## Facts

- Omne Partners II developed, operated, and managed a factory discount outlet mall in Portsmouth, New Hampshire.
- The project’s development and funding involved multiple parties, including the Northern New England Carpenters’ Pension Fund (through its trustees).
- Omne initially sought a conventional construction loan from the Pension Fund, but the Pension Fund rejected that request.
- Omne proposed a sale-leaseback structure to give the Pension Fund stronger protection for its investment if foreclosure issues arose.
- The parties implemented the arrangement by transferring ownership/title of the mall property to the Pension Fund, coupled with the Pension Fund granting Omne a 30-year ground lease.
- Under the ground lease, Omne remained in possession and continued operating the mall, while also bearing many obligations commonly associated with ownership (including taxes, insurance, and maintenance responsibilities).
- On March 20, 1986, Omne filed a Chapter 11 petition and continued operating as debtor in possession.
- After the filing, the Pension Fund’s trustees filed an adversary complaint seeking a determination of their rights in the mall property, contending Omne’s lease rights had been terminated upon the bankruptcy filing and that Omne’s continued possession was unlawful.
- Omne denied that the lease had terminated and moved for summary judgment, asserting the “ground lease” was not a true lease but part of a disguised financing transaction.

## Issues

1. Whether the sale-leaseback and 30-year ground lease should be characterized as a true lease or, in substance, a financing arrangement intended to secure the Pension Fund’s investment.
2. If the arrangement was a financing transaction, what property interest Omne retained as of the petition date and whether that interest became property of the bankruptcy estate, limiting the Pension Fund to secured-creditor remedies in the Chapter 11 case.

## Decision

- The court determined that the economic substance of the sale-leaseback/ground lease arrangement was a financing transaction rather than a true lease.
- The Pension Fund’s interest was treated in substance as a secured lender’s interest, not a landlord’s ownership interest with immediate possessory rights based solely on lease remedies.
- Omne retained an ownership-like interest in the mall property that became property of the estate upon the Chapter 11 filing.
- Because the transaction functioned as a security device, the Pension Fund could not use lease-termination theory to remove Omne from the property outside the Bankruptcy Code’s treatment of secured claims.
- The court’s ruling rejected the Pension Fund’s effort to characterize Omne as a mere tenant whose rights ended automatically upon bankruptcy and accepted Omne’s summary-judgment position that the deal was secured financing in substance.

## Legal Principles

- Bankruptcy courts look to the economic reality of a transaction, not only the labels used in the documents, when determining whether an arrangement is a true lease or a security device.
- A sale-leaseback may be recharacterized as secured financing when the “lessee” bears many of the burdens and risks commonly associated with ownership and the “lessor” functions primarily as a capital provider seeking repayment and protection of its investment.
- In deciding whether a purported lease is actually intended as security, courts consider factors such as the allocation of taxes/insurance/maintenance obligations, control and possession, the transaction’s structure and purpose, and whether the arrangement resembles a mortgage-like allocation of risk and return.
- When recharacterized as financing, the creditor’s rights are administered as a secured claim in bankruptcy, subject to the automatic stay and bankruptcy remedies (including adequate protection), rather than landlord-style remedies under a true lease.
- A debtor’s equitable or ownership-like interest in property subject to a security device is included in the bankruptcy estate, preventing a secured creditor from obtaining the functional equivalent of foreclosure by asserting lease termination.

## Conclusion

In *In re Omne Partners II*, the bankruptcy court treated the mall sale-leaseback and 30-year ground lease as a financing arrangement intended to secure the Pension Fund’s investment, not as a true lease, with the result that Omne retained a property interest that became part of the Chapter 11 estate and the Pension Fund’s trustees were limited to secured-creditor treatment and remedies within the bankruptcy case.


In re Omne Partners II, 67 B.R. 793 (1986)