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In re Harvey

United States Bankruptcy Court, E.D. Virginia
Sep 30, 2002
Case No. 02-62169-T (Bankr. E.D. Va. Sep. 30, 2002)

Opinion

Case No. 02-62169-T

September 30, 2002


MEMORANDUM OPINION


Hearing was held July 24, 2002, on creditor Best-Way Rent To Own's objection to confirmation of chapter 13 plan filed by James Harvey and Beatrice Johnson Muse, debtors. The dispute arises out of debtors' scheduling of two lease-purchase agreements with the creditor as secured interests rather than as true leases that can be either affirmed or rejected by the debtors under 11 U.S.C. § 365. The court must consider whether the two lease-purchase agreements should be treated as secured transactions or true leases under state law. See In re Smith, 262 B.R. 365, 368 (Bankr. E.D. Va. 2000).

The court finds that the lease-purchase agreements between Beatrice Johnson Muse and the creditor are true leases under the Virginia Lease-Purchase Agreement Act. Accordingly, the creditor's objection to confirmation of the debtor's chapter 13 plan is sustained and the debtors must either affirm or reject these agreements.

Findings of Fact

On September 27, 2001, and December 22, 2001, joint debtor Beatrice Johnson Muse entered into lease-purchase agreements for a television and a CPORT 32S. The September agreement pertained to a big screen television that had a cash value of $2,159.82 at the time of the transaction. This agreement required the joint debtor-lessee to make an initial payment in the amount of $29.99 for sales tax and regular payments in the amount of $119.99 per month for a period of 30 consecutive months. The monthly payments total $3,599.70. The September agreement allowed the lessee to terminate the agreement at any time without additional charges and provided that the lessor retains title to the television unless or until the lessee acquires ownership. The agreement also indicated that the disclosures made in the document are made pursuant to the Virginia Lease-Purchase Agreement Act, and the document served the purpose of perfecting Finova Capital Corporation's security interest therein.

The December agreement pertains to a CPORT 32S that had a cash value of $882.25 at the time of the transaction. This agreement required the joint debtor-lessee to make an initial payment of $17.99 for sales tax and 90 regular bi-weekly payments of $17.99. All payments total $1,637.09. The December agreement contained the same recitation of rights and duties of the lessee and lessor as mentioned above regarding the September agreement.

On or about March 14, 2002, the debtors filed a joint chapter 13 bankruptcy petition. Under their plan, they treated the lease-purchase agreements as secured claims belonging to the creditor. Debtors altered the payment schedule of the September and December agreements, planning instead to pay $65.63 toward the balance of the September agreement and $18.75 toward the balance of the December agreement.

Discussion and Conclusions of Law.

The court's ruling on creditor's motion under 11 U.S.C. § 365 turns on whether the subject lease-purchase agreements are true leases or transactions creating security interests. As noted earlier this determination is made by reference to state law. See In re Smith,

262 B.R. at 368. The relevant state law provisions are found in Virginia Code §§ 8.1-201(37) and 59.1-207.17-26.

Virginia Code § 59.1-207.17-.27 is the Virginia Lease-Purchase Agreement Act, which defines a lease-purchase agreement as:

an agreement for the use of personal property by a natural person primarily for personal, family, or household purposes, for an initial period of four months or less that is automatically renewable with each payment after the initial period, but does not obligate or require the consumer to continue leasing or using the property beyond the initial period, and that permits the consumer to become the owner of the property.

Va. Code Ann. § 59.1-207.18 (Michie 2001). There is no case law interpreting this statute although it has been a part of the Virginia Code since 1988. The court finds however that by reading the plain language of the statute the present agreements fit within the Act. They were clearly made by Beatrice Johnson Muse, the joint debtor, presumably for household purposes. According to their terms, the agreements are for an initial period of a month, are automatically renewable with each payment, and can be "terminate[d] at any time without paying any charges other than previously due." Creditor's Mem. in Supp., ex.1, 2 (¶ 13). The agreements further permit the lessee to become the owner of the subject property. See Creditor's Mem. in Supp., Ex. 1, 2 ( ¶ 7). Accordingly, the court finds that the agreements at issue are lease-purchase agreements as defined in Virginia Code § 59.1-207.18.

The Virginia Lease-Purchase Agreement Act imposes disclosure requirements on lessors that are complied with in the subject agreements. The Act also excepts the applicability of several code sections from subject agreements, including Virginia Code § 8.1-201(37), which defines the term "security interest." See Va. Code Ann. § 59.1-207.19(A)(3) (Michie 2001). From this it seems clear that agreements that fit the requirements of a lease-purchase agreement under the Act cannot be construed as creating security interests.

Despite this finding, the court also wishes to address the application of Virginia Code § 8.1-201(37) to these agreements. Section 8.1-201(37) defines a "security interest" as:

an interest in personal property or fixtures which secures payment or performance of an obligation . . . .[A] seller or lessor may . . . acquire a "security interest" by complying with Title 8.9A. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under § 8.2-401 is limited in effect to a reservation of a "security interest."

Id. at § 8.1-201(37). This section of the Code also discusses how to determine whether a transaction creates a lease or a security interest:

Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security.

Id. Part 37(2) discusses this further, suggesting:

a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and: (a) The original term of the lease is equal to or greater than the remaining economic life of the goods; (b) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods; (c) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or (d) The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.

Id. Part 37(3) indicates that a transaction with the following attributes will not necessarily create a security interest:

(a) The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;(b) The lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance, filing, recording, or registration fees, or service or maintenance costs with respect to the goods; (c) The lessee has an option to renew the lease or to become the owner of the goods; (d) The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or (e) The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.

Id.

Applying this Code section to the agreements, the court finds relevant the fact that lessee may exercise an option to purchase the property by making all of the payments during the term of the lease. The lessee may also acquire title any time after the initial lease payment and prior to the last four lease payments by paying 50% of the remaining agreement balance on a single unit. Considering this in conjunction with the applicable Code language, the court finds that these provisions alone will not make the agreement one that creates a security interest.See id. at § 8.1-201(37)(1)(a),(b).

Next the court considers the terms of the agreements that permit termination. These state that the lessee "may terminate the agreement at any time without paying any charges other than those previously due. [The lessee] must return the property to [the lessor] and make all lease payments through the date of return of the property." See Creditor's Mem. in Supp., Ex. 1, 2 (¶ 13). Such a provision makes these agreements true leases rather than secured transactions. See Va. Code Ann. § 8.1-201(37)(2) (Michie 2001).

Despite these consistencies with true leases, the court has also considered that the agreement provides the lessee "an option to become the owner of the goods for no additional consideration . . . upon compliance with the lease agreement." Id. at § 8.1-201(37)(2)(d);see Creditor's Mem. in Supp., Ex. 1, 2 (¶ 7). Such a term has been noted to be more consistent with the creation of a security interest. Additionally, the final line of the agreement between the parties indicates that the document will be "assigned to Finova Capital Corporation as collateral and for the purpose of perfecting its security interest herein." Creditor's Mem. in Supp., Ex. 1, 2 (¶ 18).

Despite these two indicators of the creation of a security interest, Virginia Code § 8.1-201(37)(3) states that the lessee having the right to purchase as indicated above will not necessarily create a security interest. The fact that the lessee assumes the risk of loss,see Va. Code Ann. § 8.1-201(37)(3)(b); Creditor's Mem. In Supp., Ex. 1, 2 (¶ 9), which the lessee does under these agreements, will also not necessarily create a security interest. Similarly, the facts present here indicate that the "present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into." Va. Code Ann. § 8.1-201(37)(3)(a) (Michie 2001); see Creditor's Mem. in Supp., Ex. 1, 2 (¶¶ 5, 8). This structure does not create a security interest.

Finally, the court wishes to address its previous treatment of similar issues in In re Smith, 262 B.R. 365 (Bankr. E.D. Va. 2000). There the court found that the debtor who had ceased making payments on two items subject to a lease-purchase agreement could adjust the monthly payments for those items in her plan as the creditor held a security interest on those items. See id. at 367. In re Smith relied upon C.F. Garcia Enter., Inc. v. Enter. Ford Tractor, Inc., 253 Va. 104 (1997) to provide an "interpretive gloss in completing the [article 9] analysis." In re Smith, 262 B.R. at 369. C.F. Garcia interpreted § 8.1-201(37) prior to the 2000 revisions of that statutory section, and clearly relied on the intent language that has now been removed from the statute for the confusion that it created in the courts. See Va. Code Ann. § 8.1-201, The Official Comment 37, ¶ 7.

Reference to the intent of the parties to create a lease or security interest has led to unfortunate results. In discovering intent, courts have relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, are as applicable to true leases as to security interests . . . Accordingly, amended Section 1-201(37) deletes all reference to the parties' intent.

Id.

Considering this change in the statute enacted by the General Assembly, the reliance on C.F. Garcia is no longer prudent for this court. Accordingly, this court will rely on the language of the revised § 8.1-201(37) and the Virginia Lease-Purchase Agreement Act to make its determination in this case.

The court finds that the structure of the agreements, notwithstanding the provisions of the Virginia Lease-Purchase Agreement Act, make these agreements true leases. Accordingly, the court sustains Best-Way Rent to Own's objection to the debtor's chapter 13 plan.


Summaries of

In re Harvey

United States Bankruptcy Court, E.D. Virginia
Sep 30, 2002
Case No. 02-62169-T (Bankr. E.D. Va. Sep. 30, 2002)
Case details for

In re Harvey

Case Details

Full title:In Re: JAMES HARVEY BEATRICE JOHNSON MUSE, Chapter 13, Debtors

Court:United States Bankruptcy Court, E.D. Virginia

Date published: Sep 30, 2002

Citations

Case No. 02-62169-T (Bankr. E.D. Va. Sep. 30, 2002)