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ATTORNEYS FOR APPELLANT R. Brock Jordan James E. Rossow, Jr. Indianapolis, Indiana

ATTORNEY FOR APPELLEES KEY EQUIP. FINANCE, INC. & CHIKOL EQUITIES, INC. William G. Lavery Elkhart, Indiana ATTORNEYS FOR APPELLEES PRESTIGE EQUIP. CORP. & NATL MACHINERY EXCHANGE, INC. Cynthia S. Gillard Dean E. Leazenby Elkhart, Indiana

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Indiana Supreme Court
_________________________________ No. 20S03-1010-CV-618 GIBRALTAR FINANCIAL CORP.,

In the

FILED
Jun 21 2011, 1:08 pm
of the supreme court, court of appeals and tax court

CLERK

Appellant (Plaintiff below), v. PRESTIGE EQUIPMENT CORPORATION, NATIONAL MACHINERY EXCHANGE, INC. KEY EQUIPMENT FINANCE, INC. F/K/A KEY CORPORATE CAPITAL, INC., AND CHIKOL EQUITIES, INC., Appellees (Defendants below). _________________________________ Appeal from the Elkhart Superior Court, No. 20D05-0805-CT-3 The Honorable Charles C. Wicks, Judge _________________________________ On Petition to Transfer from the Indiana Court of Appeals, No. 20A03-0910-CV-495 _________________________________

June 21, 2011 Sullivan, Justice.

The parties to this lawsuit claim rights to a punch press used in the manufacturing business of now-defunct Vitco Industries, Inc. Gibraltar Financial Corp. holds a perfected security interest in Vitcos tangible and intangible property, including its equipment. The other parties claim that the security interest does not cover the press because the press was not Vitcos equipment; rather, it had been leased to Vitco by Key Equipment Finance, Inc. We find that genuine issues of material fact exist regarding whether the press was leased. Background

Vitco Industries, Inc., was a manufacturer of porcelain enameled goods in Napanee, Indiana. In April, 2004, Vitco paid $243,000 for a punch press to use in its business. Roughly eight months later, in December, 2004, Vitco entered into a transaction with Key Equipment Finance, Inc. ("Finance"), in which Finance paid Vitco the same amount, $243,000, and Finance and Vitco executed a contract under which Vitco was entitled to use the punch press in exchange for monthly payments. Finance and Vitco called this contract a "Master Lease Agreement," which we will refer to in this opinion as the "Lease." Consistent with the lease nomenclature, Finance did not file a financing statement in connection with the transaction.

The Lease had the following terms:    Term: Six years. Rent: $3,591.91 per month ($43,102.92 per annum). Net Lease Terms: Vitco was required to maintain insurance, pay all personal property taxes, bear all risk of loss, and perform all repairs and maintenance with regard to the press.  Early Buyout Option ("EBO"): Vitco was entitled to buy the press after five years for $78,464.70 (32.29% of the total cost of the equipment), a price that the Lease recited

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represented "the parties[] present best estimate of the fair market value of the Equipment on the EBO Date determined by using commercially reasonable methods which are standard in the industry." Appellants App. 121.  End-of-Term Options: In the event Vitco did not exercise the EBO, Vitco was required to continue paying monthly rent during the sixth year (total of $43,102.92). At the end of the Leases six-year term, Vitco could do one of four things: (1) (2) (3) (4) buy the press for fair market value; or renew the Lease for the fair market renewal rental value; or continue the Lease month-to-month at the current monthly rental rate; or return the press to Finance (in which case Vitco would pay for the presss removal and return to Finance, or Finance could attempt to sell the press directly from Vitcos facility).

For purposes of the End-of-Term Options, the Lease defined "fair market value" as "the Equipments value as determined between Lessor and Lessee, based upon a price which would be obtained in an arms-length transaction between an informed and willing lessor or seller . . . and an informed and willing lessee or buyer." Id. at 114.

Vitco never made it to the point where it could exercise the EBO or otherwise complete the terms of the Lease. By 2007, Vitco was no longer in business and had defaulted under the Lease.

Independent of its dealings with Finance, Vitco had entered into several loan agreements with Gibraltar Financial Corp. pursuant to which it had granted Gibraltar a security interest in virtually all of its tangible and intangible property, including its equipment. It is undisputed that Gibraltar perfected its security interest. In a separate lawsuit filed against Vitco in July, 2007, Gibraltar was awarded possession of the collateral in which it had a perfected security interest, including Vitcos equipment. Gibraltar sold that equipment and credited Vitco with the sale proceeds, but Vitco still owed Gibraltar almost $580,000.

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In the meantime, Finance repossessed the press and sold it in July, 2007, for $160,000 to National Machinery Exchange, Inc. ("NME"), in a joint venture with Prestige Equipment Corp.1

In May, 2008, Gibraltar filed this action against Prestige to recover the value of the press, alleging that Prestige had acquired the press subject to Gibraltars security interest. A series of third-party complaints and amendments followed, as detailed in the margin.2 The parties agreed after a pretrial conference that the dispute turned on whether the Lease was a true lease (as argued by the Defendants) or a sale subject to a security interest (as argued by Gibraltar). The trial court granted summary judgment in favor of the Defendants after concluding that the Lease was a true lease. The Court of Appeals affirmed the trial courts grant of summary judgment. Gibraltar Fin. Corp. v. Prestige Equip. Corp., 925 N.E.2d 751 (Ind. Ct. App. 2010). Gibraltar sought transfer to this Court, arguing, in part, that the decision of the Court of Appeals in this case conflicted with the prior decision of the Court of Appeals in Gangloff Industries, Inc. v. Generic Financing & Leasing, Corp., 907 N.E.2d 1059 (Ind. Ct. App. 2009). We have granted transfer to reconcile any conflict between these two cases and to clarify Indiana law in distinguishing true leases from sales subject to security interests.3 Ind. Appellate Rule 58(A); Gibraltar Fin. Corp. v. Prestige Equip. Corp., 940 N.E.2d 828 (Ind. 2010) (table). Discussion

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Court decisions, treatises, and articles on commercial law are replete with declarations of the difficulty in distinguishing between "true" leases and sales subject to security agreements.
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Chikol Equities, Inc., acted as a broker for the transaction. NME and Prestige resold the press to a third party. 2 Gibraltar first filed an action against Prestige. Prestige then filed third-party claims against Finance and Chikol, seeking indemnification. Thereafter, Gibraltar amended its complaint to name Prestige, NME, Finance, and Chikol as defendants and included counts seeking conversion, replevin, and a money judgment. We will refer to Prestige, NME, Finance, and Chikol collectively as the "Defendants." 3 We summarily affirm the Court of Appeals as to issues not addressed in this opinion. App. R. 58(A)(2).

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For example, the court in the epic WorldCom bankruptcy case was forced to observe that though the concepts of lease and security agreement "are rather easily defined, the means to distinguish between them in a rigorous manner has often eluded the courts." WorldCom, Inc. v. Gen. Elec. Global Asset Mgmt. Servs. (In re WorldCom, Inc.), 339 B.R. 56, 64 (Bankr. S.D.N.Y. 2006). For their part, White and Summers say that whether a transaction in the form of a lease is characterized as a lease or a sale subject to a security interest is "one of the most frequently litigated issues under the Uniform Commercial Code." 4 James J. White & Robert S. Summers, Uniform Commercial Code 17 (6th ed. 2010).

Our review of the history of these disputes suggests that much of the difficulty arose under the pre-1987 version of the Uniform Commercial Code ("U.C.C."), a uniform law adopted in some version by all 50 states. See In re Edison Bros. Stores, Inc., 207 B.R. 801, 809 n.7 (Bankr. D. Del. 1997) (noting that the U.C.C. has been adopted by all 50 states). The pre-1987 U.C.C. emphasized the subjective intent of the parties entering into a lease agreement at the time the agreement was made. The Official Comment to post-1987 U.C.C.

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