In re Price

577 B.R. 643

IN RE: Sidney Ray PRICE III, Mandy Ross Price, Debtors

CASE NO. 17–00067–5–DMW

United States Bankruptcy Court, E.D. North Carolina, New Bern Division.

Signed September 14, 2017

Adrian M. Lapas, Goldsboro, NC, for Debtors.

ORDER GRANTING RELIEF FROM INTERIM ORDER AND DENYING MOTION FOR RELIEF FROM AUTOMATIC STAY

David M. Warren, United States Bankruptcy Judge

The matters before the court are the Motion for Relief from Automatic Stay ("Stay Motion") filed by Peak Leasing, LLC ("Peak") on January 30, 2017 and the Emergency Motion to Reconsider Interim Order Denying Motion for Relief from the Automatic Stay or, in the Alternative, to Reinstate the Automatic Stay ("Reconsideration Motion") filed by Sidney Ray Price III and Mandy Ross Price ("Debtors") on June 15, 2017. The court conducted interim hearings on the Stay Motion on March 23, 2017 in Raleigh, North Carolina and on April 19, 2017 in New Bern North Carolina. On June 26, 2017, the court conducted a final hearing on the Stay Motion, including the Reconsideration Motion, in Raleigh, North Carolina. David J. Haidt, Esq. appeared for Peak, Adrian M. Lapas, Esq. appeared for the Debtors, and Chapter 13 trustee Joseph A. Bledsoe III, Esq. ("Trustee") appeared by telephone on behalf of the estate. Based upon the evidence presented and arguments of counsel, the court makes the following findings of fact and conclusions of law:

BACKGROUND

1. The Debtors filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code on January 5, 2017, and the court appointed the Trustee to administer the estate pursuant to 11 U.S.C. § 1302.

2. Prior to the Debtors' petition, the male Debtor executed four Lease Agreements on May 4, 2015, June 2, 2015, July 6, 2015, and November 4, 2015, respectively, pursuant to which he agreed to lease from Peak the following equipment:

a. 2008 Timpte Hopper Bottom Trailer for $225.00 per week for an initial lease term of 182 weeks;

b. 2011 Timpte Hopper Bottom Trailer for $245.00 per week for an initial lease term of 208 weeks;

c. 1998 Wilson Hopper Bottom Trailer for $198.00 per week for an initial lease term of 130 weeks; and

d. 2010 Wilson Hopper Bottom Trailer for $249.00 per week for an initial lease term of 208 weeks.

3. With the exception of the descriptions of leased equipment, initial lease terms, and weekly payment amounts, the Lease Agreements are identical and drafted upon a form provided by Peak. The Lease Agreements each contain, inter alia, the following provisions:

DEFAULT: If LESSEE fails to pay when due any rent or other amount required herein to be paid to LESSOR by LESSEE, or if LESSEE fails to perform any other provision hereof within (10) days after LESSOR shall have demanded in writing performance thereof ... LESSOR shall have the right, but shall not be obligated, to exercise any one or more of the following remedies: (a) to sue for and recover all rents and other amounts then due and thereafter accruing under this LEASE, (b) to take possession of any and all of the EQUIPMENT ... (c) to sell any or all of the items of the EQUIPMENT at public or private sale upon such terms as LESSOR deems advisable, and ... (d) pursue any other remedy now or hereafter existing at law or in equity.

Notwithstanding any such action that LESSOR may take, including taking possession of any or all of the EQUIPMENT, LESSEE shall remain liable for the full performance of all its obligations hereunder ....

SURRENDER: On or before the expiration or earlier termination of this LEASE by LESSOR, LESSEE, at its expense shall return the EQUIPMENT in good condition and repair ....

RENEWAL: Upon expiration of the original term of the LEASE, the LEASE will automatically renew on a week to week basis without the necessity of execution of new documents and shall continue from week to week under the same terms and conditions until terminated by LESSOR or LESSEE upon thirty days prior written notice to the other.

4. Each of the Lease Agreements is supplemented by an attached Purchase Option executed by both the male Debtor and Peak and which provides as follows:

The above referenced lessor ("Lessor") hereby agrees that if Lessee maintains its account with Lessor in good order and makes prompt and timely payments, after all sums owed to Lessor have been paid in full, Lessee may purchase the above Equipment "AS IS", "WHERE IS" at the end of the lease term for:

(Check on applicable box. If no box is checked or if more than one box is checked, the Fair Market Value Purchase Option will apply.)

? Fixed Price Purchase Option of $1.00; or

? Fair Market Value Purchase Option; or

? Fair Market Value Purchase Option Not to Exceed _____% of the Total Cash Price; or

? Other: __________________________________________________

plus applicable taxes and fees.

As reflected above, on each Purchase Option, the "Fixed Price Purchase Option of $1.00" is selected.

5. At the time Peak filed the Stay Motion, Peak had not received any post-petition payments due under the Lease Agreements. Peak requested relief from the automatic stay imposed by 11 U.S.C. § 362 to allow it to take possession of the leased trailers. In response, the Debtors asserted that the Lease Agreements qualify as security agreements pursuant to N.C. Gen. Stat. § 25–1–203, and Peak should be treated as a secured creditor rather than a lessor.

6. The Debtors' Chapter 13 Plan ("Plan") filed on February 21, 2017¹ requires the Debtors to make monthly payments to the Trustee in the amount of $500.00 for two months followed by $1,075.00 for fifty-seven months. The Plan proposes to surrender the 2008 Timpte Hopper Bottom Trailer and provide Peak with a secured claim in the amount of $40,000.00, the Debtors' asserted value of the remaining trailers ("Trailers"), with the balance due under the Lease Agreements being allowed as an unsecured claim.

7. On March 17, 2017, Peak filed a Proof of Claim reflecting that the aggregate amount due under the Lease Agreements at the time of the Debtors' petition was $132,026.00, including a pre-petition arrearage in the amount of $10,187.00.

8. After the initial hearing on the Stay Motion, the court entered on March 23, 2107 an Order Allowing in Part and Continuing in Part Hearing on Motion for Relief from Automatic Stay and Requiring Trustee to Disburse Adequate Protection Payment which granted Peak relief from the automatic stay with respect to the 2008 Timpte Hopper Bottom Trailer and continued the hearing with respect to the Lease Agreements for the retained Trailers. This order also directed the Trustee to disburse the amount of $1,384.00 to Peak as adequate protection. On April 4, 2017, the Trustee filed a Trustee's Report which advised the court that the Trustee disbursed $460.00 to Peak on March 28, 2017 but had not collected adequate funds to allow for full payment of the ordered disbursement.

9. At the second hearing on the Stay Motion, Peak and the Debtors argued their respective positions regarding whether the Lease Agreements are true leases or qualify as security agreements under N.C. Gen. Stat. § 25–1–203, and the Trustee agreed with the Debtors that the Lease Agreements are disguised security agreements, rather than true leases. The court took this issue under advisement but ruled that unless and until the Lease Agreements are determined to be security agreements, the Debtors are obligated to make the contractual weekly payments in the total amount of $692.00 for the use of the Trailers. On April 21, 2017, the court entered an Order Continuing Hearing and Requiring Adequate Protection ("Interim Order") which continued its hearing on the Stay Motion until June 22, 2017² and directed the Debtors to make the weekly payments due under the Lease Agreements and maintain insurance on the Trailers. The Interim Order provides that "[i]n the event that the Debtors fail to comply with any provision of this Order, then the automatic stay imposed by 11 U.S.C. § 362 shall be immediately modified without further notice or hearing to allow Peak to take possession of the Trailers."

10. In the Reconsideration Motion, the Debtors represented that they initially made timely the first several weekly payments due under the Interim Order but were three days late on the payment due on May 31, 2017 and then five days late on the payment due on June 5, 2017. Peak accepted these late payments, but in a letter from Peak's counsel to the Debtors' counsel dated June 14, 2017, Peak demanded possession of the Trailers, because the Debtors' default under the terms of the Interim Order resulted in termination of the automatic stay. The Debtors, who continue to assert that the Lease Agreements are actually security agreements, stated that the adequate protection payments caused a tremendous economic and financial strain, as these payments were in excess of their obligations under the Plan.

11. The Debtors are seeking relief from the effects of the Interim Order in two respects. First, the Debtors request the court to reconsider the provisions of the Interim Order which led to the modification of the automatic stay. Alternatively, the Debtors request the court to reinstate the automatic stay until final resolution of the Stay Motion, including determination of the appropriate classification of the Lease Agreements.

DISCUSSION

Jurisdiction

12. The Stay Motion is a core proceeding as stated in 28 U.S.C. § 157(b)(2)(G), and the court has the authority to hear and determine the Stay Motion pursuant to 28 U.S.C. § 157(b)(1). The issues underlying the Reconsideration Motion involve the core Stay Motion; therefore, the court also has the authority to hear and determine the Reconsideration Motion. In re Kim, 384 B.R. 188, 189 (Bankr. N.D. Ohio 2007).

13. The court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference entered August 3, 1984 by the United States District Court for the Eastern District of North Carolina.

True Lease Versus Disguised Security...