In re Roberts

620 B.R. 336

IN RE: Jackie Don ROBERTS and Vickie Mae Roberts, Debtors.

Case No. 18-11927-t12

United States Bankruptcy Court, D. New Mexico.

Signed May 22, 2020

William F. Davis, Nephi D. Hardman, Andrea D. Steiling, William F. Davis & Assoc., P.C., Albuquerque, NM, for Debtors.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

Before the Court is a lessor's stay relief motion, brought so he could pick up two pieces of farm equipment leased to the debtors. Debtors and their secured lender object, arguing that the lease is really a security interest and the lessor an unsecured creditor. The Court, having heard the testimony of the parties and reviewed the relevant documents, concludes that the lease is a "true lease." As lease payments have not been made and debtors do not propose to assume the lease and cure the defaults, the lessor is entitled to relief.

I. FACTS

The Court finds:¹

Debtors have farmed in Curry County, New Mexico for forty years. Sid Strebeck has farmed and ranched in Curry County for about as long. Strebeck also has a number of other businesses. From what the Court can tell, Strebeck is a wealthy man.

Debtors and the Strebecks have been friends for 20 years. Strebecks' son and Debtors' daughter were married for 16 years and have four children. To this day, Mr. Roberts and Strebeck openly express friendship and respect for one another and acknowledge their shared love for, and connection through, their grandchildren.

Strebeck, via two of his business entities, owns a J. Bond & Sons 3048 manure spreader and a John Deere 544K 4WD loader (together, the "Equipment").² In early 2016, the Equipment was worth about $165,000. The loader is owned free and clear; the spreader is subject to a lien in favor of John Deere.³

In January 2016, Strebeck and Roberts entered into an oral agreement whereby Strebeck leased the Equipment to Roberts for five years. The impetus for the deal was that Roberts' main lender told him that he could not buy any new farm equipment. Despite this prohibition, Roberts thought he needed and could make profitable use of the Equipment. In his testimony, Strebeck characterized the transaction as a "lease." When Roberts testified, he described the transaction as a "lease to purchase."

Based on the testimony of Strebeck and Roberts, the terms of the lease (the "Equipment Lease") were:

• Roberts would take immediate possession of the Equipment;

• Robert was responsible for maintaining the Equipment;

• Strebeck was responsible for insuring the Equipment;

• Starting in 2016, Roberts would pay Strebeck $35,000 a year for five years. Each payment was due before March 31;

• In lieu of cash, Roberts could spread manure on Strebeck's farmland. Roberts would get a credit toward the annual lease payment of $3.50 for each ton of manure spread;

• If Roberts made the payments on time, the transaction would not involve the payment of interest. If Roberts did not make payments timely, interest would accrue on late payments at 6%;

• If Roberts paid as agreed, he could buy the Equipment after five years for $1;

• Roberts could buy the Equipment at any time during the five-year term for fair market value; and

• Roberts had the option, exercisable at any time, to terminate the lease and return the Equipment to Strebeck.⁴

Strebeck and Roberts never reduced the Equipment Lease to writing. Both testified that it is typical for Curry County farmers and businessmen to make deals on a handshake. The honesty and integrity of the contracting parties is paramount and, apparently, sufficient for the conduct of substantial business without a written agreement. Both men considered the other to have the necessary honesty and integrity needed for such "my word is my bond" transactions.

Under the Equipment Lease, Roberts made payments to Strebeck by check totaling $40,000 (two $10,000 payments in March 2016 and a $20,000 payment in May 2017).⁵ On each check Roberts noted that the payment was for a "lease" or an "equip lease." Roberts also earned lease credits totaling about $50,000 by spreading manure on Strebeck's property.

Debtors filed this case on July 31, 2018.

In March 2019, Strebeck sent a text message to Roberts that a payment was due to John Deere for the manure spreader and reminding Roberts that they still needed to "settle up on last year's payment and figure out this year's." In April 2019, Strebeck sent a text message to Roberts indicating that he could purchase the loader and the spreader for $117,000 or "if it's better for you I'll just pick them up." Roberts then told Strebeck that the equipment could not be moved because it was involved in bankruptcy, and to expect a lawyer to follow up. After this exchange, the two men met in person to discuss the Equipment Lease. At the meeting Strebeck told Roberts that if he could not pay for the Equipment as agreed, he could simply return it with "no hard feelings." Roberts did not return the Equipment, nor did he make any more payments.

Debtors originally listed Strebeck as a secured creditor with a $20,000 secured claim. They later scheduled him as the holder of an executory contract or unexpired lease. In a further amendment Debtors scheduled Strebeck as a creditor with a $50,000 claim, secured by the Equipment, valued at $70,000. Finally, Debtors proposed chapter 12 plan treats Strebeck as an unsecured creditor, whose claim would be offset by any damages awarded for his alleged violation of the automatic stay.

Five S and Master's filed claims on February 27, 2020.⁶ Five S, the owner of the loader, filed a claim of $96,231. Master's, the owner of the spreader, filed a claim of $50,233. The claims characterize the arrangement between Strebeck and Roberts as an equipment lease.

At trial, both Strebeck and Roberts estimated the current value of the Equipment at about $100,000 (about $50,000 for each piece).

II. DISCUSSION

A. True Leases Versus Disguised Security Agreements.

The outcome of this dispute turns on whether the Equipment Lease is a "true lease" or a secured transaction disguised as a lease. If the latter, then Strebeck's rights would be significantly adversely affected. As described by one commentator:

One purpose for distinguishing sales/secured transactions from leases is to decide the need for perfection. In other words, the lessor need not notify the world of her retained interest, while the secured party must. What appears to be ownership by a debtor in possession of the collateral must by some notice device be shown to be subject to the secured party's right to repossess; what appears to be ownership by the lessee in possession of the leased goods need not be signaled by a similar notice device. The reversionary interest of the lessor may remain hidden, while that of the secured party may not.

Richard L. Barnes, Distinguishing Sales and Leases: A Primer on the Scope and Purpose of UCC Article 2A , 25 U. Mem. L. Rev. 873, 882–83 (1995).⁷ "The treatment afforded to ‘true’ lessors of personal property is far superior to the treatment given to holders of secured claims." In re Grubbs Constr. Co. , 319 B.R. 698, 710 (Bankr. M.D. Fla. 2005). Grubbs notes, for example, that true leases must be assumed or rejected and, if assumed, any defaults must be cured and future performance assured; that secured claims can be bifurcated; and that "true lessors" are not subject to the trustee's "strong arm powers." Id.

Broadly, "[a] lease involves payment for the temporary possession, use and enjoyment of goods, with the expectation that the goods will be returned to the owner with some expected residual interest of value remaining at the end of the lease term. In contrast, a sale involves an unconditional transfer of absolute title to goods, while a security interest is only an inchoate interest contingent on default and limited to the remaining secured debt." In re Purdy , 763 F.3d 513, 518 (6th Cir. 2014) (citations omitted). The party challenging the lease bears the burden of proving that it is a disguised security agreement. Id. at 519.

Section 1-203 of the Uniform Commercial Code (in New Mexico, NMSA § 55-1-203 ) outlines how to tell a true lease from a security agreement. The section provides in part:

(a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.

(b) A transaction in the form of a lease creates a security interest if the consideration that 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 and is not subject to termination by the lessee, and:

(1) the original term of the lease is equal to or greater than the remaining economic life of the goods;

(2) 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;

(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or

(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

B. The "Bright Line" Test of 1-203(b).

NMSA § 55-1-203(b) provides what is commonly called a "bright line test" used to determine whether a transaction in the form of a lease is in fact a security agreement. See, e.g. , In re HP Distrib., LLP , 436 B.R. 679, 688-89 (Bankr. D. Kan. 2010) ; In re Johnson , 571 B.R. 167, 172 (Bankr. E.D.N.C. 2017) ; In re ES2 Sports & Leisure, LLC , 519 B.R. 476, 481 (Bankr. M.D.N.C. 2014).⁸

[A] transaction creates a security interest if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee ... and if one of four additional tests is met.

Official Comments to NMSA § 55-1-203 (emphasis added).

C. A Lease that is Terminable at Will by the Lessee; the "One...