## Facts

- John Carlson manufactured and leased auto body repair machinery, including a six-tower chassis liner and accessories, to Richard A. King for use in King’s body shop.
- The agreement required 60 monthly payments of $572.40, with two payments due in advance; total payments equaled $34,344.
- King was required to maintain the equipment and, at the lease’s end, assemble and deliver it back to Carlson.
- The agreement contained no option for King to purchase the equipment.
- King made the initial payments, later defaulted, went out of business, and sold the chassis liner to Louis F. Giacchetti for $8,600.
- At the time of purchase, Giacchetti lacked notice of Carlson’s interest; Carlson filed UCC financing statements only after the sale.
- Carlson demanded return of the equipment; when Giacchetti refused, Carlson sued for conversion and for unfair or deceptive practices under Mass. Gen. Laws ch. 93A.

## Issues

1. Whether the transaction labeled a lease was a “true lease” or a security agreement under the UCC.
2. If it was a true lease, whether the lessee lacked power to transfer title to a purchaser without notice, making the purchaser liable for conversion.
3. If it was a security agreement, whether the lessor’s failure to perfect before the sale defeated the lessor’s claim against a good-faith purchaser.

## Decision

- The Appeals Court reversed the judgment for Giacchetti.
- The court held the agreement was a true lease because Carlson retained an economically significant reversionary interest in the equipment at the end of the term.
- Because King held only possessory rights as lessee, he had no power to convey title to Giacchetti.
- A purchaser from the lessee, even without notice of the lessor’s ownership interest, could be liable for conversion.

## Legal Principles

- The lease-versus-security-agreement classification turns on economic substance under UCC definitions, not the parties’ label.
- A transaction is treated as a true lease when the lessor retains an economically significant residual (reversionary) interest in the goods at lease end.
- The absence of a purchase option (especially a nominal-price option), combined with an obligation to return the goods, supports treatment as a true lease.
- When an agreement is a true lease, Article 9 perfection and priority rules applicable to security interests do not govern the lessor’s ownership claim.
- A buyer from a non-owner lessee generally cannot receive better title than the lessee has, and may be liable in conversion for exercising dominion over the lessor’s property.

## Conclusion

The court classified the equipment agreement as a true lease because the lessor retained meaningful residual value in the equipment, making Article 9 perfection rules inapplicable; the lessee therefore could not transfer title, and the buyer’s retention of the machinery supported conversion liability.


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