In re Marhoefer Packing Co. - 674 F.2d 1139 (7th Cir. 1982)

Rule:

While Ind. Code § 26-1-1-201(37)(b) does provide a conclusive test of when a lease is intended as security, that test does not apply in every case in which the disputed lease contains an option to purchase for nominal or no consideration. An option of this type makes a lease one intended as security only when it necessarily arises upon compliance with the terms of the lease. 

Facts:

In December of 1976, Marhoefer Packing Co., Inc. entered into negotiations with Reiser for the acquisition of one or possibly two Vemag Model 3007-1 Continuous Sausage Stuffers. Marhoefer ultimately acquired two sausage stuffers from Reiser. It purchased one under a conditional sale contract. Pursuant to the contract, Reiser retained a security interest in the machine, which it subsequently perfected by filing a financing statement with the Indiana Secretary of State. Title to that stuffer is not here in dispute. The other stuffer was delivered to Marhoefer under a written "Lease Agreement." The Lease Agreement provided for monthly payments of $ 665.00 over a term of 48 months. The last nine months payments, totaling $ 5,985.00, were payable upon execution of the lease. If at the end of the lease term the machine was to be returned, it was to be shipped prepaid to Boston or similar destination "in the same condition as when received, reasonable wear and tear resulting from proper use alone excepted, and fully crated." In a letter accompanying the lease, Reiser added two option provisions to the agreement. The first provided that at the end of the four-year term, Marhoefer could purchase the stuffer for $ 9,968.00. In the alternative, it could elect to renew the lease for an additional four years at an annual rate of $ 2,990.00, payable in advance. At the conclusion of the second four-year term, Marhoefer would be allowed to purchase the stuffer for one dollar. Marhoefer never exercised either option. Approximately one year after the Vemag stuffer was delivered to its plant, it ceased all payments under the lease and shortly thereafter filed a voluntary petition in bankruptcy. On July 12, 1978, the trustee of the bankrupt corporation applied to the bankruptcy court for leave to sell the stuffer free and clear of all liens on the ground that the "Lease Agreement" was in fact a lease intended as security within the meaning of the Uniform Commercial Code ("Code") and that Reiser's failure to perfect its interest as required by Article 9 of the Code rendered it subordinate to that of the trustee. Reiser responded with an answer and counterclaim in which it alleged that the agreement was in fact a true lease, Marhoefer was in default under the lease, and its equipment should therefore be returned. Following a trial on this issue, the bankruptcy court concluded that the agreement between Marhoefer and Reiser was in fact a true lease and ordered the trustee to return the Vemag stuffer to Reiser. The trustee appealed to the district court, which reversed on the ground that the bankruptcy court had erred as a matter of law in finding the agreement to be a true lease.

Issue:

Was the written agreement between Marhoefer and Reiser covering the equipment a true lease under which Reiser is entitled to reclaim its property from the bankrupt estate?

Answer:

Yes

Conclusion:

The court concluded from the foregoing that the district court erred in its application of section 1-201(37) of the Uniform Commercial Code to the facts of this case. Neither the option to purchase the Vemag stuffer for one dollar at the conclusion of a second four-year term, nor the initial option to purchase it for $ 9,968 after the first four years, gave rise to a conclusive presumption under clause (b) of section 1-201(37) that the lease was intended as security. From all of the facts surrounding the transaction, the court concluded that the agreement between Marhoefer and Reiser was a true lease. The judgment of the district court is therefore reversed.