## Facts

- Ecco Drilling Company, Ltd., a Texas oil-and-gas drilling company, sought capital to complete and operate drilling rigs.
- In 2006, Ecco entered an equipment acquisition funding arrangement with Brin Investment Corporation; Brin later could not perform and assigned its interests to DB Zwirn Special Opportunities Fund, L.P., which provided the financing.
- After Ecco experienced cost overruns and financial distress, the parties restructured the arrangement in November 2006 using “master equipment lease” documents naming affiliated entities as “lessor” and Ecco as “lessee.”
- The documents required fixed monthly “rent” payments for a defined term and imposed a non-terminable payment obligation (Ecco could not cancel before term end).
- Ecco bore ownership-like obligations, including maintenance, insurance, and taxes, and retained possession and operational control of the rigs.
- The payment schedule effectively amortized the funds advanced plus a return, leaving little meaningful residual value for the purported lessor at term end.
- The agreements included an end-of-term purchase option based on a formula tied to value metrics, structured so that exercising the option was economically expected.
- Ecco filed Chapter 11 in November 2007 and moved for a determination that the “leases” were disguised secured transactions, affecting treatment under the Bankruptcy Code.

## Issues

1. Whether the drilling rig “master equipment leases” were true leases or disguised security interests under Texas UCC § 1-203.
2. If the agreements created security interests, whether the counterparties should be treated as secured creditors rather than lessors in the Chapter 11 case.

## Decision

- The court held the agreements were not true leases and instead created security interests.
- The court recharacterized the purported leases as secured financing transactions governed by Article 9 principles.
- The counterparties were treated as secured creditors rather than lessors with lease-based remedies and rent-based administrative claims.

## Legal Principles

- Under Texas UCC § 1-203, characterization turns on substance: whether the transaction, as an economic matter, creates a security interest.
- A non-cancellable obligation by the lessee is a threshold factor; when combined with indicators such as full amortization and an effectively nominal purchase option, the arrangement is treated as secured financing.
- The “economic realities” analysis focuses on whether the lessor retains a meaningful residual interest at term end; absence of a genuine residual interest supports secured-transaction recharacterization.
- An end-of-term purchase option can be “nominal” in relative economic terms if the structure makes it economically irrational for the lessee not to exercise the option.
- Allocation of the risks and burdens of ownership (taxes, insurance, maintenance, obsolescence risk) to the lessee supports a finding that the lessee is the functional owner and the counterparty is a financier.

## Conclusion

Applying Texas UCC § 1-203’s economic-realities framework, the bankruptcy court concluded that the rig “lease” documents functioned as non-cancellable, fully amortizing financing with an effectively nominal purchase option and no meaningful residual interest for the purported lessor, and therefore recharacterized the agreements as secured transactions in Ecco’s Chapter 11 case.


In re Ecco Drilling Co., Ltd., 390 B.R. 221 (Bankr. E.D. Tex. 2008)