No. 78-466WKUnited States Bankruptcy Court, E.D. Pennsylvania
May 5, 1980
Former Bankruptcy Act — Title to Property — Voidable Transfers — Lease Agreement
KING, JR., Bankruptcy Judge
An agreement which contained an option to purchase at the end of a sixty month payment schedule for ten percent of the original purchase price, and which provided, in part, for the acceleration of rent when due on default was characterized by the court as a lease intended for security and not a true lease. Thus, the debtor’s request to have the creditor’s security interest declared null and void was denied, as was the creditor’s request for reclamation. See Sec. 70(e) at ¶ 2699 andSec. 544(b) at ¶ 9523.
Former Bankruptcy Act — Title to Property — VoidableTransfers — Subrogation
The trustee could not be subrogated to the lien of the debtor’s landlord for purposes of Section 70(e)(1) of the Bankruptcy Act because the lien, which the debtor sought to assert, was of doubtful validity under state law and of absolute invalidity in bankruptcy law. See Sec.70(e) at ¶ 2699 and Sec. 544(b) at ¶ 9523.
[Digest of Opinion]
At issue in this case was a creditor’s complaint in reclamation which sought the return of a commercial meat tenderizer allegedly leased to the debtor. In its answer, the debtor claimed that the equipment was sold rather than leased and further, in its counterclaim, moved to have the interest of the creditor declared null and void.
The agreement contained an option to purchase at the end of a sixty month payment schedule for ten percent of the original purchase price. However, there was no evidence as to what the fair market value of the equipment would be at the end of the term. The court thus considered other factors in determining whether there was a lease intended for security. The agreement provided for an acceleration of rent due on default, required the lessee to repair and maintain the equipment, to keep the equipment insured against all risk of loss, public liability and property damage, to pay all license fees, registration fees, charges and taxes which may be imposed on ownership, leasing or sale and use of the equipment. These factors lead the court to conclude that the lease was intended for security, and the complaint in reclamation was dismissed.
Having so found the court turned to the argument raised by the debtor that the creditor’s security interest was voidable under Section 70(e) of the Bankruptcy Act.
The court noted that among the debtorin-possession’s creditors was the landlord of the building in which he operated his business. A landlord, under the law of Pennsylvania, has a statutory remedy when a tenant defaults on rental payments. However, personal property on the premises which is subject to a security interest of a third party is exempt from levy and sale if the secured party gives notice to the landlord. The landlord was thereby able, under State law, to defeat the claim of the creditor since neither the creditor or his assignee, gave the proper notice to the landlord. It was this result, as dictated by state law, that the debtor intended to take advantage of in seeking to invalidate the security interest of the creditor.
However, the court found, that since the validity of this statutory landlord’s lien is questionable at best, they determined that it should not be available to the trustee in bankruptcy, or to the debtor to invalidate other security interests under Section 70(e)(1). The court further relied on In re Buerger Co., Inc., Bky. No. 75-850 (E. D. Pa. Nov. 30, 1976) wherein the court held that the Pennsylvania’s landlord’s lien shall not defeat the interest of a secured party whose security is situated on the leased premises. Accordingly, consistent with this decision, the court held that the trustee could not be subrogated to the lien of the landlord for purposes of Section 70(e)(1).