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10/26/90 JOSEPH W. FLEMING v. CARROLL PUBLISHING

October 26, 1990

JOSEPH W. FLEMING, ET AL., T/A EQUITY LEASING 80F, APPELLANTS/CROSS APPELLEES
v.
CARROLL PUBLISHING COMPANY, APPELLEE/CROSS APPELLANT



Appeals from the Superior Court of the District of Columbia; Hon. Truman A. Morrison III, Trial Judge

Ferren, Steadman and Farrell, Associate Judges.

The opinion of the court was delivered by: Steadman

This case presents several questions arising under Article 9 of the District of Columbia's version of the Uniform Commercial Code. A creditor that "leased" computer equipment and software to a user and later repossessed part of the property seeks to recover the balance due on the "lease." The issues include: (1) whether the controlling document was a "true lease" or a security agreement; (2) if a security agreement, whether the secured creditor's sale of part of the repossessed collateral without providing the requisite notice to the debtor bars the creditor from asserting rights either to a deficiency judgment or to collateral remaining in the debtor's possession; (3) if the creditor is not barred from asserting such rights, what the creditor's present rights are to the remaining collateral, which consists of computer software whose form has been significantly transformed; and (4) whether the creditor is, in any event, entitled to attorney's fees under the terms of the agreement between the parties. We uphold the trial court's rulings that the "lease" was a security agreement and that the creditor is barred from any deficiency judgment. We remand for further proceedings on the issues of the creditor's rights in the unrepossessed collateral and to attorney's fees.

I. The Facts

While unusually complicated in their detail, *fn1 the facts relevant to Disposition of this appeal may be summarized as follows. On December 29, 1980, Carroll Publishing Company ("Carroll") entered into an "Equipment Lease Agreement" (the "lease" or the "agreement") with three individual investors who had formed a partnership called Equity Leasing Joint Venture -- 80F ("Equity"). The lease covered certain computer hardware and software. These items were acquired through third-party vendors. Some of the software was "off-the-shelf" but at least two significant software packages were to be custom-written for Carroll by a third-party vendor. The lease term was for five years, with total payments of $87,328.25. *fn2

A series of difficulties of various kinds developed, and on August 25, 1982, Carroll wrote to Equity's agent terminating the agreement, on the ground of non-delivery of certain items called for by the lease. Up to that point, Carroll had made sixteen regular lease payments totaling $26,198.46. On February 22, 1983, Equity filed the instant suit against Carroll, seeking recovery in the amount of $61,930.11 and attorney's fees. Carroll counterclaimed, alleging non-delivery of some of the leased items and seeking damages for fraud and for breach of contract.

While the case was pending, on September 29, 1983, Equity's agent went to Carroll's office armed with a court order and repossessed a number of pieces of hardware and one item of software, located in the drive of one of the repossessed machines. Subsequently, at least some of the repossessed hardware was sold at a private sale, of which Carroll was given no form of notice.

Following a bench trial, the trial court denied Equity any relief. The court concluded first that the agreement was not a "true lease" but a security agreement governed by Article 9 of the District of Columbia's version of the Uniform Commercial Code. It concluded further that any claims for non-delivery were the sole responsibility of third-party vendors and not Equity; *fn3 hence Equity was initially within its rights in proceeding under the agreement and under Article 9. However, it held, Equity's failure to give notice to Carroll of its proposed sale of repossessed collateral barred Equity from obtaining any deficiency judgment, and any rights in the software remaining in Carroll's possession had been lost because of the subsequent modification of the software. Hence, Equity took nothing by its complaint. Nonetheless, the court interpreted the agreement to permit Equity to recover reasonable attorney's fees and costs, which it awarded in the amount of $50,636.01.

II. Lease or Security Agreement

On appeal, Equity contends first that the trial court erred in concluding that the lease was not a "true lease" but a security agreement governed by Article 9 of the District of Columbia Uniform Commercial Code. D.C. Code §§ 28:9-101 to 28:9-507 (1989). District of Columbia Code § 28:1-201(37) (1989) provides, in pertinent part:

"Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation . . . . Unless a lease or consignment is intended as security, reservation of title thereunder is not a "security interest" . . . . 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.

Thus, in determining whether a lease is a "true lease" or an Article 9 security agreement, the trial court must look to the intent of the parties, which depends on "the facts of each case." The trial court's determination as to the intent of the parties is essentially one of fact, cf. Dodek v. Cf. 16 Corp., 537 A.2d 1086, 1093 (D.C. 1988) ("the question of what the parties intended [by their contract] is clearly a question of fact" (internal quotation marks omitted)), and will not be upset unless it is "plainly wrong or without evidence to support it." D.C. Code § 17-305(a) (1989). Here, the trial court recognized that the intent of the parties is essential to a determination of whether a lease is a "true lease" or security agreement and the court detailed its reasons for finding that the parties intended the lease as a security agreement. In particular, the court noted that the lease allocated to Carroll several burdens typically associated with ownership of property, such as the obligation to pay license fees and taxes on the equipment, the obligation to keep the equipment in good repair and the assumption of "the entire risk of loss of and damage to Equipment from any and every cause whatsoever." In addition, the court noted that Equity's status was as financier, rather than manufacturer or seller, and that Equity had no storage facilities for the equipment. These are among the "factors" courts use in determining whether a lease is "intended for security." 2 J. WHITE & R. SUMMERS, UNIFORM COMMERCIAL CODE § 23-3, at 251-52 (3d ed. 1988) (hereinafter, "WHITE & SUMMERS"). *fn4 The court also noted that the total price Carroll was required to pay under the lease exceeded the purchase price of the equipment by $29,028.00 and that the customized system would be of little value to other potential lessees. "Under the totality of the evidence presented," the court found that the parties "intended to create a security agreement." We cannot say that this finding is "plainly wrong or without evidence to support it."

III. The Secured ...


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