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High court questions whether transactions are leases or security interest sales

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Examining whether a transaction between two businesses is a lease or a sale subject to security interest, the Indiana Supreme Court has adopted an approach used in Colorado. The court held that various factors, such as the economy, must be considered in each situation to decide that question.

As a result, the state justices have adopted a bright-line rule with multiple parts. Essentially, they leave it up to trial courts and attorneys to determine how each transaction might be interpreted.

The ruling came Tuesday in Gibraltar Financial Corp. v. Prestige Equipment Corporation, et. al , No. 20S03-1010-CV-618, an Elkhart Superior case that involves a contract dispute over a punch press at a now-defunct manufacturing business in northern Indiana.

Vitco Industries was a porcelain manufacturer in Napanee that paid $243,000 for a punch press in early 2004. Later that year, Vitco sold the punch press to Key Equipment Finance for the same amount. Key Finance and Vitco entered into a six-year master lease agreement contract where Vitco would make monthly payments to use the punch press. The contract was governed by Colorado law.  Vitco was no longer in business by 2007 and defaulted on the lease agreement.

But independent of its dealings with Key Finance in that lease agreement, Vitco had also entered into several loan agreements with Gibraltar Financial Corp. and granted Gibraltar a security interest in almost all tangible and intangible property. A separate lawsuit in 2007 resulted in Gibraltar receiving possession of all collateral it had perfected security interest in. Gibraltar sold all of the equipment and credited Vitco with the sale proceeds, but in the meantime Key Finance had repossessed the punch press and sold it in an unrelated business venture with Prestige Equipment Corp.

In May 2008, Gibraltar sued Prestige Equipment, attempting to recover the value of the press on allegations that Prestige had acquired the equipment subject to Gibraltar’s security interest. A line of third-party suits and disputes arose. In the end, the current suit came down to whether the initial transaction between Vitco and Key Financial was a true lease or rather a sale subject to security interest.

Elkhart Superior Judge Charles Wicks granted summary judgment in favor of the defendants after concluding the transaction was a true lease, and the Court of Appeals affirmed that finding last year.

Unable to reach a final decision on whether the agreement was in fact a lease, the Supreme Court remanded for further proceedings but outlined some general rationale in making that decision on these situations in the future.

The justices relied on the Uniform Commercial Code adopted in some form in all 50 states, and they specifically looked at how Colorado has adopted a provision in §1-203 that addresses how to distinguish whether a transaction is a lease or one that creates or retains a security interest. That state has a bright line test involving two-prongs that must be met, and in this case it appears that both prongs have been satisfied to prove the transaction was a security interest, the Indiana justices found.

But other aspects of the contract – such as the early buyout option and fair market value, and any residual interest in the property – must also be examined, and factors such as the economic climate at the time can help determine whether the transaction was a lease or security interest.

“To review, we have applied the objective bright-line test of (Colorado) §1-203(b) and concluded that the Lease did not create a security interest per se,” Justice Frank Sullivan wrote, noting that material facts about the economic issues weren’t provided in the record.

“We see no way of resolving this case without this evidence (about trial-specific facts such as intent between the parties). Because such evidence was not presented, summary judgment was not appropriate.”

The trial court’s judgment is reversed and the case is remanded for further proceedings to determine whether this specific transaction constituted a lease or security interest.

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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  2. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  3. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

  4. When I hear 'Juvenile Lawyer' I think of an attorney helping a high school aged kid through the court system for a poor decision; like smashing mailboxes. Thank you for opening up my eyes to the bigger picture of the need for juvenile attorneys. It made me sad, but also fascinated, when it was explained, in the sixth paragraph, that parents making poor decisions (such as drug abuse) can cause situations where children need legal representation and aid from a lawyer.

  5. Some in the Hoosier legal elite consider this prayer recommended by the AG seditious, not to mention the Saint who pledged loyalty to God over King and went to the axe for so doing: "Thomas More, counselor of law and statesman of integrity, merry martyr and most human of saints: Pray that, for the glory of God and in the pursuit of His justice, I may be trustworthy with confidences, keen in study, accurate in analysis, correct in conclusion, able in argument, loyal to clients, honest with all, courteous to adversaries, ever attentive to conscience. Sit with me at my desk and listen with me to my clients' tales. Read with me in my library and stand always beside me so that today I shall not, to win a point, lose my soul. Pray that my family may find in me what yours found in you: friendship and courage, cheerfulness and charity, diligence in duties, counsel in adversity, patience in pain—their good servant, and God's first. Amen."

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