Lexis Nexis - Case Brief

Not a Lexis Advance subscriber? Try it out for free.

Law School Case Brief

Gib. Fin. Corp. v. Prestige Equip. Corp. - 949 N.E.2d 314 (Ind. 2011)

Rule:

The Colorado Uniform Commercial Code defines the term "lease" as follows: "Lease" means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease, Colo. Rev. Stat. § 4-2.5-103(1)(j) (2010). The key thing to note about this definition is that it specifies that a transaction creating a lease and a transaction retaining or creating a security interest are mutually exclusive.

Facts:

Vitco Industries, Inc. (“Vitco”), was a manufacturer of porcelain enameled goods in Napanee, Indiana. In April 2004, Vitco paid $243,000 for a punch press to use in its business. Roughly eight months later, in December 2004, Vitco entered into a transaction with Key Equipment Finance, Inc. ("Finance"). They executed a contract where Vitco was entitled to use the punch press in exchange for monthly payments. Finance and Vitco called this contract a Master Lease Agreement (“Lease”). Finance did not file a financing statement in connection with the transaction. Independent of its dealings with Finance, Vitco had entered into several loan agreements with Gibraltar Financial Corp., pursuant to which it had granted Gibraltar a security interest in virtually all of its tangible and intangible property, including its equipment.  In a separate lawsuit filed against Vitco in July 2007, Gibraltar was awarded possession of the collateral in which it had a perfected security interest, including Vitco's equipment. Gibraltar sold that equipment and credited Vitco with the sale proceeds, but Vitco still owed Gibraltar almost $580,000. In May 2008, Gibraltar filed an action against Prestige to recover the value of the press, alleging that Prestige had acquired the press subject to Gibraltar's security interest. The trial court granted summary judgment in favor of Prestige after concluding that the Lease was a true lease. The Court of Appeals affirmed the trial court's grant of summary judgment. Gibraltar then sought to transfer the case to the Supreme Court of Indiana, arguing that the decision of the Court of Appeals in this case conflicted with the prior decision of the Court of Appeals in Gangloff Industries, Inc. v. Generic Financing & Leasing, Corp., 907 N.E.2d 1059 (Ind. Ct. App. 2009). 

Issue:

Should the case be transferred to the Supreme Court of Indiana?

Answer:

Yes.

Conclusion:

The Supreme Court of Indiana granted transfer in order to reconcile any conflict between the present case and the previous existing cases (i.e., in Gangloff Industries, Inc. v. Generic Financing & Leasing, Corp., 907 N.E.2d 1059 (Ind. Ct. App. 2009)), and in order to clarify Indiana law in distinguishing true leases from sales subject to security interests. In the case at bar, the Court noted that because the lease provided that Colorado law governed the interpretation of its provisions, it would analyze whether the transaction constituted a lease or sale subject to a security interest according to Colorado law. The consideration Vitco was obligated to pay was an obligation for the term of the lease and was not subject to termination by Vitco. Compliance with the lease required Vitco to pay more than nominal consideration to become the owner of the press. This was because the $78,000 Early Buyout Option (EBO) price was not less than Vitco’s reasonably predictable cost of performance under the lease had the EBO not been exercised within the meaning of the Option Price/Performance Cost Test. According to the Court, the companies did not provide evidence of the expectations of Vitco and Gibraltar at the time the transaction was entered into as to such factors as the value of the punch press on the EBO and lease expiration dates, the discount rate, and whether the only economically sensible course for the manufacturer would have been to exercise the EBO. Due to the lack of evidence, the Court reversed and remanded the case for further proceedings.

Access the full text case Not a Lexis Advance subscriber? Try it out for free.
Be Sure You're Prepared for Class