National Industrial Contractors, Inc.

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Case 04-02909-5-ATS Doc 213 Filed 06/22/05 Entered 06/23/05 07:55:57 Page1of6

UN TED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEI GH Di VI SI ON
IN RE: CASE NO

NATT ONAL INDUSTRI AL 04- 02909- 5- ATS
CONTRACTORS, INC.

DEBTOR

DENYI NG APPLI CATION FOR ADM N STRATI VE CLAIM
AND ALLOW NG OBJ ECTITON TO CLAIM

The matters before the court are the application for an
adm ni strative claimfiled by US. Bancorp Equi pnent Finance, Inc. and
the obj ectionto claimfiled by the debtor. A hearing took placein
Raleigh, North Carolina on June 22, 2005.

National Industrial Contractors, Inc. fileda petition for relief
under chapter 11 of the Bankruptcy Code on August 10, 2004. The debt or
and U.S. Bancorp wre parties to a Master Lease Agreenent and Schedul e
related to a Standard Industrial Corporation Shear. The debtor
defaulted onits post petition paynents under the lease, and pursuant to
the confirned plan of reorganization, the debtor surrendered the
equi pnent to US. Bancorp. US. Bancorp nowseeks an adm ni strative
claiminthe anount of $7, 076. 30 for unpaid 1 ease paynents fromthe
date of filingtothe date of confirmation. The debtor contends that
the agreenent is a disguised security interest, not atrue lease, and
that US. Bancorpis entitled only to an unsecured deficiency claim

under the confirmed plan.

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The Master Lease Agreement provides that the lessor is the owner
of the equipment and provides for surrender at the end of the lease
term if the purchase option is not exercised. The agreement also
provides that the lessee may not cancel the lease. The Schedule to the
lease states that if any terms of the Schedule are inconsistent with
the Master Lease Agreement, the terms of the Schedule "shall prevail."
The Schedule then provides that the lessee is obligated to purchase the
equipment for $1.00 at the end of the lease term, that the ownership of
the equipment is transferred to the lessee, that the lessor will retain
a security interest in the property, and that the Schedule shall
constitute a conditional sales contract and "Lessor is not and shall
not be deemed to be the owner of the Property for any purpose." The
Schedule also provides that the lessee does not have a right of
cancellation. U.S. Bancorp filed a UCC financing statement within 10
days of the execution of the documents.
It is clear from the Schedule that the parties agreed the "lease"
was truly a security agreement. The Schedule states that its terms
control in the event of a conflict, and its terms are undeniably those
of a purchase agreement with a retained security interest.
Even if the terms of the Schedule were not clear, the Uniform
Commercial Code provides guidance on determining whether an agreement
is a true lease or a security agreement. The Master Lease Agreement
provides that it is to be interpreted under Oregon law, and Oregon has
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adopted § 1-201 of the Uniform Commercial Code. That section provides,
in relevant part, that
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:
* * *
(B) The lessee is bound . . . to become the owner of the
goods; [or]
* * *
(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.
Or. Rev. Stat. § 71.2010(37)(a). The terms of the agreement fall well
within the Uniform Commercial Code definition of a security interest
because the debtor did not have a right of cancellation, the lessee was
bound to become the owner (in fact, title transferred with the
execution of the agreement), and the debtor had the option to purchase
the equipment for only $1.00 at the end of the lease.
Notwithstanding the fact that the documents establish a security
agreement, U.S. Bancorp contends that the court should look to the
parties’ treatment of the agreement as a lease, and estop the debtor
from contending that the agreement is not a true lease. When the
debtor filed its schedules on August 25, 2004, it listed U.S. Bancorp
as a party to an unexpired lease. The debtor’s initial plan of
reorganization, filed on November 9, 2004, did not address U.S.
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Bancorp. It did provide that all leases (with one exception) would be
deemed rejected.
On December 6, 2004, U.S. Bancorp filed a motion for relief from
the automatic stay to gain possession of the equipment due to the
debtor’s default. The debtor then filed its first amended plan on
December 17, 2004, treating U.S. Bancorp as a secured creditor. On
December 21, 2004, the debtor filed a response to U.S. Bancorp’s motion
for relief from the automatic stay, contending that the lease agreement
was not a "true lease," but was a financing arrangement. On December
27, 2004, U.S. Bancorp objected to the debtor’s plan, arguing, among
other things, that the debtor’s plan unfairly discriminated between
various classes by proposing to amortize certain secured claims while
paying a reduced rate of interest to U.S. Bancorp, and that the plan
failed to pay U.S. Bancorp the present value of its property.
On March 15, 2005, the plan was confirmed with the treatment of
U.S. Bancorp amended to provide that the debtor would surrender the
equipment to U.S. Bancorp. The order of confirmation stated that the
debtor believes the creditor is a secured creditor and that its
deficiency claim should be treated as unsecured, but nothing in the
order would preclude U.S. Bancorp from filing an administrative proof
of claim and seeking a determination of whether the agreement was a
true lease or a security interest. Similarly, the parties entered a
consent order resolving the motion for relief from the automatic stay
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on April 19, 2005, specifically reserving the question of whether the
agreement was a true lease or a security interest.
While the debtor did list the agreement as a lease in its
schedules, and appeared to treat the agreement as a lease in its
original plan of reorganization (by omitting U.S. Bancorp from the
plan), it is not unusual for a debtor to prepare its initial filings
without a detailed review of its documents. Here, the debtor relied on
the title of the document and listed the agreement as a lease. Upon a
more careful review after the motion for relief from the automatic stay
was filed, the debtor asserted that the agreement was really a security
agreement. There was no extraordinary delay in the debtor’s taking
this position, and there were no agreements or other acts taken in
reliance on the treatment of the agreement as a lease. Accordingly,
the court will not estop the debtor from now asserting that the
agreement creates a security interest.
Based on the foregoing, the terms of the agreement and the
governing law establish that the agreement creates a security interest
in favor of U.S. Bancorp. Accordingly, the application for an
administrative claim is DENIED, and the objection to claim is ALLOWED.
SO ORDERED.
DATED: June 22, 2005
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