Putative Leases as Article 9 Secured Transactions

Putative Leases as Article 9 Secured Transactions

In most cases, filing a financing statement will protect the lessor/secured party from other secured parties. However, one type of transaction has bedeviled the courts for many years--the secured transaction disguised as a lease. Professor examines whether a corporation's possessory repairman's lien take priority over a lessor's security interest.

Professor Livingston writes:  Article 9 of the Uniform Commercial Code applies to any "transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract." U.C.C. § 9-109 (a)(1) (2009). Thus, Article 9 covers all consensual security interests in chattels and fixtures unless one of the statutory exceptions applies. See U.C.C. § 9-109 (c) (providing for preemption of Article 9 by certain federal and state laws), (d) (specifically exempting certain transactions from Article 9). The term "security interest" is itself defined in Article 1 as "an interest in personal property or fixtures which secures payment or performance of an obligation." U.C.C. § 1-201 (b)(35) (2009).

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True leases are not subject to Article 9, and true lessors do not need to file Article 9 financing statements or otherwise comply with Article 9. See U.C.C. § 1-201 (b)(35) ("[T]he right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a 'security interest.'"). But for various business and tax reasons, purported lessors often create leases with their customers that, beneath the surface, look suspiciously like classic secured transactions. For decades, both the Code drafters and the courts have struggled to find the proper dividing line between transactions that are properly denominated true leases and those that are really disguised Article 9 transactions. See In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir. 1982); In re QDS Components, Inc., 292 B.R. 313 (Bankr. S.D. Ohio 2002); In re Taylor, 209 B.R. 482 (Bankr. S.D. Ill. 1997). A June, 2009, decision by the Indiana Court of Appeals reveals a court once again wrestling with this issue. Gangloff Industries, Inc. v. Generic Financing & Leasing Corp., 907 N.E.2d 1059 (Ind. Ct. App. 2009).

In Gangloff Industries, the lessor Generic Financing entered into an agreement with Robert Bougher for a three-year lease of a truck in September 2005. 907 N.E.2d at 1060-61. Bougher's wife, Kathy, in turn entered into a contract with Gangloff Industries under which the Boughers were to haul good for Gangloff using the leased truck. 907 N.E.2d at 1061-62. The second contract specified that the Boughers were to pay for all repairs to the truck. Through an unfortunate series of circumstances, the truck broke down, Gangloff paid for the repairs with the understanding that the Boughers would repay it, and Robert Bougher suffered a fatal heart attack while refueling the truck at a truck stop in July 2007. 907 N.E.2d at 1062. Gangloff took possession of the truck and held it in storage, pending Kathy Bougher's payment of the repair and storage costs.

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