priority of its floating lien on the equipment of Galbreath Clearing and Grading, Inc. Case Credit Corporation filed a Motion for Summary Judgment, claiming its purchase money security interest in specific collateral is superior to Coastal Bank's general lien. The parties agreed on numerous facts, which are documented in Exhibit “A.”
Coastal Bank's security interest in all equipment owned by Galbreath Clearing and Grading, Inc. is established through a note, security agreement, and UCC-1 financing statement dating back to August 1994, thus creating a perfected security interest. Case Credit Corporation's purchase money security interest originates from a transaction in October 1998, where Track and Tire, Inc. executed a retail installment contract and security agreement, transferring five pieces of equipment to Galbreath Clearing and Grading, Inc. This was subsequently assigned to Case, and the related security agreement was perfected with a UCC-1 filing on October 26, 1998.
Coastal Bank argues that this transaction does not qualify as a purchase money security interest due to an earlier lease agreement between Track and Tire, Inc. and Galbreath Trucking Company, executed on February 25, 1998. This lease outlines terms for equipment rental that convert to a financing arrangement after five months, with guarantees and conditions for financing approval, which could affect the classification of Case's interest.
The Equipment remains the exclusive property of Track and Tire, Inc. throughout the lease term, granting the lessee only possessory rights without any ownership interest. The lessee is prohibited from assigning any interest in the Equipment or the Lease, with any such attempt constituting a default. The lease initiated in February 1998 included five pieces of equipment previously financed in October 1998, plus three others repossessed by Track and Tire, Inc. The February lease stipulated $9,000 monthly payments and an irrevocable conversion to long-term financing, which was contingent upon credit approval from Case Credit Corporation, not Track and Tire, Inc. The lessee holds no property interest beyond possession, indicating the lease is a true lease. However, Track and Tire, Inc. filed a UCC financing statement late, undermining its claim to a perfected purchase money security interest against Coastal's prior lien.
To contest Case Credit Corporation's claim for a first perfected security interest from the October transaction, Coastal Bank must prove that the February lease was a conditional sale, not a true lease, that it was not timely perfected, and that Galbreath, Inc. is merely a fictitious trade name for Galbreath Clearing and Grading, Inc. If successful, it would demonstrate that the February lease was effectively a conditional sale lacking timely perfection, thus nullifying Case's claim. Case argues for summary judgment based on two theories: 1) that the lease was not an obligation of Galbreath Clearing and Grading, Inc., and 2) that even if there is a factual dispute regarding the identity of the entities, Case's security interest was perfected in a timely manner. There is a genuine issue of material fact regarding whether Galbreath, Inc. and Galbreath Clearing and Grading, Inc. are the same entity, which requires a trial to resolve. Case emphasizes that the lessee on the February lease was Galbreath Trucking Company/Galbreath, Inc., suggesting that this designation indicates an alter ego relationship rather than a connection to Galbreath Clearing and Grading, Inc.
The equipment in question was previously owned by Galbreath Trucking Company, sold to Track and Tire, Inc., and subsequently leased back to Galbreath Trucking Company/Galbreath, Inc. Case argues that Galbreath Trucking Company/Galbreath, Inc. differs from Galbreath Clearing and Grading, Inc., a point supported by Mr. Galbreath's testimony indicating he used "Galbreath, Inc." interchangeably for both entities. Payments for the lease from February to October 1998 were made by Galbreath Clearing and Grading, Inc., which also utilized the equipment during that time, with the February contract bearing its tax identification number. Case presents evidence of a consistent business pattern where Galbreath Trucking Company/Galbreath, Inc. owned and leased equipment to Galbreath Clearing and Grading, Inc., which then serviced the lease payments. Although Case may succeed after a comprehensive evidentiary hearing, a genuine issue of material fact exists, precluding summary judgment. It is concluded that even if Galbreath Trucking Company and Galbreath Clearing and Grading are treated as the same for the lease context, the February 1998 lease is classified as a true lease, not a conditional sale, and the subsequent financing arrangement is recognized as a valid purchase money security transaction. The Court underscores that summary judgment is permissible only when no material fact issues exist, with the moving party bearing the burden of proof while the court must interpret opposing evidence favorably. The February 28, 1998 lease is determined to be a true lease under the Uniform Commercial Code, with the classification dependent on the specific facts of the case.
A transaction is classified as a security interest if the lessee is obligated to pay for the use of goods for the entire lease term without the option to terminate. In this case, the February lease does not qualify as a conditional sale because it lasted only five months, significantly shorter than the Caterpillar equipment's economic life. The lessee had no obligation to renew or extend the lease and could return the equipment or purchase it for $435,000 at the end of the term, which exceeds nominal consideration. Although the lease could convert to a financing arrangement post-lease, that conversion was not guaranteed as financing required approval from Case Credit Corporation, which was neither preapproved nor granted. Consequently, the lessee, Galbreath Trucking Company, did not acquire any ownership rights in the equipment. The lease explicitly stated that Track and Tire, Inc. retained ownership throughout the lease term, and if financing was not approved, Galbreath had no residual rights. The lessee’s options were limited to paying the agreed amount or surrendering the equipment, with Track and Tire, Inc. entitled to repossess it upon default. As the lease was a true lease, Track and Tire, Inc. did not need to file a financing statement to protect its interests against Coastal Bank. Coastal's argument that the lease should encompass a longer financing period is invalid due to the lack of prearranged financing and differing terms in subsequent financing agreements. The lease term is therefore confined to the five-month duration. A condition precedent must be fulfilled before a contract becomes binding, as illustrated by relevant case law.
In First National Bank of Cobb County v. Atlanta Classic Cars, Inc., the court establishes that a key difference between a lease and a conditional sale is the lessee's lack of ownership of the property. The case examines whether a lease from February constituted a conditional sale that would affect Case's lien priority against Coastal Bank. It concludes that Case holds a timely perfected purchase money security interest superior to Coastal's interest, governed by O.C.G.A. 11-9-312(4), which requires perfection at the time of possession or within 15 days. Case must demonstrate it has a purchase money security interest and that it was perfected within the required timeframe.
The definition of a purchase money security interest includes interests taken by the seller to secure payment or by a party providing funds for the debtor to acquire collateral. Case Credit, as an assignee of Track and Tire, Inc., advanced $300,000 to enable Galbreath Clearing and Grading, Inc. to gain rights in collateral, with the financing statement filed within 15 days of the transaction. Coastal Bank contends that Case merely refinanced an earlier lease obligation, arguing that this precludes Case from establishing a purchase money security interest. The court clarifies that the February lease was a true lease with an unexercised purchase option, and at the time of the October transaction, no existing debt existed between the relevant parties, thereby allowing Case to create a valid purchase money security interest.
The October contract is characterized as a distinct credit arrangement between Case Credit and Galbreath Clearing and Grading, Inc., lacking refinanced credit features from the original lease. Key differences between the February and October transactions include the source of rental payments, the number of equipment pieces financed (five versus eight), the financing amounts ($300,000.00 compared to $435,000.00), the term of financing (40 months versus unspecified), and the interest rates (11.9% versus 1.5% above prime). Coastal references Franklin v. ITT Financial Services, where the court ruled that refinancing by the note holder extinguished the purchase money nature of the security interest, distinguishing it from the current case as no existing debt to Case was refinanced and no purchase money security interest existed between Track and Tire, Inc. and Galbreath Clearing and Grading, Inc. The critical issue of priority hinges on whether perfection occurred within 15 days after Galbreath Clearing and Grading, Inc. took possession of the equipment. Despite prior possession under a short-term lease, true possession as a debtor commenced only on October 16, 1998, when the contract was executed. Citing Citizens Bank of Americus, the Georgia Court of Appeals affirmed that possession occurs when a debtor is contractually obligated to perform, with the transition from bailee to debtor marking the possession point for financing statement filing.
In re Hughes established that a debtor's possession of collateral occurs upon signing a security agreement, rather than when the equipment is physically received. Similarly, In re Hooks determined that a farmer's physical possession of cows did not grant actual possession until a security agreement and note were executed. Coastal's reliance on Ivie is misplaced, as that case involved a backdated lease corresponding to the possession date, rendering an untimely filing ineffective. In contrast, the contract relevant to the current case was not backdated to the initial possession date of the equipment. Coastal's argument regarding Citizens Bank of Americus lacks merit, as Galbreath Clearing and Grading, Inc. did not have credit approval from Case in February, and the terms of the October lease differed significantly from those anticipated earlier. Hence, Citizens Bank is applicable to the current matter.
The Court concludes that Case Credit Corporation’s security interest qualifies as a purchase money security interest, perfected within 15 days of the debtor obtaining possession under O.C.G.A. 11-9-312. Consequently, Case's security interest takes priority over The Coastal Bank’s pre-existing floating lien on the equipment. With no material facts in dispute, summary judgment is granted in favor of Case Credit Corporation against The Coastal Bank and other defendants who did not contest this priority.
The stipulations include the identification of the competing security interests in specific Caterpillar equipment and confirm that John Douglas Galbreath was the president and sole shareholder of the involved corporations, both validly existing under Georgia law. The stipulations also note that two pieces of equipment were purchased and subsequently refinanced by Galbreath Trucking Co. Inc.
Galbreath Trucking Co. Inc. purchased a Caterpillar 12G Motor Grader (Serial No. 61M15264) from Carlton Company in August 1994. There is no formally organized corporation named 'Galbreath, Inc.' Track and Tire, Inc. and Galbreath Clearing and Grading, Inc. entered into a Retail Installment Sale Contract and Security Agreement on October 16, 1998, with Track and Tire filing UCC-1 Financing Statement No. 015-98-667 shortly after. This UCC-1, filed within 15 days of the contract, was later assigned to Case Credit. Galbreath Clearing and Grading, Inc. also executed a $404,041 Promissory Note and Security Agreement with a bank on August 3, 1994, which was renewed multiple times, and the bank filed a related UCC-1 Financing Statement on September 15, 1994, followed by a continuation statement in March 1995. A second Promissory Note for $425,577.56 was executed on October 24, 1997, secured by the existing financing statement. The bank's UCC-1 Financing Statement claimed security interest in all of the debtor's equipment, but none of the equipment related to Galbreath Trucking Co., Inc. is listed on the attached schedule. The bank had a security interest in only a boat, motor, and trailer owned by Galbreath Trucking Co., Inc. Douglas Asphalt Company filed a UCC Financing Statement on November 20, 1998, while the United States filed a tax lien of $222,094.63 in Bryan and Chatham Counties on November 19 and 30, 1998, respectively, which is subordinate to the bank's and Case's interests. Caterpillar Financial Services Corporation claimed no interest in the equipment described in the complaint and consented to the cancellation of any UCC-1 filings in its name. Douglas Asphalt Company sought dismissal of the complaint and filed a motion for an extension of discovery but did not respond to the motion for summary judgment. The United States requested a determination of its security interest's validity and priority but also failed to respond to the summary judgment motion. James B. Wessinger, III, the Chapter 7 Trustee, and United States Trustee Jack Berry did not appear or respond further after initial appearances.
