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 TractorLoader-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. MidContinent 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.