Opinion
Case No. 07-59587 Adv. Pro. No. 09-02546
10-01-2012
In re: Amerigraph LLC Debtor(s) Myron N. Terlecky, Trustee, Plaintiff(s) v. People's Capital & Leasing Corp., Defendant(s)
Matthew T. Schaeffer, Esq., Attorney for Plaintiff Daniel M. Anderson, Esq., Attorney for Defendant
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_______________
C. Kathryn Preston
United States Bankruptcy Judge
Chapter 7
Judge Preston
MEMORANDUM OPINION AND ORDER
ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
This matter came on for consideration of the Plaintiff's Motion for Summary Judgment ("Motion") (Doc. 35), the Defendant's Response (Doc. 32), and Plaintiff's Reply (Doc. 38) filed in the above captioned adversary proceeding. The Plaintiff seeks summary judgment on the claims for relief asserted in this adversary proceeding commenced by Myron N. Terlecky ("Trustee" or "Plaintiff"), who was appointed the Chapter 7 Trustee of the bankruptcy estate of Amerigraph, LLC ("Debtor").
In the Complaint, the Trustee alleges that prior to the commencement of the above-captioned bankruptcy case, Peoples' Capital and Leasing Corp. ("Defendant"), received three preferential payments from the Debtor on account of a Lease Agreement involving printing equipment. In the Motion, the Plaintiff argues that the Lease Agreement entered into by Debtor and Defendant should not be characterized as a true lease because: 1) the Debtor could not terminate the Lease Agreement and the option to purchase the printing equipment was based on nominal additional consideration; and 2) exercising the purchase option was the only economically sensible course of action under the terms of the Lease Agreement. The record, however, fails to contain sufficient evidence for this Court to determine as a matter of law whether the Lease Agreement is a true lease or a disguised security interest. Accordingly, the Motion must be denied.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and General Order No. 05-02 entered in this District referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
I. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, provides that a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party seeking summary judgment bears the initial burden of "informing the . . . court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
Rule 56, in its current form, became effective on December 1, 2010, after this adversary proceeding was commenced. "Amendments to the Federal Rules of Civil Procedure govern proceedings after the date they are effective in an action then pending unless the Supreme Court specifies otherwise or the court determines that applying them in a particular action would be infeasible or work an injustice." Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1317 n.4 (11th Cir. 2010). The summary judgment standard now appears in Rule 56(a) rather than, as it formerly did, Rule 56(c); however, the standard did not materially change. See Fed. R. Civ. P. 56(a) advisory committee's note (2010 Amendments) ("Subdivision (a) carries forward the summary-judgment standard expressed in former subdivision (c) . . . ."). Inasmuch as the amended rule does not change the standard for entry of summary judgment, application of "the amended version of Rule 56 in this case is just and practicable and would not work a manifest injustice . . . ." Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782 n.4 (1st Cir. 2011).
If the movant satisfies this burden, the nonmoving party must then assert that a fact is genuinely disputed and must support the assertion by citing to particular parts of the record. See Fed. R. Civ. P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the non-moving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). When deciding a motion for summary judgment, all justifiable inferences must be viewed in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Anderson, 477 U.S. at 255.
The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:
[T]he moving [party] may discharge its burden by "pointing out to the . . . court . . . that there is an absence of evidence to support the nonmoving party's case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its complaint. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must beHall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997) (citations omitted). A material fact is one whose resolution will affect the determination of the underlying action. See Tenn. Dep't of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. See Schaffer v. A.O. Smith Harvestore Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996). "The substantive law determines which facts are 'material' for summary judgment purposes." Hanover Ins. Co. v. Am. Eng'g Co., 33 F.3d 727, 730 (6th Cir.1994). In determining whether each party has met its burden, the court must keep in mind that "[o]ne of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses . . . ." Celotex, 477 U.S. at 323-24.
evidence on which the jury could reasonably find for the [nonmoving party]."
II. Findings of Fact
Based upon the record, including the docket of the Debtor's bankruptcy case, the Court makes the following findings of fact:
On or about April 1, 2004, Debtor and KBA North America, Inc., ("KBA") entered into a Purchase Agreement whereby the Debtor agreed to purchase a five color printing press with related accessories ("Equipment") from KBA for $5,395,000. Thereafter, the parties agreed to lease the Equipment, and the Debtor and KBA entered into an irrevocable Lease Agreement dated July 22, 2004. The term of the lease was thirty-seven (37) months with an advance rental payment of $750,000.00 in addition to thirty-six (36) monthly payments in the amount of $74,142.16. In addition, attached to the Lease Agreement is a Fair Market Value Purchase Option Agreement which provides in pertinent part as follows:
The Motion states the purchase price as $6,351,000, however, Exhibit A to the Motion provides the "Purchase price of Equipment, Delivered & Installed" as $5,395,000.
The Lease Agreement provides that "[t]his Lease is irrevocable for the full term hereof and for the aggregate rentals herein and delinquent installments of rent, additional rental and other sums due hereunder." Motion Ex. B.
The Lease Agreement contains a Payment Adjustment Rider, the terms of which are not material to this opinion.
Provided the Lessee is not in default under the Lease, the Lessee shall have the right at the expiration of the term of the Lease to purchase all but not less than all of the Equipment at a price equal to the "fair market value" . . . not to exceed $3,089,603.03.Motion Ex. B. The Lease Agreement also contains an assignment and acknowledgment of assignment whereby the Debtor and KBA acknowledged that the Lease Agreement was collaterally assigned from KBA to Defendant. The Debtor, KBA and Defendant later amended the Lease Agreement ("Lease Amendment" and collectively "Agreements") to modify the payment schedule and establish a new cap for the Fair Market Value Purchase Option. The amendment provides as follows:
. . .
If Lessee does not exercise its option to purchase the Equipment as provided above, then upon the expiration of the Lease term Lessee shall pay a cancellation fee in the amount of $2,300,000.00 to Lessor and return the Equipment to Lessor in accordance with the following terms and conditions: (a) subject to the storage/show period described in (g) below, at the option of Lessor, Lessee shall properly de-install, dismantle, crate and deliver the Equipment to a location designated by Lessor in writing within the continental United States by the later of fifteen (15) days after the end of the Lease term or thirty (30) days after Lessor gives notice designating the location for delivery; (b) the Equipment return, including but not limited to de-installation, dismantling and packing shall be performed or supervised by Lessor's representative and in compliance with the manufacturer's recommendations; (c) the cost of all items related to the return of the Equipment, including but not limited to de-installation, dismantling, removal, assembling, packing, insuring and transporting
the Equipment will be at the expense of Lessee; (d) the Equipment shall be shipped by a reputable carrier (with freight and insurance prepaid) to the location designated by Lessor and prior to shipment Lessee shall deliver to Lessor a certificate evidencing that transit insurance is in place from the place of shipment to the place of destination and naming Lessor as loss payee for the replacement cost of the Equipment; (e) the condition of the Equipment shall be such that (i) it qualifies for the Lessor's standard maintenance/service agreement without additional expense to Lessor (ii) the Equipment, including all electrical, hydraulic, mechanical, and pneumatic systems, shall be operational and in the same condition as when new normal wear and tear excepted, (iii) all units of the Equipment shall be capable of passing performance tests according to the manufacturer specifications and (iv) all peripherals and additional systems on the pieces of Equipment shall be intact and operational; (f) if the condition of the Equipment does not satisfy the provisions of this paragraph, then Lessor at its option may repair or replace any damage and the costs thereof shall be paid by Lessee upon receipt of Lessor's invoice for same; (g) at the option of Lessor, Lessee shall provide 120 days storage for the Equipment at the Equipment location specified in the Lease, under power and operation, and shall permit Lessor to show and demonstrate the Equipment to potential purchasers and third parties, free of charge; and (h) if Lessee fails to timely return the Equipment in satisfactory condition in accordance with the provisions of this paragraph, then until the Equipment is so returned and in satisfactory condition, Lessee shall pay to Lessor a monthly rental equal to the regular periodic monthly rent due under the Lease for the final month of the Lease term, such rental to be payable monthly in advance commencing on the date the Equipment was due to be returned to Lessor and continuing on the same day of each month thereafter.
[People's Capital and Leasing Corp.], KBA and the Lessee acknowledge, agree and consent that the installments due under the Agreement are hereby amended to consist of the following, commencing April 1, 2006: Six (6) payments of Fixed Principal of $25,000.00 plus interest, followed by Three (3) payments of Fixed Principal of $35,000.00 plus interest, followed by Thirty (30) equal successive monthly installments of $86,362.27. At the end of the term of the Agreement the Equipment is subject to a Fair Market Value Purchase Option Agreement in the amount not toMotion Ex. B.
exceed $3,468,628.14.
In all other respects the terms and provisions of the Agreement are hereby ratified and reconfirmed.
The Lease Agreement defines "fair market value" in pertinent part as follows:
The "fair market value" of the Equipment shall be the amount determined on the basis of, and equal in value to, the amount which would be obtained in an arm's length transaction between an informed and willing buyer-user (other than the buyer-user currently in possession or a used equipment or scrap dealer) and an informed and willing seller, under no compulsion to buy or sell, provided, however, that in such determination (i) the costs of removal from the location of current use shall not be a deduction from such value, (ii) it shall be assumed (whether or not the same is true) that the Equipment has been maintained and would have been returned to Lessor in compliance with the requirements set forth below and (iii) the fair market shall be determined on an installed basis, in place and in use. If Lessor and Lessee are unable to agree upon the fair market value of the Equipment, then the fair market value shall be determined by an appraiser selected by mutual agreement of Lessor and Lessee. If the parties cannot mutually agree upon an appraiser, the same shall be selected by the American Arbitration Association in the City of New York.
On May 25, 2007, KBA sued the Debtor in the United States District Court for the District of Vermont ("Vermont Litigation") for breach of contract. Thereafter, on July 3, 2007, the Debtor filed suit against KBA in the Franklin County Common Pleas Court asserting breach of contract and breach of warranty ("Ohio Litigation"). A representative from KBA made certain representations in the Vermont Litigation regarding KBA's claim for damages which included, among other things, a statement regarding the fair market value of the Equipment, by filing the Declaration of Gerrit A. Zwergel ("Declaration") in support of KBA's motion for default judgment. The parties entered into a Forbearance Agreement and an Agreed Writ of Replevin and within ninety days of Debtor's bankruptcy case commencing, the Debtor made three payments to Defendant totaling $293,631.76 ("Payments").
The suit was subsequently removed to the United States District Court for the Southern District of Ohio.
The individual payments consisted of the following: 1) check number 7721 in the amount of $86,362.27 was remitted on May 11, 2007 and cleared on August 31, 2007; 2) check number 8698 in the amount of $86,362.27 was remitted on September 5, 2007 and cleared on September 17, 2007; and 3) check number 8913 in the amount of $120,907.22 was remitted on October 4, 2007 and cleared on October 10, 2007.
The Debtor's bankruptcy case began on November 28, 2007 ("Petition Date") when three petitioning creditors (who were later joined by two others) filed a Chapter 11 involuntary petition against the Debtor. The Debtor eventually consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code and, on February 1, 2008, the Court entered such an order. See Doc. 66 in Case No. 07-59587. The bankruptcy case proceeded under Chapter 11 of the Code, until April 14, 2008, the Debtor filed its Motion of Amerigraph LLC to Convert Chapter 11 Case to One Under Chapter 7. See Doc. 151 in Case No. 07-59587. On May 21, 2008, the Court entered an order granting the Debtor's motion to convert. See Doc. 189 in Case No. 07-59587. The next day, on May 22, 2008, the Trustee was appointed as the Chapter 7 Trustee of the Debtor's estate. On November 25, 2009, the Trustee commenced this adversary proceeding.
The Defendant was not one of the petitioning creditors.
III. Law and Analysis
For the reasons explained below, the Court cannot determine as a matter of law the character of the Agreements (i.e., true lease or security interest) based on the evidence in the record, and thus, summary judgment is not appropriate.
Plaintiff seeks to avoid the Payments that Debtor made to Defendant on the basis that they are preferential transfers pursuant to 11 U.S.C. § 547(b). The Plaintiff has the burden of proving the avoidability of a transfer under § 547(b). That section provides as follows:
(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property-11 U.S.C. § 547(b).
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the date of the filing of the petition;(5) that enables such creditor to receive more than such creditor would receive if-
. . . and
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
Condensed, a party seeking to prove a preference must demonstrate that the transfer was (1) to benefit a creditor; (2) on account of antecedent debt; (3) made while theSilagy v. Jay's Auto Sales, Inc. (In re Jackson), 2006 Bankr. LEXIS 2955, *6 (Bankr. N.D. Ohio 2006) (citations omitted). Although not expressly stated in the statute, the secured status of a defendant's claim is relevant:
debtor was insolvent; (4) made within the applicable preference period; and (5) enabled the creditor to receive a larger share of the estate than the creditor would otherwise receive.
If a claim is fully secured, then payments which such secured claimant received during the preference period are not preferential because a preference only involve [sic] payments to unsecured claimants or undersecured claimants. It is well established that payments to a fully secured claimant, in contrast to payments to an unsecured or undersecured claimant, are not preferences.Esser v. First Fed. Fin. Serv. (In re Carini), 245 B.R. 319, 322 (Bankr. E.D. Wis. 2000) (citations omitted). Similarly, payments to a lessor pursuant to a lease agreement generally are not preferences. Thus, the Court must make a determination regarding the nature of the agreement between Debtor and KBA.
Plaintiff argues that Defendant is an undersecured creditor because the Lease Agreement is not a true lease and should be characterized as a disguised security interest. Plaintiff asserts that because the proof of claim filed by KBA in the Debtor's main bankruptcy case evidences a claim for more than $7.1 million and the parties agreed that the value of the Equipment was $6.3 million as evidenced in a Forbearance Agreement executed by the parties in November 2007, Defendant thereby is undersecured by more than $800,000.
Plaintiff appears to concede that if the Agreements are found to be true leases, then the Payments are not avoidable under 11 U.S.C. § 547(b) because the Debtor would have "received 'new value' in the form of continued possession of the equipment." Motion at 2.
A copy of the Forbearance Agreement is attached to Defendant's Response as Exhibit 2.
B. True Lease or Disguised Security Interest
1. Burden of Proof and Governing Law
As the party contending that the subject lease agreements are something other than what they purport to be, Plaintiff bears the burden of proving that same are disguised security agreements rather than true leases. In re HB Logistics, LLC, 460 B.R. 291, 299 (Bankr. N.D. Ala. 2011) (citations omitted). The existence, nature, and extent of a security interest in property is governed by state law. Butner v. United States, 440 U.S. 48, 55, 59 L. Ed. 2d 136, 99 S. Ct. 914 (1979). "Thus, 'whether 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.'" In re QDS Components, Inc., 292 B.R. 313, 321 (Bankr. S.D. Ohio 2002) (citation omitted). The Lease Agreement provides and the parties agree that Connecticut law governs this dispute. The section of Connecticut's General Statutes that governs a lease distinguished from a security interest is substantively identical to the corresponding section of the Uniform Commercial Code ("UCC"). See Conn. Gen. Stat. § 42a-1-203 and U.C.C. § 1-203. "Since the UCC has been adopted by all 50 states, and given the uniformity purpose of the UCC, decisions from other states are relevant." In re Edison Bros. Stores, 207 B.R. 801, 809 n.7 (Bankr. D. Del. 1997) (citations omitted).
The Lease Agreement specifically provides as follows: "This Lease and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the state of Connecticut."
Connecticut adopted the 2001 Revision of Uniform Commercial Code Article -General Provisions in 2005, which became effective October 1, 2005. The version of the Uniform Commercial Code governing whether a transaction is a lease or a sale that was in effect in Connecticut at the time the Lease Agreement was executed was 1-201(37). The version of the Uniform Commercial Code governing whether a transaction is a lease or a sale that was in effect in Connecticut at the time the Lease Amendment was executed is the current version § 1-203. The 2001 Revision of the Uniform Commercial Code and Conn. Gen. Stat. § 42a-1-203 are "substantively identical to those portions of the former Section 1-201(37) that distinguished 'true' leases from security interests, except that the definition of 'present value' formerly embedded in Section 1-201(37) has been placed in Section 1-201(28)." U.C.C. § 1-203 cmt; see also Conn. Gen. Stat. § 42a-1-203. Plaintiff and Defendant both cite to Conn. Gen. Stat. Ann. § 42a-1-203 as the governing statute so for the sake of clarity and because the sections are substantively identical, the Court will refer to § 1-203 in this opinion.
2. Development of UCC § 1-201(37) to UCC § 1-203
Several court decisions discuss in depth the evolution of the law governing the distinction between a true lease and disguised security agreement. See QDS Components, 292 B.R. 313; see also In re Gateway Ethanol, L.L.C., 415 B.R. 486, 499 (Bankr. D. Kan. 2009) ("The 1987 revision of the UCC eliminated reference to the intent of the parties to create a lease or security agreement, which had been in the prior version of the UCC and led to unfortunate results, and changed the focus to the economics of the transaction."). This Court will try to summarize the significant changes and reasoning therefor.
a. "Old" Uniform Commercial Code Section 1-201(37)
The pre-1987 version of the UCC §1-201(37) ("Old §1-201(37)") focused on the subjective intent of the parties to the agreement. See In re Kim, 232 B.R. 324, 329 (Bankr. E.D. Pa. 1999). Old § 1-201(37) stated in part:
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.U.C.C. § 1-201(37) (1978) (amended 1987).
The Old § 1-201(37) did not make clear exactly how to distinguish a true lease from a disguised security agreement. Thus, courts developed two tests to help guide the analysis. QDS Components, 292 B.R. at 324 (Bankr. S.D. Ohio 2002). The first test was the Multiple-Factor Approach. Id.; see K.L.C., Inc. v. Brookside Drug Store, Inc. (In re Brookside Drug Store, Inc.), 3 B.R. 120, 122-23 (Bankr. D. Conn. 1980). Under this test, a list of sixteen factors were used to determine whether an agreement was a true lease or a disguised security agreement. Id. "Most of these factors look to the lease terms[, and] their probative value rests on the assumption that certain rights and obligations are allocated to one party under a lease and to the other in a sale." In re APB Online, Inc., 259 B.R. 812, 821 (Bankr. S.D.N.Y. 2001).
Alternatively, courts looked to a variety of common law tests to determine the nominality of the purchase option stated in the agreement. QDS Components, 292 B.R. at 324. The common law nominality tests include the Percentage Test, the Option Price/FMV Test, and the Economic Realities Test. Id. at 326-29.
Under the Percentage Test, courts applying Old § 1-201(37) compared: "(1) the option price contained in the agreement with the original purchase price of the 'leased' goods; (2) the option price with the total stream of rental payments made under the contract; and (3) the original cost of the 'leased' goods with the total payment stream." Id. at 326-27 (citation omitted). The Option Price/FMV Test determined the nominality of the purchase option by comparing the option price to the fair market value at the time the option is exercised. Id. at 327 (citing APB Online,259 B.R. at 818 (Bankr. S.D.N.Y. 2001)). Under the Economic Realities Test, when the terms of the lease and purchase option were such that the only reasonable and sensible course of action for the lessee at the expiration of the lease term was to exercise the purchase option and take ownership of the goods, the agreement between the parties was intended to create a security interest. Id. at 328.
b. "New" Uniform Commercial Code Section 1-201(37)
In 1987 the Old § 1-201(37) was amended (as amended, the "New § 1-201(37)"). Under the New § 1-201(37), the focus moved to the economic realities of the transaction. PSINet, Inc. v. Cisco Sys. Capital Corp. (In re PSINet, Inc.), 271 B.R. 1 (Bankr. S.D.N.Y. 2001); In re Meeks, 210 B.R. 1007, 1009 (Bankr. S.D. Ill. 1995). New § 1-201(37) provided in part:
Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, andUCC § 1-201(37) (1987). Under the New §1-201(37) a court was required to apply a "Bright-Line Test", which focused on the lessee's obligation under the agreement. PSINet, 271 B.R. at 43. There were two prongs to the test. The first prong was whether "the consideration the lessee is to pay the lessor . . . for the term of the lease [is] not subject to the termination by the lessee . . . ." Id. at 43 (quoting New § 1-207(37)). Under the second prong of the test, a court was required to determine whether any one of the requirements of subparagraphs (a)-(d) of § 1-201(37) were met. HPSC, Inc. v. Wakefield (In re Wakefield), 217 B.R. 967, 970 (Bankr. M.D. Ga. 1998). If both the first prong and second prong were met, then the transaction was deemed a security interest. PSINet, 271 B.R. at 44 ;Wakefield, 217 B.R. at 970. However, if the second prong was not satisfied, a court would undertake further analysis.
(a) The original term of the lease is equal to or greater than the remaining economic life of the goods,
(b) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods,
(c) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or
(d) The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.
If the Bright-Line Test was not satisfied, a court would look to all the facts and circumstances of the case to determine whether the economic realties of a particular transaction created a security interest. In re Triplex Marine Maint., Inc., 258 B.R. 659, 669 (Bankr. E.D. Tex. 2000). The key issue before the court was whether the lessor retained a meaningful residual interest at the end of the lease. In re Zaleha, 159 B.R. 581, 585 (Bankr. D. Idaho 1993). If the lessor retained a meaningful reversionary interest, the transaction was determined to be a lease; however, if there is no reversionary interest, the parties had made a security agreement. QDS Components, 292 B.R. at 333 (citing James J. White & Robert S. Summers, Uniform Commercial Code vol. 4, § 30-3, at 30 (5th ed. 2002)).
c. Uniform Commercial Code Section 1-203
In 2001, the New §1-201(37) was amended. The current version is now known as UCC §1-203. There are virtually no substantive changes between §1-201(37) and §1-203. The Official Comment to §1-203 states that it "is substantively identical to those portions of former [§] 1-201(37) that distinguished 'true' leases from security interests . . . ." U.C.C. § 1-203 cmt.
An often cited law review article states the following as the guiding principles of the UCC amendments distinguishing leases from security interests that were initially codified in UCC § 1-201(37) and are now found in UCC § 1-203: The important principle recognized in amended section 1-201(37) is that lessors under a true lease are economic investors possessing a real economic stake in the residual value of the leased goods . . . . The original agreement in a true lease cannot contain an economically irresistible option, which the parties expect from the outset will be exercised by the lessee to purchase the goods or renew the lease for the remaining economic life of the goods. To have a true lease, the original agreement must leave the lessor with some meaningful economic interest in the residual.In re Warne, 2011 Bankr. LEXIS 1342, *7 (Bankr. D. Kan. 2011) (quoting Edwin E. Huddleson, III, Old Wine in New Bottles: UCC Article 2A-Leases, 39 Ala. L. Rev. 615, 632 (1988)).
UCC § 1-203 makes it clear at the outset that the focus is on the facts of each case and that the Court must apply sequentially two distinct tests. . . . The first such test is the Bright-Line Test designed to provide the courts with a per se standard. . . . The second test, to be applied if the Bright-Line Test is not satisfied, is a contextual analysis that asks the court to determine whether 'the facts of each case' demonstrate that a security interest was created.Rentrak Corp. v. Ladieu (In re Ladieu), 2011 Bankr. LEXIS 721, *31-32 (Bankr. D. Vt. Feb. 24, 2011) (citations and internal quotation marks omitted). "[T]he touchstone for making the determination is whether the lessor retained an economically significant reversionary interest." In re Allen, 174 B.R. 293, 295 (Bankr. D. Or. 1994).
The test for determining whether a transaction in the form of a lease creates a security interest under § 1-203(b) remains the Bright-Line Test, with the same requirements: 1) that the lease cannot be terminated by the lessee; and 2) that one of four independent factors (which are commonly referred to as Residual Value Factors) exists. See QDS Components, 292 B.R. at 332.
C. Application of the Bright-Line Test in the Instant Case
As previously discussed, the Lease Agreement contains a choice of law provision whereby Connecticut law shall govern the transaction. Connecticut law provides as follows:
(a) Whether a transaction in the form of a lease creates a lease or a security interest is determined by the facts of each case.Conn. Gen. Stat. Ann. § 42a-1-203.
(b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
(1) The original term of the lease is equal to or greater than the remaining economic life of the goods;
(2) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
(3) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
(4) The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
(c) A transaction in the form of a lease does not create a security interest merely because:
(1) The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
(2) The lessee assumes risk of loss of the goods;
(3) The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording or registration fees, or service or maintenance costs;
(4) The lessee has an option to renew the lease or to become the owner of the goods;
(5) The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
(6) The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
(d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
(1) When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
(2) When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
(e) The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.
1. Termination
The first prong of the Bright-Line Test is whether the lessee may terminate the agreement during its term. Gateway Ethanol, 415 B.R. at 499. Section 1-203 provides in pertinent part as follows:
(b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee[.]Conn. Gen. Stat. Ann. § 42a-1-203(b). The Lease Agreement clearly states that the "Lease is irrevocable for the full term . . . ." Motion Ex. B. Accordingly, the first prong of the Bright-Line Test is satisfied. Next, the Court must determine whether any of the Residual Value Factors are present in this case.
2. Residual Value Factors
The second prong of the Bright-Line Test looks at the Residual Value Factors. Gateway Ethanol, 415 B.R. at 499. "If the lessee may not terminate the lease during its term and any one of the Residual Value Factors is present, the transaction is a sale without consideration of any other facts and circumstances." Id., at 499 (emphasis added). Pursuant to § 1-203(b), the Residual Value Factors consist of the following:
(1) The original term of the lease is equal to or greater than the remaining economic life of the goods;Conn. Gen. Stat. Ann. § 42a-1-203(b)(1)-(4). A lease agreement will be characterized as a security agreement as a matter of law if any one of these four factors is satisfied in addition to the lessee's lack of termination rights. Plaintiff posits that the option price stated in the Lease Agreement is nominal, and thus, the parties dispute focuses on the fourth Residual Value Factor contained in the statute and whether the Debtor "has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement." Conn. Gen. Stat. Ann. § 42a-1-203(b)(4).
(2) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
(3) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
(4) The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
[Section 1-203(d)] sets forth two tests for determining whether an option price is nominal: (1) the option price is not nominal when the option to purchase is stated in the agreement to be the fair market value of the property (the "FMV Standard"); and (2) the option price is nominal if it is less than the lessee's reasonably predictable costs of performing under the lease agreement if the option is not exercised (the "Option Price/Performance Cost Test").QDS Components, 292 B.R. at 335 (explaining that Option Price/Performance Cost Test is essentially a codification of the Economic Realities Test) (citations omitted).
When the parties sign the contract and become bound, they have either made a lease or a security agreement. That agreement is based upon their judgments about values, useful life, inflation, risk of non-payment, and other matters . . . [F]oresight not hindsight controls. Thus, the date of the transaction, rather than a future date, is the more appropriate point to determine the adequacy of the option price. Whether the Court looks at FMV Standard or the Option Price/Performance Cost Test, the focus must be on the value or cost anticipated at the time the agreement was signed.Ladieu, 2011 Bankr. LEXIS 721, at *39 (citations and internal quotation marks omitted).
The parties do not discuss any other Residual Value Factors so the Court assumes they are not applicable in this case.
Plaintiff asserts that under the Lease Agreement the purchase price payable upon exercising the purchase option was less than the reasonably predictable costs of performing under the Agreements if the purchase option was not exercised. Specifically, Plaintiff argues that the fair market value of the Equipment at the end of the lease term was $2.3 million based on the statements in the Declaration and testimony from a Deposition of Gerrit A. Zwergel ("Deposition"). Plaintiff further argues that the reasonably anticipated cost of performance under the Agreements if the option to purchase was not exercised was $2.46 million. Plaintiff calculates this figure by adding (i) costs visited upon Debtor pursuant to the Agreements in the event of failure to exercise the purchase option (estimated to be $160,000) and (ii) the $2.3 million cancellation fee pursuant to the Agreements. Thus, Plaintiff argues that the option price is nominal since it is less than the Debtor's reasonably predictable costs of performing under the Lease Agreements if the option is not exercised.
In response, the Defendant argues that the Agreements provide that the purchase option price is determined by the fair market value of the Equipment, and as a matter of law the option price is not nominal. In addition, Defendant argues that Plaintiff fails to meet his burden of proof because the record contains no evidence of what the parties at the time the Agreements were executed believed the reasonably predictable cost of performing and the fair market value of the Equipment would be at the conclusion of the Agreements.
Defendant asserts a number of other arguments as to why the Bright-Line Test is not satisfied, however, for reasons discussed infra, the Court does not need to address the merits of those arguments.
a. Fair Market Value Standard
Defendant's argument that the additional consideration (i.e., the option price) required under the Agreements is not nominal is misplaced. Section 1-203(d)(2) provides in pertinent part:
Additional consideration is not nominal if:Conn. Gen. Stat. Ann. § 42a-1-203(d)(2). As discussed previously, "it is the parties' projections at the outset of a transaction of the expected fair market value of the leased goods . . . that must be examined." In re UNI Imaging Holdings, LLC, 423 B.R. 406, 417 (Bankr. N.D.N.Y. 2010) (citation omitted). The term "fair market value" is defined as the "price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm's-length transaction; the point at which supply and demand intersect." Black's Law Dictionary 1587 (8th ed. 2004). The Lease Agreement contains a Fair Market Value Purchase Option Agreement whereby "the Lessor has agreed to grant to the Lessee the option of purchasing the Equipment at its fair market value at the expiration of the term of the Lease provided that the Lessee is not in default under the Lease." The Fair Market Value Purchase Option Agreement also states that "the Lessee shall have the right at the expiration of the term of the Lease to purchase all but not less than all of the Equipment at a price equal to the 'fair market value' . . . not to exceed $3,089,603.03." The Lease Amendment provides that "[a]t the end of the term of the Agreement the Equipment is subject to a Fair Market Value Purchase Option Agreement in the amount not to exceed $3,468,628.14." The Agreements clearly did not provide for a straightforward determination of fair market value as both documents contain a monetary cap limiting and qualifying same. The definition of fair market value contemplates a transaction whereby the only limitations are what one party is willing to pay based on her opinion of the value of the goods is and what the other party is willing to accept based on his opinion of the value of the goods. The concept of fair market value being the point at which supply and demand intersect is lost once parties introduce a specific dollar amount as a limitation into the formula for determining fair market value. Therefore, § 1-203(d)(2) does not provide the safe-harbor the Defendant proposes because the Lease Amendment placed a limitation on the maximum purchase price, i.e., $3,468,628.14. Accordingly, whether the Agreements should be recharacterized as disguised security agreements under the Bright-Line Test will depend on application of the Option Price/Performance Cost Test. See QDS Components, 292 B.R. at 335.
. . .
When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
Any capitalized terms not defined herein are terms defined and capitalized by the parties in the Agreements.
The Fair Market Value Purchase Option Agreement further defines "fair market value" in pertinent part as follows:
The "fair market value" of the Equipment shall be the amount determined on the basis of, and equal in value to, the amount which would be obtained in an arm's length transaction between an informed and willing buyer-user (other than the buyer-user currently in possession or a used equipment or scrap dealer) and an informed and willing seller, under no compulsion to buy or sell, provided, however, that in such determination (i) the costs of removal from the location of current use shall not be a deduction from such value, (ii) it shall be assumed (whether or not the same is true) that the Equipment has been maintained and would have been returned to Lessor in compliance with the requirements set forth below and (iii) the fair market value shall be determined on an installed basis, in place and in use. If Lessor and Lessee are unable to agree upon the fair market value of the Equipment, then the fair market value shall be determined by an appraiser selected by mutual agreement of Lessor and Lessee. If the parties cannot mutually agree upon an appraiser, the same shall be selected by the American Arbitration Association in the City of New York.
b. Option Price vs. Performance Cost Test
The Option Price/Performance Cost Test requires a comparison of the option amount with the Debtor's reasonably predictable cost of performing under the Agreements if the option is not exercised. The test is set forth in § 1-203(d) which provides that "[a]dditional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised." As discussed previously, the Option/Price Performance test is a "codification of what has traditionally been referred to as the 'economic realities' test [which] focuses on whether the lessee has, in light of all the facts and circumstances, no sensible alternative but to exercise the purchase option. Under this test, if only a fool would fail to exercise the purchase option, the option price is generally considered nominal and the transaction characterized as a disguised security agreement." Banterra Bank v. Subway Equip. Leasing Corp. (In re Taylor), 209 B.R. 482, 486 (Bankr. S.D. Ill. 1997) (citations omitted). Section 1-203(e) further provides in pertinent part that "'reasonably predictable' fair market rent, fair market value or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into." Conn. Gen. Stat. Ann. § 42a-1-203(e) (emphasis added). "[I]n determining whether an option price is nominal, the proper figure to compare it with is not the actual fair market value of the leased goods at the time the option arises, but their fair market value at that time as anticipated by the parties when the lease is signed." In re Marhoefer Packing Co., 674 F.2d 1139, 1144-45 (7th Cir. 1982).
The Court cannot make a determination regarding nominality under § 1-203(d) because the record does not contain the necessary and competent evidence to do so. Plaintiff asserts that a reasonable estimate of the fair market value of the Equipment is $2,300,000. In support of this proposition, Plaintiff relies upon the Declaration that was filed in support of KBA's motion for default judgment against the Debtor in the Vermont Litigation. Motion Ex. G The Declaration, however, is not executed, and as such, it does not constitute competent evidence that this Court can consider in ruling on the Motion. Ignoring the competency issue for the moment, the Declaration gives an estimate of the fair market value as of the time the Declaration was created, which appears to be some time in August 2008 based upon the context of the document. The Declaration states in pertinent part as follows: "A reasonable estimate of the fair market value of the [Equipment] at this time, based on an actual sale price in 2008, is [$2,300,000]." The jurat in the Declaration states: "Executed at Williston, Vermont on August ____, 2008." The context of the document, therefore, suggests that the estimate of the fair market value of the Equipment was an estimate of the value as it existed in 2008 and not an estimate of the future fair market value anticipated by the parties when they entered into the Agreements in 2004.
The Plaintiff also relies upon the Deposition testimony of Mr. Zwergel, in which he testified as follows:
Q. Going back to paragraph 22, when you entered into the lease, would $2.3 million have been a reasonable estimate of the fair market value of the press at the conclusion of the term of the lease?Trustee's Reply Ex. A. Apparently Mr. Zwergel believed at the time the Agreements were executed, the reasonable estimate of the fair market value of the Equipment at the conclusion of the lease term to be the amount stated as the capped amount in the Agreements (i.e., approximately $3,089,000 or $3,468,628.14). Plaintiff, however, argues that "although, Mr. Zwergel stated that he believes that the fair market value would have been $3.4 million, he also acknowledged that $2.3 million was a 'conservative estimate' of the fair market value when the Agreement was entered into." Essentially, Plaintiff argues that the Court should disregard Mr. Zwergel's statement that he believed the fair market value to be either $3,089,000 or $3,468,628.14 and apply the $2.3 million figure when analyzing the nominality of the option to purchase simply because of his acknowledgment that the $2.3 million figure was a conservative estimate. The Court has difficulty with Plaintiff's argument.
A. I think the amount what we had at that point in time was this 3,089,000 or subsequently the 3 million 480 - $68,000. This would be the fair market value.
Q. Okay. So would 2.3 million be a reasonable estimate, or are you say [sic] it would not have been a reasonable estimate at the time?
A. It is - it is a conservative - it is definitely a conservative estimate.
The Deposition testimony attached to the Motion does not indicate to what document paragraph 22 relates as it contains only excerpts from the complete Deposition; the Court will assume the related document is the Declaration.
First, Mr. Zwergel tosses about three figures in connection with the fair market value of the Equipment, one of which varies in significant amount from the others; this presents issues of credibility with respect to the statements themselves. Second, the second question presented to Mr. Zwergel above sets the time period with the phrase "at the time" instead of "at the time the Agreements were executed" or something similar that would have provided a specific time period for Mr. Zwergel to consider before responding. This is significant because the questions leading up to that point in the Deposition referenced paragraph 22 of Mr. Zwergel's Declaration in which he opined on the Equipment's value as of the date of the Declaration in 2008. This was discussed in Mr. Zwergel's deposition:
The question can be found on pages 71-72 of the Deposition attached as Exhibit A to Trustee's Reply.
Q. Okay. And then moving back to paragraph 22 of your declaration, the final sentence states there, "A reasonable estimate of the fair market value of the press at this time, based on an actual sale price in 2008, is $2.3 million."Deposition of Gerrit A. Zwergel (Doc. 39) at 68-70. The evidence is clear from this line of questioning that Mr. Zwergel thought that $2.3 million represented a conservative estimate of the Equipment's fair market value in 2008. In light of this, at the very least, the record is unclear what Mr. Zwergel meant. When considering a motion for summary judgment the Court does not make determinations as to the credibility of the deposition testimony. Determinations of credibility, weight to be given the evidence, and inferences to be drawn from the facts remain the province of the jury. Anderson, 477 U.S. at 255.
Now, when you use words "at this time," do you mean at the time you signed your declaration?
A. Yes.
Q. Okay. And if you look on the final page of the declaration, it's dated August 2008?
A. Yes.
Q. So what you're saying is the reasonable estimate of the fair market value of the press around August of 2008, based upon an actual sale price in 2008, is $2.3 million; is that correct?
A. In August of 2008 - yeah.
Q. Okay.
A. Yes. But, again, what you have to understand, what we were doing here is we are looking to establish a damages claim. We could have basically - and we were on the conservative side of it, not to basically inflate or overinflate this kind of a damages claim. Therefore, we were going with the lower amount, which was $2.3 million. I think we could have also justified in front of the court a higher amount, but for this kind of purposes, of establishing a damages claim, so that we didn't get into any kind of additional arguments and have to do any valuations and to spend additional monies for what you referred before for the valuations from third parties, we basically went with a very low amount. Or it was a low amount.
Q. Okay.
A. Then you have to see always this affidavit in connection to what was occurring.
Q. So you're saying that the $2.3 million is a conservative amount?
A. Yes.
Q. Does that mean that it's an inaccurate amount, or is it within the range of accuracy?
A. I don't know how to answer that.
Q. Well, I mean you wouldn't have put an amount that's not accurate, would you?
A. No.
The evidence before the Court is inconclusive on the issue of the value that the parties expected the Equipment to have at the time the option would be exercised when they entered into the Agreements. Additionally, in connection with a dispute regarding the true nature of an agreement, the evidence offered in support of a motion for summary judgment must contain the proper foundation establishing that the affiant, deponent, declarant or other party whose testimony is relied upon participated in the transaction or the computation of the option price. This is because "absent personal knowledge, the danger lurks that his testimony may be based on inadmissible hearsay . . . ." APB Online, 259 B.R. at 819 (citing Schwimmer v. Sony Corp. of America, 637 F.2d 41, 45 (2d Cir. N.Y. 1980) (finding a hearsay affidavit is a nullity on a motion for summary judgment)). The portion of the Deposition testimony attached to Plaintiff's Reply does not contain sufficient foundation for this Court to determine whether Mr. Zwergel participated in the lease transaction and/or the computation of the option price. Without any direct statements indicating that Mr. Zwergel participated in the lease transactions, the Court may not assume same. Accordingly, the Plaintiff has failed to carry his burden of proof establishing the estimated fair market value of the Equipment at the time the option to purchase would be exercised as anticipated by the parties when the lease was signed.
The Court acknowledges that Plaintiff filed a copy of the complete Deposition in the record, however, it is not the Court's duty to comb through such documents to find support for a party's argument. Federal Rule of Civil Procedure 56(c)(1)(A) provides that "[a] party asserting that a fact cannot be or is genuinely disputed must support the assertion by . . . citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations . . ., admissions, interrogatory answers, or other materials[.]" In addition, Federal Rule of Civil Procedure 56(c)(3) states "[t]he court need consider only the cited materials . . . ."
Similarly, the Declaration of Mr. Zwergel lacked the necessary foundation as well; however, since the copy of the Declaration before the Court is unexecuted, the Court need not provide a detailed discussion regarding same. The Declaration does not contain any direct statements establishing that Mr. Zwergel participated in the lease transactions or the computation of the option prices.
The record also fails to allow the Court to determine what the Debtor's reasonably predictable cost of performing would be if it chose not to exercise its purchase option, based on the facts and circumstances at the time the Agreements were entered into by the parties. Section 1-203 expressly states that the "'reasonably predictable' . . . cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into." Conn. Gen. Stat. Ann. § 42a-1-203(e). Plaintiff argues that the reasonably predictable cost of performing under the Agreements if the purchase option was not exercised is $160,000 as testified to by Mr. Zwergel in his Declaration and Deposition. For the same reasons discussed above, the evidence before the Court regarding the cost of performance is also insufficient. As noted earlier, the Declaration is not executed and lacks the necessary foundation. Similarly, the Deposition testimony lacks the necessary foundation and also fails to establish the point in time at which the calculations were determined. The Deposition provides in pertinent part as follows:
Q. With respect to the costs identified in paragraph 5 of the Fair Market Value Purchase Option Agreement, was it reasonably anticipated that those costs could amount to $760,000?Trustee's Reply Ex. A. The question asked during the Deposition did not specifically reference a time period such as "at the time the parties executed the lease" or "at lease inception" when asking what the reasonably anticipated costs under paragraph 5 were. The record therefore contains no evidence establishing what the original parties to the transaction anticipated at contract inception regarding the future costs of performance if the option to purchase was not exercised. Accordingly, Plaintiff has failed to demonstrate the nominality of the option amount under the Bright-Line Test.
A. What is stated in paragraph 5, the reasonable costs would be in the neighborhood of $160,000.
Q. So you're saying that properly deinstalling, dismantling, crating and delivering the equipment costs $160,000?
A. Yes, approximately.
D. Contextual Analysis - Facts and Circumstances Test
The applicable Connecticut statute provides that "[w]hether a transaction in the form of a lease creates a lease or a security interest is determined by the facts of each case." Conn. Gen. Stat. Ann. § 42a-1-203(a).
When the bright line test is not satisfied, UCC 1-201(37) requires the court to consider "the facts of each case." This consideration is guided by the fact that the drafters of amended UCC 1-201(37) sought to "preserve common law principles," under which 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." The Official UCC Comments states: "If a transaction creates a lease and not security interest, the lessee's interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor." When the bright line test is not satisfied, the court must then answer the question whether the lessor retained a reversionary interest, either an upside or downside risk. "To have a true lease, the original agreement must leave the lessor with some meaningful economic interest in the residual." The challenge to the courts "therefore is first to establish the indicia that evidence a reversionary interest in the leased goods and then determine whether those indicia are apparent in the case at hand."Gateway Ethanol, 415 B.R. at 503-04 (citations omitted). "[T]he Court must address the outcome-determinative question: Did the [l]essors retain a meaningful reversionary interest in the [equipment]?" QDS Components, 292 B.R. at 340-41 (citations omitted). UCC § 1-203 does not contain a test for determining whether a lessor has retained a meaningful reversionary interest and this has caused confusion and unpredictability in the caselaw. See QDS Components, 292 B.R. at 341-42. The Lease Agreement provides that Connecticut law governs the transaction; however, the Court has not been able to find cases from that state which help in this case. It seems appropriate, then to focus on the economics of the transaction. See Gateway Ethanol, 415 B.R. at 505.
In the end, we "focus on economics." This includes "all the economic factors which drove the transaction and which were the prime impetus to the ultimate decision to enter into the transaction and the reasons for structuring the transaction as it was done." . . . Other factors may include, but are not limited to, the total amount of rent required of the lessee, whether the lessee acquired equity or any pecuniary interest in the goods, the useful life of the goods, the practical limitations on the lessee's ability to remove and return the leased goods, and the ability of the lessor to market the equipment.Gibraltar Fin. Corp. v. Prestige Equip. Corp., 949 N.E.2d 314, 325 (Ind. 2011). For the same reasons the Court was not able to make a determination under the specific statutory tests of the UCC, it cannot make a determination under the Facts and Circumstances Test either. The evidence relied upon by Plaintiff simply is not sufficient for the Court to make a determination as a matter of law that the Agreements constitute a lease or disguised security interest. As the movant for summary judgment, Plaintiff has the burden to establish the absence of any genuine issue of material fact as to the economic realities of the transaction including, but not limited to, the expectations of the parties at the time of the transaction regarding such factors as the value of the Equipment at the end of the lease term. Therefore, the Court cannot make a determination of the character of the agreement (i.e., lease or security interest) as a matter of law based on the evidence before it. As a result, the Court cannot make a determination whether the Payments are avoidable under 11 U.S.C. § 547(b).
APB Online interprets and applies Connecticut law; however, the version of the UCC adopted by Connecticut at the time of this decision was the 1972 iteration of the UCC. The court in APB specifically stated the "nature of the transaction depends on the intent of the parties." APB Online, 259 B.R. at 815. As such, the court focused its analysis on a laundry list of criteria that would "provide circumstantial evidence of the parties' intent." Id. at 820 (citation omitted). It is no longer appropriate to apply the same analysis in this case because the UCC was amended specifically to eliminate the parties' intent from the analysis.
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IV. Conclusion
For the reasons discussed above, the Motion is hereby DENIED. The Court will set this adversary proceeding for status conference by separate notice.
IT IS SO ORDERED. Copies via CM/ECF to: Matthew T. Schaeffer, Esq., Attorney for Plaintiff Daniel M. Anderson, Esq., Attorney for Defendant
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Motion Ex. B.