## Facts

- Michael L. Johnson (the debtor) filed a voluntary Chapter 13 petition on January 16, 2017 in the U.S. Bankruptcy Court for the Eastern District of North Carolina.
- Before bankruptcy, on March 8, 2016, Johnson entered into a “Consumer Rental Purchase Agreement” with RTO National, LLC (RTO) covering a movable 10′ × 12′ storage shed/small barn (the Barn).
- The Barn was not a permanent structure; it was secured by pins in the ground or placed on a pad, and it was treated as personal property rather than a fixture.
- The agreement contemplated 57 monthly payments totaling $61.27 per month (including a base rental charge, a loss-damage waiver fee, and taxes).
- The agreement stated a cash purchase price of $1,520.74 (including taxes) if bought outright at inception.
- At the end of the 57-month payment period, Johnson could obtain ownership by making a final balloon payment equal to three regular payments ($183.81).
- Johnson could also purchase the Barn earlier by paying 65% of the remaining payments.
- Johnson had the right to terminate the agreement at any time by returning the Barn and paying amounts due through the termination date.
- RTO did not file a financing statement regarding the Barn.
- In his bankruptcy schedules and plan, Johnson treated RTO as a secured creditor and did not list the agreement as an executory contract or unexpired lease.
- RTO filed a motion to compel Johnson to assume or reject the agreement under 11 U.S.C. § 365, contending it was a true lease; Johnson contended the agreement was a sale with an unperfected security interest.

## Issues

1. Whether the Consumer Rental Purchase Agreement was a true lease or a disguised secured transaction under North Carolina’s enactment of U.C.C. § 1-203.
2. If the agreement was a true lease, whether the debtor had to assume or reject it under 11 U.S.C. § 365 and amend plan treatment accordingly.

## Decision

- The court granted RTO’s motion to compel.
- The court determined the agreement was a true lease, not a disguised security agreement.
- The court required the debtor to assume or reject the lease under § 365(d)(2) and to revise Chapter 13 plan treatment consistent with RTO’s status as lessor.

## Legal Principles

- State law governs whether a transaction labeled a lease is treated as a lease or a secured transaction; North Carolina’s U.C.C. § 1-203 supplies the framework.
- Under U.C.C. § 1-203’s “bright-line” approach, a transaction is treated as a security interest only if (among other conditions) the lessee’s obligation is not subject to termination; a lessee’s contractual right to terminate generally prevents per se treatment as a secured transaction.
- When the bright-line test does not resolve characterization, the court examines the transaction’s economics, including whether the lessor retains a real residual (reversionary) interest in the goods.
- Whether a purchase option is “nominal” and whether the lessee has built equity commonly depend on valuation evidence (such as the item’s fair market value at relevant times). Without valuation evidence, a court may be unable to find that the lessor’s residual interest is illusory.
- The party seeking recharacterization of an agreement as a secured transaction bears the burden of proof; failure to supply needed economic evidence can result in the agreement being treated as a lease.
- If the agreement is a true lease in bankruptcy, § 365 applies and the debtor must timely decide to assume or reject, with plan treatment reflecting ongoing lease obligations if assumed.

## Conclusion

In *In re Johnson*, the bankruptcy court held that the debtor’s rent-to-own agreement for a movable barn was a true lease because the debtor could terminate the agreement and did not carry his burden to prove—through economic evidence such as fair market value—that the purchase options were nominal or that RTO lacked a real residual interest; as a result, the debtor was ordered to assume or reject the agreement under § 365 and to adjust his Chapter 13 plan to treat RTO as a lessor.


In re Johnson, 571 B.R. 167 (2017)