## Facts

- Sevina Cherry (debtor) entered into a written contract with Access Automotive, LLC (creditor) involving a 2003 Buick Rendezvous.
- The contract described the parties as “lessor” (Access Automotive) and “lessee” (Cherry) and was drafted in the form of a consumer vehicle lease.
- Cherry paid $1,000 down and agreed to make 78 biweekly payments under the agreement.
- The contract gave Cherry an end-of-term option to purchase the vehicle for an “agreed residual value” of $350 plus a purchaser-option fee of $300 (total $650).
- The contract referenced that an early end to the lease could result in a “substantial charge,” but it did not specify the exact amount for that charge.
- The contract also stated that Cherry could terminate early if she paid an early-termination fee of $495 and paid “all outstanding payments due.”
- The State of Alabama issued the certificate of title listing Access Automotive as the titled owner of the vehicle.
- Cherry filed a Chapter 13 bankruptcy case and treated Access Automotive as a secured creditor in her schedules and proposed Chapter 13 plan.
- Access Automotive asserted the agreement was a true lease requiring assumption or rejection under 11 U.S.C. § 365 and continued lease payments if Cherry kept the vehicle.
- Cherry contended the agreement was a lease intended as security (a financed purchase), so Access Automotive should be treated as a secured creditor rather than a lessor.
- Cherry moved for summary judgment seeking a ruling that the transaction created a security interest under Alabama’s version of U.C.C. § 1-203.

## Issues

1. Whether the agreement for the 2003 Buick Rendezvous, though written in lease form, created a security interest rather than a true lease under Ala. Code § 7-1-203.
2. Whether the contract was “not subject to termination by the lessee” for purposes of Ala. Code § 7-1-203(b) when early termination required payment of an early-termination fee plus “all outstanding payments due.”
3. Whether the end-of-term purchase option price ($650 total) was nominal in relation to the anticipated value of the vehicle at the end of the term, supporting characterization as a secured transaction.

## Decision

- The court granted Cherry’s motion for summary judgment.
- The court held the transaction was not a true lease; it was a lease intended as security under Ala. Code § 7-1-203.
- The court treated Access Automotive as holding a secured claim in Cherry’s Chapter 13 case, not the rights of a lessor under 11 U.S.C. § 365.

## Legal Principles

- Under Ala. Code § 7-1-203, whether a transaction in lease form is a true lease or a security interest depends on the transaction’s economic substance rather than the contract’s labels.
- A transaction in lease form creates a security interest as a matter of law under § 7-1-203(b) when the lessee’s payment obligation is for the term and is not meaningfully terminable by the lessee, and one of the statutory conditions is satisfied, including an option to become the owner for nominal consideration.
- A stated “right to terminate” may fail to prevent § 7-1-203(b) from applying when termination requires payment of essentially the full remaining payment stream (and added charges), leaving the lessee economically bound as if the term could not be ended.
- An end-of-term purchase option price that is nominal compared to the predicted end-of-term value supports the conclusion that the lessee is expected to purchase and that the arrangement functions as a financed sale.

## Conclusion

In re Cherry held that a consumer auto agreement labeled as a lease was a secured transaction under Alabama’s U.C.C. because Cherry’s supposed termination right—requiring an early-termination fee plus payment of all outstanding amounts—did not meaningfully relieve her from the full economic obligation, and the $650 end-of-term purchase option was nominal in relation to the vehicle’s anticipated value, so the creditor was treated as a secured claimant in Chapter 13 rather than a lessor under § 365.


In re Cherry, 2012 WL 3252231 (2012)