Case: Carter v. Tokai Financial Services, Inc.
Georgia Court of Appeals (1998)
231 Ga. App. 755, 500 S.E.2d 638
Facts: On January 3, 1996, Tokai’s (now part of De Lage Laden Leasing and Trade
Finance) predecessor in interest, Mitel Financial, entered into a “Master Equipment Lease
Agreement,” (agreement) with Applied Radiological Control, Inc. (ARC) for the lease of
certain telephone equipment valued at $42,000. Randy P. Carter of ARC personally
guaranteed ARC’s obligations under the agreement. ARC made four rental payments and
then defaulted on its obligations. Thereafter, Tokai repossessed the telephone equipment
and sold it for $5,900. Tokai then brought this suit against Carter, and the trial court
awarded Tokai $56,765.74. Carter appeals.
Opinion: Carter contends that the true intent of the parties was to enter into a security
agreement. Whether a transaction creates a lease or security interest is determined by the
facts of each case. A transaction, however, “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 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 additional consideration upon compliance with the lease
agreement, or d) the lessee has an option to become the owner of the goods for no
additional consideration upon compliance or nominal additional consideration upon
compliance with the lease agreement.” UCC 1-201 (37).
Here, the agreement’s initial term was for 5 years. ARC was not obligated to renew
the lease or buy the telephone equipment at the end of the term. Also, ARC did not have
the option to renew the lease or buy the equipment at the end of the term for nominal
consideration. Therefore, the agreement does not fit within the definition of a secured
transaction provided by the UCC and is a true finance lease. Thus, the agreement is
governed by Article 2A, not by Article 9.
Judgment and result: Trial court decision reverse. A lease will be governed by UCC
Article 2A unless in complying with the “lease’s” terms, the lessee may either become
the owner of the property for no or minimal added consideration.