Carlson v. Giachetti

Brief Fact Summary. John Carlson, (Appellant) leased a machine to Richard A. King, (King), who defaulted on payments and then sold that machine to Louis Giachetti, (Appellee). When Appellant sued Appellee, the trial court ruled that the lease was a security agreement and Appellant’s failure to perfect his security interest until December was fatal.

Synopsis of Rule of Law. To determine intent of the parties, the court must adopt an economic analysis: 1) If the obligations of the lessee under the lease are not subject to termination by the lessee 2) If the lessee may without further consideration acquire all rights in the goods from the full economic life of the goods 3) But if the lessor retains the reversionary interest in the goods, then the transaction is a true lease 4) If the lease includes a “full payout lease” or a “net lease,” then the transaction is a true lease.

Facts. Carlson leased a machine to Richard King. Soon after, King defaulted on his payments and went out of business. He then sold the machine to Louis Giacchetti. Giachetti had no notice of Carlson’s interest in the machine because Carlson did not file financing statements in the appropriate offices until December. If the lease was a true lease and not a security agreement subject to Article 9 of the Uniform Commercial Code, then King had no power to transfer title to the equipment and Giachetti may be liable for conversion. The trial court ruled that the lease agreement was not a true lease but a security agreement and Carlson’s failure to perfect his security interest until December was fatal. Carlson appealed this decision.

Issue. Whether this is a true lease or whether the parties intended to create a security agreement.

Held. No. The parties did not intend to create a security agreement so this is a true lease.

Discussion. In this lease, the lessee’s obligations were non-cancelable by the lessee, and the lease contained no option to purchase by the lessee. The lessee was obligated to keep the leased equipment in good repair and at the end of the term of the lease to assemble and deliver the equipment to the lessor. Consistent with these covenants of the lessee was the judge’s finding that upon the termination of the lease Carlson would be entitled to a return of the equipment which still had significant resale value. This establishes that Carlson had reserved an economically significant reversionary interest in the lease goods. Therefore the lease is a true lease and is not intended as a security agreement.