## Facts

- In 1997, Charles and Sylvia Hoskins entered a written “Motor Vehicle Lease Agreement” with Southtown Ford, Inc. to lease a 1998 Ford Windstar for a 24-month term; the agreement was assigned to Ford Motor Credit Company.
- The agreement required fixed monthly payments for the 24-month term and listed an agreed vehicle value; it also allocated amounts characterized as depreciation and a rent charge.
- At the end of the term, the Hoskinses had an option to purchase the vehicle for $15,263.60 plus taxes and fees, which was slightly more than the estimated end-of-term value.
- The agreement allowed early termination by the lessees, but provided that even with early termination the lessees would be required to pay the remaining amounts due under the lease.
- Upon default, Ford could terminate the lease, repossess the vehicle, and sell it, applying the sale proceeds to the amounts owed under the agreement.
- The Hoskinses stopped making payments in March 1999 and voluntarily surrendered the Windstar in May 1999.
- In June 1999, Sylvia Hoskins signed a surrender form acknowledging return of the vehicle and her understanding that Ford would sell it.
- Ford sent a notice regarding the sale to Sylvia Hoskins, then sold the vehicle and credited the proceeds to the account, leaving a claimed deficiency balance of $3,653.81.
- Ford sued to recover the deficiency. The Hoskinses contended the transaction was actually a secured sale (a security interest), so Article 9 required notice to Charles Hoskins before disposition; they argued the lack of notice barred any deficiency and supported statutory relief.
- After the Hoskinses filed Chapter 13, the dispute proceeded as an adversary matter in bankruptcy court on a summary-judgment-type record.

## Issues

1. Whether the “Motor Vehicle Lease Agreement” was a true lease or a transaction creating a security interest under Missouri’s UCC.
2. If the agreement created a security interest, whether Article 9’s disposition-notice requirements applied such that Ford’s failure to notify Charles barred a deficiency and supported the Hoskinses’ counterclaim.
3. If the agreement was a true lease, whether Article 9 remedies and defenses were unavailable and Ford could pursue the deficiency under the lease and applicable bankruptcy law.

## Decision

- The court determined the agreement was a true lease, not security for a conditional sales contract.
- Because the transaction did not create a security interest, Missouri UCC Article 9 did not govern Ford’s disposition of the vehicle and did not impose Article 9 notice duties.
- The Hoskinses’ Article 9-based defenses and counterclaim failed, and the court ruled in favor of Ford Motor Credit Company in the adversary proceeding, allowing it to pursue the asserted deficiency to the extent permitted in the Chapter 13 case.

## Legal Principles

- In bankruptcy, the nature of a debtor’s interest in property (including whether a contract is a lease or a secured transaction) is determined under applicable state law.
- Under Missouri’s UCC, a “lease” is a transfer of the right to possession and use for a term in exchange for consideration, but a transaction that retains or creates a security interest is not a lease; labels do not control when the substance shows otherwise.
- The lease-versus-security-interest inquiry turns on the economic substance of the arrangement, including whether the lessee is effectively required—by contract terms and economics—to become the owner.
- A purchase option price that approximates anticipated fair market value at the end of the term is generally not “nominal” and supports classification as a true lease rather than a disguised sale with financing.
- Terms commonly found in consumer vehicle leases—such as assigning the lessee responsibilities associated with use and permitting repossession and sale upon default—do not, by themselves, convert a lease into a security agreement.
- Article 9’s rules governing disposition of collateral, notice of sale, and related deficiency consequences apply only when the transaction creates a security interest; if the agreement is a true lease, Article 9 notice-based deficiency defenses are not available.

## Conclusion

In re Hoskins held that the Hoskinses’ Ford Windstar contract was a true lease because the end-of-term purchase option was not nominal and the structure did not make ownership the only practical outcome; therefore, Missouri UCC Article 9 did not apply to the vehicle’s post-default sale or require notice to both co-lessees as a condition to recovering the claimed deficiency.


In re Hoskins, 266 B.R. 154, 45 UCC Rep. Serv. 2d 1025 (2001)