Case #1. An equipment lease or a disguised financing?

Lyon Fin. Servs., Inc. v. Illinois Paper and Copier Co.

US District Court, Northern District of Illinois, Eastern Division

2015 U.S. Dist. Lexis 169946 (December 21, 2015)

Background

Lyon Financial Services purchased copier equipment from Illinois Paper and Copier Company and provided it to the Village of Bensenville under a Value Lease Agreement calling for monthly payments for six years and a fair market value purchase option. Two years later, the Village stopped making payments, declaring the lease agreement unenforceable.

Holding

For purposes of a summary judgment motion, there is a dispute as to whether the lease is a true lease or security interest. A transaction in the form of a lease creates a security interest when it is not terminable and any one of four specified requirements is met. UCC Section 1-203 (810 ILCS § 5/1-203). The court found that the lease could not be terminated, and that there is a material dispute as to whether two of the four specified requirements were met, specifically (i) it appears that the lease term exceeds the goods’ economic life, and (ii) the equipment could be bought at the end of the term for nominal value.

Observations

  • Whether a lease is a true lease or a security interest is one of the most litigated issues under UCC Article 9 because of its importance in bankruptcy (although that was not the issue in this case), the difference being whether the lessor is a secured creditor or the owner of the equipment subject to the debtor’s right to assume or reject the lease in the bankruptcy proceeding.
  • While the lease had a fair market purchase option at the end of the lease, since the value of the equipment was nominal at the end of the lease, the purchase option was nevertheless nominal.
  • Where the characterization of the lease is uncertain, always (i) make sure that the lease grants a security interest, and (ii) file a precautionary financing statement to assure treatment as a secured creditor with a perfected security interest in case the lease is found to be a financing transaction.

Case #2. Rejection of leased goods

Lease Finance Group LLC v. Traian Indus.

Civil Court of the City of New York, New York County

2015 N.Y. Misc. Lexis 4483 (December 9, 2015)

A question of fact remains as to whether Traian Industries rejected a credit processing machine under UCC § 2-A-509 or revoked its acceptance under UCC § 2-A-517. Under Article 2A, a lessee may either reject nonconforming equipment within a reasonable time or revoke acceptance of nonconforming equipment that the lessee later discovers within a reasonable time is nonconforming on notice to the lessor.