## Facts

- Grubbs Construction, Inc. (Grubbs) acquired construction equipment with financing provided by Banc One Leasing Corporation (Banc One).
- The parties used a document titled “Master Lease Agreement” that set out general terms, while the equipment-by-equipment financial terms were set out in separate “lease schedules.”
- Multiple schedules included end-of-term option structures, including early-buyout or renewal/purchase options; four schedules were highlighted for having three alternative options at the end of the lease term.
- An analysis of the option pricing showed that, from the start, an early buyout was the only option that made economic sense for Grubbs.
- Regardless of which option Grubbs selected, the payment structure ensured Banc One would receive the full amount it financed, plus interest and additional charges labeled as lease-related amounts.
- The agreements placed ownership-type burdens on Grubbs, including allocating the risk of loss to Grubbs and requiring broad indemnification protecting Banc One from losses connected to its nominal “ownership” of the equipment.
- If Grubbs defaulted and Banc One repossessed and sold the equipment, Banc One would apply sale proceeds to costs and the amount owed, credit Grubbs with any excess, and pursue Grubbs for any deficiency—remedies that tracked secured lending rather than a traditional lease.
- Grubbs later filed for Chapter 11 bankruptcy and argued that the “lease” documents were disguised secured transactions creating a security interest that Banc One had not perfected under Article 9.
- Banc One contended the transactions were true leases, so it should be treated as a lessor rather than as a secured creditor.

## Issues

1. Whether the Master Lease Agreement and related schedules were true leases or secured transactions creating security interests governed by U.C.C. Article 9.
2. If the agreements were not security interests by the statute’s bright-line criteria, whether the full set of facts showed the transactions functioned as secured financing under an economic-substance analysis.

## Decision

- The court held the equipment “leases” were not true leases.
- The court found that the economic substance of the transactions required them to be treated as security agreements subject to U.C.C. Article 9.
- As a result, Banc One’s rights in bankruptcy were those of a secured creditor holding a security interest in the equipment, not a lessor seeking lease treatment.

## Legal Principles

- Characterization of a transaction labeled a “lease” is governed by U.C.C. § 1-201(37) (now commonly codified as § 1-203) and depends on the transaction’s substance rather than its labels.
- Courts apply a two-stage approach: first consider whether the agreement is a security interest under the statute’s bright-line tests; if not, examine all facts to determine the transaction’s economic substance.
- A transaction is more likely secured financing where the “lessee” bears the core economic risks and costs associated with ownership (such as risk of loss and broad indemnity duties).
- Default remedies that provide for repossession and sale, credit to the “lessee” for surplus, and liability for a deficiency resemble Article 9 enforcement and weigh against true-lease status.
- Option structures matter: when pricing and payment terms make a purchase/early buyout the only economically rational outcome from the start, the arrangement functions like an installment sale or loan rather than a temporary transfer of use.
- A TRAC-style schedule may be treated as secured financing when it operates like a full-payout arrangement that repays the amount advanced plus interest and charges, leaving the “lessor” with no meaningful residual-value exposure.

## Conclusion

The bankruptcy court recharacterized Banc One’s Master Lease Agreement and related equipment schedules as Article 9 security agreements because the payment and option terms guaranteed Banc One repayment of the financed amount with interest and charges, placed ownership-like risks on Grubbs, and used lender-style remedies on default, showing secured financing rather than a true lease.


In re Grubbs Construction Company, 319 Bankr. 698, 55 U.C.C. Rep. Serv. 2d 501 (2005)