Orix Credit Alliance, Inc. v. Pappas

• Decision Date: 25 October 1991
• Docket Number: No. 90-3147,90-3147
• Citation: 946 F.2d 1258
• Parties: 16 UCC Rep.Serv.2d 502 ORIX CREDIT ALLIANCE, INC., Plaintiff-Appellant, v. James PAPPAS and Parashevic Pappas, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1258

946 F.2d 1258

16 UCC Rep.Serv.2d 502

ORIX CREDIT ALLIANCE, INC., Plaintiff-Appellant, v. James PAPPAS and Parashevic Pappas, Defendants-Appellees.

No. 90-3147.

United States Court of Appeals Seventh Circuit.

Argued May 17, 1991.

Decided Oct. 25, 1991.

Michael J. O'Rourke (argued), Frank J. Kokoszka, Brian E. Neuffer, Michael J. Collins, Winston & Strawn, Chicago, Ill., for plaintiff-appellant.

Nathaniel Ruff (argued), Lesniak & Ruff, East Chicago, Ind., Robert J. Rooth, Adler & Rooth, Chicago, Ill., for defendants-appellees.

Before COFFEY, MANION and KANNE, Circuit Judges.

KANNE, Circuit Judge.

Pursuant to two separate agreements, Orix Credit Alliance, Inc., leased six trailers--four Fruehauf trailers and two Timpte grain trailers--to Orlando Cartage, Inc. Orlando became bankrupt and defaulted on payment due under the leases. Orix sued James Pappas and Parashevic Pappas as guarantors. The Guarantors concede liability under the Fruehauf agreement but argue that the agreement is a sales agreement with a retained security interest and that Orix's assessment of damages is incorrect. Orlando retained possession and use of the Timpte trailers under the provisions of a settlement agreement with Orix and court order whereby Orlando would make full payment of outstanding sums owed and pay all future rent installments.

With regard to damages on default, the leases provide a late charge of 1/15 of 1% per day on delinquent payments, collection expenses and attorney fees at the rate of 15% of the delinquent balance, and acceleration of the debt on default. Orix was given the option to sell the trailers (and apply the net proceeds of the sale less 20% of the actual cost of the trailers to the unpaid balance of the total rent) and Orlando remained liable for any deficiency. Orix sold the Fruehauf trailers at auction for $60,250.00.

Orix calculated the damages under the leases as follows:

Fruehauf

                Agreement:  Lease balance upon
                            default                      $73,250.45
                            Interest to date at late
                            charge rate of 24%           $22,763.45
                                                         -----------------
                                                         $96,013.90
                            Auction sale proceeds        $60,250.00
                            --20% total rent             (25,114.44  )
                                                         -----------------
                                                         $35,135.56
                                                         -----------------
                                                         $60,878.34
                            Costs of sale                  6,988.69
                                                         -----------------
                            Total :                      $67,866.03  1
                Timpte
                Lease:      Lease balance at present     $10,182.90
                            Purchase option, plus taxes    5,579.25
                                                         -----------------
                            Total:                       $15,762.15
                Attorney
                Fees:       (16,056.58"$3,500
                            credit)                      $12,556.58
                            Aggregate Total :            $96,184.76
                

After considering evidence submitted by the parties concerning damages, the district court concluded that the Fruehauf agreement was a conditional sale. The court determined that the Guarantors are liable to Orix for $19,981.14 (deficiency less auction proceeds and plus auction expenses) under that agreement and allowed late charges of 24% on that amount from the date of the sale of the trailers. Orix was awarded attorney fees of 15% of the overall figure. The district court denied Orix any damages for Orlando's default of the Timpte lease because the agreed order provides that Orlando would make full payment of the outstanding sums owed and remain current on future rent installments and therefore no debt exists under the guaranty.

Orix appeals the district court's characterization of the Fruehauf agreement as a conditional sale and the court's assessment of damages. ²

Conditional Sale or True Lease

The parties agree that New York law governs here. Pursuant to § 1-201(37) of the New York Uniform Commercial Code, whether a lease is intended as security (thus a conditional sale) is to be determined by the particular facts of each case.

While the inclusion of an option to purchase in a lease does not in and of itself make the lease one intended for security, where the lessee can become the owner of the leased goods for only nominal consideration at the expiration of the lease the transaction is in substance a conditional sale and should be treated as such. Matter of Marhoefer Packing Co., Inc., 674 F.2d 1139, 1142 (7th Cir.1982).

To determine whether an option price represents nominal consideration, it can be compared to the total rental price of the equipment. Matthews v. CTI Container, 871 F.2d 270, 275 (2d Cir.1989). As the district court noted, the range of determinations of what constitutes "nominal consideration" under this comparison is broad. See e.g., National Equipment Rental v. Priority Electronics, 435 F.Supp. 236 (E.D.N.Y.1977) (2.7% of the total rental value was nominal); In re Crown Cartridge Corp., 220 F.Supp. 914 (S.D.N.Y.1962) (7.7% was nominal); In re Oak Mfg., Inc., 6 U.C.C.Rep. 1273 (S.D.N.Y.1969) (9% of the total rental value was nominal); In re Herold Radio & Electronic Corp., 218 F.Supp. 284 (S.D.N.Y.1963), aff'd 327 F.2d 564 (2d Cir.1964) (10% was nominal).

Under the Fruehauf agreement, Orlando had an option to purchase the four trailers after the 54-month agreement term for $15,648.00. The original price of the trailers when purchased by Orix was $104,320.00. We do not agree with the district court's determination, however, that a comparison of these amounts is unhelpful to the present case because the option price is 12% of the total rental price and just outside of the courts' range. While not dispositive, the comparison should be considered as a factor in determining whether the agreement is a conditional sale. ³

An option price may also be found to be nominal where it is insubstantial in relation to the fair market value of the leased goods at the time the option arises as anticipated by the parties when the agreement was executed. Marhoefer, 674 F.2d at 1144-45; Guardsman Lease Plan, Inc. v. Gibraltar Transmission Corp., 129 Misc.2d 887, 494 N.Y.S.2d 59, 63 (N.Y.1985). However, the parties have failed to present valuable evidence as to what the fair market value of the trailers would be at the expiration of the agreement. ⁴

The extent to which the total rentals exceed the purchase price of the trailers may also be an indication that the transaction is a sale. National Equipment, 435 F.Supp. at 239; Guardsman, 494 N.Y.S.2d at 64. The purchase price of the Fruehauf trailers was $104,320.00, while the total rental payments under the agreement are $125,572.20. Therefore, the rentals exceed the purchase price by approximately 20%. We agree with the district court's conclusion that the total rental payments may represent the fair market value of the trailers plus a financing charge.

Similarly, the Guarantors submitted an affidavit of a Certified Public Accountant showing that the present value of the total amounts to be paid under the agreement, including the monthly payments, "advance rent" and option price, was $105,649.37, using an implied interest rate of 13.6%. The affiant asserted that that present value was essentially equivalent to the $104,320.00 purchase price of the trailers and therefore the transaction can be viewed as a conditional sale with the monthly payments under the agreement being installment payments containing principal and interest portions.

New York courts have recognized a number of factors within an agreement that may indicate a conditional sale, many of which are present here. See Matthews, 871 F.2d at 275-76; Guardsman, 494 N.Y.S.2d at 63-64. Under the Fruehauf agreement, Orlando bore the risk of loss or damage of the trailers. Orlando was obligated to repair the trailers at its own expense, to maintain insurance on the trailers, and to pay all charges and taxes on the "ownership, leasing, renting, sale, purchase, possession or use of the equipment" during the agreement term. In addition, Orlando paid $10,464.35 in "advance rent" under the agreement. See Credit Car Leasing Corp. v. DeCresenzo, 138 Misc.2d 726, 525 N.Y.S.2d 492, 496 (N.Y.City Civ.Ct.1988) (down payment for goods was a factor indicating a conditional sale). Another significant factor is Orix's requirement of a guaranty executed by a third party. Guardsman, 494 N.Y.S.2d at 64.

Moreover, the fact that the agreement contains a provision for the...