
    In re TENNA CORPORATION, Debtor. GENERAL ELECTRIC CREDIT CORPORATION, Plaintiff, v. TENNA CORPORATION, Defendant.
    Bankruptcy, No. B 79-2521.
    Adv. No. B 80-0226.
    United States Bankruptcy Court, N. D. Ohio, E. D.
    Jan. 28, 1981.
    
      Edward R. Brown, Cleveland, Ohio, for plaintiff.
    Marvin A. Sicherman, Cleveland, Ohio, for defendant.
   MEMORANDUM OF OPINION AND DECISION

WILLIAM J. O’NEILL, Bankruptcy Judge.

This cause is before the Court on the complaint of General Electric Credit Corporation and the answer and counterclaim of Tenna Corporation, hereinafter referred to as GECC and TENNA, respectively. The parties were involved in two transactions for manufacturing equipment. The filing of TENNA’S Chapter 11 reorganization proceedings precipitated GECC’S “Complaint for Reclamation or for Relief from Stay and Request for Adequate Protection” for the equipment. TENNA’S answer and cross-complaint maintains GECC is entitled to no relief since the transactions violated the Ohio Retail Installment Sales Act, commonly referred to as ORISA. The issue is whether the transactions denominated as “Lease Agreements” are loans as GECC alleges or sales covered by ORISA with its attendant penalties as TENNA asseverates.

Attorneys Edward R. Brown and Marvin A. Sicherman representing GECC and TEN-NA, respectively, have stipulated the facts, submitted extensive briefs and presented cogent oral arguments. The approved stipulations with pertinent documents annexed are attached hereto. [Matter omitted for purposes of publication.] The Court adopts them and finds the facts to be as follows:

“1. Plaintiff, General Electric Credit Corporation (‘GECC’), offers prospective customers several formats for the purpose of structuring financing arrangements, including security agreements, leases without options to purchase, and leases with options to purchase at the end of the terms of such leases for a nominal consideration. Defendant, Tenna Corporation (‘Tenna’), selected the format of a lease with an option to purchase for a nominal consideration.

2.Attached hereto and identified as ‘Stipulation Exhibits’ are the following:

S-l ‘Chattel Lease Agreement’ dated September 25, 1979.
S-2 Promissory Note relating to Exhibit ‘S-l’.
S-3 Letter dated September 21,1979 regarding ‘S-l’ purchase obligation of Defendant.
S-4 Financing Statements filed with the Secretary of State and County Recorder relative to Exhibit ‘S-l’.
S-5 ‘Chattel Lease Agreement’ dated October 24, 1979.
S-6 Promissory Note relating to Exhibit ‘S-5’.
S-7 Purchase Agreement between the parties relative to Exhibit ‘S-5’ evidencing the obligation of Defendant to purchase the equipment described in Exhibit ‘S-5’ at the end of the purported lease term.
S-8 Financing Statements filed with the Secretary of State and County Recorder relative to Exhibit ‘S-5’.
S — 9 Letter of March 25, 1980 from Plaintiff to Defendant which relates to Exhibit ‘S-5’.
S — 10 The Amended Proof of Claim filed by Plaintiff purporting to be a creditor of the Debtor in the case under Title 11 of the U. S. Code.

3. The items of equipment described in Exhibits ‘S-l’ and ‘S-5’ were manufactured and delivered to Defendant, Tenna, pursuant to orders entered by it with the manufacturers previous to such delivery, and as follows:

a. Harper Buffing Machine — manufactured and shipped by Harper Buffing Machine Company.
b. Stud Driving Machine — manufactured and shipped by Dial X Automated Equipment Company.
c. Reader-Printer — manufactured and shipped by Oce Industries, Inc.

4. GECC upon delivery of the above-described equipment to Tenna, paid to the manufacturers of such equipment the full purchase price of the equipment. GECC paid the purchase price for the equipment described in Exhibit ‘S-5’ on October 26, 1979, and for the equipment described in Exhibit ‘S-l’ on September 25, 1979.

5. Concurrent with the payment of GECC described in Stipulation No. 4 Tenna paid to GECC the following sums:

a. $908.01 plus $44.94 purportedly for Ohio Sales or Use tax for a total sum of $957.95 as relates to Exhibit‘S — 1’.
b. $13,693.80 as relates to Exhibit ‘S-5’.

6. Thereafter on November 1,1979 Ten-na paid Plaintiff $302.67 plus $16.65 purportedly for Ohio Sales or Use tax for a total of $319.22 as relates to Exhibit ‘S-l’.

7. Subsequent thereto Tenna has not paid any additional sums to Plaintiff relative to Exhibit ‘S-l’.

8. If Tenna had continued to pay monthly installments to Plaintiff as relates to Exhibit ‘S-l’ it would have been required to include Ohio Sales or Use taxes computed at the rate of five and one-half (5%%) percent on each such installment which would have been thirty-two installments of $302.67 and a thirty-third installment of $303.67 or including the purported Ohio Sales or Use tax, payment of $319.32 per month for thirty-two months, and a final installment of $320.37.

9. Describing the transaction contemplated in the document identified as Exhibit ‘S-l’ as a ‘lease’ would require Ohio Sales or Use taxes in the sum of $599.45 to be paid.

10. If the transaction contemplated in Exhibit ‘S-l’ were classified as a sale the aggregate Ohio Sales or Use taxes assessable against Defendant, Tenna, would have been $497.20.

11. Tenna has made no payments to Plaintiff as relates to Exhibit ‘S-5’ after the payment of the sum of $13,693.80.

12. If Tenna had continued to make payments relative to Exhibit ‘S-5’ it would have paid eighty-two consecutive monthly installments of $2,375.35, and a final installment of $2,376.76, all of which are exclusive of Ohio Sales or Use Taxes, as Tenna had claimed to be exempt from such taxes as the equipment was to be used for manufacturing.

13. The aggregate Ohio Use Tax assessable against Tenna, if it had made installment payments to Plaintiff as relates to Exhibit ‘S-5’ as a purported lease of chattels and was not exempted from such taxes, would have been in the aggregate sum of $11,597.18.

14. If the transaction contemplated by Exhibit ‘S-5’ had been denoted as a sale the aggregate Ohio Sales or Use taxes that would have been payable by Defendant, Tenna, would have been the sum of $7,531.59, provided Tenna was not exempted from such taxes as above mentioned.

15. Without Plaintiff admitting that the Retail Installment Law of Ohio as found in Chapter 1317 of the Ohio Revised Code or the finance and service charge limitations set forth therein, are applicable, the following represents the disclosure material necessary and the computations of permissible charges thereunder particularly Section 1317.06 thereof based upon a 33 month amortization schedule, as relates to Exhibit ‘S-l’.

Cash Price $ 9,040.00 ‘Finance Charge Computations '
Down Payment Unpaid Balance 908.01 $ 8,131.99 8% -s-12 months = .0066666 per month
Official Fees _6.00 x 83 months = .5533278 $ 8,137.99 x $123,250.20 = $68,197.76
‘Finance Charge 1,790.34
“Service Charge 57.75
Time Balance $ 9,986.08
Total Time Price $10,888.09
‘Finance Charge Computations
8% 12 months = .0066666 per month
x 33 months = .2199978
x $8,137.99 = $1,790.34
“Service Charge Computations
$.50 for 1st $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month $1.75
x 33 months $57.75

16. Item 8* of Exhibit ‘S-l’ is in the sum of $9,989.11, which would exceed the finance and service charges described in the preceding Stipulation by $3.03, exclusive of the additional Qhio Use tax burden herein-before described and stipulated to.

17. Without Plaintiff admitting that the Retail Installment Law of Ohio as found in Chapter 1317 of the Ohio Revised Code or the finance and service charge limitations set forth therein are applicable, the following represents the disclosure material necessary and the computations of permissible charges thereunder particularly Section 1317.06 thereof based upon an 83 month amortization schedule, as relates to Exhibit ‘S-5’.

Cash Price $136,938.00
Down Payment 13,693.80
Unpaid Balance $123,244.20
Official Fees 6.00
$123,250.20
‘Finance Charge 68,197.76
“Service Charge 145.25
Time Balance $191,593.21
Total Time Price $205,281.01
** Service Charge Computations
$.50 for 1st $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
.25 for next $50.00 unit per month
■25 for next $50.00 unit per month $1.75
x 83 months $145.25

18. Item 8 of Exhibit ‘S-5’ is in the sum of $197,155.46, which would exceed the finance and service charges described in the preceding Stipulation by $5,562.25, exclusive of the potential additional Ohio Use Tax burden hereinbefore described and stipulated to.

19. The computations made by Plaintiff with respect to Exhibit ‘S-9’ included calculations of interest charges without making an adjustment upon the principal sum relating to the $13,693.80 payment.

20. Predicated upon Exhibit ‘S-9’ and without Plaintiff admitting that the transaction contemplated in Exhibit ‘S-5’ is a Retail Installment Sale, the components thereof as purportedly adjusted by the referenced Exhibit would be as follows:

Cash Price Down Payment $136,938.00 13,693.80
Unpaid Balance $123,244.20
Official Fees 6.00
$123,250.20
Finance Charge 69,015.75
Service Charge 147.00
Time Balance $192,412.95
Total Time Price $206,100.75

21.The amount reflected in the preceding Stipulation as relates to the ‘Time Balance’ is $819.74 greater than the sum reflected as ‘Time Balance’ in paragraph 17 supra. The interest rate reflected in Stipulation 20 is 8.096% add-on, and if the alleged lease had required payments to extend for 84 months as opposed to 83 months the interest rate would have been 8% add-on.

22.The parties are unable to agree or stipulate as to whether Exhibit ‘S-9’ is a timely rectification of a purported overcharge, or if the overcharge is wilfull, and therefore incapable of rectification under Ohio Revised Code Section 1317.08.

23. The parties are unable to agree or stipulate whether the additional Ohio Sales and Use Taxes applicable to the transactions described as a lease, as opposed to a sale, constitute a ‘wilfull overcharge’ as that term is described in Ohio Revised Code Section 1317.08.

24. The parties are further unable to stipulate or agree whether Exhibit ‘S-10’ constitutes an attempt by Plaintiff to exact a ‘wilfull overcharge’ as that term is defined in Ohio Revised Code Section 1317.-08.

25. The principal balance as asserted in the Proof of Claim (Exhibit ‘S-10’) represents, as relates to the equipment and transaction described in Exhibit ‘S-5’, the net cash price of the equipment adjusted by a deduction of $13,693.80 constituting the sums paid by Defendant to Plaintiff relative thereto as hereinabove described.

26. The principal balance as asserted in the Proof of Claim (Exhibit ‘S-10’) represents as relates to the transaction described in Exhibit‘S — 1’, the cash price of the equipment, adjusted by a deduction of $908.01 plus that portion of the November 1, 1969 (sic) payment to Plaintiff by Defendant in the sum of $319.32, which Plaintiff alleges was attributable to ‘principal amortization’ only.

27. To the extent Financing Statements were required to be filed in the Offices of the Secretary of State of Ohio and the County Recorder of Cuyahoga County, Ohio, to perfect security interests in the chattel equipment described in Exhibits ‘S-1’ and ‘S-5’ such Financing Statements were timely and properly filed on the dates indicated in Exhibits ‘S — 4’ and ‘S-8’.

28. GECC herewith and hereby currently waives any right to receive payment of any interest on any obligations evidenced by Exhibits ‘S-l’ and ‘S-5’ exceeding eight (8%) percent simple interest per annum after maturity.

29. That the transactions and documents hereinbefore stipulated to constitute extensions of credit by Plaintiff to Defendant.

30. That all of the transactions between the parties hereinbefore described and stipulated to are governed by the laws of the State of Ohio.

31. The parties do hereby agree that the foregoing is a complete and comprehensive statement of facts, and that there are no other facts which either party wishes to introduce into evidence respecting the applicability and effect of the Ohio Retail Installment Sales Act, and by reason thereof, the parties do hereby waive the right to trial by jury and the right to introduce additional facts unless requested by the Court to do so. The parties further recognizing the rights of the Court to request oral argument from Counsel for the parties.”

ISSUES

1. Are the GECC-TENNA transactions “loans” or “sales”?

2. If “sales”, are the transactions retail installment sales governed by ORISA?

3. If ORISA controls, did GECC violate the statute thereby subjecting itself to the attendant penalties?

LAW AND COMMENTS

Obviously, if the transactions in question are determined to be loans rather than sales, Issues No. 2 and No. 3 are moot. Consequently, our attention is focused upon Issue No. 1.

Since the stipulations are rather extensive, a brief summary of the salient facts may be helpful. TENNA selected and ordered several items of equipment from various manufacturers. The agreement of September 25, 1979 dealt with the Reader-Printer and the October 24, 1979 transaction covered the Conveyer Buffing Machine and a Stud Driving Machine. Upon manufacturers’ delivering equipment to TENNA, GECC paid the manufacturers in full. Concurrent with payment, GECC and TENNA entered into two agreements designated “Chattel Leases” which contained options to purchase for $1.00 upon expiration. TEN-NA selected this lease format from three available choices, the other two being a lease with security agreements and another containing no purchase option. TENNA paid GECC a total of $1,210.68 on the Reader-Printer, $908.01 down payment and a subsequent $302.67 payment on November 1, 1979. A $13,693.80 down payment was made on the Buffing and Stud Driving Machines. No additional payments were made. TENNA filed the Chapter 11 petition on December 5,1979 and scheduled the GECC debt on A-2 for a total of $206,-842.30.

There is a paucity of law in Ohio defining the scope of ORISA. None of the cases in Ohio or elsewhere is identical with the case in point. Determination of the issues, therefore, lies with examining the statutory language and applying the law in cases with similar facts.

It is clear that ORISA (Ohio Revised Code, Section 1317.01, etc.) applies only to transactions involving retail installment sales. Case law also indicates that one purpose of the Act was to separate the interests of the retail seller and the financing institution in profits resulting from a retail sale. Teegardin v. Foley, 166 OS 449 (1957) and In the Matter of City Home Service, Inc., Bankruptcy No. 77123, (N.D.Ohio, 1958), unreported. From the statutory language and these cases it is apparent the financing agent is not covered by or subject to the provisions of ORISA. Further, ORI-SA restricts only the relationship between the retail seller and buyer and does not affect a buyer’s independent dealings with a financier. To determine, therefore, whether GECC was acting as a financing agent or a seller, the proper method for analyzing the transactions is to look through the form and examine the intent of the parties and the facts and circumstances which existed at the time of the agreements.

It is imperative to reiterate that the evidence reflects no dealings between GECC and the manufacturers other than the former’s payment in full for the equipment selected and ordered by TENNA.

The parties agree and the statute corroborates that the transactions constitute security interests. O.R.C., Section 1301.01 (KK) states,

“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.” (emphasis added)

GECC’S security interest in the equipment, however, is not sufficient to apply ORISA without the existence of a retail sale. We must determine, therefore, whether GECC sold the equipment to TEN-NA or loaned them the purchase price and took the security interests to insure repayment.

A retail installment sale is defined under ORISA as including “... every retail installment contract to sell specific goods, every consumer transaction in which the cash price may be paid in installments over a period of time, and every retail sale oí specific goods to any person in which the cash price may be paid in installments over a period of time.” O.R.C., Section 1317.-01(A). (emphasis added) “Contract for sale” and “sale” for the purposes of ORISA carry the same meaning as those terms are given in the general definitions of the Ohio Commercial Code. O.R.C., Section 1317-01(M). “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the seller to the buyer for a price.” O.R.C., Section 1302.-01(A)(11). Section 1302.02, O.R.C., makes it clear, however, that even though a transaction takes the form of a contract for sale, if it is intended only to operate as a security transaction it will not be treated as a sales agreement.

The GECC-TENNA transactions are indeed difficult to characterize as sales or loans. Careful scrutiny and deliberation, however, lead to the inescapable conclusion that the agreements are purchase money loans with retained security. In economic reality TENNA selected the merchandise, placed the orders and received delivery of the equipment from the manufacturers; i. e., TENNA purchased the equipment from the manufacturers. GECC then provided the funds to complete the. purchases and took a security interest in the equipment to insure repayment of the loan. Despite any appearance of a sale, it is apparent there was never any intent that GECC sell TEN-NA the equipment. GECC was acting as a financing agent for TENNA’s purchases from the manufacturers, and Section 1302.-02, O.R.C. precludes the transactions from being construed as sales.

Similar transactions to those in question have been considered by other Courts. The basic guideline for characterizing the transactions is well stated in Burroughs Corp. v. Barry, 380 F.2d 427, 429 (8th Cir. 1967),

“At the outset we would point out that in determining the character of an instrument, the use of the term “lease” has undoubted weight, but the governing consideration is the legal effect of the instrument as gathered from all its provisions.”

Courts have found transactions substantially comparable to the within to be loans rather than leases or sales contracts. In McKeeman v. Commercial Credit Equipment Corp., 320 F.Supp. 938 (D.Neb., 1970), the Court held a lease was actually an agreement for a loan of money. Although the lessor held legal title to the equipment, the burdens of ownership were placed on the lessee with no recording of the lessor’s ownership interest. In determining a lease agreement to be a loan, Courts have also considered and were persuaded by the fact the lessor was not in the business of selling the goods involved, did not maintain an inventory or sales staff, did not advertise the goods and had no interest therein other than financing the purchase. In re Sherwood Diversified Services, Inc., 15 UCC Rep.Serv., 701 (S.D.N.Y., 1974) and McGalliard v. Liberty Leasing Co. of Alaska, Inc., Alaska, 534 P.2d 528, (1975).

In the case at bar, the burdens of ownership fall upon TENNA despite GECC’s purportedly retaining title to the equipment. TENNA bears responsibility to provide insurance, pay any and all taxes and is obligated for any damage to or loss of the equipment. GECC is to receive the full amount of the agreement; i. e., repayment of advanced funds. The burdens of ownership upon TENNA weigh heavily in determining it purchased the equipment from the manufacturers, and GECC’s only interest in the equipment was security on the loan of the purchase price. Also significant and most persuasive is that GECC is a financing agent, not a seller of equipment, maintains no inventory, advertises no equipment sales and has no sales staff.

The GECC-TENNA transactions were purchase money loans for commercial equipment, not sales. The sales occurred between TENNA and the manufacturers. GECC, whose purpose is structuring financing arrangements, had no voice in the selection or delivery of the equipment. In fact, GECC had no contact with the manufacturers other than advancing the purchase price for TENNA. Since ORISA regulates retail installment sales and not purchase money loans in commercial transactions, and there being no evidence GECC as financing agent was involved in the sales between TENNA and the manufacturers, the GECC-TENNA agreements do not fall within the purview of ORISA.

Assuming, arguendo, the transactions were sales, in this Court’s opinion, ORISA is still inapplicable. Courts and commentators alike have noted the primary purpose behind retail installment sales regulation is “... to protect the unwary, inexperienced retail buyer, easily misled and overreached.” In the Matter of City Home Service, Inc., supra; see also Consumer Credit: The Ohio Retail Installment Sales Act and Its Abuses, 30 CWR Law Rev. 621, (1969). The latter article contains the following language on page 621, “In general, installment sales acts were passed to relieve economic burdens on low-income, high-risk consumers.” Further, on page 629, “Such sales are generally the result of heavy television advertising campaigns which offer expensive luxury items at seemingly low prices and at favorable terms of time payment.” On page 453 of Teegardin v. Foley, supra, in referring to ORISA, the Court states, “... Chapter 1317 was enacted by the General Assembly in order to correct certain abuses existing in the field of dealer participation in the financing of sales made on the installment plan, which were so common, and that the abuses directly responsible for the legislation centered in the area of sales of automobiles, both new and used.”

TENNA relies heavily upon the case of In re Sloan, 285 F.Supp. 1, (N.D.Ohio, 1968). This Court appreciates the Sloan argument when applied to retail consumer sales such as motor vehicles, motor homes, washers, dryers, television sets, etc., but not to commercial transactions where the equipment is used for manufacturing purposes. The application of the Sloan case is best described on page 625 of CWR Law Review article, supra, “The Sloan decision should also be a major weapon of Legal Aid offices and the neighborhood law offices in the ghetto areas, where the negative equity situation is most likely to occur.”

To torture the GECC-TENNA agreements into retail installment sales will serve neither the purposes of ORISA nor the realities of the purchase money loans in the commercial transactions herein.

CONCLUSIONS OF LAW

1. The GECC-TENNA transactions are loans to TENNA for TENNA’s purchase of commercial equipment from the manufacturer.

2. The GECC-TENNA transactions being loans and not retail installment sales, ORISA has no application and Issues No. 2 and No. 3 are, therefore, moot. 
      
      . “§ 1302.02 (UCC 2-102) Scope; certain security and other transactions excluded.
      Unless the context otherwise requires, sections 1302.01 to 1302.98, inclusive, of the Revised Code, apply to transactions in goods; they do not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor do sections 1302.01 to 1302.98, inclusive, of the Revised Code impair or repeal any statute regulating sale to consumers, farmers, or other specified classes of buyers.”
     