## Facts

- Marhoefer Packing Company, Inc., an Indiana meat-packing business, obtained two Vemag Model 3007-1 continuous sausage stuffers from Robert Reiser & Company, Inc.
- One machine was acquired under a conditional sale contract; Reiser filed a financing statement in Indiana and perfected its security interest (not disputed).
- The second machine was delivered under a written “Lease Agreement” and was in Marhoefer’s possession when Marhoefer entered bankruptcy.
- The lease required $665 monthly payments for 48 months, and the last nine payments were prepaid at execution.
- The agreement imposed obligations commonly associated with ownership and financing (e.g., taxes, location restrictions, maintenance, insurance/risk allocation, and default repossession remedies).
- The agreement provided purchase options: after the initial term, Marhoefer could purchase for just under $10,000 (below then-market value); if Marhoefer renewed for another four-year term, it could then purchase for $1.
- Reiser claimed the transaction was a true lease and sought return of the machine; the bankruptcy trustee claimed it was a security interest that Reiser failed to perfect by filing.

## Issues

1. Whether the “Lease Agreement” created a true lease or a security interest under UCC § 1-201(37) as enacted in Indiana.
2. If the agreement created a security interest, whether Reiser’s failure to file a financing statement left its interest unperfected and subordinate to the bankruptcy trustee.

## Decision

- The Seventh Circuit affirmed the district court’s judgment for the trustee.
- The court held the agreement was a lease intended as security (a security interest), not a true lease.
- Because Reiser did not file a financing statement for the second machine, its security interest was unperfected.
- Reiser’s unperfected interest was subordinate to the trustee’s rights, and the machine remained in the bankruptcy estate.

## Legal Principles

- Whether a transaction is a lease or a security interest is determined by the facts and the transaction’s economic substance, not by the label used in the contract.
- Under UCC § 1-201(37), an option to become owner for nominal or no additional consideration is a strong indicator the transaction is intended as security.
- The presence of a nominal-price purchase option does not create a categorical, conclusive presumption; courts should assess the totality of the transaction.
- In bankruptcy, an unperfected security interest is vulnerable to the trustee’s priority and avoidance powers, consistent with UCC filing and notice policies protecting third-party creditors.

## Conclusion

The court treated the equipment “lease” as a secured financing arrangement because the payment structure and purchase options made ownership by the debtor economically inevitable; without perfection by filing, the creditor’s interest was subordinate to the bankruptcy trustee and the machine stayed in the estate.


In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir. 1982)