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Carlson v. Giacchetti - 35 Mass. App. Ct. 57, 616 N.E.2d 810 (1993)

Rule:

If the obligations of a lessee under a lease of personal property are not subject to termination by the lessee, and if the lease is for the full economic life of the goods, or if the lessee may, without further consideration, acquire all rights in the goods for the full economic life of the goods, then a security interest is created. But if the lessor retains the reversionary interest in the goods, then the transaction is a true lease.

Facts:

John Carlson leased a six-tower chassis liner, a machine used in auto body shops to remove dents from damaged cars, together with a complete accessory package, to one Richard A. King, the owner of an auto body repair shop in Quincy. The lease called for a monthly payment of $572.40 for each of 60 months, with two such payments to be made in advance of delivery. King made the required advanced payment for two months, and then defaulted. Thereafter, King went out of business and sold the chassis liner to the defendant Louis Giacchetti, who had no notice of Carlson’s interest in the machinery, Carlson brought the present action against Giacchetti, who refused to return the chassis liner to Carlson. The district court ruled in favor of Giachetti, holding that the lease agreement between Carlson and King was not a “true lease,” but rather, a security agreement, and that Carlson’s failure to perfect his security interest until December was fatal.

Issue:

Did the original parties intend the lease agreement as a security agreement?

Answer:

No.

Conclusion:

G. L. c. 106, § 1-201(37) provided that: (i) the inclusion of an option to purchase did not of itself make the lease one intended for security; and (ii) 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 did make the lease one intended for security. In the case at bar, the Court found that King had no option to purchase at the end of the lease and was required to return the equipment, which would have had substantial lease-end residual value. The Court held therefore that the equipment lease was a true lease rather than a security agreement, and that the lessee had no power to transfer title to the equipment to Giacchetti.

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