*1 District, Independent confirming the arbitration School Harris court erred County County, De- Harris Education award. County Emergency partment, Harris Burlington’s We sustain second issue. 1, County District No. Harris Service 7, Emergency No. Service District Conclusion County Emergency Harris Service portion reverse the of the trial We 9, County Harris Emer- District No. judgment confirming portion court’s 28, gency No. District Harris Service awarding award the Trust the arbitration County District, Flood Control Harris (labeled $6,243,990 in the arbitration County Emergency Bend Fort Service A”), vacate award as “MMS/Jicarilla-Case 100, County No. Harris Hos- District award, portion of the arbitration and County pital District, Harris Munici- modify that this award the award reflect Utility 33, pal No. District Harris render a take-noth- has been vacated. We Utility County Municipal District No. ing judgment Burlington’s favor on the 38, County Municipal Utility Harris giving Trust’s claim rise to the arbitration 64, County Munic- District No. Harris $6,243,990. award of We also reverse the Utility 81, ipal District No. Harris portion judgment deny- of the trial court’s Utility County Municipal District No. ing Burlington’s claim for breach of the County Utility 120, Municipal Harris and we remand for Agreement, Arbitration 132, County Mu- District No. Harris proceedings further consistent with this Utility 158, nicipal District No. Harris opinion. County Fire Prevention Dis- Rural 13, County Rural Fire
trict No. Harris 16, District No. Harris Prevention County Prevention Rural Fire Dis- County 17, trict Harris Rural Fire No. 20, No. Harris Prevention District County Rural Fire Prevention Dis- County 24, Rural Fire trict No. Harris 25, District No. Harris Prevention AND AUTO TRUCK EXCEL County Rural Fire Prevention Dis- LEASING, L.L.P., County 26, Rural Fire trict No. Harris Appellant, No. Harris Prevention District County Fire Prevention Dis- Rural DIS ALIEF INDEPENDENT SCHOOL County Fire Harris Rural trict No. Municipal TRICT, Utili Charterwood 48, Harris Prevention District No. Municipal ty District, Chelford One Utility County District No. Harris Municipal Utility District, Cimarron Improve- County Water Control Utility District, City Baytown, City County 113, Harris ment District No. Park, City Houston, City Improvement of Deer Dis- Water Control Pasadena, Katy, City County Clear Harris Water trict No. Utility District, City Municipal No. Improvement Brook District Control District, Utility Bayou Municipal CY-Champ 133, Horsepen Utili- Public Community Independent District, Cypress-Fairbanks ty Col- Houston District, Independent District, Indepen lege Deer Park Houston School Independent District, District, Humble Fallbrook dent Utili School School District, Katy Independent District, ty Consolidated School Goose Creek *2 District, Independent Klein School Utility District, Lake Forest
School District,
District, College Lee Louetta Utility District, North Public
North Utility District, North Forest In
Belt District, Har
dependent North School Community College Montgomery
ris Utility
District, Northpark Public County
District, Harris Northwest
Municipal Utility District No. Pas District, Independent
adena School Utility District,
Ponderosa Forest Authority of Harris
Port of Houston
County, Municipal Rankin Road West Utility
Utility District, Sagemeadow Community
District, Jacinto Col San District, Spring Indepen
lege Branch District, Spring Indepen
dent School District, Lane
dent Timber School District, County
Utility Harris West Utility
Municipal Ap District No.
pellees.
No. 01-04-01185-CV. Texas, Appeals
Court of (1st Dist.).
Houston
Aug. 2007. Aug.
Rehearing Overruled 2007. *3 Smith,
Bonner Law Offices of Bonner Smith, Lubbock, TX, Appellant. for East, Perdue, Brandon, Greg Fielder, R. Collins, Mott, Kahn, Coats, Rose, & Josh Yale, Holm, Lee, Houston, TX, Ryman, & Appellees. TAFT, Panel consists of Justices KEYES, and HANKS.
OPINION ON REHEARING HANKS, JR., GEORGE C. Justice. Opinion April We withdraw our 2007 and issue this one in its stead. Excel Leasing, Auto and Truck L.L.P.’s motion rehearing is denied. delinquent this suit for ad valorem taxes, Leasing, Excel Auto & Truck L.L.P., appellant/taxpayer, complains of granting summary judg- the trial court’s units, taxing ment in of the various favor issues, appellees. argues In three Excel (1) that finding that the trial court erred it was the owner of the vehicles and liable taxes; finding that for ad valorem any mate- genuine there was no issue as to vehicles; rial ownership fact as to (3) granting summary judgment agree- these agreement, District the terms Independent School Pasadena by a cus- (“ISD”), be terminated filed no Motion for Sum- ments could not which court judgment the trial mary Judgment, rendering tomer.” Excel asked for sum- interlocutory. taxing units’ motions deny the judgment in favor mary judgment, enter affirm. We “on the liability, tax Excel as to no alternative, matter find as a Background that Court law, the form non-payment action arises from the This security agreement, used was a and/or by Excel Auto & of ad valorem taxes or, vehicles, Excel is not the owner of the Leasing, Truck L.L.P. Pasadena ISD filed *4 alternative, one or both of these in the that Excel, and delinquent against tax suit Jury in be submitted to the matters should The taxing numerous units intervened. fact for a determination of the this case to collect intervening taxing sought units questions involved.” property taxes on ve- delinquent personal taxing allege were hicles that units was no The trial court found that there recom- by owned Excel. The Tax Master fact that genuine any issue as to material units, judgment taxing for the mended judgment were entitled to taxing units appealed the recommendation to the Excel a matter of law and that the motions as requested jury trial court and trial de granted against things should in all be taxing novo. The units moved for sum- Leasing, L.L.P. and Excel Auto and Truck that mary judgment contending Excel is Fund, Inc. as successor Excel Lease the owner of vehicles for which the Associates, Inc. & BLJ d/b/a delinquent 2002 and 2003 taxes are due (in only).1 Company Excel Financial rem owing, responsible and Excel is for the payment of those taxes. Attached to the Interlocutory Judgment copies motions were certified of the delin- quent tax records. three, In Excel contends that issue summary granting erred in trial court that responded asserting
Excel ISD, no which filed judgment to Pasadena does not the vehicles because its own rendering summary judgment, motion for actually security agreements. “leases” are judgment interlocutory. argued It that “it is not the owner form agreement vehicles and the lease ap- taxing supplemented units actually used is cre- motion with Pasadena ISD’s pellate record ating interest in the vehicles its is- summary judgment. We overrule for pos- own.” Its customers have customers sue three. session of the automobiles and insure and them, care for but Excel maintains a lien Ownership of Vehicles original title. Excel two, argues Excel that one and issues Larry included an affidavit from Tschoer- finding that it was the trial court erred ner, general manager and finance Excel’s and liable for ad the owner of the vehicles director, in which he testified that Excel’s finding there valorem taxes and responsible paying customers were material genuine fur- no issue as on their vehicles. The affidavit taxes addition, ownership of the vehicles. pursuant “in to fact as to ther states Fund, ap- Company party to this is not a in in- Financial 1. Excel Lease Inc. as successor Associates, peal. BLJ & Inc. terest to d/b/a 50
Summary Judgment taxing Standard of Review ies of a unit’s tax records or tax prima statements constitute facie evidence summary A party moving of all of the elements of the taxing unit’s judgment conclusively prove must all of petition, including ownership of the prop action or elements its cause of de erty, presumption and create a that the fense as a matter of law. Tex.R. Civ. P. taxing units all complied with of the re 166a(c); Holy Cross Church God quirements imposed upon them law. (Tex. 562, Wolf, Christ v. (Vernon 33.47(a) Tex. Tax Ann. Code Rhone-Poulenc, 2001); Steel, Inc. Austin, 2004); City Davis v. S.W.2d (Tex.1999). When, S.W.2d 222-23 (Tex.1982); Indep. Aldine Sch. here, summary judg both sides move for (Tex. Ogg, Dist. v. 263-64 S.W.3d ment, grants and the trial court one mo App.-Houston pet.). It [1st Dist.] other, tion reviewing but denies the court liability is an affirmative to tax defense summary judg should review both sides’ person against that the the tax is whom evidence, questions ment determine all of the proper assessed was not the owner presented, and the judgment render ty at the time of assessment. Tex. Tax the trial court should have rendered. FM (Vernon 2004). 42.09(b)(1) It Code Ann. *5 Austin, Props. Operating City Co. v. 22 person holding has also been held that a (Tex.2000). 868, S.W.3d 872 a sum When is security upon property lien or other the mary judgment specify or state does purposes. not an for tax Comerica owner relied, grounds the on which the trial court Apprais Acceptance v. Dallas Cent. Corp. appeal negate any the non-movant on must Dist., 495, (Tex.App. al 52 497 S.W.3d grounds on which the trial court could denied). 2001, pet. -Dallas relied, have will affirm the sum we Here, taxing the units attached certified mary judgment appeal on if of the copies of their tax records to their motions grounds presented in the motion is merito summary judgment, establishing thus rious. See Harwell v. State Farm Mut. prima response, their facie case. (Tex. Co., 170, Auto. Ins. 896 S.W.2d 173 it asserted the affirmative defense that 1995); v. Mellon Serv. Co. Touche Ross & not the of the vehicles because was owner Co., 432, 17 (Tex.App.-Houston S.W.3d 435 interpreted security be as its leases should pet.). A non-movant is [1st Dist.] the actual agreements, making the lessees required ground alleged to show that each the Excel did not dis- owners of vehicles. summary judgment the motion for pute any aspect the or amount of taxes summary judgment. support insufficient to levy only dispute the Its the taxes. Doe, Star-Telegram, Inc. 915 S.W.2d it as the owner of whether can be taxed (Tex.1995). 471, 473 taxing argue the vehicles. The units property because Excel is the owner Ad Taxes Valorem merely and not or a secured lienholder All taxable tangible personal property is be, it party personally claims to Excel is exempt by unless otherwise law. Tex. Tax property imposed. liable for the taxes 2004). (Vernon Proper § 11.01 Code Ann. Analysis ty obligation of the personal taxes “are the acquires property owns or The Texas Business Commerce person who tax controls the determination of wheth- January year on for which the Code transaction, form of a imposed.” 32.07 er a Tex. Tax Ann. Code (Vernon 2004). or interest. prosecution In a for the creates a lease Tex. (Vernon taxes, § 1.203 cop certified Bus. & Com.Code Ann. delinquent collection of Code Section Commercial sets forth the sion Uniform Supp.2006). Section 1.203 1-201(37). by guided are Accordingly, we following two-part test to determine jurisdictions which other an constitutes lease decisions from whether e.g., See interest: this uniform statute. interpret Boser, Bank v. Franklin Nat’l Security Distinguished In- From pet. de- (Tex.App.-Texarkana terest nied). (a) in the form of a transaction Whether interest, a lease or To create a a lease creates requires is determined the facts of this test part interest first can pay each case. the lessee must rental during the not be terminable the lessee (b) A transaction the form of a lease the lease. Tex. Bus. & Com.Code term of con- creates a requires 1.203. This factor sideration that the lessee is to Ann. high water” clause. existence of a “hell lessor for Inc., Maint. Triplex for See In re Marine goods obligation use of the is an (Bankr.E.D.Tex.2000). A the term of the lease and is not sub- B.R. lessee, requires that ject high to termination and: “hell or water” clause item, lessee, accepts the leased once (1) original term of (i.e., in all come pay. must its rent events equal greater to or than the remain- water) regard without for the high hell or ing goods; economic life of the or the conduct function of the item proper the lessee is bound to renew subject or respect of the lessor with to the remaining lease for the economic at n. 20.2 any other transaction. See id. life of the or is bound *6 conjunctive of the test part The second goods; become the owner of the factors, must also four one of which lists (3) option the lessee has an to renew exist for the lease to be deemed remaining the for the lease econom- interest.3 goods ic life of the for no additional or for nominal addi- consideration the two-part test focuses on This upon compli- tional consideration transaction rather than economics of the agreement; the or ance with lease the parties the or the label of the intent of
(4) option the lessee has an to become Boser, 103; at In document. the owner of the for no addi- Inc., Maint. 258 B.R. at Triplex re Marine tional consideration or for nominal satisfy which the fore 668-69. For leases upon consideration com- additional test, inquiry bright-line two-part going pliance agreement. with the lease to an end—such leases constitute comes as a matter of law. In
security interests added). Inc., at Maint. 258 B.R. By enacting Triplex re Marine (emphasis Id. Section not satis- 1.203, bright-line If the test is adopted has the official ver- 668-69. Texas statute, summary judgment mo- purposes of the previous version of this 3. For 2. Under the tion, high dispute clause” parties the existence of a "hell or water not that one of do requirement to create also this case: four factors exists in these See, e.g., Rigg, 198 B.R. interest. the owner has an to become the lessee (Bankr.N.D.Tex.1996) (stating “[a] goods for no additional consideration of the create a can be construed to upon nominal additional consideration or for agreement prohib- only interest if the agreement. compliance with the lease lease.”). terminating the its the lessee from fied, Nevertheless, finding argues of that its leas- mandated, may not and the court examine satisfy part es the first of the test because facts, statute, recognized by additional high a “hell or water” clause is not re- to determine whether the economic reali- quired early leases’ termination —the particular ties of a transaction create a clause serves the same function. We dis- security interest. Id. agree. case, In this Excel’s Motor Vehicle find, us, nor do we Excel has not cited to Agreements Lease do not meet the first version of any case law under the current they do part of the test because not con with the re- dispenses Section 1.203 that Instead, high tain “hell or water” clauses. high water quirement express of an hell they provisions, specifically contain which a secu- clause to establish the existence of lease, including that the entire state early rity Furthermore, ter- interest.4 payment of the rent over provisions for a provision mination cannot substitute agreement, the term of the can be termi high hell or water clause because it does nated at time at the will of the lessee. terminating prevent not the lessee from Paragraphs 23 of Excel’s Motor Vehicle Excel— agreed upon consideration to Agreements provide as follows: payment of the full amount 23. LEASE TERMINATION: This ear- under the lease. The payments rental (“terminate”) Lease will end when one ly require not termination clause does occurs, following events which- termination, at the time of the lessee still (a) happens ever first: You choose past due responsible payment be early end this Lease and return the rental and unmatured future us; ... Vehicle to fact, under the lease. the terms of language part cannot meet the first This termination, the event of a lessee because, high the test unlike a hell or rental fees paid amount to Excel for future clause, pay- require
water does vary on the calculation depending will rents, ment of all past both due and dm of the vehicle versus the “realized value” upon the term the future for due on the “adjusted lease balance” See, e.g., lessee’s termination the lease. *7 Para- at the time of termination. vehicle Inc., re Triplex Marine Maint. 258 Lease graph 24 of Excel’s Motor Vehicle (holding part B.R. at that the first Agreements provides that: the test met the inclusion of the This 24. EARLY TERMINATION: following language capital in the lease in if Lease terminates applies section heading “Important letters under Lease before the end scheduled that: “YOU UN- [the debtor] Conditions” termination, you early term.... On (A) DERSTAND AND AGREE THAT: us. You will return the Vehicle to will THE LEASE CANNOT BE CANCELED address or to another deliver it to our BY AT ANY YOU ANY TIME FOR REASON....”). request. at our reasonable location changes significant to the statute. contains 4. To the extent that Excel relies on caselaw Inc., developed previous version of Sec- at Triplex under the Maint. 258 B.R. Marine high argue result, a hell or clause tion 1.203 to certain prior consider As a cases 669. exist, required interest, is not for a interest factors as attributes of a helpful analy- we find this caselaw not to our longer under which are no considered as such by the in sis in this case. As noted court version. Id. current Triplex, of Section 1.203 the current version Credit (a) Liability. Leasing v. Mercedes-Benz Class Early On Termination Inc., A.2d Canada, N.J.Super. termination, yon agree pay early (1991). here. This is the case 665-66 us: provide expressly Excel’s leases (1) FEE, if RETURN A VEHICLE interest the vehicle. equity has no lessee 28(b); any, given in section Excel’s Motor Vehicle Paragraph 27 of (2) amounts unpaid All accrued provides, pertinent Agreements dm at that past that are due or part, as follows: ...; time TITLING, FEES OFFICIAL 27. (3) “Adjust- The amount which You understand AND TAXES: than greater Lease Balance” is ed is a lease that this agree “Realized [sic] Value: and it will own the Vehicle only. We ...; and Vehicle”5 name or in the in our name be titled imposed All official fees and taxes no owner- assignee. You have our the Lease termi- in connection with except for in the Vehicle ship interest nation. provid- any options future best, nothing more provision At this in this Lease. ed damages provision, not liquidated than a that, despite language argues equivalent high of a hell or the functional interests, not above, are the leases Thus, that Excel’s water clause. we hold terms, leases, because, under their true satisfy two-part do not test leases taxes, any, required pay to: the lessee is security in- establishing the existence of a vehicle; maintain insur for and pay on the terest. vehicles; ance on the Other Considerations of the vehicle. and maintenance service However, contrary arguments, to Excel’s next turn to an examination of We acceptance held that lessee’s are courts have lease to determine whether there to those stated by of the costs similar recognized other factors that have been leases, not typical are of true of a Excel’s lease the courts to indicate the existence likely re transactions, and more secured recognized interest. Courts have power be that, if, bargaining the relative under the terms of the flect character of rather than the equity parties whatsoever tween lessee has Nat’l Bank See Rainier may a true lease the transaction. property, be Co., Wash.App. Mach. Touch v. Inland and not a interest. (or agree 24(c) longer period, parties so if all Paragraph provides as follows: 5. requires). apprais- law so or if the (c) Determining the Realized Value. If the *8 wholesale you al shall be of the Vehicle’s requires, we will send law so period binding any required on notice and wait and shall be final value us; taking (3) establish time before action to it is not you and or if both Vehicle’s Realized Value. Unless days Vehi- within 15 determined law, required by the Realized otherwise return, we determine the Real- will cle's will be determined in one Value accepted in accordance ized Value (1) agree- following ways: by a written industry for the automobile practices in you and us reached with- ment between determining value of used the wholesale return; (2) days of Vehicle’s in 15 obtaining cash a wholesale vehicles professional appraisal an inde- by the byor purchase of the Vehicle for the bid by you party agreed to pendent third an otherwise disposing the Vehicle in expense your at us and obtained commercially manner.... reasonable days the Vehicle's return within 15 (1981) (stating (noting 631 P.2d that “les that court found it sufficient for going sor is either to include those costs finding of true lease that lease was termin- charge agree within rental will); lower able at In re Arthur Rigg, 198 B.R. rent, if responsibility (Bankr.N.D.Tex.1996) (court lessee takes 681, 685 held them”); Mr. C’s Rent To Own v. Jarrells can be construed “[a] (In Jarrells), re 205 B.R. 998-99 to create a only interest (Bankr.M.D.Ga.1997) that, (recognizing agreement prohibits the lessee from termi- responsible while debtor would be for all lease,” not, nating the if it does then maintenance, taxes, insurance, repairs, agreement is considered a rath- true lease these factors alone are not controlling). security agreement). er than a Business and Commerce Code Section We hold because the taxing units’ 1.203(c) specifically addresses this issue production copies of certified of tax rec- and notes that such facts are not control ords or tax statements constituted prima in ling the determination of a facie of all the evidence elements their interest: petitions and Excel’s affirmative defense of (c) A transaction the form of a lease failed, nonownership genuine there is no does not create a issue of material fact for the trial court to merely because: determine this case. Excel failed to re- taxing prima but the units’ facie case of
(2) the lessee assumes risk of loss of ownership. one. We overrule Excel’s issue goods; agrees pay, the lessee with re- Question Fact taxes, insurance, spect goods, to the two, In issue Excel contends that filing, recording, registration finding trial court erred in that there was fees, or service or maintenance genuine issue as to material fact as costs; ownership of the vehicles. 1.203(c)(Ver- Tex. Bus. & Com.Code Ann. Once the movant establishes that Supp.2006). non summary judgment, entitled to the non- Excel’s leases do not comply with only by showing movant can defeat that two-part test for the existence of a a fact producing evidence raises issue. interest rather than lease. This man- Savoy Haight Apartments, agreements dates the conclusion that the 849, 851 (Tex.App.-Houston [1st Dist.] leases, are true and Excel is the owner of denied). 1991, writ “To compe- constitute Accordingly, vehicles. Excel’s affirma- evidence, summary judgment tent affida- of nonownership, tive defense based on its personal knowledge, vits must be made on claim that its leases with its customers forth set facts as would be admissible interests, were fails as a matter of affirmatively that evidence and show law. See Tex. Ann. Bus. ComlCode & competent testify to matters affiant is Powers, 1.203(b); 983 F.2d 166a(f). P. stated therein.” Tbx.R. Crv. (7th Cir.1993) (“where a lessee has the Tschoerner, Larry general man- to terminate the lease before the Excel’s director, property ager arises to and finance submitted an *9 consideration, in no additional or nominal the affidavit which he testified that Excel’s paying is a true cannot the responsible lease lease and be customers were sale”); Yarbrough, conditional 211 taxes on their vehicles. Most of Tschoer- (Bankr.W.D.Tenn.1997) addressing B.R. on the 658-59 ner’s affidavit focused
55 Justice, KEYES, EVELYN four listed in Section 1.203 of the V. factors dissenting concurring judgment in the Texas and Commerce Code. Business rehearing. from denial of Having already held that leases Excel’s they expressly provide subject that are judgment and I I concur in the dissent prerequi- termination the lessee—the Excel appellant/taxpayer from denial of n the four fac- considering site additional (“Excel” L.L.P.’s Leasing, Auto & Truck examine tors —we need not Tschoerner’s Auto’”s) rehearing. or “Excel motion to these four factors. pertaining affidavit ad valorem taxes delinquent This suit for a tax case and as a important both as that, The further states “in ad affidavit regarding in of first Texas impression case dition, pursuant the terms of agree a lease and secu- the distinction between ment, could agreements these not be ter 1.203 of the rity agreement under section contrary minated a customer.” This is (UCC), codify- Uniform Commercial Code plain language agreement. to the 1.201(37) of the ing former section Code. ambiguous ques Whether a contract is is a Excel, a motor The issue is whether vehi- tion of law. Ins. Co. Burns Mo Gulf owner for ad leasing company, cle is the (Tex.2000). tors, Inc., 22 S.W.3d tax of the vehicles it valorem purposes If a that a court determines contract leases or the lessees of whether vehi- may ambiguous, then the court consider responsible cles are the for the owners extraneous evidence to ascertain the true that its “Motor argues taxes. Excel Vehi- meaning of instrument. Nat’l Union (“Lease” or Leasing Agreement” cle Indus., Inc., Fire v. CBI Ins. Co. is, “Agreement”) as a matter economic (Tex.1995). Here, S.W.2d neither reality, a security agreement executed subject party ambiguity has claimed financing of the pur- connection with its Accordingly, lease agreements. may we by the lessees and chase of the vehicles not testimony consider Tschoerner’s it, therefore, are the they, owners changes plain language purposes. for tax vehicles agreements, as noted above. April judgment Our affirmed genuine We that there is no summary judgment hold issue trial in fa- court’s units, as to fact ownership taxing appellees, material of vor of the various ground Agreement issue vehicles. We overrule two. on the mere agree- and not a ment, that, therefore, Excel was the Conclusion for ad valorem tax owner the vehicles to raise Because Excel failed a material purposes. rehearing, In its motion for refuting fact ownership issue in construing that we erred contends vehicles, the trial hold that court did we the Lease as a rather Agreement denying summary judg- not err in Excel’s and, security agreement than as a there- judg- ment. affirm the trial We court’s fore, liability for ad valo- affirming its ment. chargeable to properly rem taxes that are majority has response,
its lessees. April opinion and substi- withdrawn the concurring Justice KEYES explaining a new basis opinion tuted judgment. continues to panel for its conclusion. in favor of the dissenting summary judgment from denial affirm Justice KEYES disagree I taxing authorities. Because rehearing. *10 56 majority’s reasoning, agree holding legal
with the but to the property, holding or an conclusion, judg- with its I concur in the equitable right legal to obtain title to the only. ment property.” Acceptance, Comerica 52 Equitable S.W.3d at 497. pres- title is the
“Ownership” Purposes for Tax right compel legal ent title. Travis in ownership Appraisal The issue this case is the Cent. Dist. v. Signature Flight (Tex. purposes 833, for ad valorem tax Support Corp., of vehicles 140 S.W.3d 840 majority 2004, Comerica, Excel leases. The bases its con- App.-Austin pet.); 52 that clusion Excel is the owner of the Generally, at person S.W.3d 497-98. leased vehicles on its determination that having legal property, title to the or the Excel is not a lienholder. See Comerica equivalent, is considered to be the owner Acceptance Corp. Apprais- v. Dallas Cent for purposes. taxation See Childress Dist, 495, (Tex.App.- al S.W.3d State, County v. 127 Tex. S.W.2d (lienholder denied) 2001, pet. Dallas is not (1936); Capital General Elec. property owner of within “the common Corp. City Corpus Christ% of term”). meaning majority of that The (Tex.App.-Corpus Christi does not address the construction of the denied) entity (explaining taxing writ Code, term “owner” under the Tax which I may impose ad valorem taxes on secured controlling would deem to be the issue. party possession posses- or though legal sion even actual title is not All tangible personal property, including name; party’s pur- for ad valorem tax vehicles, motor is exempted taxable unless poses, party equiv- secured is by § law. See Tex. Tax Cobb Ann. 11.01 owner). alent of title (Vernon 2001). person A is entitled to an from exemption personal prop- taxation of Here, Agreement provides the Lease erty that is not used for production vehi- Excel retains title to the leased (Vernon § income. Id. 11.14 Supp.2006). cles until exercised. purchase option Excel, by The leased vehicles are used but compel present right Lessees have no lessees, production its for the Rather, Excel to title to them. transfer Indeed, specifically income. the Lease they only by compel can transfer of title provides agrees that the lessee “not to use early for fulfilling conditions set Excel public the Vehicle as a taxi or for other termination of the lease and delivery.”1 person hire or private by completing pay- the vehicle or January property who owns the on 1 of the buy exercising option ments and year person tax is the liable for the tax. $4,000. vehicle at end of the Even (Vernon Supp. 32.07 Tex. Tax Code Ann. term, lease must have been 2006). registration Vehicle records this granted, Excel must not have declared Auto, case that appellant, show default, the lessee the title owner of the vehicles and that days notice. given must have Excel 30 Fund, Excel Lease Inc. is the hen holder. Thus, since the lessees are neither the For purposes construing legal equitable the ad valo- title owners nor the owners Excel, statutes, rem tax property an “owner” of of the vehicles leased to them person entity purposes been “a tax has construed as the owner for ad valorem provides exemption complete certifying 1. The Tax an vehicle is Code form that the personal motor vehicles leased for use if the production Tex. not used for the of income. 2, 2001, 11.252(d) (Vernon January Supp. lease was entered into after Tax Code Ann. 2006). provided requires that the lessor the lessee to *11 that incorrectly held and, Support, therefore Signature Flight Excel. See a and not was a lease Agreement Lease (“Here, agree- the lease at 841 S.W.3d security interest. mere state clearly unambiguously and ments the im- City legal title to that the holds issue of Excel that the disagree I Appel- accepts it them. provements after true leases or secu- its leases are whether title, they for equitable have lees do not pur- tax controlling for rity interests is give toCity grounds compel have no to However, issue of because poses. title; they may merely operate legal them is a dis- Agreement Lease whether in accordance with and use the facilities or a true lease security interest guised terms.”). therefore, would, I af- an affirmative defense by Excel as raised summary judgment entered firm the majority, and be- by the and addressed taxing of the units. favor business important to cause this issue UCC, scope of the relationships within Leasing Agreement The Motor Vehicle I hold that the would I address below.2 and that is a true lease Agreement Lease however, contends, should we for UCC the owner of the vehicles Excel is ownership of the vehicles determine tax as for ad valorem purposes as well the nature of purposes by tax reference to analyze the I not although would purposes, lessees, with its ei- its transaction way majority does. law the same ownership title equitable ther look vehicles. It contends that we should Excel’s “Motor Vehicle itself) (Excel and beyond the titleholder Agreement” a the Lease not as a lease but as construe Agreement provides: Excel’s Lease to security interest it holds se- disguised TERMINATION: This payment of the full con- 23. LEASE cure the lessees’ (“terminate”) one end when to its Lease will pursuant sideration of the vehicles occurs, which- following events It contends sale of the vehicles to them. (a) choose to UCC, first: You happens ever that Section 1.203 of the Texas early and return end this Lease distinguishes which a interest us; you ... On termination further to from a controls this case. It Vehicle in this agreed amounts contends, will rehearing, in its motion for keep are not entitled to Lease. You properly we did not construe Section 1.203 1998, pet. de- (Tex.App.-Texarkana is a lease or a sale is 102-04 2. Whether transaction nied) apply to (provisions of UCC purposes of article 9 important commercial and for lease); Supe- disguised rights as under secured transaction the determination of creditors' Fin., Leasing & subject Packing, Bankruptcy rior Inc. v. Worldwide Code. A true lease is Inc., UCC; (Tex.App.-Houston is not a 880 S.W.2d article 2A of the but sale denied) (same); and, therefore, pet. see subject [14th Dist.] to article lease is not (Bankr. Bailey, 326 B.R. also In re Tex Bus. & Com.Code Ann. 2A.102 2A. See W.D.Ark.2005) (if (Vernon 1994) (“[Tjhe is construed as transaction definition of cmt. 1 personal property and is secured a sale ... or retention sale lease does not include interest, ...; in bank- debtor perfected sales or creation of claim ruptcy propose to treat creditor’s governed by must are other interests 1325(a)(4) Act.”); provided in section id. this see also Articles of Code; 2A.103(10) (Vernon (" is true Bankruptcy if transaction Supp.2006) 'Lease' keep property, then and Debtor desires a transfer of means defaults, lease, cure all must assume in return for Debtor for a term and use consideration, ..., according its terms perform lease or retention or but sale 1322(b)(7) lease.”); and 365 compliance with sections interest is not a creation of Code). Boser, Nat'l Bank v. Franklin *12 (1) (2) past fee; the the end together Vehicle with vehicle return scheduled past unpaid Lease term or the date of all due and due accrued (3) early prior vehicle; termination without our amounts for use of the “[t]he “Adjusted consent. amount” which the Lease greater Balance” is than the “Realized Val- 24. EARLY TERMINATION: This (4) Vehicle”; ue: the [sic] “[all applies section if the Lease terminates in imposed official fees and taxes connec- before the end of the scheduled Lease tion the the Lease termination.”3 If termination, early you term.... On in specified lease is not default after a return will the Vehicle to us. You will (30 of the 60 number of months months deliver it to our address or to another lease), option month the lessee has the to request. reasonable location at our fees, purchase by paying the vehicle all (a) Early Liability. Termination taxes, the and other costs incurred for termination, early you agree On to purchase charges and all other fees and pay us: the past plus due or due under (1) FEE, A VEHICLE RETURN Adjusted Lease Balance. Under 28(b); any, if given section Lease, Base terms of the the lessee’s (2) All unpaid accrued and amounts to reduce Monthly Payment applied first past are due or due at that Charge,” way,” the “Rent “in a the Lease ...; time states, to interest “that is similar (3) The amount which the “Ad- to re- applied loans.” The remainder is justed great- Lease Balance” is Thus, Adjusted Balance. duce the Lease er than the “Realized Value: time, any given Adjusted Lease “[a]t and; of the Vehicle” .... [sic] (1) the Re- equal Balance is to: Vehicle’s (4) All official fees and taxes im- (2) ..., of all plus sidual Value the total posed connection with the Monthly Payments, remaining unpaid Base Lease termination. the unearned minus the amount of (emphasis original). (emphasis add- Charge Rent at that time.” ed). provides agrees pay The Lease thus that the Vehicle lessee The lessee may $4,000 any upon terminate the lease at time Return if the Lease is termi- Fee of compliance the Lease term Upon with its terms. termi- nated before the end of returned, sort, not if he any nation of the lessee “will and the but vehicle is lease,” has an agreed purchases amounts in this and he must the vehicle. If the lessee vehicle, may he option option purchase return the vehicle unless he has the termination, Lease purchase Upon early it. exercise the at the end of the $4,000 Excel' if declared lessee must deliver the vehicle to term for Excel has not provides beginning monthly payments "applied 3. The reduce the that at the are Lease, Adjusted Lease Balance is Adjusted at the end of Lease Balance so that equal Adjusted Capitalized to the Cost of the Adjusted the Lease term the Lease Balance i.e., vehicle, Capitalized the Gross Cost minus Value,” i.e., equals the Vehicle's its Residual allowance, any the amount of rebate, net trade-in Excel, wholesale value as determined credit, reduces noncash or cash that standards, "by industry ob- accordance with Cost, i.e., Capitalized the Gross that reduces purchase taining bid for the a wholesale cash agreed upon plus any paid value items by disposing of the Vehicle of the Vehicle or contracts, term, over the lease such as service commercially reasonable in an otherwise insurance, outstanding prior credits or zero Value is manner.” The Realized payments lease balances. If all are made on vehicle not returned. met, obligations time and other lease are vehicles, a lien maintains legal title to and the les- in default payments to the them, through taxes passes days notice. on given has Excel 30 see agreed make all must lessees. The lessees Additionally, provides the Lease lease, either in the specified the risk of loss assumes lessee vehicle and use of the to retain the risk of theft to the vehicle and damage go first to Payments it. toor the vehicle. The leased or total loss of afterwards costs and “interest” pay down *13 by Excel. conveys no warranties vehicle of the vehicle. satisfy the realized value to agrees pay to all maintenance The lessee maintenance, all costs of The lessees bear Finally, the Lease costs. operating and insurance, legal They have and loss. provides: vehicles, the Lease informs as title to TITLING, AND FEES OFFICIAL Lease, them, and, according to the no own- agree and You understand TAXES: Rather, legal title to obtain ership rights. only. a lease We agreement that this the lessees ownership, to the vehicles in and it will be titled own the Vehicle the Lease with all terms of comply must assign- in name of our our name or addition, as and, purchase costs of pay interests in ownership have no ee. You Excel, Adjusted by plus the determined option for future except the Vehicle by Excel. as determined Lease Balance in this Lease. purchase provided they may complete Alternatively, title, registration, agree to all You for the vehicles purchase Lease term and sales, use, excise, personal license, has $4,000 purchase option been valorem, inspection, property, ad test- them, default, and they are not in granted taxes, ing, and all other fees to Excel. The vehi- they given have notice by government charges imposed au- value at the end cles retain residual in connection with the Vehi- thorities to Excel and must be returned lease term during cle and this Lease the Lease is exercised. option unless the term, except taxes. ... our income (emphasis original). option There is no is whether question for this Court The to renew the Lease. is a lease or Agreement Excel’s security agreement attend- it is a whether
A Lease form taken sample completed the vehicles contingent sale of ant on the appel- attached to from the record and of UCC under the terms to the lessees lant’s brief shows a lease dated March Section 1.203. Benz 2001 model 2002 for a used Mercedes agreed upon value S55 AMG. 1.203 UCC Section which, $115,516.20, Capital- after
vehicle is (includ- $47,243.99 Reduction of ized Cost UCC, “a transfer of a lease is Under the $53,000 yields an Ad- paid signing), at ing goods use of $68,272.21, justed Capitalized Cost of consideration, but for for a term return Monthly calculating Base which is used for ..., or creation or retention a sale pay- In addition to the down Payments. is not a lease.” security interest Tex. Bus. $53,000, must make the lessee ment of (Vernon 2A.103(10) § Ann. & Com.Code $1,756.01, monthly so payment total “[ljease added). A Supp.2006) (emphasis period by the end of 60-month respect bargain, is “the agreement” $152,604.59. paid will have the lessee the lessee of the lessor and to the by impli- or language in their fact as found sum, customers have although Excel’s ... circumstances from other and cation use of the vehicles possession and Id. chapter.” this them, provided possesses and maintain insure 2A.103(11). interest,” “security A consideration or for nominal addi- contrast, is “an in personal prop- upon compli- tional consideration erty ... payment per- which secures agreement; ance with obligation.” formance of an Tex. &Bus. (4)the an to become lessee has 1.201(35) (Vernon Supp. Com.Code Ann. the owner of the no addi- 2006). tional consideration or nominal distinguishes Section 1.203 of the UCC upon additional com- consideration lease from a interest. For a lease pliance agreement. with the lease agreement qualify security agree- as a
ment, the consideration for the transaction (d) Additional consideration is nominal subject must not be termination if it is less than the lessee’s reason- satisfy lessee and the must at ably predictable performing cost of least one of the four factors in subsection *14 if agreement op- under the lease the 1.203(b). Tex. Bus. & Com.Code Ann. Additional con- tion is not exercised. 1.203(b) (Vernon § Supp.2006). Section if: sideration is not nominal provides: 1.203 Distinguished Security From (2) to the option
Interest when the become granted to the goods owner of the is (a) a transaction in the of Whether form lessee, is stated to the price the be security a lease creates a lease or goods fair of de- market value interest is determined the facts of option termined at the time the each case. performed. be (b) A transaction in the form of a lease security creates a interest the con- sideration that the lessee is to added). (emphasis Id. 1.203
lessor for the right of goods obligation use is an Discussion the term of the lease and is not sub- Former Sec- UCC ject lessee, and: of termination Effect of Codification 1.201(37) tion 1.203 as Section (1) original term of the lease is equal greater to or than the remain- Septem- Section became effective 1.203 ing goods; economic life of the 1, substantively ber 2003. id. It is See (2) the lessee is bound to renew the identical to of former UCC portions the remaining
lease for economic 1-201(37) section leases distinguished goods life of the or is bound to security from interests. Id. cmt. Howev- goods; become the owner er, law, codify part, it was decided to in the lessee has an to renew “to an resolve issue that created considera- remaining the lease for the in a econom- ble confusion the courts: what ic life for no additional In of the opinion lease?” Id. cmt. 2.4 (Vernon 1994). j The drafters 4. drafters of the UCC were likewise driv- 2A.103 cmt. pointed codify respect out: en to the law to the lease with goods by uncertainty similar in the defini- If the transaction creates a lease, specifically by necessity tion of a “to disguised will be the transaction define lease to determine whether a transac- governed by on Trans- the Article Secured (Article 9) tion creates a lease or a interest dis- actions and the lessor will be guised financing required as a lease.” to file statement Tex. & Bus. Com.Code Ann. UCC, Dist.] writ (Tex.App.-Houston [14th courts had focused on drafters denied) (test so, security inter- and, for creation of parties doing the intent is whether transaction had relied on factors that the courts est under UCC security); In to have effect of thought more consistent with sales or intended cf. Maint., Inc., 258 B.R. that, fact, Marine Triplex than but “were as re loans leases (discuss- (Bankr.E.D.Tex.2000) to true leases as to 665-67 applicable intent parties’ focus on ing problems section with interests.” Id. The comments to lease should be distinguishing determining a lease whether 1.203 direct transaction).5 as secured security agreement, from a we focus on characterized economics, parties. not on the intent of the prior Texas law to the codification Id. 1.201(37) as section 1.203 focused section test for heavily prong on the second a transaction is construed as
Whether
interest, namely, whether the
property
secured
personal
sale of
upon
on its face that
com-
provided
interest or whether it is construed
its terms the lessee would
by applicable
pliance
as a lease is determined
without
property
B.R.
the owner of the
Bailey,
state law.
re
become
consideration,
(Bankr.W.D.Ark.2005);
by pay-
additional
Copeland,
paying
(Bankr.E.D.Ark.1999).
consideration, deeming
nominal
ing only
B.R.
be,
as a matter of
has been
na-
such an
adopted
Because
UCC
*15
law,
tionwide,
security.
Superior
for
See
may
guidance
the courts
look for
intended
71-72;
jurisdictions
in-
at
see also
Packing,
to decisions from other
880 S.W.2d
Baser,
Bank v.
972 S.W.2d
terpreting a uniform section of the Code. Franklin Nat’l
1998,
Rents, Inc.,
520, 98,
pet. de-
(Tex.App.-Texarkana
In
B.R.
See
re Rebel
291
103
nied)
(Bankr.C.D.Cal.2003);
section
(stating
regard
with
Copeland,
526
1.201(37),
on the
However,
majority
that
test focuses
“[t]his
Second of Section transaction is a determining whether the Security Distinction Between Lease and security agreement or a because lease Interest provision may appear either a such a lease, including a or a securi- finance inability
A a lease lessee’s terminate case, courts ty agreement. full due paying without consideration (in- to the of a lease must look definition agreement only under crite- first financing meet; cluding the definition of a rion interest must 2A.1.03(74)) and of in section transaction the form of a lease interest,7 case, facts of the satisfy criterion one and also to the meets that must still UCC, "security agreement” is 7. Under Tex interest.” Bus. & vides for (Vernon 9.102(74) Supp. any particular form. required to have Ann. Com.Code Rather, 2006). Generally, the test for the creation of *19 UCC defines pro- security law is whether agreement or interest under Texas merely as "an that creates 66
to determine whether
per
the instrument
is a
se rule for identifying
UCC’s
secured
(in)
credit”;
security
lease or a
Triplex,
interest.
balloon payment
See
had
paral-
lease,
258 B.R. at
lel in
(holding
agree-
667-69
true
but was common feature
(iv)
credit;
ment
high
which contained “hell or
of secured
and
on prepayment,
water”
security
clause
lease and
agreement
was
“as a mat-
sublease would terminate imme-
law,”
diately
ter of
rather than
though agreement
even
secure tenant’s
itself
occupy property
period);
stated it
finance
for additional
was
when lease was
cf.
Rents,
In re Rebel
not
67
Cir.1987)
true
(holding that
was
lease
lease
due for the entire
term
consideration
exercised,
instrument
purchase option
the
rather
than
paid and
i.e.,
satisfy
sale,
obligated
the first
was
disguised
the Lease does not
where lessee
Qui-
In re
test of a
interest. See
at lease’s end
equipment
return
to
leased
(Bankr.
855,
senberry, 295 B.R.
860
option,
purchase
if it
to invoke
decided not
N.D.Tex.2003). But
if it had
even
satisfied
to
option
to
obligation
but had no
exercise
satisfy
it would
prong,
that
second.
Shores,
In
332
purchase property);
re
In
a
particular,
fact that lessees have
(holding
agreement
at
that
was
B.R.
39
purchase option
not make the trans-
does
stat-
agreement expressly
true
where
lease
Excel Lease a
action evidenced
any
at
ed that
could terminate lease
lessee
financing
for
pur-
secured
transaction
to
have
time
notice
lessor and
written
of a vehicle. There is no reference
chase
liability for
for
obligation except
no further
parties’
to
to the
“sale”
“collateral” or
damage
during lease
property
to leased
interest;
quite
to create a
intent
prop-
useful
of leased
term and where
life
contrary. Nor
does
Lease evi-
lease);
erty
Cope-
In re
exceeded term
a
parties’
dence the
intent that
sale take
(Bankr.E.DArk.
land,
801,
B.R.
806
238
place and that title
from Excel to
pass
.the 1999)
law, that
(holding, under Arkansas
Rather,
title remains with Excel
lessee.
re-
“does not
though
even
section 1.203
until specified
unless and
conditions set
that a
quire a
as a
of law
finding
matter
out
are satisfied and the
only on
transaction is a true lease based
and
option
granted
both
exer-
terminate
may
the fact the lessee
Indeed, the
cised.
Excel Lease satisfies
time,”
precluded finding
any
at
this fact
a
grants
“hallmark” of
in that it
lease
sale).
that
transaction
right
for a
the lessee
to use
vehicle
Agreement
Motor Vehicle Lease
Excel’s
period less than its economic life with the
only”
“a
that
(unless
says
is what it
it is:
obligation
the pur-
concomitant
exercised)
ownership
in the
“no
interests
option is
to return
transfers
chase
to
lessor, Excel,
except
to the
while
Vehicle
for
future
property
it still
retains some substantial economic value.
this Lease.”
purchase provided
QDS
re
Inc. 292
Components,
See In
B.R.
defines
lessees are lessees
the UCC
(Bankr.S.D.Ohio 2002);
313,
(as
322
see also
person
acquires
“a
that term
who
Co., Inc.,
Packing
re
674
under
right
possession
goods
use of
Marhoefer
(7th Cir.1982);
F.2d
1145
In re
lease”);
is a
as the UCC
lessor
(M.D.Fla.2005).
Shores,
B.R.
(as
person
“a
who trans-
defines the term
and use of
fers the
have
A number
other courts
reached
lease”);
the Lease
goods under a
the same conclusion on
similar basis.
Agreement
is a true lease
Powers,
(7th
In re
F.2d
See
not a
contract
creates
sales
Cir.1993) (concluding
though
that “even
collateral,
in the
interest in the
as defined
at
acquire
goods
can
the end
the lessee
(“[a]
passing
consists in the
UCC
‘sale’
term,
the lessee is under no
the lease’s
buyer
seller to the
title from the
to make the
that will
obligation
“[cjontract
both
includes
price”; a
sale’
option”);
In re
him exercise the
allow
goods
and a contract
present
sale
Marhoefer,
(holding
Because Excel’s Motor Vehicle Lease
Agreement ais true the lessees are
not owners of the leased vehicles. Excel is
the owner of the vehicles pur- for UCC
poses as well as ad valorem tax purposes.
Conclusion
I grant would Excel’s motion for rehear-
ing. I would hold for the foregoing
reasons, the taxing authorities conclusively
established summary their judg- Therefore,
ment. I panel’s concur
judgment affirming summary judg- taxing
ment favor of the authorities. (USA)
MHCB AND LEASING FI
NANCE CORP. Valero Re
fining-texas, L.P., Appellants,
v.
GALVESTON CENTRAL APPRAISAL Ap
DISTRICT and Galveston Central
praisal Board, Appel District Review
lees. Appraisal
Galveston Central District Appraisal Galveston Central Dis Board, Appellants,
trict Review (USA) Leasing
MHCB and Finance
Corp. Refining- and Valero
Texas, L.P., appellees.
No. 01-06-00529-CV. Texas, of Appeals
Court (1st Dist.).
Houston
Sept. 2007.
Rehearing Overruled Nov. 2007.