## Facts

- Jackie Don Roberts and Vickie Mae Roberts were Chapter 12 debtors who had farmed in Curry County, New Mexico for decades.
- Sid Strebeck, a long-time farmer/rancher and businessman, was a friend of the debtors and had family connections to them through their children and grandchildren.
- Strebeck, through two business entities, owned two pieces of farm equipment: a J. Bond & Sons 3048 manure spreader and a John Deere 544K 4WD loader.
- In early 2016, the equipment’s value was about $165,000; by the bankruptcy proceedings, both sides valued it at about $100,000.
- The loader was owned free and clear; the spreader was subject to a lien in favor of John Deere.
- In January 2016, after the debtors’ main lender told Mr. Roberts he could not buy new farm equipment, Strebeck and Mr. Roberts entered an oral agreement for Strebeck to provide the equipment for the debtors’ use for five years.
- Based on testimony, the basic terms were: immediate possession to Roberts; Roberts would maintain the equipment; Strebeck would insure it; and Roberts would pay $35,000 per year, due before March 31, for up to five years.
- The debtors made no down payment and posted no security deposit.
- The debtors had the option to terminate the arrangement at any time by returning the equipment to Strebeck, rather than being bound to make all five annual payments.
- After the debtors filed bankruptcy, they stopped making the annual payments.
- Strebeck filed a motion for relief from the automatic stay so he could recover the equipment; the debtors and their secured lender objected, arguing the “lease” was actually a disguised secured financing.

## Issues

1. Whether the oral equipment agreement was a “true lease” or a transaction creating a security interest under New Mexico’s UCC (including the UCC § 1-203 framework) and the economic substance of the deal.
2. If the agreement was a true lease, whether Strebeck was entitled to relief from the automatic stay because the debtors were not paying and did not propose to assume the lease and cure defaults in their Chapter 12 case.

## Decision

- The court held the agreement was a true lease, not a security interest.
- The court found the arrangement did not satisfy the UCC’s security-interest test that requires, as a threshold matter, that the lessee’s payment obligation be for the term of the lease and not subject to termination by the lessee.
- The court credited evidence that the debtors could end the arrangement by returning the equipment, which weighed strongly toward lease treatment.
- The court also found insufficient proof of terms typical of a financed sale (such as a binding requirement to pay the full value of the goods or a purchase option for a nominal amount).
- Because the debtors had stopped making payments and did not propose to assume the lease and cure defaults, the court granted Strebeck relief from the automatic stay to recover the equipment.

## Legal Principles

- Labels used by the parties do not control; courts classify a “lease” by the transaction’s economic substance.
- Under UCC § 1-203 (as adopted in New Mexico), a transaction in the form of a lease is treated as creating a security interest only if the lessee’s payment obligation is not subject to termination by the lessee and one of the listed statutory conditions is met (such as a nominal purchase option or an obligation for the goods’ remaining economic life).
- A meaningful lessee right to terminate is strong evidence of a true lease and prevents automatic treatment as a security interest under the UCC’s threshold test.
- In bankruptcy, a true lease is governed by 11 U.S.C. § 365: to keep the leased property, the debtor must assume the lease, cure defaults, and provide assurance of future performance.
- When a debtor is in default under a true lease and does not propose assumption and cure, the lessor may be granted relief from the automatic stay to recover its property.

## Conclusion

In *In re Roberts*, the bankruptcy court determined that the parties’ oral farm-equipment arrangement was a true lease because the debtors could terminate by returning the equipment and the record did not show a deal structured as a financed purchase; since the debtors stopped paying and did not seek to assume and cure under § 365, the court granted the lessor relief from the automatic stay to repossess the equipment.


In re Roberts, 620 B.R. 336 (2020)