CIT Grp/Equip Fin v. Condere Corporation ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED APRIL 8, 2003
April 3, 2003
UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
Clerk
For the Fifth Circuit
No. 00-60103
CIT GROUP/EQUIPMENT FINANCING, INC
Plaintiff-Counter Defendant-Appellee,
VERSUS
CONDERE CORPORATION, doing business as Service Fleet Tire
Company, doing business as
Fidelity Tire and Manufacturing Company
Defendant-Counter Claimant-Appellant.
Appeals from the United States District Court
For the Southern District of Mississippi, Jackson
(5:98-CV-5-BrS)
Before DeMOSS and STEWART, Circuit Judges, and LITTLE,* District
Judge.
PER CURIAM:**
This is an appeal of two final judgments entered by the district
court. Plaintiff-Counter Defendant-Appellee, CIT Group/Equipment
*
District Judge of the Western District of Louisiana, sitting by
designation.
**
Pursuant to 5th Cir. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5th Cir. R. 47.5.4.
Financing, Inc., (“CIT”), filed a replevin action in the district
court seeking immediate possession of equipment that was in the
possession of Defendant-Counter Claimant-Appellant, Condere
Corporation (“Condere”). Condere posted a bond allowing it to
continue to possess the equipment and made counter claims asserting
that they had the right to have the lease reinstated because the
lease was part of its bankruptcy estate, or, alternatively, the
equipment was not subject to a lease but rather a security
agreement, that it had the right of redemption, and that the
equipment was a fixture. The district court ruled in favor of CIT
and ordered Condere to return the equipment. Condere appealed
without supersedeas. While the appeal was pending, the parties
settled two issues: Condere allowed CIT’s third-party purchaser to
remove the equipment and Condere paid CIT to release the lien on
certain equipment used as collateral for the lease. This Court
then ordered a stay of the appeal of the replevin action and
remanded the case for a hearing on damages. The district court
held a hearing and found CIT was entitled to $1,650,815.17 in
damages. Condere now appeals the final judgment in the replevin
action and the final judgment awarding damages. We affirm the two
judgments of the district court for the reasons stated therein and
summarize those reasons below.
BACKGROUND
Condere operated a tire manufacturing plant in Natchez,
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Mississippi. On December 14, 1993, the City of Natchez executed a
Bill of Sale to Condere covering the equipment at issue in this
case. Both the City’s resolutions authorizing the sale and the
Bill of Sale itself referred to the equipment as “personal
property.”
Also around the same time, because Condere needed cash, they
proposed and CIT approved a transaction whereby CIT would purchase
the equipment at issue, mainly eleven tire presses, from Condere
for $1,300,000.00 and lease it back to Condere in a “sale-
leaseback” transaction, which is a common commercial transaction.
On December 21, 1993, the transaction was closed. Condere
executed a Bill of Sale to CIT for the equipment, which was to be
covered by a Master Lease (“Lease”), and Condere received
$1,300,000.00 for the equipment. The Lease provided for monthly
lease payments of $23,468.40 per month for 60 months, the last
being due December 31, 1998. At the end of the Lease, Condere had
the option of purchasing the equipment or returning it to CIT at
Condere’s expense. Condere was required to give CIT reasonable
written notice prior to expiration of the lease term as to which of
these options it would exercise. Condere has never given any
written notice to CIT.
On December 21, 1993, Condere also executed a separate Security
Agreement to Collateralize the Master Lease (“Security Agreement”)
covering different equipment for the purpose of providing
collateral to CIT in the event of a default on the Lease by
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Condere. This equipment was not covered by the Bill of Sale to
CIT.
U.C.C. Financing Statements were filed by CIT as the “Lessor”
under the Lease and as “Secured Party” for the equipment covered by
the Lease and Security Agreement. At the time the transaction was
closed, CIT required Condere to install tags with “CIT” and a
number on all equipment covered by the Lease that did not have
identifying serial numbers. The Lease form was one commonly used.
In all the Condere corporate documents authorizing the
transaction, the correspondence between CIT and Condere, and the
transaction documents themselves, the transaction was always
referred to as a “Lease.” The invoices Condere received from CIT
were for “rent.” As required by Mississippi law, on every lease
payment made by Condere to CIT, the appropriate amount of
Mississippi sales tax was included.
In the transaction documents, Condere made numerous
representations and warranties to CIT that all the equipment
covered by the Lease and the Security Agreement was personal
property.
Condere made monthly lease payments of $23,468.40 rent plus
$352.03 sales tax to CIT on the Lease but was two payments
delinquent when, on May 13, 1997, Condere filed for bankruptcy.
After filing for bankruptcy, Condere made no further payments on
the Lease, and on June 24, 1997, CIT filed a Motion to set a
deadline for Condere to reject or accept the Lease. On September
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11, 1997, Condere rejected the Lease and an Agreed Order was
entered by the bankruptcy court to that effect, but the Order
contained the provision “with the Debtor in possession reserving
the right to litigate whether said instrument is a lease or a
financing transaction, together with any other rights, claims or
defenses incident to such determination.” The automatic stay was
lifted as to all equipment covered by both the Lease and Security
Agreement, but Condere made no further payments on the Lease
thereafter.
Condere took no steps to litigate any issues regarding the
rejected Lease from September 11, 1997, until it filed its
responsive pleadings in the replevin action on February 13, 1998.
Condere also had a second lease from CIT covering computer
equipment (which is not the subject of this case). Condere assumed
this lease in the bankruptcy proceedings and brought all payments
current. No claim was made that the second lease was not a true
lease.
Because Condere had defaulted and rejected the Lease, CIT
actively sought buyers for the equipment covered by both the Lease
and the Security Agreement. Condere was aware of CIT’s efforts
and, in fact, CIT contacted Condere about Condere’s interest in
purchasing the presses several times. Nevertheless, Condere made
no effort to bring the Lease current or make any payments on it.
Condere and its successor Titan Tire Corporation of Natchez simply
did nothing and continued to use the equipment without paying.
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On December 8 and 9, 1997, representatives of CIT and Specialty
Tire Company (“Specialty”) inspected the presses in the Natchez
plant. Specialty made an offer to CIT to purchase the eleven tire
presses for $250,000.00 by a letter dated December 11, 1997,
conditioned upon acceptance that same day. CIT accepted the offer
by a letter of the same date.
On December 12, 1997, CIT’s attorney wrote to Condere’s attorney
and informed him of CIT’s contract to sell the eleven tire presses.
Condere refused to turn over the presses to CIT for delivery to
Specialty.
A week later, on December 18, 1997, Condere, without seeking or
obtaining approval of the bankruptcy court, tendered $224,000.00 by
a cashier’s check to CIT’s counsel stating that “the debtor has
elected to cure the default in connection with the CIT equipment
lease.” The $224,000.00 amount included an estimate of CIT’s
attorney’s fees to that date. Condere did not introduce evidence
that this amount was correct nor was there bankruptcy court
approval of any transaction to “cure the default.” CIT’s attorney
wrote to Condere’s attorney on December 29, 1997, returning the
$224,000.00 check advising that CIT could not accept it.
When Condere sought to “cure the default in connection with the
CIT equipment lease,” no mention was made of a security agreement.
No request was made by Condere about what would be necessary to
bring any “loan” current or pay off a “loan.” While Condere, when
it rejected the Lease in bankruptcy court, reserved the right to
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litigate whether it was a lease or a security agreement, Condere
made no attempt at this time to enjoin the sale or litigate any
issue as to whether the Lease was a security agreement.
When CIT sought to take possession of the equipment, including
the eleven tire presses sold to Specialty, Condere refused to
surrender it. CIT filed a replevin action in January 1998, seeking
immediate possession of the equipment. As is allowed by
Mississippi law, Condere posted a bond with a surety to prevent CIT
from obtaining immediate possession. No approval was sought or
obtained in the bankruptcy court and Condere concedes that Titan
arranged for the bond. This allowed Condere and subsequently,
Titan Tire Corporation of Natchez, to continue using the equipment
without paying. Ultimately, the Lease expired by its own terms in
December 1998. There is no evidence that Condere exercised its
option to purchase the equipment covered by the Lease.
In May 1998, Specialty, the purchaser of the eleven tire presses,
filed suit in Pennsylvania against CIT seeking damages in excess of
$12,000,000.00 due to CIT’s inability to deliver the eleven tire
presses CIT had sold to Specialty.
Meanwhile, in the replevin action Condere made counter-claims
asserting that they had the right to have the Lease reinstated
because it was part of their bankruptcy estate, or, alternatively,
the equipment was not subject to a lease but rather a security
agreement, that they had the right of redemption, and that the
equipment was a fixture. There was a trial on October 13, 1999.
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The district court on January 25, 2002, ruled in favor of CIT and
ordered Condere to return the equipment. Final Judgment was
entered on January 27, 2002.
Because of the CIT/Specialty litigation, the district court
ordered Condere to post a supersedeas bond of $12,000,000.00 before
appealing. Condere appealed without supersedeas.
On February 4, 2000, summary judgment in favor of CIT was granted
in the Specialty litigation and the case was dismissed. This
ruling was affirmed on appeal on November 20, 2000.
While the appeal was pending in this present case, the parties
settled two issues: Condere allowed Specialty to remove the
equipment and Condere paid CIT to release the lien on equipment
used as collateral for the Lease. This Court then ordered a stay
of the appeal of the replevin action and remanded the case for a
hearing on damages.
The district court held a hearing on August 20, 2001, concerning
damages. The court conducted a detailed analysis of the damages
allowed under the Lease for: past due lease payments, late fees,
fees for continued use of the equipment by Condere without payment
after expiration of the Lease, the cost to CIT of having the
equipment removed, and attorney’s fees and costs. CIT presented
evidence, including expert testimony from Lawrence McCabe, a former
general counsel of a Fortune 500 company, concerning the necessity
of the legal fees incurred by CIT, including the fees charge by
out-of-state lawyers at the Otterbourg firm. The district court
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awarded CIT $1,650,815.17 in damages.
Condere now appeals the final judgment in the replevin action in
so far as the court held that: 1) the Lease was rejected by Condere
and therefore not part of Condere’s bankruptcy estate and Condere
did not have a right to have the Lease reinstated; 2) the Lease was
not a disguised security agreement; 3) Condere had no right to
redeem the equipment; and, 4) the equipment was personal property.
Condere also appeals the district court’s final judgment on
damages making four arguments: 1) no damages incurred by CIT were
caused by Condere; 2) the Lease limited CIT’s recovery; 3) the
district court should not have considered the testimony of CIT’s
expert, Lawrence McCabe; and, 4) the district court should have
reduced the fees of CIT’s out-of-state counsel, the Otterbourg
firm.
DISCUSSION
I. Whether the district court erred in finding the Lease was not
part of Condere’s bankruptcy estate and therefore Condere had
no right to have the Lease reinstated.
It appears Condere asserts that if the Lease really is a lease
then the Lease and Security Agreement, along with the equipment
covered, were part of the bankruptcy estate and therefore Condere
had the right, under the bankruptcy code, to reinstate the Lease
upon full payment of all past due amounts. However, on
September 11, 1997, the bankruptcy court entered an order, that was
signed by both parties, finding that Condere had rejected the Lease
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and the court then lifted the automatic bankruptcy code stay
covering all the equipment that CIT was seeking to recover. The
effect of Condere rejecting the Lease and the court then lifting
the stay was to “return the parties to whatever legal relationship
existed before commencement of the [bankruptcy] case.” In re
Malone Properties, Inc., 1992 WL 611459 at *2 (Bankr. S.D. Miss.
1992); see Matter of Garfinkle, 577 F.2d 901, 904-05 (5th Cir.
1978) (holding, under the old bankruptcy code, that after rejection
the bankruptcy estate no longer has an interest); and see also
Matter of Austin Dev. Co., 19 F.3d 1077, 1081-83 (5th Cir. 1994)
(finding Garfinkle’s holding to be persuasive even under the new
code).
Condere was in default before filing for bankruptcy. The
agreement between the parties controls, not the bankruptcy code,
and the language in the Lease does not give Condere the right to
reinstate the Lease after defaulting. Condere does not cite any
authority that supports its assertion that the Lease remains part
of the bankruptcy estate but only cites to bankruptcy code
provisions that allow for cure and assumption, which are
inapplicable because the Lease controls. Accordingly, the district
court properly rejected Condere’s argument that Condere could
reinstate the Lease after being in default and rejecting the Lease
and the decision is affirmed.
II. Whether the district court’s finding that Condere failed to
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prove the Lease was a disguised security agreement was clearly
erroneous.
The district court’s finding that the Lease was not a security
agreement is, under Mississippi, a factual determination depending
on the intent of the parties and therefore subject to the clearly
erroneous standard of review. MISS. CODE ANN. § 75-1-201(37).1 A
security interest under Mississippi law is defined as “an interest
in personal property or fixtures which secures payment or
performance of an obligation.” MISS. CODE ANN. § 75-1-201(37).
According to the district court, Condere has the burden of proving
that the Lease was a disguised security agreement.
In the present case the district court made the following
findings, which we agree with:
1. An option to purchase the equipment does not of itself make
a lease a security agreement but an agreement that the
lessee has the option to become the owner of the equipment
upon completion of a lease for nominal consideration does
make a lease one intended to be a security. MISS. CODE ANN.
§ 75-1-201(37). Condere offered no credible evidence that
the option price in the Lease was nominal.
2. Condere’s corporate resolutions authorized both a lease and
a security agreement - two separate documents.
3. All the transaction documents describe the Lease as a
lease. The form is one commonly used for leases.
1
Neither the Lease nor Security Agreement contains a choice of
law provision and the contracts were to be performed in, and the
subject matter of the contract is in, Mississippi and therefore
Mississippi law governs. Todd v. Deposit Guar. Nat. Bank, 849 F.
Supp. 1149 (S.D. Miss. 1994). Additionally, the lease was executed
in 1993, so the 1990 version of MISS. CODE ANN. § 75-1-201 (37)
applies and not the current version.
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4. Contemporaneously, a security agreement was executed,
demonstrating that the parties recognized the distinction
between a security agreement and a lease and followed the
directives of Condere’s resolutions.
5. Another equipment lease from CIT was involved, and Condere
assumed it in the bankruptcy court, never claiming it was
a security agreement.
6. Sales tax was added to each “rent” payment. This is
applicable only to a lease.
7. The Lease had to be a lease for Condere to reject it in
bankruptcy (see issue I supra). Condere had no right to
reject a security agreement.
8. When Condere tendered $224,000.00 it was expressly stated
to be for the purpose of curing “lease” defaults.
9. Not until this suit was filed did, Condere take any
affirmative act to secure a judicial determination that the
Lease was a security agreement.
Thus, the district court found that the evidence established that
the Lease was exactly what it was: a lease. CIT had title to the
equipment and therefore was entitled to immediate possession
because Condere was in default under the Lease and Security
Agreement before it filed for bankruptcy (see supra). Condere on
appeal makes several factual arguments that basically revolve
around their contention that the reason for the arrangement between
Condere and CIT was because Condere was “cash starved.” This,
however, does not overcome the findings of the district court
concerning the intent of the parties and may in fact support the
finding that the Lease was a lease. Accordingly, the finding of
the district court that the Lease was a lease is not clearly
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erroneous and is affirmed.
Additionally, whether Condere had the right to redeem the
equipment and did in fact properly redeem the equipment depends on
finding the lease was really a security agreement. Because we
agree with the district court that the Lease really was a lease,
there is no need to address this issue.
III. Whether the district court’s finding that the equipment was
personal property was clearly erroneous.
In Mississippi, the question of whether an object is a fixture
or personal property is one of intent and a question of fact.
Bondafoam, Inc. v. Cook Const. Co., 529 So. 2d 655, 658 (Miss.
1988). The general rule is that whatever is affixed to land
becomes part of the realty; however, Mississippi courts recognize
that the parties, such as a lessor and lessee, can agree between
themselves as to whether or not something is to be considered a
fixture and the parties can incorporate this agreement into a
lease. Simmons v. Bank of Miss., 593 So. 2d 40, 42 (Miss. 1992).
In the present case, the Lease in the first and second paragraphs
describes the equipment as personal property. Further the eighth
paragraph of the Lease states that the equipment shall remain
personal property. The Bill of Sale refers to the equipment as
personal property and the Security Agreement, which collateralizes
the Lease, states that regardless of how the property is affixed it
shall remain personal property. Accordingly, the intent of the
parties is clear and the district court did not err in finding the
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equipment was personal property and the decision is affirmed.
IV. Whether the district court erred in awarding damages.
A district court’s factual determination of damages is subject
to clear error review and legal determinations are reviewed de
novo. Sockwell v. Phelps, 20 F.3d 187, 192 (5th Cir. 1994).
Condere makes four, basically factual, arguments concerning
damages: 1) no damages incurred by CIT were caused by Condere; 2)
the Lease limited CIT’s recovery; 3) the district court should not
have considered the testimony of CIT’s expert, Lawrence McCabe;
and, 4) the district court should have reduced the fees of CIT’s
out-of-state counsel, the Otterbourg firm.
The factual history of this case indicates that Condere brought
this damages judgment upon itself and the district court did not
err.
First, as to whether Condere caused the damages. Condere’s
argument is based on its earlier argument that had it been given
the right of redemption and had CIT complied with the notice
requirements, CIT would not have incurred any damages. This
argument depends on a finding that Condere had the right of
redemption and properly exercised the right, a finding the district
court properly rejected.
Second, Condere claims Section 11 of the Lease limits recovery
in a default situation. This argument was not made until post-
trial briefing to the district court. Nonetheless, Section 11 of
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the Lease refers only to CIT’s right if Condere is in default
during the term of the Lease. Condere’s holdover and use of the
equipment for 21 months after the Lease term is not limited by
Section 11. Condere’s limitation argument does not make sense
because it only applies to the past due lease payments and if
adopted would result in Condere possibly paying more in damages.
Third, as to Condere’s argument that the court should not have
considered the testimony of CIT’s expert, Lawrence McCabe, because
according to Condere, McCabe’s area of experience was not in
bankruptcy matters involving leases nor in Mississippi law.
Condere presents no legal arguments but only its disagreement with
the district court that McCabe was qualified to testify. CIT,
however, used McCabe, a former general counsel of a Fortune 500
company, to testify as to whether the expenses incurred by CIT in
the litigation between CIT and Condere and CIT and Specialty were
reasonable. There is nothing to indicate McCabe lacked experience
in the area for which he offered testimony.
Fourth, as to whether the out-of-state attorney’s fees were
reasonable. Condere argues that the rate charged by the Otterbourg
firm was unreasonably excessive compared to local rates and
therefore should have been reduced. The Lease obligates Condere to
pay attorney’s fees and the fees in this case were, in part, the
result of Condere’s refusal to surrender the equipment, which
caused Specialty to bring suit against CIT. In summary, the
bankruptcy litigation, the Mississippi litigation, and the
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Pennsylvania litigation were intertwined and CIT sought the
assistance of the Otterbourg firm in coordinating all the
litigation. The district court was correct in accepting CIT’s
evidence that the fees were necessary and reasonable when Condere
presented no evidence to the contrary but merely complained about
the fees.
Accordingly, the district court did not err in awarding damages.
Therefore, the decision is affirmed.
CONCLUSION
Having carefully reviewed the record of this case and the
parties’ respective briefing and arguments, for the reasons set
forth above we conclude that the district court did not err in
deciding any issue now appealed and therefore both judgments are
affirmed. AFFIRMED.
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