PATSY L WILLIAMSON V MASSE LINCOLN-MERCURY
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STATE OF MICHIGAN
COURT OF APPEALS
PATSY L. WILLIAMSON,
UNPUBLISHED
June 17, 1997
Plaintiff-Appellant,
v
MASSE LINCOLN-MERCURY, JEEP-EAGLE,
INC. d/b/a MASSE, INC., MASSE NISSAN, INC.
and TERRYL E. MASSE,
No. 189869
Genesee County
LC No. 94-027654
Defendant-Appellee.
Before: Reilly, P.J., and Wahls and N.O. Holowka,* JJ.
PER CURIAM.
Plaintiff appeals as of right from the circuit court’s order dismissing her complaint which sought
specific performance of two asset purchase agreements. We affirm.
This case arose out of an agreement between plaintiff and defendants whereby plaintiff would
purchase defendants’ automobile dealerships. Plaintiff agreed to purchase all of the personal property
and intangibles belonging to defendants Masse Lincoln-Mercury, Jeep-Eagle, Inc., and Masse Nissan,
Inc., free and clear of all security interests, liens, material restrictions, claims, escrow balances, or
changes of any kind, and that plaintiff would assume certain of defendants’ outstanding leases. A
dispute arose between the parties, and plaintiff filed a claim in circuit court seeking specific performance
of the agreement, claiming that defendants failed to perform their contractual obligations. On May 22,
1994, the parties entered into a settlement agreement which resolved all disputed issues in the case
except for one. The remaining issue involved a Reynolds and Reynolds computer that defendant Masse
Lincoln-Mercury Jeep-Eagle leased from Reyna Financial Corporation, a subsidiary of the Reynolds
and Reynolds Company. Plaintiff claimed that the transaction was not a true lease, but was an
installment sale with a security interest, and, therefore, she was not required to assume this lease.
Defendants argued that the lease agreement was in fact a true lease, and thus plaintiff assumed the
obligations of the lease agreement by the terms of the asset purchase agreement.
* Circuit judge, sitting on the Court of Appeals by assignment.
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On appeal, plaintiff argues that the circuit court erred in relying on the intent of the contracting
parties and the terminology of the agreement to determine that the agreement was a true lease rather
than an installment sale. We disagree.
Whether a transaction creates a lease or security interest is determined by the facts of each
case. MCL 440.1201(37); MSA 19.1201(37). This Court reviews the trial court’s findings of fact for
clear error. Triple E Produce Corp v Mastronardi Produce, Ltd, 209 Mich App 165, 171; 530
NW2d 772 (1995). A finding of fact is clearly erroneous when the reviewing court is left with a firm
conviction that a mistake has been made. Id.
MCL 440.1201(37); MSA 19.1201(37), which is based on Uniform Commercial Code § 1
201(37), defines a security agreement. The statutory provision distinguishes between a true lease and
an installment sale with a security agreement as follows:
Whether a transaction creates a lease or security interest is determined by the facts of
each case; however, a transaction creates a security interest if the consideration the
lessee is to pay the lessor for the right to possession and use of the goods is an
obligation for the term of the lease not subject to termination by the lessee, and any of
the following;
(a) The original term of the lease is equal to or greater than the remaining
economic life of the goods.
(b) The lessee is bound to renew the lease for the remaining economic life of
the goods or is bound to become the owner of the goods.
(c) The lessee has an option to renew the lease for the remaining economic life
of the goods for no additional consideration or nominal consideration upon compliance
with the lease agreement.
(d) The lessee has an option to become the owner of the goods for no
additional consideration or nominal additional consideration upon compliance with the
lease agreement.
A transaction does not create a security interest merely because it provides any
of the following:
(a) The present value of the consideration the lessee is obligated to pay the
lessor for the right to possession and use of the goods is substantially equal to or is
greater than the fair market value of the goods at the time the lease is entered into.
(b) The lessee assumes the risk of loss of the goods, or agrees to pay taxes,
insurance, filing, recording, or registration fees, or service or maintenance costs with
respect to the goods.
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(c) The lessee has an option to renew the lease or to become the owner of the
goods.
(d) The lessee has an option to renew the lease for a fixed rent that is equal to
or greater than the reasonably predictable fair market rent for the use of the goods for
the term of the renewal at the time the option is to be performed.
(e) The lessee has an option to become the owner of the goods for a fixed
price that is equal to or greater than the reasonably predictable fair market value of the
goods at the time the option is to be performed. [MCL 440.1201(37); MSA
19.1201(37).]
The statute was amended in 1992 to delete all references to the parties’ intent, focusing instead on
economic factors. UNIFORM COMMERCIAL CODE § 1-201 comment 37.
“Where a contract provides that a person receiving certain goods is the lessee of those goods,
has an obligation to pay a stipulated rental without obtaining title, and has an option to purchase the
property at the end of the lease, the contract may not be deemed one of sale.” Hill v GMAC, 207
Mich App 504, 512; 525 NW2d 905 (1994). In the present case, the circuit court first noted that the
agreement was characterized by the contracting parties as a lease, but then the court went beyond the
label and looked to the substance of the agreement to determine the issue. In particular, the court
stressed the provisions that the lessor retained ownership at all time, that the lessee could not assign,
sublet, or mortgage the equipment, that the lessee could not remove the equipment from the specified
location, and that the lessee’s risk of loss was limited to one percent or $1,000. The court also stressed
the fact that the agreement gave the lessee the option to purchase the equipment for the fair market
value up to 15% of the cost of the equipment. Finally, the agreement expressly provided that “nothing
herein contains shall give or convey to the lessee any right, title or interest in or to the equipment leased
hereunder.” On the facts of this case, the trial court did not err in concluding that the agreement in
question was a true lease and not a sale with a security agreement.
Plaintiff argues that the contractual language the court relied on is equally consistent with a
security agreement. This argument has no merit. The statute expressly provides that the question is one
of fact. The trial court analyzed the agreement in light of the statutory factors and concluded that it was
a true lease. This conclusion was not clearly erroneous.
Plaintiff relies primarily on case law from other jurisdictions which hold that an option to
purchase for less than twenty or twenty-five percent of the original cost is an option to purchase for
nominal consideration as a matter of law. In re Excello Press, Inc, 83 BR 539, 542 (ND Ill, 1988),
aff’d 90 BR 335 (ND Ill 1988), rev’d on other grounds 890 F 2d 896 (CA 7, 1989); In re Royal
Food Markets, Inc, 121 BR 913 (SD Fla, 1990); In re Alpha Creamery Co, Inc, 4 UCC Rep Serv
794, 795 (Bankr WD Mich, 1967). However, upon close examination of these cases, we do not
believe that they stand for the proposition asserted by plaintiff.
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Instead, we find the statutory provision more helpful. MCL 440.1201(37); MSA 19.1201(37)
provides:
As used in this subsection:
(a) Additional consideration is not nominal if when the option to renew the lease is
granted to the lessee the rent is stated to be the fair market rent for the use of the goods
for the term of the renewal determined at the time the option is to be performed, or
when the option to become the owner of the goods is granted to the lessee, the price is
stated to be the fair market value of the goods determined at the time the option is to be
performed. Additional consideration is nominal if it is less than the lessee’s reasonably
predicable cost of performing under the lease agreement if the option is not exercised.
In the present case, the lessee was given the option to purchase the equipment at the end of the lease
term for “fair market value not to exceed fifteen percent of the original equipment cost.” The trial court
found this was not nominal consideration. This finding is consistent with the authority cited by plaintiff,
which indicates that the relationship of the option price to the original purchase price is an important
factor to consider, but not the only factor. It is also consistent with MCL 440.1201(37); MSA
19.1201(37) because the option price is tied to the fair market value of the equipment, even though the
agreement places a cap on the price. The trial court could reasonably have found, given the nature of
the equipment involved, that fifteen percent of the original purchase price was not nominal consideration.
Affirmed.
/s/ Myron H. Wahls
/s/ Nick O. Holowka
Judge Reilly concurs in result only
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