## Facts

- Buddy Lee Lash (debtor) entered an “Equipment Lease” with Tucker Capital, Inc. (creditor/lessor) for a 2003 Freightliner truck.
- The lease required Lash to make an upfront payment and then monthly rent payments during an initial term (a 42-month structure described in the lease’s payment schedule).
- The agreement provided that, after the initial term, either party could terminate the arrangement with at least 90 days’ written notice; absent notice, the term automatically extended in successive one-month periods.
- The lease included a Terminal Rental Adjustment Clause (TRAC) requiring Tucker to sell the truck at the end of the initial term.
- The TRAC provision directed sale proceeds to be applied first to sale-related costs and then to Tucker up to the stated TRAC amount (identified in the lease as $4,225); any remaining proceeds were paid to Lash as an adjustment to rent previously paid.
- The lease also allocated risk to Lash in the event of loss or destruction of the truck during the initial term, requiring payment of remaining rent and the TRAC amount, with insurance/condemnation proceeds credited against Lash’s obligation.
- After executing the lease, Lash filed a Chapter 13 bankruptcy petition in the U.S. Bankruptcy Court for the Middle District of North Carolina.
- In the bankruptcy case, Lash contended the agreement was not a true lease but a disguised financing that created a security interest in favor of Tucker.
- The court held a hearing on the threshold classification question; neither party offered evidence about the truck’s value or economic life.
- The lease contained a Utah choice-of-law provision, and the court applied Utah’s enactment of U.C.C. § 1-203 to determine whether the transaction was a lease or a security interest.

## Issues

1. Under Utah U.C.C. § 1-203, did the parties’ TRAC “Equipment Lease” constitute a true lease or a transaction that created a security interest?
2. If it created a security interest, should Tucker be treated in the Chapter 13 case as a secured creditor rather than as a lessor under an unexpired lease?

## Decision

- The court held the agreement created a security interest rather than a true lease.
- The court determined Tucker’s rights were those of a secured creditor for bankruptcy purposes, not those of a lessor seeking lease assumption, cure, and continued performance under an executory contract framework.

## Legal Principles

- Whether an agreement in the form of a lease is a true lease or a secured transaction is governed by U.C.C. § 1-203 and turns on the transaction’s economic substance, not the label used by the parties.
- Contractual choice-of-law provisions may control which state’s U.C.C. § 1-203 applies; here, Utah law governed the lease-characterization analysis.
- Even when the statute’s bright-line “non-terminable” test does not resolve the question on its own, the court examines whether the putative lessor retains a meaningful residual interest and whether the lessee has assumed the benefits and burdens commonly associated with ownership.
- A TRAC clause is not automatically determinative, but where it allocates most residual-value benefit (surplus) to the lessee and places residual-value risk on the lessee, it can show the lessor’s expected return is effectively fixed and that the lessor lacks a real residual stake in the equipment.
- Provisions requiring the lessee to pay remaining rent and a set amount upon loss or destruction, with insurance proceeds applied to the lessee’s obligation, can support recharacterization when they operate like repayment of a financed balance rather than payment for use.

## Conclusion

In re Lash held that Tucker Capital’s truck “lease,” governed by Utah law and containing a TRAC sale-and-proceeds-allocation mechanism, functioned economically as a secured financing: Tucker’s return was limited to specified amounts while Lash received any upside from the truck’s sale and bore key risks commonly tied to ownership. Accordingly, the bankruptcy court recharacterized the transaction as creating a security interest and treated Tucker as a secured creditor in Lash’s Chapter 13 case rather than as a lessor under a true lease.


In re Lash, 2010 WL 5141760 (2010)