## Facts

- On May 1, 1971, Opelika Manufacturing Corporation (Opelika) entered into a written “lease agreement” with the Pulaski County–Hawkinsville Development Authority (the Authority).
- The agreement contemplated that the Authority would purchase land and construct a plant in Hawkinsville, Georgia, and would acquire and install machinery and equipment for Opelika’s use.
- The acquisition, construction, and equipment installation were to be financed through tax-exempt bonds issued by the Authority.
- The agreement set “rent” at amounts tied to the bonds’ repayment obligations, rather than to the property’s fair market rental value.
- Opelika’s obligation to pay rent was unconditional for as long as the bonds remained due.
- The agreement provided that once the bonds were repaid, Opelika would purchase the property for $10.00.
- The agreement also allowed Opelika to end the arrangement by redeeming the bonds.
- Opelika received rights and responsibilities commonly associated with ownership, including the right to improve the plant in its sole discretion, the right to sell or scrap equipment in its sole discretion, and the right to assign the agreement without the Authority’s consent.
- On the same day the lease was executed, the Authority and the First National Bank of Chicago (the Bank) entered into a trust indenture under which interests connected to the lease arrangement were assigned to the Bank as trustee.
- After Opelika entered bankruptcy proceedings in the United States Bankruptcy Court for the Northern District of Illinois, Opelika sought a determination whether the “lease agreement” was a true lease or a security agreement; Opelika contended it functioned as a financing secured by the plant, while the Bank argued it was a lease (raising lease-assumption questions).

## Issues

1. Whether the May 1, 1971 agreement labeled a lease was a true lease or, in economic effect, a security agreement.

## Decision

- The court concluded the transaction was a security agreement rather than a true lease.
- The court treated the Bank/Authority position as that of a secured creditor, not a landlord under an unexpired lease.

## Legal Principles

- Whether an agreement is a true lease or a security agreement depends on the transaction’s economic substance, not the label used by the parties.
- A requirement or near-certainty that the “lessee” will obtain title for nominal consideration at the end of the term supports characterization as secured financing because it leaves no meaningful residual ownership interest in the “lessor.”
- Payment terms structured to match repayment of bond financing, rather than market rent, indicate the payments function as debt service.
- Granting the user broad control commonly associated with ownership—such as unilateral rights to improve property, dispose of equipment, and assign the agreement—supports finding that the arrangement is a financing with title retained as security.
- An unconditional obligation to make payments for the period the bonds remain outstanding resembles repayment of a loan rather than rent due only for continued use under a true lease.

## Conclusion

The bankruptcy court determined that Opelika’s industrial development bond “lease” operated as a secured financing arrangement: the rent stream tracked bond repayment, Opelika’s payment duty was unconditional while the bonds were outstanding, and Opelika was positioned to obtain the property for $10 upon bond repayment (or sooner through bond redemption). Accordingly, the arrangement was treated as a security agreement and the Bank, as trustee, was treated as holding a secured claim rather than rights of a lessor under an unexpired lease.


In re Opelika Manufacturing Corp., 67 B.R. 169 (1986)