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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. Indianapolis employers harassment among minorities AFRICAN Americans needs to be discussed the metro Indianapolis area is horrible when it comes to harassing African American employees especially in the local healthcare facilities. Racially profiling in the workplace is an major issue. Please make it better because I'm many civil rights leaders would come here and justify that Indiana is a state the WORKS only applies to Caucasian Americans especially in Hamilton county. Indiana targets African Americans in the workplace so when governor pence is trying to convince people to vote for him this would be awesome publicity for the Presidency Elections.

  2. Wishing Mary Willis only God's best, and superhuman strength, as she attempts to right a ship that too often strays far off course. May she never suffer this personal affect, as some do who attempt to change a broken system: https://www.youtube.com/watch?v=QojajMsd2nE

  3. Indiana's seatbelt law is not punishable as a crime. It is an infraction. Apparently some of our Circuit judges have deemed settled law inapplicable if it fails to fit their litmus test of political correctness. Extrapolating to redefine terms of behavior in a violation of immigration law to the entire body of criminal law leaves a smorgasbord of opportunity for judicial mischief.

  4. I wonder if $10 diversions for failure to wear seat belts are considered moral turpitude in federal immigration law like they are under Indiana law? Anyone know?

  5. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

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