OPINION
BRETT, District Judge.
Defendants-Appellants, General Motors Acceptance Corporation (GMAC) and Chuck Naiman Buick Company (Naiman), appeal to this Court for reversal of judgment entered by the Bankruptcy Court on March 13, 1979. That judgment and the accompanying Findings of Fact and Conclusions of Law held that leases involving four automobiles were as a matter of law leases intended for security and thus subject to the perfection requirements of the Uniform Commercial Code. It was further held that since these security agreements had not been perfected as required by the U.C.C., the interest of the plaintiff trustee in bankruptcy in the subject automobiles or the proceeds is superior to that of the general creditor defendants, GMAC and Naiman.
After carefully considering the substance of the agreements and the applicable law, the Court- finds that the judgment of the Bankruptcy Court should be affirmed.
During 1976 and 1977, the Bankrupt in this case entered into four separate “Non-Maintenance Lease Agreements” with Nai-man, which were assigned to GMAC. The four agreements are identical in all pertinent respects.
The leases here involved are “open-end” leases which are distinguished from “closed-end” leases primarily by the method of termination as provided in Items 30 and 31 of the agreements.
The agreements provide that in a closed-end lease, at the end of the
lease term, the lessee returns the vehicle to lessor and the obligations of both come to an end. Further, if the lease is terminated prematurely, the lessee is responsible for the unpaid rental with the vehicles being returned to lessor.
In an open-end lease, the termination provisions are somewhat more complex, Here, at the end of the lease term, the lessee is to return the vehicles to the lessor, However, unlike the situation involving a closed-end lease, the relationship between
lessor and lessee does not come to an end. Rather, the lessor, upon return of the vehicle, must sell the vehicle, and if the net amount received from the sale is greater than the predetermined “agreed depreciated value”, lessor must pay any excess to the lessee. On the other hand, if the net amount received is less than the “agreed depreciated value”, lessee must pay to lessor the deficiency.
In case of premature termination, by default or choice of lessee, the lessee must also return the vehicle and the lessor must sell it. However, the “agreed depreciated value” is adjusted to determine the “maximum amount of open end lessee liability,” and then lessee will either receive a refund or be required to pay a deficiency, based upon the net sale price. The “net amount” in either event is defined as the sale price of the vehicle less costs to the lessor in connection with the sale and all debts incurred by lessee which might constitute a lien on the vehicle or a liability to the lessor.
The face of each agreement contains a section entitled “Lessee Liability Disclosure: (must be completed if this is an open-end lease).” In this section, the amounts for which lessee will be responsible are computed. The computation begins with the Original Value of the vehicle, from which is deducted any Cash Down Payment and or net trade-in, to arrive at the Net Original Value. In these particular leases, the original value and the net original value are the same, since there is no down payment or trade-in. The next item is designated Agreed Depreciated Value, and is an estimate of the value of the vehicle at the end of the lease term. This Agreed Depreciated Value is deducted from the Net Original Value, and the difference is designated as Total Amount of Fixed Monthly Rentals for the Full Lease Term to be Credited Against Original Value. The final item (numbered 6A) in the section is Total Amount of Fixed Monthly Rentals Not to be Credited Against Original Value.
There is no explanation of the method by which Item 6A is computed.
Items 6 and 6A are then totaled and sales tax added to arrive at total monthly charges for lease term. This amount is then divided by the number of months of the lease term to arrive at the monthly rental payment.
Determination of the nature of these agreements must begin with Title 12A O.S. § 1-201(37), which defines the term “security interest.”
This section clearly states
that whether a particular lease is intended for security is to be determined by the facts of each case. The section then goes on to provide guidelines in the case of a lease with an option to purchase. However, the leases involved here do not include options to purchase, so the guidelines referring to such options and the tests concerning nominal or substantial consideration are not applicable.
Neither is the absence of an option to purchase controlling. As the Court observed in
In The Matter of Tillery,
571 F.2d 1361 (5th Cir. 1978):
“Just as the
inclusion
of an option to purchase does not in and of itself make the lease one intended for security; so also, the exclusion of such an option does not ipso facto make it a ‘pure lease.’ ”
Whether an agreement is a lease intended for security is dependent on the intent of the parties as ascertained from the terms of the instrument. The fact that these agreements are denominated as leases is not a controlling factor. Stanley
v. Fabricators, Inc.,
459 P.2d 467 (Alaska 1969).
It is substance and not form which is decisive in determining whether an agreement is intended to create a security interest.
In Re A & T Kwik-N-Handi, Inc.,
13 UCCRS 960 (D.C.Ga.1973). Therefore, the Court must analyze the contract to determine what rights and obligations have been created.
Uniroyal, Inc. v. Michigan Bank, N.A.,
12 UCCRS 745 (Mich.1972). In other words, the real test is what the contract actually does, rather than what it superficially says.
A careful look at these agreements reveals that they are indeed leases intended for security. The only interests retained by the lessor are naked title, plus the right to receive the purchase price and an amount which is apparently interest.
Under these agreements the parties have consented at the outset how much lessor is to realize from the sale of the vehicles. He is to receive from the lessee the agreed monthly payments which include interest. The remainder of the price is then obtained by sale of the vehicle at termination.
It is the lessee who has the real interest in the disposition of the vehicle. Lessor is
assured by the agreement of the lessee
that he will receive the original agreed value of the vehicle—no more and no less—plus an amount that is apparently interest. (Emphasis supplied).
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OPINION
BRETT, District Judge.
Defendants-Appellants, General Motors Acceptance Corporation (GMAC) and Chuck Naiman Buick Company (Naiman), appeal to this Court for reversal of judgment entered by the Bankruptcy Court on March 13, 1979. That judgment and the accompanying Findings of Fact and Conclusions of Law held that leases involving four automobiles were as a matter of law leases intended for security and thus subject to the perfection requirements of the Uniform Commercial Code. It was further held that since these security agreements had not been perfected as required by the U.C.C., the interest of the plaintiff trustee in bankruptcy in the subject automobiles or the proceeds is superior to that of the general creditor defendants, GMAC and Naiman.
After carefully considering the substance of the agreements and the applicable law, the Court- finds that the judgment of the Bankruptcy Court should be affirmed.
During 1976 and 1977, the Bankrupt in this case entered into four separate “Non-Maintenance Lease Agreements” with Nai-man, which were assigned to GMAC. The four agreements are identical in all pertinent respects.
The leases here involved are “open-end” leases which are distinguished from “closed-end” leases primarily by the method of termination as provided in Items 30 and 31 of the agreements.
The agreements provide that in a closed-end lease, at the end of the
lease term, the lessee returns the vehicle to lessor and the obligations of both come to an end. Further, if the lease is terminated prematurely, the lessee is responsible for the unpaid rental with the vehicles being returned to lessor.
In an open-end lease, the termination provisions are somewhat more complex, Here, at the end of the lease term, the lessee is to return the vehicles to the lessor, However, unlike the situation involving a closed-end lease, the relationship between
lessor and lessee does not come to an end. Rather, the lessor, upon return of the vehicle, must sell the vehicle, and if the net amount received from the sale is greater than the predetermined “agreed depreciated value”, lessor must pay any excess to the lessee. On the other hand, if the net amount received is less than the “agreed depreciated value”, lessee must pay to lessor the deficiency.
In case of premature termination, by default or choice of lessee, the lessee must also return the vehicle and the lessor must sell it. However, the “agreed depreciated value” is adjusted to determine the “maximum amount of open end lessee liability,” and then lessee will either receive a refund or be required to pay a deficiency, based upon the net sale price. The “net amount” in either event is defined as the sale price of the vehicle less costs to the lessor in connection with the sale and all debts incurred by lessee which might constitute a lien on the vehicle or a liability to the lessor.
The face of each agreement contains a section entitled “Lessee Liability Disclosure: (must be completed if this is an open-end lease).” In this section, the amounts for which lessee will be responsible are computed. The computation begins with the Original Value of the vehicle, from which is deducted any Cash Down Payment and or net trade-in, to arrive at the Net Original Value. In these particular leases, the original value and the net original value are the same, since there is no down payment or trade-in. The next item is designated Agreed Depreciated Value, and is an estimate of the value of the vehicle at the end of the lease term. This Agreed Depreciated Value is deducted from the Net Original Value, and the difference is designated as Total Amount of Fixed Monthly Rentals for the Full Lease Term to be Credited Against Original Value. The final item (numbered 6A) in the section is Total Amount of Fixed Monthly Rentals Not to be Credited Against Original Value.
There is no explanation of the method by which Item 6A is computed.
Items 6 and 6A are then totaled and sales tax added to arrive at total monthly charges for lease term. This amount is then divided by the number of months of the lease term to arrive at the monthly rental payment.
Determination of the nature of these agreements must begin with Title 12A O.S. § 1-201(37), which defines the term “security interest.”
This section clearly states
that whether a particular lease is intended for security is to be determined by the facts of each case. The section then goes on to provide guidelines in the case of a lease with an option to purchase. However, the leases involved here do not include options to purchase, so the guidelines referring to such options and the tests concerning nominal or substantial consideration are not applicable.
Neither is the absence of an option to purchase controlling. As the Court observed in
In The Matter of Tillery,
571 F.2d 1361 (5th Cir. 1978):
“Just as the
inclusion
of an option to purchase does not in and of itself make the lease one intended for security; so also, the exclusion of such an option does not ipso facto make it a ‘pure lease.’ ”
Whether an agreement is a lease intended for security is dependent on the intent of the parties as ascertained from the terms of the instrument. The fact that these agreements are denominated as leases is not a controlling factor. Stanley
v. Fabricators, Inc.,
459 P.2d 467 (Alaska 1969).
It is substance and not form which is decisive in determining whether an agreement is intended to create a security interest.
In Re A & T Kwik-N-Handi, Inc.,
13 UCCRS 960 (D.C.Ga.1973). Therefore, the Court must analyze the contract to determine what rights and obligations have been created.
Uniroyal, Inc. v. Michigan Bank, N.A.,
12 UCCRS 745 (Mich.1972). In other words, the real test is what the contract actually does, rather than what it superficially says.
A careful look at these agreements reveals that they are indeed leases intended for security. The only interests retained by the lessor are naked title, plus the right to receive the purchase price and an amount which is apparently interest.
Under these agreements the parties have consented at the outset how much lessor is to realize from the sale of the vehicles. He is to receive from the lessee the agreed monthly payments which include interest. The remainder of the price is then obtained by sale of the vehicle at termination.
It is the lessee who has the real interest in the disposition of the vehicle. Lessor is
assured by the agreement of the lessee
that he will receive the original agreed value of the vehicle—no more and no less—plus an amount that is apparently interest. (Emphasis supplied). In the case of premature termination, the lessor is still assured that he will receive the original value of the vehicle plus interest, except that the interest is reduced by the “Rule of 78’s.” This Rule of 78’s is a method used to compute interest earned by a lender when a loan, set up on monthly installments, is paid off prematurely.
Bone
v.
Hibernia Bank,
493 F.2d 135 (9th Cir. 1974).
It is true that the lessee probably will not pay the full purchase price himself because the termination value will probably be paid by a third party purchaser. However, it is lessee who will pay any deficiency or receive any surplus. The practical effect of this arrangement is the same as if lessee purchased the car, then sold it two or three years later and used the proceeds to pay off the note. This similarity is strengthened by the fact that all expenses incurred by lessor in selling the vehicles are to be borne by lessee.
One of the characteristics of a lease is that, at the end of the term, the owner has the absolute right to retake control and use the property.
Transamerica Leasing Corp. v. Bureau of Revenue,
80 N.M. 48, 450 P.2d 934 (1969). In other words, the owner, after the lease term has expired, can do as he pleases with his property. In the leases involved here, however, that is not the case. These agreements require the lessor to sell
the vehicles in a commercially reasonable manner. This lends support to the conclusion that, even after the lease term has ended, the lessor is not the owner but acting as a representative of the lessee.
While it is true that these leases contain no option to purchase, lessee can, if he wishes, purchase the vehicle for the amount agreed upon at the outset. The lessee will pay, and the lessor will receive, the original agreed value plus interest, and this is true even if lessee must bid more than the agreed depreciated value, since any excess he may have to bid will be refunded under the termination provisions.
Finally, these agreements contain other indicia of a sale, indicating that they are leases intended for security.
Lessee must
pay all operating, maintenance, and repair costs and he must pay all taxes and license fees. Lessee must purchase insurance satisfactory to lessor which contains a loss payable clause in favor of lessor and GMAC “as their interests may appear.” Lessee is required to indemnify lessor against “all losses, damages, injuries, claims, demands and expenses arising out of the condition, maintenance, use or operation of the vehicle.” Finally, the agreement may be terminated by lessee upon 30 days written notice, thus activating the premature termination provisions. Lessor, however, may only terminate the agreement upon default by lessee.
While neither party has discussed it, and there is no evidence it was ever operative, the Court notes that there is an Excess Mileage Charge paragraph in each of the agreements. This charge is 6 cents per mile for each mile the automobile is driven more than an average of 15,000 miles per year. This is one indicia that might support a finding these are true leases but the excess mileage paragraph is inexplicable in the context of the whole agreement.
The Bankruptcy Court, in finding that these instruments were leases intended for security, relied on
In the Matter of Tillery,
571 F.2d 1361 (5th Cir. 1978), in which the order of the Bankruptcy Judge was adopted by the Court of Appeals. The leases involved in
Tillery
were very much like those involved here; in fact they were almost identical in all important respects. There, the Bankruptcy Court found:
“The termination formula recognizes the equity of the ‘Lessee’, in the vehicle because he is required to bear the loss or receive the gain from its wholesale disposition. In addition, his equity extends to the retail value of the vehicle which, in effect, he is required to pay under the contract. If the contract runs through the completion of the initial term (36 months) the ‘Lessor’ will have received through monthly ‘rental payments’ the sum of $8,611.20 and is still entitled to receive the sum of $3,570.00 by direct payment from the ‘Lessee’ and/or from disposition of the vehicle. This constitutes a total payment of $12,181.20; and although no evidence was presented as to
the retail sales price of the vehicle on April 12,1974, it appears to be reasonable to presume that the total amount received would constitute the retail price of the vehicle plus a substantial interest charge for financing the transaction over a period of three (3) years. Mathematically, this same result would occur at an earlier termination.”
The Court then observed:
“An equity in the ‘Lessee’ is one of the distinctive characteristics of a lease intended for security. As stated by Judge Hiller in the case of
In Re Royer’s Bakery, Inc.,
(ED-Pa., 1963) 1 UCC Rep. 342:
“ ‘. . . Whenever it can be found that a lease agreement concerning personal property contains provisions the effect of which are to create in the lessee an equity or pecuniary interest in the leased property the parties are deemed as a matter of law to have intended the lease as security within the meaning of Sections 9-102 and 1-201(37) of the Uniform Commercial Code.”
The Court found in
Tillery
the instruments as a whole created rights and obligations indicating a sale rather than a true lease, and therefore were leases intended as security.
Naiman and GMAC argue strongly that
Tillery
was incorrectly decided. These leases, they say, create not an equity in the property, but only a secondary liability in connection with the use of the property. They emphasize the requirement that lessee return the vehicles to the lessor, and contend that any obligation of lessee beyond the lease term is an obligation to pay for the use of goods. These arguments are unpersuasive. While it is true that lessee’s right to receive a refund or obligation to pay depends on the price received at sale, once the car is sold lessee’s right or obligation becomes unconditional in keeping with the previously agreed upon price.
GMAC and Naiman also argue that
Till-ery
is directly in conflict with the tests for determining whether a lease is intended for security as adopted by the Tenth Circuit and by many other courts.
Percival Construction Co. v. Miller and Miller Auctioneers, Inc.,
532 F.2d 166 (10th Cir. 1976);
Crest Investment Trust, Inc., v. Atlantic Mobile Corp.,
252 Md. 286, 250 A.2d 246 (1969);
Citicorp Leasing, Inc. v. Allied Institutional Distributors, Inc.,
454 F.Supp. 511 (W.D.Okl.1977). These cases, it is argued, establish that these are “true leases”, because the “option” price at the end of the term is greater than 25% of the original purchase price,
In Re Alpha Creamery Co., Inc.,
4 U.C.C.R.S. 794 (W.D.Mich.1967);
Percival Construction Co. v. Miller and Miller Auctioneers, Inc., supra,
and is also approximately the same as market value at the end of the lease term. The problem with applying those tests, however, is that the leases involved in those cases all contained options to purchase. The word option indicates a choice, that is, the lessee can choose whether to purchase the article or to return it to the lessor. In fact, one of the tests adopted by the Courts is whether the terms of the lease and option are such that the only sensible course for the lessee at the end of the term is to exercise the option.
Citicorp Leasing, supra.
In other words, where the terms of the agreement effectively leave the lessee no choice, then the agreement will be found to be a lease intended for security.
In this case, there is no “option.” The rights and obligations of the parties are unconditional. Therefore, the tests for determining the effect of an option to purchase are inapplicable.
It is noteworthy as well that the cases relied on by GMAC and Naiman indicate that in order to have a true lease there must be “facts showing that the lessee is acquiring no equity in the leased article during the term of the lease.”
Crest,
supra. Such facts are not present here.
Other cases in which agreements similar to these have been considered have reached the same conclusions as reached by the
Tillery
court.
In Re Brothers Coach Corp.,
9 U.C.C.R.S. 502 (E.D.N.Y.1971);
G. R. Pierce v. Leasing International, Inc.,
142 Ga.App. 371, 235 S.E.2d 752 (Ga.App.1977).
THE JUDGMENT OF THE BANKRUPTCY COURT IS AFFIRMED.