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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. KUDOS to the Indiana Supreme Court for realizing that some bureacracies need to go to the stake. Recall what RWR said: "No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!" NOW ... what next to this rare and inspiring chopping block? Well, the Commission on Gender and Race (but not religion!?!) is way overdue. And some other Board's could be cut with a positive for State and the reputation of the Indiana judiciary.

  2. During a visit where an informant with police wears audio and video, does the video necessary have to show hand to hand transaction of money and narcotics?

  3. I will agree with that as soon as law schools stop lying to prospective students about salaries and employment opportunities in the legal profession. There is no defense to the fraudulent numbers first year salaries they post to mislead people into going to law school.

  4. The sad thing is that no fish were thrown overboard The "greenhorn" who had never fished before those 5 days was interrogated for over 4 hours by 5 officers until his statement was illicited, "I don't want to go to prison....." The truth is that these fish were measured frozen off shore and thawed on shore. The FWC (state) officer did not know fish shrink, so the only reason that these fish could be bigger was a swap. There is no difference between a 19 1/2 fish or 19 3/4 fish, short fish is short fish, the ticket was written. In addition the FWC officer testified at trial, he does not measure fish in accordance with federal law. There was a document prepared by the FWC expert that said yes, fish shrink and if these had been measured correctly they averaged over 20 inches (offshore frozen). This was a smoke and mirror prosecution.

  5. I love this, Dave! Many congrats to you! We've come a long way from studying for the bar together! :)

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