Reed Smith Client Alerts

In a recent ruling, the U.S. Court of Appeals for the Tenth Circuit held that a lease assignment, which included an executed bill of sale, was in fact an unperfected security interest. As a result, a bank with a prior blanket lien received priority and was entitled to the proceeds of the sale of the equipment at issue.

The case, decided Sept. 13, is Stillwater National Bank and Trust Co. v. CIT Group/Equipment Financing Inc., 03-5087, 03-5088, 03-5123, 03-5136 (10th Cir. 2004).

The dispute centered on which party had priority to proceeds from the sale of equipment once owned by Sabre International Inc. Stillwater obtained a blanket lien over all of Sabre’s inventory and equipment in 1996, and properly perfected its lien by filing UCC-1 financing statements.

Sabre subsequently entered into a lease agreement for equipment with Preussag-Wasser und Rohrtechnik GmbH in January 1999, which included a purchase option. A month later, Sabre entered into an agreement with CIT assigning its lease with Preussag and certain lease-related equipment. Sabre agreed to repurchase the equipment if Preussag did not exercise its purchase option.

In June of that year, Sabre executed a bill of sale transferring title of the leased equipment to CIT, as well as a second agreement conveying its interest in the lease and transferring the equipment to CIT. The parties did not execute a security agreement and no financing statement was filed.

At the end of the nine-month lease, Preussag purchased some of the equipment and returned the rest to Sabre’s equipment yard. Sabre failed to repurchase the equipment and declared bankruptcy.

Stillwater then sought the appointment of a receiver to recover Sabre’s assets.

On appeal, the court determined the party entitled to the proceeds of the equipment sale turned on whether the transaction between Sabre and CIT was a sale or secured transaction. If the agreement was a secured transaction, Stillwater would prevail because its perfected blanket lien would have priority over CIT’s unperfected security interest. If the agreement was a sale, CIT would prevail because the purchase would be free and clear of Stillwater’s lien.

The court concluded that the transaction—viewed as a whole—was a secured transaction. This was the case, the court stated, because the original June 1999 assignment merely granted a security interest in the equipment at issue to CIT.

The character of the transaction should be determined by its substance, without regard to form, the court stated. The transaction “was a financing transaction from the outset and the failure of CIT to perfect its security interest renders its claim in the proceeds inferior to Stillwater’s prior perfected lien,” the court concluded.