Opinion issued August =
31,=20
2007
Our April=20
19, 2007 judgment affirmed the trial court's summary judgment in =
favor of=20
the various taxing units, appellees, on the ground that the Lease=20
Agreement was a lease, and not a mere security agreement, and =
that,=20
therefore, Excel was the owner of the vehicles for ad valorem tax=20
purposes. In its motion for rehearing, Excel contends that we =
erred in=20
construing the Lease Agreement as a lease rather than as a =
security=20
agreement and, therefore, in affirming its liability for ad =
valorem taxes=20
that are properly chargeable to its lessees. In response, the =
majority has=20
withdrawn the April 19 opinion and substituted a new opinion =
explaining=20
the basis for its conclusion. The panel continues to affirm =
summary=20
judgment in favor of the taxing authorities. Because I disagree =
with the=20
majority's reasoning, but agree with its conclusion, I concur in =
the=20
judgment only. All=20
tangible personal property, including motor vehicles, is taxable =
unless=20
exempted by law. See Tex. Tax Code Ann. =A7 11.01 (Vernon =
2001). A=20
person is entitled to an exemption from taxation of personal =
property that=20
is not used for the production of income. Id. =A7 11.14 =
(Vernon=20
Supp. 2006). The leased vehicles are used by Excel, but not by its =
lessees, for the production of income. Indeed, the Lease =
specifically=20
provides that the lessee agrees "not to use the Vehicle as a taxi =
or for=20
other public or private hire or delivery." For=20
purposes of construing the ad valorem tax statutes, an "owner" of =
property=20
has been construed as "a person or entity holding legal to the =
property,=20
or holding an equitable right to obtain legal title to the =
property."=20
Comerica Acceptance, 52 S.W.3d at 497. Equitable title is =
the=20
present right to compel legal title. Travis Cent. Appraisal =
Dist. v.=20
Signature Flight Support Corp., 140 S.W.3d 833, 840 (Tex.=20
App.--Austin 2004, no pet.); Comerica, 52 S.W.3d at =
497-98.=20
Generally, the person having legal title to the property, or the=20
equivalent, is considered to be the owner for taxation purposes. =
See=20
Childress County v. State, 92 S.W.2d 1011, 1015 (Tex. 1936);=20
General Elec. Capital Corp. v. City of Corpus Christi, =
850 S.W.2d=20
596, 599 (Tex. App.--Corpus Christi 1993, writ denied) (explaining =
that=20
taxing entity may impose ad valorem taxes on secured party in =
possession=20
or with right of possession even though actual legal title is not =
party's=20
name; for ad valorem tax purposes, secured party in possession is=20
equivalent of title owner). Here, the=20
Lease Agreement provides that Excel retains title to the leased =
vehicles=20
until the purchase option is exercised. Lessees have no present =
right to=20
compel Excel to transfer title to them. Rather, they can compel =
transfer=20
of title only by fulfilling conditions set by Excel for =
early=20
termination of the lease and purchase of the vehicle or by =
completing the=20
lease payments and exercising the option to buy the vehicle for =
$4,000.=20
Even at the end of the lease term, the option must have been =
granted,=20
Excel must not have declared the lease payments in default, and =
the lessee=20
must have given Excel 30 days notice. Thus, since the lessees are =
neither=20
the legal title owners nor the equitable owners of the vehicles =
leased to=20
them by Excel, the owner for ad valorem tax purposes is Excel. =
See=20
Signature Flight Support, 140 S.W.3d at 841 ("Here, the lease =
agreements clearly and unambiguously state that the City holds =
legal title=20
to the improvements after it accepts them. Appellees do not have =
equitable=20
title, for they have no grounds to compel the City to give them =
legal=20
title; they may merely operate and use the facilities in =
accordance with=20
the lease terms."). Excel=20
contends, however, that we should determine ownership of the =
vehicles for=20
tax purposes by reference to the nature of its transaction with =
its=20
lessees, not by either equitable or title ownership of the =
vehicles. It=20
contends that we should look beyond the titleholder (Excel itself) =
and=20
construe the Lease not as a lease but as a disguised security =
interest it=20
holds to secure the lessees' payment of the full consideration of =
the=20
vehicles pursuant to its sale of the vehicles to them. It contends =
that=20
Section 1.203 of the Texas UCC, which distinguishes a security =
interest=20
from a lease, I =
disagree=20
with Excel that the issue of whether its leases are true leases or =
security interests is controlling for tax purposes. However, =
because the=20
issue of whether the Lease Agreement is a disguised security =
interest or a=20
true lease is raised by Excel as an affirmative defense and =
addressed by=20
the majority, and because this issue is important to business=20
relationships within the scope of the UCC, I address it below. Excel's=20
Lease Agreement provides: 23.=20
LEASE TERMINATION: This Lease will end ("terminate") when =
one of=20
the following events occurs, whichever happens first: (a) You =
choose to=20
end this Lease early and return the Vehicle to us; . . . On =
termination=20
you will pay the amounts agreed in this Lease. You are not =
entitled to keep the Vehicle past the end of the scheduled Lease =
term or=20
the date of early termination without our prior=20
consent. 24.=20
EARLY TERMINATION: This section applies if the Lease =
terminates=20
before the end of the scheduled Lease term. . . . On early =
termination,=20
you will return the Vehicle to us. You will deliver it to our =
address or=20
to another reasonable location at our request. (a)=20
Early Termination Liability. On early termination, =
you agree to=20
pay us: (1) A=20
VEHICLE RETURN FEE, if any, given in section 28(b); (2) All=20
accrued and unpaid amounts that are due or past due at that time . =
. .=20
; (3) The=20
amount by which the "Adjusted Lease Balance" is greater than the =
"Realized=20
Value: [sic] of the Vehicle. . . . and; (4) All=20
official fees and taxes imposed in connection with the Lease=20
termination. (emphasis=20
in original). The Lease=20
thus provides that the lessee may terminate the lease at any time =
upon=20
compliance with its terms. Upon termination of any sort, the =
lessee "will=20
pay the amounts agreed in this lease," and he must return the =
vehicle=20
unless he has the option to purchase it. Upon early termination, =
the=20
lessee must deliver the vehicle to Excel together with (1) a =
vehicle=20
return fee; (2) all due and past due unpaid accrued amounts for =
use of the=20
vehicle; (3) "[t]he amount by which the "Adjusted Lease Balance" =
is=20
greater than the "Realized Value: [sic] of the Vehicle"; and (4) =
"[a]ll=20
official fees and taxes imposed in connection with the Lease=20
termination." Additionally, the =
Lease=20
provides that the lessee assumes the risk of any loss or damage to =
the=20
vehicle and the risk of theft or total loss of the vehicle. The =
leased=20
vehicle conveys no warranties by Excel. The lessee agrees to pay =
all=20
maintenance and operating costs. Finally, the Lease =
provides: TITLING, =
OFFICIAL=20
FEES AND TAXES: You understand and agree that this =
agreement is a=20
lease only. We own the Vehicle and it will be titled in our name =
or in the=20
name of our assignee. You have no ownership interests in the =
Vehicle=20
except for any future option to purchase provided in this Lease.=20
You agree to pay all title, registration, license, sales, =
use,=20
excise, personal property, ad valorem, inspection, testing, and =
all other=20
taxes, fees and charges imposed by government authorities in =
connection=20
with the Vehicle and this Lease during the Lease term, except our =
income=20
taxes. . . . (emphasis in =
original).=20
There is no option to renew the Lease. A sample completed =
Lease=20
form taken from the record and attached to appellant's brief shows =
a lease=20
dated March 20, 2002 for a used Mercedes Benz 2001 model S55 AMG. =
The=20
agreed upon value of the vehicle is $115,516.20, which, after =
Capitalized=20
Cost Reduction of $47,243.99 (including $53,000 paid at signing), =
yields=20
an Adjusted Capitalized Cost of $68,272.21, which is used for =
calculating=20
Base Monthly Payments. In addition to the down payment of $53,000, =
the=20
lessee must make total monthly payment of $1,756.01, so that by =
the end of=20
the 60-month lease period the lessee will have paid=20
$152,604.59. In sum, although =
Excel's=20
customers have possession and use of the vehicles and insure and =
maintain=20
them, Excel possesses legal title to the vehicles, maintains a =
lien on=20
them, and passes through taxes to the lessees. The lessees must =
make all=20
agreed payments as specified in the lease, either to retain =
possession and=20
use of the vehicle or to purchase it. Payments go first to pay =
down=20
"interest" costs and afterwards to satisfy the realized value of =
the=20
vehicle. The lessees bear all costs of maintenance, insurance, and =
loss.=20
They have no legal title to the vehicles, as the Lease informs =
them, and,=20
according to the Lease, no ownership rights. Rather, to obtain =
legal title=20
to the vehicles and ownership, the lessees must comply with all =
terms of=20
the Lease and, in addition, pay costs of purchase as determined by =
Excel,=20
plus the Adjusted Lease Balance as determined by Excel. =
Alternatively,=20
they may complete the Lease term and purchase the vehicles for =
$4,000 if=20
the purchase option has been granted them, they are not in =
default, and=20
they have given notice to Excel. The vehicles retain residual =
value at the=20
end of the lease term and must be returned to Excel unless the =
purchase=20
option is exercised. The question for =
this Court=20
is whether Excel's Lease Agreement is a lease or whether it is a =
security=20
agreement attendant on the contingent sale of the vehicles to the =
lessees=20
under the terms of UCC Section 1.203. UCC=20
Section 1.203 Under the =
UCC, Section 1.203 of =
the UCC=20
distinguishes a lease from a security interest. For a lease =
agreement to=20
qualify as a security agreement, the consideration for the =
transaction=20
must not be subject to termination by the lessee and the agreement =
must=20
satisfy at least one of the four factors in subsection 1.203(b). =
Tex. Bus.=20
& Com. Code Ann. =A7 1.203(b) (Vernon Supp. 2006). Section =
1.203=20
provides: Lease =
Distinguished=20
From Security Interest (a) Whether a =
transaction in=20
the form of a lease creates a lease or security interest is =
determined by=20
the facts of each case. (b) A transaction =
in the=20
form of a lease creates a security interest if the consideration =
that the=20
lessee is to pay the lessor for the right to possession and use of =
the=20
goods is an obligation for the term of the lease and is not =
subject to=20
termination by the lessee, and: (1) the original =
term of the=20
lease is equal to or greater than the remaining economic life of =
the=20
goods; (2) the lessee is =
bound to=20
renew the lease for the remaining economic life of the goods or is =
bound=20
to become the owner of the goods; (3) the lessee has =
an option=20
to renew the lease for the remaining economic life of the goods =
for no=20
additional consideration or for nominal additional consideration =
upon=20
compliance with the lease agreement; or (4) the lessee has =
an option=20
to become the owner of the goods for no additional consideration =
or for=20
nominal additional consideration upon compliance with the lease=20
agreement.
. . . =
. Id. =A7 =
1.203=20
(emphasis added). Section 1.203 =
became=20
effective September 1, 2003. See id. It is substantively=20
identical to the portions of former UCC section 1-201(37) that=20
distinguished leases from security interests. Id. cmt. =
However,=20
it was decided to codify the law, in part, "to resolve an issue =
that=20
created considerable confusion in the courts: what is a lease?"=20
Id. cmt. 2. Whether a=20
transaction is construed as a sale of personal property secured by =
a=20
security interest or whether it is construed as a lease is =
determined by=20
applicable state law. In re Bailey, 326 B.R. 156, 160 =
(Bankr.=20
W.D. Ark. 2005); In re Copeland, 238 B.R. 801, 803 =
(Bankr. E.D.=20
Ark. 1999). Because the UCC has been adopted nationwide, the =
courts may=20
look for guidance to decisions from other jurisdictions in =
interpreting a=20
uniform section of the Code. See In re Rebel Rents, Inc., =
291=20
B.R. 520, 526 (Bankr. C.D. Cal. 2003); In re Copeland, =
238 B.R.=20
at 803. However, as the majority points out, the codification of =
section=20
1.203 makes case law prior to the 2003 effective date of section =
1.203=20
suspect to the extent that prior law focuses on the intent of the =
parties=20
to determine whether an agreement is a lease or a security =
interest.=20
See, e.g., Superior Packing, Inc. v. Worldwide =
Leasing &=20
Fin., Inc., 880 S.W.2d 67, 71 (Tex. App.--Houston [14th =
Dist.] 1994,=20
writ denied) (test for creation of security interest under UCC is =
whether=20
transaction is intended to have effect of security); cf. In re =
Triplex=20
Marine Maint., Inc., 258 B.R. 659, 665-67 (Bankr. E.D. Tex. =
2000)=20
(discussing problems with focus on parties' intent in =
determining=20
whether lease should be characterized as secured transaction). Texas law prior to =
the=20
codification of section 1.201(37) as section 1.203 focused heavily =
on the=20
second prong of the test for a security interest, namely, whether =
the=20
lease provided on its face that upon compliance with its terms the =
lessee=20
would become the owner of the property without paying additional=20
consideration, or by paying only nominal consideration, deeming =
such an=20
agreement to be, as a matter of law, intended for security. =
See=20
Superior Packing, 880 S.W.2d at 71-72; see also =
First =
Prong of=20
Section 1.203(b) Test: Terminability of=20
Consideration In my opinion, the =
majority=20
correctly focuses in this case on the first part of the =
test of a=20
security agreement under section 1.203, namely "the =
consideration=20
that the lessee is to pay the lessor for the right to possession =
and use=20
of the goods is an obligation for the term of the lease and is =
not=20
subject to termination by the lessee. . . ." Tex. Bus. & =
Com.=20
Code Ann. =A7 1.203(b) (emphasis added). However, I disagree with =
the=20
majority's interpretation of the meaning and standard of proof of =
the=20
first prong of the test. Our April 19, 2007 =
opinion=20
concluded that "Excel's leases expressly provide that they are =
subject to=20
termination by the lessee" and, therefore, that "Excel's =
affirmative=20
defense of nonownership based on its claim that its leases with =
its=20
customers were security agreements fails as a matter of law." In =
its=20
motion for rehearing, Excel argues that the panel made a mistake =
by=20
interpreting subsection 1.203(b) as providing that if a lessee may =
terminate the lease, it is not a security agreement. It =
correctly=20
points out that UCC section 1.203(b) provides that "[a] =
transaction in the=20
form of a lease creates a security interest if the =
consideration=20
that the lessee is to pay the lessor for the right to possession =
and use=20
of the goods is an obligation for the term of the lease and is not =
subject=20
to termination by the lessee" and if one of the four additional =
conditions=20
set out in subsection 1.203(b) is met. Id. (emphasis =
added).=20
Excel argues that while its customer agreements provide that =
customers may=20
terminate the lease, the agreements provide that they =
must still=20
pay the full consideration required by Excel for the =
right to=20
possession and use of the vehicles for the term of the =
lease. In its opinion on =
denial of=20
Excel's motion for rehearing, the majority states, "To create a =
security=20
interest, the first part of this test requires that the rental =
payments the lessee must pay cannot be terminable by the =
lessee=20
during the term of the lease." Excel Auto & Truck Leasing, =
LLP v.=20
Alief Indep. Sch. Dist., No. 01-04-01185-CV, slip. op. at 9 =
(Tex.=20
App.--Houston [1st Dist.] Aug. 30, 2007, no pet. h.) (citing Tex. =
Bus.=20
& Com. Code Ann. =A7 1.203) (emphasis added). It thus =
interprets=20
consideration as "the rental payments." The majority then states =
that the=20
Lease is not a security interest because it contains no "'hell or =
high=20
water clause,' which is essential to the existence of a security=20
interest." Excel Auto & Truck Leasing, slip op. at 9. =
I agree with the =
majority=20
that Excel's Lease Agreement is not a security agreement because =
the=20
stream of rental payments (the consideration) is terminable prior =
to the=20
end of the lease term. The critical reason for holding the =
consideration=20
terminable, however, is not that upon complying with the early =
termination=20
provisions the lessee is released from making further rental =
payments, it=20
is that he is released from any further obligation to Excel =
and=20
is not obligated to pay the entire amount of money he would be =
required to=20
pay if he continued the lease to the end; he pays less. I also =
strongly=20
disagree with the majority's statement that the essence of a =
security=20
interest is a "hell or high water" clause and its implicit holding =
that a=20
"hell or high water" clause is a talisman for finding a security =
interest=20
instead of a lease. I believe this implicit holding is both =
inaccurate and=20
misleading and can only introduce even further confusion into this =
difficult area of the law in which courts are required to =
distinguish=20
among (1) a true lease; (2) a true lease that is a =
finance=20
lease; and (3) a security interest retained by the =
lender in=20
a financing transaction to secure the debtor's =
performance, which=20
is not a lease. Finance=20
Lease The majority =
confuses a=20
finance lease, which is one type of true lease, with a security =
interest,=20
which is not a lease at all. A "hell or high water" clause is not =
the=20
essence of a security interest. It can appear in any kind of =
agreement,=20
but it is, in particular, the essence of a finance lease, =
which=20
is a true lease governed by article 2A of the UCC, =
not a=20
secured transaction, which is governed by article 9 of the UCC.=20
See =
Triplex,=20
258 B.R. at 665-67. A finance lease is =
a=20
three-party transaction. Hell or High =
Water=20
Clause A "hell or high =
water"=20
clause is defined by article 2A of the UCC, governing leases, as =
"a term=20
in the lease agreement that provides that the lessee's promises =
under the=20
lease contract become irrevocable and independent upon =
the=20
lessee's acceptance of the goods. . . ." Tex. Bus. & Com. Code =
Ann. =A7=20
2A.407(a) (Vernon 1994) (emphasis added); see also =
id.=20
cmt. 1 (extending "hell or high water" protection to leases that =
are not=20
consumer leases). The=20
"hell or high water" clause "makes covenants in a finance lease=20
irrevocable and independent due to the function of the finance =
lessor in a=20
three party relationship: the lessee is looking to the supplier to =
perform=20
the essential covenants and warranties. . . . Thus, upon the =
lessee's=20
acceptance of the goods the lessee's promises to the lessor under =
the=20
lease contract become irrevocable and independent." Id. =
cmt. 1=20
(citation omitted);=20
see also GreatAmerica Leasing Corp. v. Star Photo Lab, =
Inc., 672=20
N.W.2d 502, 504 (Iowa Ct. App. 2003) ("hell or high water" clause =
"makes a=20
lessee's obligation under a finance lease irrevocable upon =
acceptance of=20
the goods, despite what happens to the goods afterwards."). The =
clause, as=20
characterized by the UCC for finance leases, is thus a specialized =
clause=20
peculiar to a three-party transaction, which insures that the =
payments=20
owed by the lessee to a lessor who does not manufacture or supply =
the=20
leased goods are independent of the state of the goods and =
irrevocable, so=20
that the lessee looks to the manufacturer or supplier of goods for =
warranties and remedies for defects in the goods, not to the =
lessor. It=20
does not merely indicate that payments under a lease cannot be =
terminated=20
before completion of the lease clause; it indicates =
more. A "hell or high =
water"=20
clause is thus neither the essential feature of a security =
agreement nor a=20
distinguishing feature between a lease and a security agreement. =
Indeed,=20
if the first prong of section 1.203(b)'s two-pronged test for a=20
security agreement could be satisfied only by =
the=20
agreement's incorporating the essential feature of a type of true=20
lease, as the majority implicitly holds, section 1.203(b) =
would=20
serve no function other than to confuse courts and litigants, and =
it would=20
not meet the UCC drafters' goal in codifying section 1.203 of =
providing=20
guidance to courts to enable them to distinguish between =
a lease=20
and a security agreement. See Tex. Bus. & Com. Code =
Ann. =A7=20
1.203 cmt. 2. Non-Terminability of=20
Consideration as Test of Security Agreement Under Section=20
1.203(b) I would hold that =
the first=20
prong of section 1.203(b)'s "bright line" test for distinguishing =
between=20
a security agreement and a lease should be interpreted according =
to its=20
plain language and the intent of the section's drafters. =
Specifically, "A=20
transaction in the form of a lease creates a security interest [1] =
if the=20
consideration that the lessee is to pay the lessor for the right =
to=20
possession and use of the goods is an obligation for the term of =
the lease=20
and [2] is not subject to termination by the lessee." Tex. Bus. =
& Com.=20
Code Ann. =A7 1.203(b). Under this test, it is not necessary that =
the=20
agreement contain a true "hell or high water" clause as defined in =
article=20
2A of the UCC to constitute a security interest; it must only =
provide that=20
the full consideration due under the terms of the lease not be =
terminable=20
by the lessee. Here, the obligation of a lessee to Excel =
is=20
expressly made subject to early termination by the lessee, =
relieving the=20
lessee of the obligation to pay Excel the total amount due for =
possession=20
and use of the vehicle for the full term of the Lease. The lessee =
may=20
terminate his own obligation under the Lease at any time, return =
the=20
vehicle, and pay Excel less than he would have to pay if =
he=20
completed the lease. Upon the vehicle's return at any time, Excel=20
subtracts the Retained Value of the vehicle from the =
total=20
consideration due and adds any agreed upon fees and charges, and =
the=20
lessee is relieved of any further obligation. Indeed, the lessee =
does not=20
even have the option to purchase the vehicle until he has =
completed a=20
specified number of monthly payments. Nor is Excel required to =
provide a=20
purchase option. I agree with the =
majority,=20
therefore, that, in this case, it is unnecessary to look beyond =
the first=20
prong of section 1.203's bright line test to determine that the =
Lease is=20
not a security interest because the consideration due under its =
terms=20
is terminable prior to the end of the lease term by the =
lessee;=20
therefore, the first prong of section 1.203(b)'s bright line test =
of a=20
security agreement is not satisfied. If the Excel Lease Agreement=20
had satisfied the first prong of section 1.203(b)'s test =
of a=20
security agreement, however--if, for example, it had had a "hell =
or high=20
water clause" the Agreement still would not necessarily have been =
a=20
security interest instead of a lease. Second =
Prong of=20
Section 1.203(b) Test: Distinction Between Lease and Security=20
Interest If a transaction =
in the form=20
of a lease has a "hell or high water" clause, or other =
non-terminability=20
provision, satisfaction of the first prong of the test is not a =
factor in=20
determining whether the transaction is a lease or a security =
agreement=20
because such a provision may appear in either a lease, =
including=20
a finance lease, or a security agreement. In that case, =
the=20
courts must look to the definition of a lease (including the =
definition of=20
a financing lease in section 2A.1.03(74)) and of a security =
interest, The Excel Lease =
does not=20
attempt to secure the lessee's performance until the consideration =
due for=20
the entire lease term is paid and the purchase option exercised, =
i.e., the=20
Lease does not satisfy the first test of a security interest. =
See In=20
re Quisenbery, 295 B.R. 855, 860 (Bankr. N.D. Tex. 2003). But =
even if=20
it had satisfied that prong, it would not satisfy the second. In=20
particular, the fact that lessees have a purchase option does not =
make the=20
transaction evidenced by the Excel Lease a secured financing =
transaction=20
for the purchase of a vehicle. There is no reference to "sale" or=20
"collateral" or to the parties' intent to create a security =
interest;=20
quite the contrary. Nor does the Lease evidence the parties' =
intent that a=20
sale take place and that title pass from Excel to the lessee. =
Rather,=20
title remains with Excel unless and until specified conditions set =
out in=20
the Lease are satisfied and the purchase option is both granted =
and=20
exercised. Indeed, the Excel Lease satisfies the "hallmark" of a=20
lease in that it grants the lessee the right to use the =
vehicle=20
for a period less than its economic life with the concomitant =
obligation=20
(unless the purchase option is exercised) to return the property =
to the=20
lessor, Excel, while it still retains some substantial economic =
value.=20
See In re QDS Components, Inc. 292 B.R. 313, 322 =
(Bankr.=20
S.D. Ohio 2002); see also In re Marhoefer Packing Co., =
Inc., 674=20
F.2d 1139, 1145 (7th Cir. 1982); In re Shores, 332 B.R. =
31, 39=20
(M.D. Fla. 2005). A number of other =
courts=20
have reached the same conclusion on a similar basis. See In re =
Powers, 983 F.2d 88, 91 (7th Cir. 1993) (concluding that =
"even though=20
the lessee can acquire the goods at the end of the lease's term, =
the=20
lessee is under no obligation to make the payments that will allow =
him to=20
exercise the option"); In re Marhoefer, 674 F.2d at 1143 =
(holding=20
that "where the lessee has the right to terminate the transaction, =
it is=20
not a conditional sale"); In re Celeryvale Transp., Inc. v. =
M.W.=20
Kellogg Co., 822 F.2d 16, 18 (6th Cir. 1987) (holding that =
lease was=20
true lease, rather than security instrument in disguised sale, =
where=20
lessee was obligated to return leased equipment at lease's end if =
it=20
decided not to invoke purchase option, but had no obligation to =
exercise=20
option to purchase property); In re Shores, 332 B.R. at =
39=20
(holding that agreement was true lease where agreement expressly =
stated=20
that lessee could terminate lease at any time by written notice to =
lessor=20
and have no further obligation except for liability for damage to =
leased=20
property during lease term and where useful life of leased =
property=20
exceeded term of lease ); In re Copeland, 238 B.R. 801, =
806=20
(Bankr. E.D. Ark. 1999) (holding, under Arkansas law, that even =
though=20
section 1.203 "does not require a finding as a matter of law that =
a=20
transaction is a true lease based only on the fact the lessee may=20
terminate the lease at any time," this fact precluded finding that =
transaction was sale). Excel's Motor =
Vehicle Lease=20
Agreement is what it says it is: "a lease only" that transfers "no =
ownership interests in the Vehicle except for any future option to =
purchase provided in this Lease." The lessees are lessees as the =
UCC=20
defines that term (as "a person who acquires the right to =
possession and=20
use of goods under a lease"); Excel is a lessor as the UCC defines =
the=20
term (as "a person who transfers the right to possession and use =
of goods=20
under a lease"); and the Lease Agreement is a true lease agreement =
and not=20
a sales contract that creates a security interest in the =
collateral, as=20
defined in the UCC ("[a] 'sale' consists in the passing of title =
from the=20
seller to the buyer for a price"; a "[c]ontract for sale' includes =
both a=20
present sale of goods and a contract to sell goods at a future =
time").=20
Tex. Bus. & Com. Code Ann. =A7=A7 2A.103 (defining "lessee" =
and "lessor"),=20
2.106 (defining "sale" and "sales contract"). Because Excel's =
Motor=20
Vehicle Lease Agreement is a true lease, the lessees are not =
owners of the=20
leased vehicles. Excel is the owner of the vehicles for UCC =
purposes as=20
well as ad valorem tax purposes.
I would grant =
Excel's motion=20
for rehearing. I would hold that, for the foregoing reasons, the =
taxing=20
authorities conclusively established their right to summary =
judgment.=20
Therefore, I concur in the panel's judgment affirming the summary =
judgment=20
in favor of the taxing authorities. Evelyn V. =
Keyes Justice Justice Keyes, =
concurring in=20
the judgment. Justice Keyes, =
dissenting=20
from denial of rehearing.=20
2. Whether a transaction is a lease or a =
sale is=20
important for commercial purposes and for the determination of =
creditors'=20
rights under the Bankruptcy Code. A true lease is subject to =
article 2A of=20
the UCC; but a sale is not a lease and, therefore, is not subject =
to=20
article 2A. See Tex. Bus. & Com. Code Ann. =A7 2A.102 =
cmt. 1=20
(Vernon 1994) ("[T]he definition of lease does not include a sale. =
. . or=20
retention or creation of a security interest. . . ; sales and =
security=20
interests are governed by other Articles of this Act."); see =
also=20
id. =A7 2A.103(10) (Vernon Supp. 2006) ("'Lease' means a =
transfer=20
of the right to possession and use of goods for a term in return =
for=20
consideration, but a sale . . . , or retention or creation of a =
security=20
interest is not a lease."); Franklin Nat'l Bank v. Boser, =
972=20
S.W.2d 98, 102-04 (Tex. App.--Texarkana 1998, pet. denied) =
(provisions of=20
article 9 of UCC apply to secured transaction disguised as lease); =
Superior Packing, Inc. v. Worldwide Leasing & Fin., =
Inc., 880=20
S.W.2d 67, 71 (Tex. App.--Houston [14th Dist.] 1994, pet.=20
denied)=20
(same); see also In re Bailey, 326 B.R.156, 160 (Bankr. =
W.D. Ark.=20
2005) (if transaction is construed as sale of personal property =
and is=20
secured by perfected security interest, debtor in bankruptcy must =
propose=20
to treat creditor's claim as provided in section 1325(a)(4) and =
(5) of=20
Bankruptcy Code; if transaction is true lease and Debtor desires =
to keep=20
property, then Debtor must assume lease, cure all defaults, and =
perform=20
lease according to its terms in compliance with sections =
1322(b)(7) and=20
365 of Code).=20
3. The Lease provides that at the beginning =
of the=20
Lease, the Adjusted Lease Balance is equal to the Adjusted =
Capitalized=20
Cost of the vehicle, i.e., the Gross Capitalized Cost minus the =
amount of=20
any net trade-in allowance, rebate, noncash credit, or cash that =
reduces=20
the Gross Capitalized Cost, i.e., that reduces the agreed upon =
value plus=20
any items paid over the lease term, such as service contracts, =
insurance,=20
and outstanding prior credits or lease balances. If all payments =
are made=20
on time and other lease obligations are met, the monthly payments =
are=20
"applied to reduce the Adjusted Lease Balance so that at the end =
of the=20
Lease term the Adjusted Lease Balance equals the Vehicle's =
Residual=20
Value," i.e., its wholesale value as determined by Excel, in =
accordance=20
with industry standards, "by 4. If the=20
transaction creates a security interest disguised as a lease, the=20
transaction will be governed by the Article on Secured =
Transactions=20
(Article 9) and the lessor will be required to file a financing =
statement=20
or take other action to perfect its interest in the goods against =
third=20
parties. There is no such requirement with respect to leases under =
the=20
common law and, except with respect to leases of fixtures (Section =
2A-309), this Article imposes no such requirement. Yet the =
distinction=20
between a lease and a security interest disguised as a lease is =
not clear=20
from the case law. . . . 5. The distinction is important in this case =
because=20
Excel's Lease Agreement provides that it is a lease and that =
conveys no=20
ownership interest "except for any future option to purchase =
provided in=20
this Lease." 6.
The first=20
is to compare the option price to the market value of the =
equipment at the=20
time the option is exercisable. If the option price is =
substantially less=20
than the market value, the option price is nominal. The second =
test is to=20
determine whether the terms of the option do not leave the lessee =
with any=20
sensible alternative but to exercise the option. The two tests are =
not=20
cumulative, but are alternative. Horton=20
v. Dental Cap. Leasing Corp., 649 S.W.2d 655, 657 (Tex.=20
App.--Texarkana 1983, no writ). The UCC's test for whether the =
purchase=20
price is nominal or not is now set out in subsection 1.201(d), =
quoted=20
supra.=20
=20