In re Peacock
| Citation | 6 BR 922 |
| Decision Date | 14 November 1980 |
| Docket Number | Bankruptcy No. 480-00223. |
| Parties | In re Roland Earl PEACOCK and wife, Linda Sue French Peacock, Debtors. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
St. Clair Newbern, III, Fort Worth, Tex., for debtors, Peacocks.
Rufus Garrett, Jr., Fort Worth, Tex., for Borg-Warner Leasing, Inc.
Tim Truman, Fort Worth, Tex., Interim Trustee.
The issue in this case arises from a novel application of the "cram down" provisions of Chapter 13 to lease agreements which the debtor asserts are intended as security devices. Chapter 13 authorizes the Court to confirm a plan in which the present value of any deferred payments to a secured creditor equals the value of the collateral, 11 U.S.C. §§ 1325(a)(5), 506(a). The issue here is whether claims arising under the debtor's lease agreements may be treated as secured claims for purposes of the § 1325(a)(5) "cram down".
The business relationship between the debtors and Borg-Warner Leasing, Inc. began in August, 1979, when the debtor and representatives of Borg-Warner traveled to Ohio for the purpose of purchasing dairy cows which Borg-Warner then leased to the debtors. The parties entered into three agreements under which the debtors received 68 Holstein cows and various items of farm equipment.
The agreement labeled Equipment Lease reflects that Borg-Warner paid $20,884.50 for certain farm equipment. It then delivered the equipment to the debtor under a lease that obligated the debtors to pay a total of $33,672.00 over a 60 month term. In the event of default, the lessor is entitled to repossess the equipment, and may recover from the lessee a sum equal to the total unpaid rental which would have accrued for the balance of the rental term less only the net proceeds of any reletting or sale. No option to purchase is granted the lessee in the equipment lease.
The parties also executed two documents entitled Cow Lease Agreement. These documents contain in essence identical terms, one pertains to a transfer of 35 cows in August, 1979, and the other to a transfer of 33 cows in November, 1979. Borg-Warner paid the third party Ohio seller $124,495.00 for the 68 cows which it then transferred to the debtors pursuant to the leases. In turn under the cow leases the debtors became unconditionally obligated to pay $223,848.00 over the 60 month term.
Unlike the equipment lease, the cow leases grant the lessee an option to purchase the cows at the end of the lease term at a combined option price of $24,899 which amounts to approximately $366 per cow. In the event of default, the lessee is obligated to deliver the cows to the lessor and is liable for the option price of any cow not delivered. If the lessor then sells the repossessed cows, and a deficiency results, the lessee is liable for such deficiency.
Under all the leases involved, the lessee is obligated to obtain insurance and bears the entire risk of loss to the property. Financing statements regarding all three leases were properly filed in the public records.
The debtors filed their joint petition for relief under Chapter 13 of the Bankruptcy Code on May 16, 1980. On July 9, 1980 the debtors filed their Chapter 13 plan which provided that "Debtor elects to treat Borg-Warner as a secured creditor and will pay to Borg-Warner the fair market value of the 60 dairy cows ($60,000) and the dairy equipment ($18,000) as of the date of this plan, in sixty monthly installments of $1820 each . . ." The debtors have not asserted a claim of usury. Borg-Warner filed an application under § 365 of the Bankruptcy Code requesting the Court to order the debtor to accept or reject the leases according to the terms originally agreed upon.
At trial, the debtor testified that but for the option to purchase he would not have signed the cow lease agreements. The Debtors and Borg-Warner introduced conflicting testimony regarding the value of the cows. I find that the fair market value of the cows to be $875.00 per cow, as of the date the purchase option could be exercised by the debtor.
The issue squarely presented is whether any or all of the leases are actually intended as security devices. An examination of the case law reveals a lack of uniformity in the methods used to analyze leases alleged to be security devices. The problem of determining an appropriate legal standard for the issue is further complicated by the almost infinite variety of leases found in contemporary leasing arrangements which are being utilized in an ever growing number of consumer and commercial transactions.
The Bankruptcy Code does not define "lease". It does define "security interest" to be a lien created by agreement, 11 U.S.C. § 101(37). The legislative history states, "Whether a consignment or a lease constitutes a security interest under the bankruptcy code will depend on whether it constitutes a security interest under applicable state or local law." House Report No. 95-595, 95th Cong. 1st Sess. (1977) 313-314, U.S.Code Cong. & Admin.News 1978, p. 5787.
The principal state law authority on this question is the definition of a "security interest" found in the Uniform Commercial Code Texas Business & Commercial Code § 1.201(37) which provides in pertinent part:
"Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. Unless a lease or consignment is intended as security, reservation of title thereunder is not a "security interest . . ." Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security.
Professor Gilmore has pointed out that the word "intended" as used in the § 1.201(37) definition has nothing to do with the subjective intention of the parties. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY § 11.2, at 338. The question then becomes by what objective criteria are lease agreements to be adjudged security devices. An examination of the authorities reveals that the following three-tier analysis is an appropriate, though not exclusive, procedure to review lease agreements which are alleged to be security devices.
The first tier of analysis is mandated by the opening sentence of § 1.201(37): "Security interest means an interest in personal property or fixtures which secures payment or performance of an obligation." In order to find that a lease is intended as security, it is necessary to find an obligation on the part of the lessee that is to be secured. A definite obligation to pay rentals during the lease term totaling an amount substantially equivalent to the fair market value of the leased property plus a financing factor as viewed at the time the property is transferred to the lessee, is a precondition to finding that the lease is intended as security. Conversely an agreement that gives the lessee the right to terminate the lease at any time during the lease term, without any obligation for rents accruing during the remainder of the lease term, should undoubtedly be viewed as a true lease.
Upon finding a sufficient obligation on the part of the lessee, it is necessary to proceed to a second tier of analysis. If the agreement provides that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration, the court is compelled as a matter of law to find that the lease is intended as security, § 1.207(37), In re Vaillancourt, 7 U.C.C.Rep. 748, 759 (U.S.Dist.Ct., D.Maine, 1970). Tackett v. Mid-Continent Refrigeration Co., 579 S.W.2d 545 (Tex.Civ.App.-Ft. Worth, 1979, writ ref'd n.r.e.).
The Uniform Commercial Code does not define "nominal". Common usage of the word as indicated in Webster's Third New International Dictionary (1976), defines nominal as one "being so small, slight, or negligible as scarcely to be entitled to the name". In re Vaillancourt, supra, is a decision involving a negligible consideration; the lessee was given an option to purchase at the end of the lease term for a consideration of $1.00. In Tackett, supra, no additional consideration was required at the end of the term for the lessee to become owner.
Other cases have found substantial dollar amounts to be nominal consideration after comparing the option price to the fair market value of the leased property at the termination of the lease; $1,350 option price described as "nominal" in In re Washington Processing Co., Inc., 3 U.C.C.Rep. 475 (U.S.Dist.Ct.S.D.Cal., 1966); $1,000 option price described a "nominal" in Peco, Inc. v. Hartbauer Tool and Die Co., 262 Or. 573, 500 P.2d 708 (1972). By characterizing significant dollar amounts as nominal, those courts have implicitly adopted a relative rather than absolute definition of nominal. Invariably the large dollar "nominal price" cases also cite other factors in finding that the lease is intended as a security device. In view of the mandate of § 1.201(37) which compels a court to hold a nominal option price lease is intended as security regardless of other lease terms, the adopted approach is to construe "nominal consideration" in a narrow and absolute fashion to mean a few dollars.
A finding that the lease agreement contains an option to purchase for a consideration that is more than nominal or that the agreement contains no option requires the court to proceed to a third tier of analysis to determine by the facts of each case whether the lease is intended as security, Davis Brothers v. Misco Leasing, Inc., 508 S.W.2d...
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