Keeling v. Ford Motor Credit Co. , 314 Md. 311 ( 1988 )

RODOWSKY, Judge.

The principal question presented here is whether the lease of an automobile to the petitioner is governed by the Retail Installment Sales Act (RISA), McLCode (1975, 1983 Repl.Vol.), Title 12, Subtitle 6 of the Commercial Law Article.¹

Petitioner, Carmen A. Keeling (Keeling), by a paper writing headed “Net (Closed End) Lease” and dated June 20, 1984, in terms leased from Champion Ford in Baltimore City a new 1984 Ford Escort two-door sedan equipped with radio and automatic transmission but without air conditioning or power steering.² The form lease contemplated immediate assignment to Ford Motor Credit Company (Ford Credit), the respondent, and it was so assigned. The lessees defaulted after making payments for the first two months. Ford Credit repossessed the vehicle in January 1985 by which time it had been driven approximately 10,700 miles. Ford Credit sold the car at auction and then sued Keeling in the District Court of Maryland in Baltimore City for the resulting deficiency. Keeling’s principal defense was that RISA barred a deficiency judgment because Ford Credit failed to give required notices. The District Court concluded that the arrangement was a lease and not an installment sale governed by RISA. That court entered judgment for Ford Credit. In an appeal on the record the Circuit Court for Baltimore City affirmed, having similarly analyzed the transaction to be a “ ‘true’ lease.” We granted Keeling’s petition for certiorari.

Under RISA a person (the “holder”) who is entitled to enforce an “installment sale agreement” against a buyer may repossess goods sold under the agreement if the buyer is in default. Under § 12-624(d) the holder “[wjithin five days after he repossesses the goods ... shall deliver to the buyer ... a written notice” concerning the buyer’s right of redemption and to a resale, the buyer’s liability for a deficiency and the location of the goods. If the installment sale agreement provides for liability for a deficiency and if the holder “has complied with all requirements of [RISA], including the notice requirement of § 12-624(d),” then the buyer may be liable for a deficiency. See § 12-626(e)(4). It was stipulated at trial that Ford Credit had not sent the § 12-624(d) notice. Thus, if the subject lease is an installment sale agreement, Keeling is not liable for any deficiency.

The statute to be construed in this case is § 12-601(Z), which reads:

“Installment sale agreement. — (1) ‘Installment sale agreement’ means a contract for the retail sale of goods, negotiated or entered into in this State, under which:

(1) Part or all of the price is payable in one or more payments after the making of the contract; and

(ii) The seller takes collateral security or keeps a security interest in the goods sold.

(2) ‘Installment sale agreement’ includes:

(i) A prospective installment sale agreement;

(ii) A purchase money security agreement; and

(iii) A contract for the bailment or leasing of goods under which the bailee or lessee contracts to pay as compensation a sum that is substantially equal to or is more than the value of the goods.

(3) ‘Installment sale agreement’ does not include a bona fide C.O.D. transaction or a layaway agreement as defined in § 14-1101(g) of this article.”

In State v. Action TV Rentals, Inc., 297 Md. 531, 467 A.2d 1000 (1983), we read § 12-601(Z )(2), which “includes” three types of contracts within the definition of “installment sale agreement,” to enlarge the basic definition of § 12-601(Z)(1) and not merely to illustrate it. The basic definition requires that part or all of the “price” be payable in one or more installments but “[i]n a lease transaction payments are not, in form, paid toward price, but for use. Section 12 — 601(Z )(2)(iii) is the legislative test for determining cases in which substance will prevail over form for the purpose of subjecting the nominal lease to RISA.” Id. at 548, 467 A.2d at 1009. In the leases involved in Action TV Rentals the lessees had not contracted to pay future installments. Those lessees paid cash in advance, usually for one week at a time, and could terminate without liability for any future payments. In the case now before us Keeling was obligated to make the lease payments for the term of the lease. Consequently, we must determine whether what is, in form, a lease to Keeling is, in substance, an installment sale agreement.

At trial in the District Court the only witness was a representative of Ford Credit who proved the lease and the deficiency as matters of business record. The lease is a printed form in which the specifics of this particular transaction were inserted by hand while the remaining provisions are “boilerplate.” The lease was to run for forty-eight months from June 20, 1984, at a monthly rent, excluding rental tax, of $144.51 so that the total rent payments over the full term would have been $6,936.48. The lessee had to obtain comprehensive, collision and liability insurance and pay all operating, maintenance and repair costs excluding normal wear and tear.³ The lessee paid all fees and taxes on the vehicle which was to be “titled in the name of Ford Credit” and “registered as directed by Ford Credit.” There were no warranties under the lease, although “[t]he Lessee may receive a separate written warranty on the Vehicle.” The lessee paid all taxes, other than income taxes, charged to the lessor by reason of the lessor’s interest in the vehicle and the lessee was obliged to indemnify the lessor and Ford Credit “from all claims, losses and costs arising out of the use or condition of the Vehicle.” Keeling paid a $175 “Refundable Security Deposit.”

The lease provided for an excess mileage charge at the end of the lease of six cents per mile for each mile in excess of 60,000 or, on earlier termination, on a prorated basis. With respect to “Return of the Vehicle” the lease provided:

“At the end of this Lease, the Lessee will return the Vehicle to the Lessor’s address shown above or to such other place as Ford Credit may direct. If the Lessee keeps possession of the Vehicle past the end of the lease term, the Lessee shall continue to pay the monthly rental payments____ That payment shall not permit the Lessee to keep the Vehicle. The Lessee also shall pay to the Lessor any damage which the Lessor may have because the Lessee failed to return the Vehicle at lease end.”

There is no option to purchase on the part of the lessee. Indeed, the document contains an express disclaimer that there is any purchase option.

If the lessee defaults, the lease provides that the lessor may repossess and sell at public or private sale, with or without notice to the lessee. On default the monthly payments for the balance of the lease term are accelerated. The lessor and lessee agree that “[t]he Lessor will subtract from the amount owed sums received from the sale of the Vehicle in excess of what the Lessor would have had invested in the Vehicle at the end of the lease term.”

The printed form contains a separate section headed, “ASSIGNMENT,” under which the lessor assigns to Ford Credit. In that section “Lessor agrees that the lease end residual value of the Vehicle is as follows[.]” In the lease to Keeling the amount inserted for residual value is $2,898.29. Beneath the assignment Keeling signed again to acknowledge that she had received a filled in copy of the lease and notice of the assignment to Ford Credit.

Keeling did not present any testimony before the District Court. In argument Keeling’s counsel referred to a publication, which counsel called an “official used car guide,” issued by the National Automobile Dealers Association. Counsel indicated that in “October of 1984, for a 1984 Escort, the manufacturer’s sales and retail price — suggested retail price was $5,629.00.” The court commented that 1984 Escorts come in different models, with two doors or four doors and with or without optional equipment and that the court did not know to which model counsel was referring or what equipment it had. The court further pointed out that Ford Credit was entitled to a return on its capital employed in the transaction.

I

Keeling’s RISA argument is premised on the retail sale market value of the Escort being $5,629 on June 20, 1984. Then, pointing to the total lease payments, excluding taxes, of $6,936.48, Keeling submits that under § 12-601(i )(2)(iii) the lease is an installment sale agreement because she contracted “to pay as compensation a sum that is substantially equal to or is more than the value of the goods.” The short answer to this contention is that the record does not reflect that the suggested retail selling price is in evidence or that the District Court found that the guide referred to by Keeling’s counsel was probative of the retail sale market value of the particular car leased to Keeling. Nevertheless, because of the importance of the substantive issue, we shall assume, arguendo, that there is competent evidence in the record that the retail sale market value of the car leased to Keeling as of June 20, 1984, was $5,629.⁴

Ford Credit’s principal answer to Keeling’s RISA argument is based on the vehicle’s having a lease end residual value of $2,898.29.⁵ Ford Credit submits that the “value” of a leased vehicle, at the commencement of the lease, is the value of the lease plus the anticipated residual value of the vehicle. Thus, Keeling cannot possibly have contracted “to pay as compensation a sum that is substantially equal to or is more than the value of the goods,” because, no matter how the “compensation” paid under the lease is computed, it will fall short of the value of the vehicle by the residual value of approximately $2,900.

Ford Credit’s residual value figure of $2,898.29 is set forth in the lease and assignment. That document is in evidence. Its admission was not limited to any particular purpose. The document reflects that at least Champion Ford and Ford Credit agreed on a residual value of $2,898.29. The agreement of those two parties is probative of residual value. It is the only evidence of residual value in the case and if Ford Credit’s argument is legally correct, the evidence is sufficient to support the judgment of the District Court on the RISA issue.

Residual value has been explained by the Consumer Council of Maryland (the Council), an advisory group to the Consumer Protection Division of the Attorney General’s Office. See § 13-202. In its Consumer Automobile Leasing Study (1986), the Council cautions “that at the end of the lease the ‘residual value,’ or what the car will bring on the used car market, remains with the lessor.” Id. at 20. That study also points out that

“[ljeasing can produce 4 times the profit of a sale at term. This does not mean that a consumer is charged 4 times more for a lease, but the combination of the difference between the capitalized cost of the vehicle and the residual value, fees, and dealer overhead, taking into account interest during the life of the lease, over time generates more profit. According to the industry, however, lessors assume more risk than sellers.”

Id. at 1-2 (footnotes omitted). When comparing leasing versus buying the study makes the following observations:

“In leasing, according to the industry, a consumer pays for only the amount of time the car is actually used. With new cars, the lease generally coincides with the time during which most of the depreciation in the value of the car occurs, leaving a residual value, generally, based on The Black Book, or other current vehicle guidebooks. The lessor bases the monthly payments on depreciation, the difference between the purchase or capitalized costs and the estimated residual or market value at the end of the lease, plus fees and other profits. As stated earlier, the residual value of cars with the same purchase price may not be the same. A $25,000 Mercedes will not have the same residual value as a comparably priced Lincoln. Usage, such as excess wear and tear and high mileage, will also reduce value.”

Id. at 28-29.

The issue in the case before us is the meaning of “value” in § 12 — 601 (Z)(2)(iii). “ ‘Value’ is a word of many meanings.” Missouri ex rel. S. W. Bell Tel. Co. v. Public Service Comm’n, 262 U.S. 276, 310, 43 S.Ct. 544, 554, 67 L.Ed. 981, 995 (1923) (Brandéis, J., with Holmes, J., concurring). Here, Keeling and the dissent take the position that “value” in § 12-601(i )(2)(iii) can be determined only by utilizing the retail market selling price. Under this approach, even though the goods are in fact leased, the lease is ignored. Ford Credit’s approach to the value of the goods recognizes the fact of the lease in a manner not unlike the appraisal of a piece of real estate that is subject to a lease. One who purchases in fee simple real estate that is subject to a lease must evaluate the lease, which may or may not be an advantageous one, and also evaluate the remainder interest. Ford Credit submits that the vehicle’s value in the instant case is the value of the lease and the value of whatever remaining useful life the vehicle reasonably is expected to have at the expiration of the lease term, assuming the lessee has used and maintained the vehicle in accordance with the lease.

Ford Credit has the better of the argument. Under Ford Credit’s approach it is immaterial whether the “compensation” paid by the lessee equals or exceeds the retail market selling price of the vehicle. The “compensation” is the economic equivalent of that part of the value of the vehicle over its lifetime which represents the term of the lease. So long as it is reasonable to anticipate at the time of the lease transaction that the-vehicle will have some substantial value as a used car at the expiration of the lease, the § 12-601(Z )(2)(iii) “value” of the vehicle will exceed the “compensation” paid under the lease by the residual value.

Nothing in RISA requires that “value” in § 12-601(Z )(2)(iii) be given the limited meaning sought by Keeling and applied by the dissent. The subject section is exclusively directed at goods which are leased. Thus it is appropriate to value the goods as of the instant after they are leased and not as of some time before the lease. A common definition of the value of an item is the highest price at which a seller, willing but not compelled to sell, could sell it to a buyer who is willing but not compelled to buy. In the context of goods which are subject to a lease, that price would reflect the value (or detriment) to the buyer of the existing lease and it would reflect the anticipated retail market selling price, if any, of the used goods at the expiration of the lease.

Nor do we find any legislative history of RISA which contradicts the foregoing conclusion. RISA was enacted by Ch. 851 of the Acts, of 1941. The legislation resulted from Research Report No. 6 of the Maryland Legislative Council, Retail Installment Selling (1940). That study identified many abuses in installment selling but it did not address the use of leases at all. The likely model for present § 12-601(Z )(2)(iii) was a provision in the Uniform Conditional Sales Act (Uniform Act). It had been adopted by the National Conference of Commissioners on Uniform State Laws in 1918. See The National Conference of Commissioners on Uniform State Laws, Proceedings, Twenty-eighth Annual Meeting, at 356 et seq. (1918). The Uniform Act was withdrawn from the active list of recommended statutes in 1943, pending the preparation of the Uniform Commercial Code. See Unif. Conditional Sales Act, 2 U.L.A. 1, 9 (1922, 1967 Supp.).

Section 1 of the Uniform Act included in its definition of a conditional sale

“any contract for the bailment or leasing of goods by which the bailee or lessee contracts to pay as compensation a sum substantially equivalent to the value of the goods, and by which it is agreed that the bailee or lessee is bound to become, or has the option of becoming the owner of such goods upon full compliance with the terms of the contract.”

2 U.L.A. at 1-2 (italics added). The 1941 enactment of RISA picked up the first half of this definition but not the italicized portion. See Md.Code (1939, 1947 Supp.), Art. 83, § 139(b).

The Commissioners’ Note to § 1 of the Uniform Act gives the following explanation of the lease provision:

“It is well known that some sellers attempt to evade the conditional sale recording acts by calling the contract a ‘lease’ or ‘hiring agreement’ and providing for the payment of ‘rent.’ Wherever these ‘leases’ are substantially equivalent to conditional sales, they should be subject to the same restrictions. This equivalency seems to exist when the buyer is bound to pay rent substantially equal to the value of the goods and has the option of becoming or is to become the owner of the goods after all the rent is paid. In such a contract ‘rent’ means the purchase price, and possession as ‘lessee’ means the possession of a buyer under an executory contract of sale. That the buyer, in some cases, has the option of becoming the owner and thus a sale is not sure to take place, is of but small importance, for, as a practical matter, the buyer will always be willing to accept ownership when he has paid the value. The instances of a buyer declining to become the owner of goods where he has paid ‘rent’ equivalent to the value of the goods, and electing to return the goods and allow these payments to be considered as actual rent, must be exceedingly infrequent.”

2 U.L.A. at 3.

In his Commentaries on the Uniform Conditional Sales Act, the reporter for that Act, Dean George G. Bogert of Cornell University College of Law, identified four types of contracts having the possible or probable purpose of passing title to goods at the end of a time set by a “lease”: (1) the instrument provides for automatic transfer of title to the lessee; (2) the lessor agrees to execute a bill of sale; (3) the lessee has the option to become the owner, without further payment; and (4) the lessee has the option of becoming the owner upon payment of a nominal sum. 2A U.L.A. at 21-25 (1924).

The RISA definition of an installment sale agreement does not require that there be an agreement or option for the lessee to be or become owner. By not requiring that element the General Assembly made the RISA definition more flexible than the Uniform Act. Thus, the RISA definition eliminates any argument over the inclusion of “leases” accompanied by an oral, side agreement that the lessee can buy at lease expiration for a nominal consideration, and over the inclusion of “leases” by lessors who make no oral or written promises to sell but who, by practice, will sell at expiration for a nominal sum. Eliminating an option requirement also permits finding that “leases” of goods which are peculiarly susceptible to early functional obsolescence are installment sales if there will be little or no residual value at lease expiration and the lessor recovers the cost of the goods, overhead and profit in the form of rent. But a lease of goods which will have a substantial residual value at the expiration of the lease does not fit the traditional pattern of a disguised sale at which § 12-601(i )(2)(iii) is aimed.

Moreover, the limited meaning of “value” for which Keeling contends is inconsistent with the contemporaneous practical construction of RISA and with the apparent administrative construction of that statute. Numerous legal questions arise as to how a businessperson would achieve compliance with RISA when a contract, which has been structured as a lease, is statutorily considered to be an installment sale. We shall limit the discussion, however, to certain disclosure aspects of RISA. In the discussion we assume an “advantageous” lease, a term which we shall use to mean a lease under which the consideration paid by the lessee equals or exceeds the retail market selling price of the goods and after which the goods are expected to retain a substantial residual value.

RISA regulates the form and content of an installment sale agreement. Such an agreement must include, inter alia, “[t]he cash price of the goods sold,” “[t]he principal balance owed,” and “[t]he finance charge stated as a sum in dollars[.]” § 12-606(b)(l), (8) and (9). On June 20, 1984, the date of the lease in the instant case, and of its assignment to Ford Credit, the finance charge on the installment sale of a new motor vehicle was not permitted to exceed twenty-four percent, computed as simple annual interest, on the outstanding balance. § 12-609(f)(l). Thus, under Keeling’s interpretation, all advantageous leases are statutorily considered to be installment sales subject to RISA so that the lessor would be obliged to state part of the consideration paid for the lease as the “cash price of the goods sold.” The lessor would also be obliged to state part of the consideration, not exceeding a rate of twenty-four percent per annum on the outstanding balance, as the amount of finance charge, and to state part of the consideration as the principal balance.

It is apparent from Ford Credit’s printed lease form that Ford Credit has not been doing this. It is also apparent from the Council’s 1986 Consumer Automobile Leasing Study that leasing is widespread in this State and that it is significantly more profitable than selling, based in part on the residual value that reverts to the lessor or the lessor’s assignee. Yet the Council’s study gives no indication that the Consumer Protection Division considers advantageous leases to be governed by RISA.

Further, Ford Credit and other companies which engage “in the business of acquiring ... any interest in ... [a]n installment sale agreement made between other parties” are sales finance companies as defined in Md.Code (1980, 1986 Repl.Vol.), § ll-401(k) of the Financial Institutions Article (FI). Sales finance companies are required to be licensed by the Commissioner of Consumer Credit. FI § 11-403. The Commissioner, upon written complaint from a buyer, may investigate, pursuant to FI § ll-413(b), alleged violations of any provision of the subtitle relating to sales finance companies “or of any other law that regulates [installment sale] agreements[.]” After appropriate administrative proceedings, “the Commissioner may suspend or revoke the license of any licensee, if ... [t]he licensee knowingly or without exercising due care ... [violates any provision of [the sales finance companies] subtitle or of any other law that regulates [installment sale] agreements.” FI § ll-414(a)(l)(i). If Keeling’s interpretation of § 12-601(i )(2)(iii) is correct, there have been wholesale violations of RISA by sales finance companies taking assignments of advantageous motor vehicle leases. Yet there is no indication that the Commissioner of Consumer Credit has administratively adopted and applied the interpretation contended for by Keeling.

The result of our interpretation of “value” is also consistent with contemporary consumer protection disclosure policy for consumer leases. By Ch. 577 of the Acts of 1987, the General Assembly enacted the Consumer Motor Vehicle Leasing Contracts Act, codified as §§ 14-2001 through 14-2007. Although this Maryland statute does not deal with the type of consumer motor vehicle lease presented here, see, e.g., § 14 — 2001(c)(iii) (option to purchase is a prerequisite of statutory application), the disclosure provisions of the Maryland statute bear on the policy issue under consideration. A lease regulated by the Act must contain “[a]ll disclosures required under Regulation M.” § 14-2002(a)(2). Regulation M, 12 C.F.R., part 213, was adopted by the Federal Reserve Board pursuant to the Federal Truth-in-Lending Act, 15 U.S.C. § 1604 (1982). The regulation applies to consumer leasing and primarily defines a “consumer lease” to mean

“a contract in the form of a bailment or lease for the use of personal property by a natural person primarily for personal, family or household purposes, for a period of time exceeding four months, for a total contractual obligation not exceeding $25,000, whether or not the lessee has the option to purchase or otherwise become the owner of the property at the expiration of the lease.”

12 C.F.R. § 213.2(a)(6) (1988). Under Regulation M the consumer lease must disclose “[t]he number, amount, and due dates or periods of payments scheduled under the lease and the total amount of such periodic payments.” 12 C.F.R. § 213.4(g)(3) (1988). Neither Regulation M nor the Maryland Consumer Motor Vehicle Leasing Contracts Act require the lessor to take the stream of lease payments and break out of it in some fashion a “cash price of the goods sold,” “[t]he principal balance owed,” and “[t]he finance charge stated as a sum in dollars.” § 12-606(b)(l), (8) and (9). Under Keeling’s argument, this would be required because the lease would be subject to RISA.⁶ The Keeling interpretation would absolve her from the deficiency judgment at the price of confusion in disclosure to those who choose to obtain the use of an automobile through leases of the subject type.

On the record before us it appears that, in the economics of current society, the retail market selling price of an automobile does not function as a ceiling on the income which the automobile’s owner can derive by first leasing the vehicle and then selling the used car after the lease has run its course. We decline Keeling’s invitation to interpret the ambiguous term “value” in § 12-601(i )(2)(iii) in a strained and limited manner, inconsistent with the realities of the market place.

II

Keeling next submits that the U.C.C. concept of a lease intended as security applies to § 12-601(i )(2)(iii) and that the subject lease is one intended as security for a sale. The concept finds partial expression in § 1-201(37), defining “security interest.” The more relevant portions of the section read:

“Unless a lease ... is intended as security, reservation of title thereunder is not a ‘security interest’____ 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.”

The secured transactions title of the U.C.C. applies “[t]o any transaction (regardless of its form) which is intended to create a security interest in personal property,” including a lease intended as security. § 9-102(l)(a) and (2). One commentator has aptly observed that “the majority of the problems arising under [§§] 1-201(37) and 9-102 involve leases, a fact which indicates that the Code’s treatment of leases is not among its better accomplishments.” Coogan, Leases of Equipment and Some Other Unconventional Security Devices: An Analysis of U.C.C. Section 1-201(37) and Article 9, 1973 Duke L.J. 909, 919 (Coogan).

This Court’s approach to the true lease versus conditional sale problem in the context of secured transactions under the U.C.C. was set forth in Crest Inv. Trust, Inc. v. Atlantic Mobile Corp., 252 Md. 286, 250 A.2d 246 (1969). We listed a number of considerations and factors which determine whether a lease is a “true lease,” but the factual emphasis was on residual value. Crest involved an office trailer which had been leased for a minimum of twelve months. Seventy-five percent of the rental was credited to purchase price under an option, but at the expiration of the lease, even with that credit, approximately fifty-five percent of the purchase price would have to have been paid for the lessee to become owner. We held it was not a lease intended as security. Id. at 292, 250 A.2d at 249. Crest found the pertinent law well summarized in In re Alpha Creamery Co., 4 U.C.C. Rep.Serv. 794 (Bankr.W.D.Mich. 1967). That case concerned the lease of a typewriter accounting machine for a minimum of one year with a credit toward an option purchase of seventy percent of the rentals. Because thirty-two percent of the list price of the equipment would have to have been paid at the end of the lease for the lessee to become the owner, it was held to be a true lease. Id. at 798.

In Crest we distinguished United Rental Equip. Co. v. Potts & Callahan Contracting Co., 231 Md. 552, 191 A.2d 570 (1963). There a diesel-powered compressor had been leased for an indefinite term and eighty-five percent of the rentals could be applied against the purchase price under an express option. On that basis the lessee could become owner in twenty-one months.

We also find merit in a suggestion by Professor Coogan who has found that the analysis of the lease-security interest issue “in much of the tax literature is likely to be more penetrating than is that in most U.C.C. lease cases.” Coogan, at 965. He describes a rule of thumb which has developed in the “super-cautious” opinions of lessors’ tax counsel who are concerned not with winning the point if it is litigated “but rather [in being assured] that the issue is sufficiently clear that no litigation will be commenced.” Id. at 967. Under that rule of thumb a lease is a “true” lease if it “must come to an end at a time when at least two years or twenty percent of the useful life of the leased item remains and ... this residual must be valued at not less than fifteen percent of the purchase price.” Id. We take judicial notice of the fact of contemporary life that there are motor vehicles in use six and more years after the model year. The lease here also satisfies the second element of the rule of thumb. The residual value of $2,898.29 is 51.48% of the assumed retail market selling price of $5,629.

With respect to the lease before us we agree with the courts below in concluding that it is not intended for security. The relatively stringent repair clause of the lease together with the surcharge for mileage exceeding an average of 15,000 miles per year reinforces the importance to the economic structure of the transaction of achieving the anticipated residual value when the car must be returned to Ford Credit at the end of the term. There is no provision for transfer of title to the lessee and there is no basis for concluding that the lessee was to become the owner at the expiration of the lease by some form of abandonment on the part of Ford Credit.

Keeling submits that the case at hand should be controlled by three decisions under Art. 9 of the U.C.C. involving auto leases, In re Tillery, 571 F.2d 1361 (5th Cir.1978), In re Tulsa Port Warehouse Co., 4 Bank.R. 801 (N.D.Okla. 1980), aff'd, 690 F.2d 809 (10th Cir.1982) and Columbus Motor Car Co. v. Textile-Tech, Inc., 68 Ohio Misc. 25, 428 N.E.2d 882 (1981). Each of these cases involved a type of motor vehicle lease in which the vehicle did not revert to the permanent possession of the lessor. Each involved leases under which the vehicle was to be sold at the expiration of the lease. If the sále produced less than the estimated residual value, the lessee paid the difference to the lessor, but if the estimated residual value was exceeded by the sales proceeds, the excess went to the lessee. Thus the lessee was viewed as having equitable ownership of the vehicle and the retained title of the lessor secured a purchase price. We need not indicate agreement or disagreement with the holdings of these cases. It is sufficient to note that the leases there involved are distinguishable from that in the case at bar.⁷

Keeling’s final argument is that the default provision under the subject lease casts this transaction as one for security. In part, the default clause of the lease provides that “[t]he Lessor will subtract from the amount owed sums received from the sale of the Vehicle in excess of what the Lessor would have had invested in the Vehicle at the end of the lease term.”⁸ This damage computation formula can be illustrated by the following hypothetical:

REMAINDER LEASE INTEREST TERM

Balance of Lease Payments $4,000

Sale Proceeds $3,000

Lessor’s investment at lease end -2,000

Credit to lessee against accelerated payments 1,000 -1,000

Damages payable by lessee $3,000

The formula computes expectation interest damages which reinforce the true lease nature of the transaction. The formula first applies the sales proceeds to reimburse for something described as “what the Lessor would have had invested in the Vehicle at the end of the lease term.” Whether this is intended to be the precise residual value figure in the assignment portion of the lease, it is clearly-designed to represent a residual value. The philosophy of the damage provision is that Ford Credit first gets back in cash from the proceeds of the sale a residual value of the vehicle. That value would have been received in the form of the used car had the lease run full term without default, repossession and sale. The balance of the sale proceeds are then credited to the unpaid rental installments and Ford Credit may, pursuant to the contract, obtain a judgment for any deficiency.

JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE CITY AFFIRMED. COSTS TO BE PAID BY THE PETITIONER.

ELDRIDGE, J., dissents and files an opinion in which COLE and ADKINS, JJ., concur.

1 . Unless otherwise noted all statutory references are to the above-cited Code and Article.

2 . The lease was also signed by Joel E. Keeling who was sued but never served in this action.

3 . Repair obligations of the lessee included:

“(iii) repair or replace all dented, scratched, chipped, rusted or mismatched body panels, paint or vehicle identification items; all dented, scratched, rusted, pitted, broken or missing trim and grill work; all scratched, cracked, pitted or broken glass; all faulty window mechanisms; all broken or burned out lights; all electronic malfunctions; all interior rips, stains, burns or worn areas; and all damage which would be covered by collision or comprehensive insurance whether or not such insurance is actually in force.”

4 . We make this assumption for the purpose of testing the legal sufficiency of Keeling’s position under facts most favorable to her, because we conclude that, even on that assumption, her position is legally insufficient. It would be improper for us to assume unproven facts most favorable to Keeling and on that basis to mandate entry of judgment in her favor.

5 . Ford Credit also argues that “compensation” contracted to be paid by the lessee must be reduced to present value in some fashion not specified in RISA. In the view we take of the case it is unnecessary to decide that issue.

6 . This analysis does not take into consideration possible federal preemption, on which we intimate no opinion.

7 . In the parlance of the trade the distinction is between “a closed-end” leases, represented by the Ford Credit lease here, and “an open-end” lease, represented by the leases in the cases relied upon by Keeling. See Consumer Automobile Leasing Study, supra, at 21.

8 . In its computation of the deficiency in this case Ford Credit did not follow its own default clause. Ford Credit charged Keeling with the total of delinquent payments, accelerated future rent payments, unpaid late charges, the cost of repossession and the cost of reconditioning the car for sale. Keeling was credited with the entire sales proceeds and the refund of the security deposit.