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 Tractor-
Loader-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
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
- 2 -
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
- 3 -
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. Mid-
Continent Refrigerator Co., 579 S.W.2d 545, 548 (Tex. Civ. App.
1979).
This statutory language is based on the rationale that when
1
In 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.
- 4 -
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
2
of the agreement.
2
Enterprise 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
- 5 -
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.
- 6 -
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.
- 7 -