Thank You For Submiting Feedback!
Prior to the 1995 amendment, N.Y. U.C.C. Law § 1-201(37) provided that whether a lease was intended as security (that is, a security interest disguised as a lease) was to be determined from the facts of each case. Reference to the intent of the parties to create a lease or security agreement has led to unfortunate results. In discovering intent, courts have relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, are as applicable to true leases as to security interests. Accordingly, amended § 1-201(37) deletes all references to the parties' intent. Judicial opinions construing § 1-201(37) and the Official Uniform Commercial Code Comments clearly place the focus of the inquiry under the revised statute on the economics of the transaction rather than on the intent of the parties as had been the emphasis previously.
Duke Energy Royal LLC (“Duke”) filed a motion to compel Pillowtex Corporation to make lease payments owing under the Master Energy Services Agreement ("MESA"), an agreement its predecessor entered into with Pillowtex. The district court denied Duke's motion on the grounds that the MESA was not a true lease, but rather a secured financing arrangement. Duke appealed.
Did the district court correctly deny Duke’s motion to compel lease payments under the MESA?
The court agreed with the district court that, based on the economic realities of the underlying transaction, the MESA was a secured financing arrangement. The court concentrated on the factor that the aggregate rental payments owing by the debtor under the MESA had a present value equal to or exceeding the cost of the energy fixtures. The court rejected the creditor's argument that the district court erred by failing to analyze the parties' intent to create a lease.