HITCHIN POST STEAK CO v. GENERAL ELECTRIC CAPITAL CORPORATION
| Decision Date | 03 September 2010 |
| Docket Number | Adversary No. 09-5258,Chapter 11,Case No. 09-12308,Case No. 09-12310 |
| Parties | In re: HP DISTRIBUTION, LLP., Debtor. In re: HITCHIN POST STEAK CO., Debtor. HITCHIN POST STEAK CO., Plaintiff, v. GENERAL ELECTRIC CAPITAL CORPORATION Defendant. |
| Court | U.S. Bankruptcy Court — District of Kansas |
PUBLISHED
robert e. nugent united states chief bankpuptcy judge.
These cross-motions for summary judgment seek the Court's determination whether certain truck lease agreements between Hitchin Post Steak Co. ("HPS") and General Electric Capital Corporation ("GECC") are true leases or disguised security agreements. These motions were argued to the Court on July 13, 2010.1 At stake here is whether HPS must cure and assume these leases in order to retain its tractors and trailers under 11 U.S.C. § 365 or whether it can cram down its obligations to GECC to the current value of the tractors and trailers under 11 U.S.C. § 1129(b)(2).2After careful review of the motions, memoranda, and arguments of the parties, the Court is prepared to rule.3
The primary purpose of granting a summary judgment motion is to avoid an unnecessary trial when there is no genuine issue of material fact in dispute. If there are no material facts in dispute, the sole issue for the court is whether the moving party is entitled to judgment as a matter of law.5
Cross-motions for summary judgment do not require the Court to decide the case on the motions; if neither moving party has met its burden of establishing that there are no genuine issues of material fact and that, as a matter of law, it is entitled to judgment, the Court can deny both motions.6 The interpretation of the Agreements at issue here are particularly well-suited for resolution by summary judgment, where neither party asserts that the Agreements are ambiguous.7 As the party seeking to characterize the lease Agreements as something "other than what they purport to be," HPS bears the ultimate burden of persuasion at trial and the summary judgment stage.8
Each motion included an extensive statement of uncontroverted facts. With one exception, the only statements of fact controverted by either HPS or GECC related to the characterization given by the parties of the transactions as either "purchases" or "leases." Their legal character is the ultimate legal issue in this case.9 There is no controversy as to the execution, delivery and contentof the transaction documents. The only other controverted fact is GECC's assertion that, based upon a summary appraisal (filed after the argument), the useful life of all of the property exceeds eight years.10 HPS's controverting statement contains no supporting citation to the record.11 At oral argument, counsel for both sides agreed that the property had a useful life in excess of the terms of the transactions.12 Whether the Court may consider the appraisal is considered below.
The facts controlling this adversary proceeding may be summarized as follows.
HPS filed this case on July 21, 2009. Beginning in 2006, HPS executed a series of agreements titled "Truck Lease Agreement (TRAC)" (the "Agreements") whereby GECC purported to lease to HPS a line of tractors and refrigerated trailers for use in HPS meat delivery business. The agreements are substantially similar in format and effect, except as set out below.
The First Agreement is dated June 30, 2006 and describes a 60-month lease of five sets of new refrigerated trailers and refrigerator units (referred to herein as "reefers" and "reefer units" respectively). The Second Agreement is dated September 1, 2006 and describes a 60-month lease of ten new tractors. The Third Agreement is dated October 27, 2006 and describes a 60-month lease of one new tractor. The Fourth Agreement is dated May 4, 2007 and describes a 60-month lease oftwo new reefers and reefer units. The Fifth Agreement is dated October 27, 2006 and describes a 60-month lease of five new reefers (and no reefer units). The Sixth Agreement is dated May 20, 2007 and describes a 60-month lease of three new reefers and reefer units. The Seventh Agreement is dated May 1, 2008 and describes a 48-month lease of six used reefers and six used reefer units. Five of the six used units were model year 2006, thus at least two years old at the time of the agreement. The sixth unit was a model year 2007, thus at least one year old at the time.13
GECC's assertion that the useful life of these tractors, trailers and reefer units exceeds eight years is supported by a summary appraisal that was referenced as an exhibit to its summary judgment memorandum, but not attached.14 HPS' rebuttal of this assertion is merely a general denial that lacks any documentary support.15 At argument, however, both counsel agreed that this equipment had a useful life in excess of the terms of the Agreements. After argument, the Court noted the absence of the appraisal exhibit and the clerk advised the parties accordingly. GECC filed this exhibit on July 21, 2010.16 The exhibit consists of the appraisal report under cover of a letter dated February 16, 2010, from GECC's counsel to debtor's counsel stating that the attached appraisal report is "our designation of expert and his report." The appraisal report is not referenced in GECC's supporting affidavit submitted with its summary judgment papers as required by Fed. R. Civ P. 56(e)(1) and this District's local rule.17 Rule 56(c)(2) provides that summary judgment may be rendered "if the pleadings, the discovery and disclosure materials on file, and any affidavits" show the absence of a factual controversy and that the movant is entitled to judgment as a matter of law. The Court concludes that the appraisal report is part of the "disclosure materials on file" and finds that it may be relied upon by GECC in support of its motion. This finding is buttressed by the parties' stipulation that these tractors, trailers and reefer units have a useful life in excess of 60 months and HPS's failure to properly controvert GECC's paragraph 68 statement.18 The Court finds that the useful life of the goods in question was equal to or exceeded 8 years at the times the Agreements were executed.
While six of the seven Agreements are virtually identical, the First Agreement is different. The Second through Seventh Agreements consist of the following components. The seminal document is the "Truck Lease Agreement (TRAC)." Attached to this agreement are "Schedule A Even Payments (TRAC)" and "Schedule B Final Adjustment Table." The Agreement sets out the relationship and duties of the parties while Schedule A contains what the parties agreed was the value of the equipment at the inception date, the monthly rent, and the residual value at the end ofthe term. Schedule B contains the "final adjustment," the percentage by which the initial agreed value of the equipment is multiplied to determine the extent to which the parties are indebted to each other upon early termination of the lease.
The First Agreement is different in that it includes Schedule A, but does not include Schedule B. Instead, the parties signed an "Amendment to Truck Lease Agreement (TRAC)" (the "Amendment") that modifies paragraph 9 of the form Agreement to reference a different formula for determining the terminal adjustment, one that relies on the calculation of the net present value of the agreed residual value.
All of the Agreements specify that Texas law will apply.19 The Court observes that Kansas has also adopted the same UCC provisions at issue here.20 As a practical matter, the Court can consider decisions from other jurisdictions that interpret these uniform provisions without affecting the outcome.21
There is no dispute that all of these agreements and supporting documents were properly executed by authorized representatives of the parties and that they are enforceable. The only remaining question here is a legal one, whether these Agreements should be enforced as leases tobe assumed or rejected under § 365 or allowed as secured claims to be crammed down to the equipment's value under §§ 506(a) and 1129(b)(2).
These motions require the Court to apply § 1-203 of the Uniform Commercial Code (UCC) to determine the legal status of the Agreements as leases or security agreements. Texas has adopted the UCC, but there are numerous cases that interpret this uniform section and its predecessor, the 1987 version of § 1-201(37).22 Before analyzing these Agreements by applying the statute, it is important to note as have UCC treatise authors, James White and Robert Summers, that a true lease in its purest form has two distinguishing attributes: the lessor retains an "entrepreneurial stake" in the leased property and keeps a valuable "reversionary" interest:
The central feature of a true lease is the reservation of an economically meaningful interest to the lessor at the end of the lease term. Ordinarily, this means two things: (1) at the outset of the lease the parties expect the goods to retain some significant residual value at the end of the lease term; and (2) the lessor retains some entrepreneurial stake (either the possibility of gain or the risk of loss) in the value of the goods at the end of the term.23
on the other hand, a security interest involves a lender who lends money to a purchaser to acquire property.24 The borrower grants a lien on the purchased goods to secure the loan's repayment. The lender has an interest in the collateral's value not declining below the loan balance, but that is the extent of the lender's entrepreneurial interest in the property. Instead, it is the owner who retains the stake. The Agreements before the Court today fall somewhere between these two extremes. The Court applies § 1-203's provisions as "signposts" to determine whether these Agreements are true leases as a matter of law.
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