Title: C.F. Garcia Enterprises v. Enterprise Ford Tractor

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
C.F. GARCIA ENTERPRISES, INC., 
T/A C.F. GARCIA & ASSOCIATES 
 
v.  Record No. 960616 
OPINION BY JUSTICE BARBARA MILANO KEENAN 
                                     January 10, 1997 
ENTERPRISE FORD TRACTOR, INC. 
 
 
FROM THE CIRCUIT COURT OF YORK COUNTY 
 
Samuel T. Powell, III, Judge 
 
 
In this appeal, we consider whether a contract created a 
security interest or a lease. 
 
In April 1989, C.F. Garcia Enterprises, Inc. (Garcia), and 
Enterprise Ford Tractor, Inc. (Enterprise), entered into a 
contract titled "Equipment Lease Agreement."  The contract 
provided for Garcia to lease a 1979 Ford model 555 Tractor-
Loader-Backhoe (backhoe) from Enterprise in exchange for monthly 
rental payments totalling $17,250.  The contract provided that 
when the lease terminated on July 31, 1990, Garcia retained the 
option to purchase the backhoe for $1 upon informing Enterprise 
in writing that it intended to exercise this option. 
 
The contract also provided that if Garcia failed to make any 
rental payment when due, Enterprise could demand the entire 
balance of the rental payments.  The default provision also 
stated that, in the event Garcia failed to make a rental payment 
when due, Enterprise could demand the surrender of the equipment 
and repossess it. 
 
It is undisputed that Garcia was late in making each monthly 
payment, and that Enterprise never demanded the entire balance 
due, nor the surrender of the backhoe.  The final payment, due 
July 1, 1990, was mailed on August 3, 1990, and was cashed by 
 
 
 
 
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Enterprise on August 9, 1990.  Garcia did not inform Enterprise 
in writing that it intended to exercise its option to purchase 
the backhoe, nor did it tender $1 to exercise that option. 
 
On August 5, 1990, Enterprise took possession of the backhoe 
from one of Garcia's work sites.  Enterprise performed $1,532.31 
of repairs on the backhoe, and sold it for $13,000, less selling 
expenses of $250.  Enterprise did not give Garcia prior notice of 
the sale. 
 
Garcia later instituted this action against Enterprise 
alleging breach of contract, conversion, and violation of the 
Virginia Uniform Commercial Code (UCC).  Enterprise moved for 
summary judgment on the ground that Garcia had failed to make 
timely payments under the lease agreement, to give notice of its 
intent to purchase the backhoe, or to tender the required $1 
consideration.  The trial court granted the motion for summary 
judgment and entered final judgment for Enterprise. 
 
On appeal, Garcia contends that the contract provision 
allowing Garcia to purchase the backhoe for $1 establishes, as a 
matter of law, that the contract was a security agreement rather 
than a lease.  Thus, Garcia asserts, Enterprise was not entitled 
to repossess the backhoe based on Garcia's late payments, but was 
limited to pursuing a secured party's remedies under the UCC. 
 
In response, Enterprise argues that the plain language of 
the contract created a lease between the parties, and that 
Garcia's failure to make timely payments and exercise its option 
 
 
 
 
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to purchase the backhoe extinguished its right to obtain full 
title to the equipment at the termination of the agreement.  We 
disagree with Enterprise. 
 
Since the interpretation of a contract is a question of law, 
we are not bound by the trial court's conclusions on this issue, 
and we are permitted the same opportunity as the trial court to 
consider the contract language.  Langman v. Alumni Ass'n of the 
Univ. of Virginia; 247 Va. 491, 498, 442 S.E.2d 669, 674 (1994); 
Wilson v. Holyfield, 227 Va. 184, 187-88, 313 S.E.2d 396, 398 
(1984).  To resolve the interests of the parties in the backhoe, 
we must determine whether the contract was a lease or a security 
agreement. 
 
Article 9 of the UCC governs any transaction, "regardless of 
its form," which is intended to create a security interest in 
personal property.  Code § 8.9-102.  Thus, we turn to the UCC 
definition of "security interest," which is applicable throughout 
the Commercial Code.  In defining the term "security interest," 
Code § 8.1-201(37) provides, in relevant part: 
 
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.  [Emphasis added.] 
 
 
We have not previously addressed this statutory provision.  
The plain language of the statute creates a security interest in 
 
 
 
 
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property as a matter of law if the parties' contract allows the 
lessee to become the owner of the leased property for nominal or 
no additional consideration upon compliance with the terms of the 
lease.
1  Further, we note that this construction is in accord 
with the holdings of several courts that have considered the 
issue.  See, e.g., Interpool Ltd. v. Char Yigh Marine (Panama) 
S.A., 890 F.2d 1453, 1459 (9th Cir. 1989); Percival Construction 
Co. v. Miller & Miller Auctioneers, Inc., 532 F.2d 166, 171 (10th 
Cir. 1976); Stanley v. Fabricators, Inc., 459 P.2d 467, 469-70 
(Alaska 1969); Eimco Corp. v. Sims, 598 P.2d 538, 541 (Idaho 
1979); Taylor Rental Corp. v. Ted Godwin Leasing, Inc., 681 P.2d 
691, 695 (Mont. 1984); Reyna Financial Corp. v. Lewis Service 
Ctr., Inc., 429 N.W.2d 380, 383 (Neb. 1988); Tackett v. Mid-
Continent Refrigerator Co., 579 S.W.2d 545, 548 (Tex. Civ. App. 
1979).   
 
This statutory language is based on the rationale that when 
                     
     
1In 1991, Code § 8.1-201(37) was amended, adding subsection 
(2)(d), which provides that a transaction creates a security 
interest if the lessee has the option to become the owner of the 
goods for no additional consideration or for nominal 
consideration upon compliance with the terms of the lease 
agreement.  However, since this subsection was not in effect at 
the time of the execution of the present contract, we do not 
consider that provision here. 
 
 
 
 
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the terms of the "lease" and option to purchase are such that the 
only sensible course of action for the "lessee" at the end of the 
term is to exercise that option and become the owner of the 
property, the "lease" becomes one intended to create a security 
interest under Code § 8.1-201(37).  Percival Construction Co., 
532 F.2d at 172.  If a contract contains such an option, the 
agreement is conclusively presumed to be one intended as 
security, without reference to other facts from which the 
opposite conclusion might be drawn.  In re J.A. Thompson & Son, 
Inc., 665 F.2d 941, 947 (9th Cir. 1982); see Marhoefer Packing 
Co., Inc. v. Robert Reiser & Co., Inc., 674 F.2d 1139, 1142 (7th 
Cir. 1982); Morris v. Lyons Capitol Resources, Inc., 510 N.E.2d 
221, 223 (Ind. Ct. App. 1987); Commercial Credit Equipment Corp. 
v. Parsons, 820 S.W.2d 315, 319 (Mo. Ct. App. 1991); Peco, Inc. 
v. Hartbauer Tool & Die Co., 500 P.2d 708, 709-10 (Or. 1972); FMA 
Financial Corp. v. Pro-Printers, 590 P.2d 803, 805 (Utah 1979).  
Thus, as a matter of law, the present contract was a security 
agreement because it provided Garcia the option to purchase the 
backhoe for nominal consideration upon compliance with the terms 
of the agreement.
2
                     
     
2Enterprise argues that Code § 8.1-205(4), which provides 
that express terms of a contract control over an inconsistent 
course of dealing or usage of trade, supports its argument that 
the contract terms supersede the provisions of Code § 8.1-
201(37).  As noted above, however, Article 9 applies to all 
 
 
 
 
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We next consider whether Garcia is entitled to recover 
damages for Enterprise's repossession and sale of the backhoe.  
Enterprise argues that Garcia is barred from recovering damages, 
because Garcia breached the agreement by failing to notify 
Enterprise in writing of its intent to purchase the backhoe, and 
by failing to pay $1 to exercise this option prior to the 
termination of the agreement.  We disagree. 
 
A breach of contract does not necessarily constitute a 
default under a security agreement.  Moreover, when a default 
occurs, a secured creditor is required to comply with Article 9 
of the UCC in taking possession and selling the secured property. 
See Code §§ 8.9-503 and -504. 
 
The present agreement does not define the word "default," 
but specifies certain actions which would create a default by the 
debtor, including missed or late payments, bankruptcy, or 
attempts by Garcia to sell or encumber the property.  All these 
events would have affected Enterprise's ability to recover timely 
and full compensation for the collateral.  In contrast, Garcia's 
failure to notify Enterprise of its intent to "purchase" the 
(..continued) 
transactions, regardless of their form, intended to create a 
security interest.  Code § 8.9-102.  Thus, the use of lease terms 
is not controlling of the issue whether the lease was intended as 
security.  Morris, 510 N.E.2d at 223 n.1; Commercial Credit 
Equipment Corp., 820 S.W.2d at 319. 
 
 
 
 
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backhoe or to tender $1 did not affect Enterprise's right to 
receive payment for the backhoe.  Thus, we hold that Garcia's 
contract breach in failing to notify Enterprise and to pay $1 did 
not constitute a default nor affect Garcia's ownership interest 
in the backhoe. 
 
While Garcia's failure to make timely payments constituted a 
default under the security agreement, this default does not bar 
Garcia's right to recover damages.  Enterprise violated Garcia's 
ownership rights in the backhoe by failing to comply with the 
requirements of Code § 8.9-504 in selling the secured property.  
Under that section, Enterprise was required to conduct a 
commercially reasonable sale of the equipment, with prior notice 
to Garcia, and to remit to Garcia any surplus of funds after 
satisfaction of the indebtedness secured by the agreement and 
deduction of Enterprise's reasonable expenses and attorney's 
fees.  See Code § 8.9-504.  Although Enterprise could have taken 
possession and sold the property in compliance with these 
requirements, Enterprise elected not to do so.  Thus, we conclude 
that Garcia is entitled to damages for Enterprise's wrongful 
seizure and sale of the backhoe. 
 
For these reasons, we will reverse the trial court's 
judgment and remand the case for a determination of the amount of 
Garcia's damages arising from the wrongful seizure and sale of 
the backhoe. 
 
Reversed and remanded.