## Facts

- Southeastern Materials, Inc. (Southeastern) obtained high-cost machinery for its business under a written “lease” arrangement with TCP Leasing, Inc. (TCP).
- The agreement required Southeastern to make scheduled payments and made Southeastern’s obligations irrevocable; Southeastern had no contractual right to end the agreement early.
- At the end of the term, the agreement gave Southeastern the option to purchase the equipment for $1.
- Southeastern later filed for Chapter 11 bankruptcy protection.
- After the bankruptcy filing, TCP sought an order requiring Southeastern to pay unpaid amounts labeled as rent under the agreement (and sought related relief based on TCP’s claim that it was a true lessor/owner of the equipment).
- First Bank objected, asserting that the TCP transaction was not a true lease but a secured financing, and that First Bank’s previously perfected lien had priority over any interest TCP held in the equipment.

## Issues

1. Whether the TCP–Southeastern transaction was a true lease or a security interest under North Carolina’s enactment of UCC § 1-203.
2. If the transaction created a security interest, whether TCP could compel “rent” payments on the theory that it was a lessor rather than a secured creditor.
3. If the transaction created a security interest, whether First Bank’s perfected security interest had priority over TCP’s interest in the equipment.

## Decision

- The court determined the agreement was not a true lease and instead created a security interest under UCC § 1-203.
- Because TCP was treated as holding a security interest rather than ownership as a lessor, TCP was not entitled to relief that depended on true-lease status, including compelling payment as “rent” based on that characterization.
- The court concluded that First Bank’s perfected lien had priority over TCP’s interest in the equipment.
- TCP’s requested relief was denied to the extent it depended on TCP being a lessor with superior rights in the equipment.

## Legal Principles

- A transaction labeled a “lease” is classified by its economic substance rather than its title.
- Under UCC § 1-203(b), a transaction creates a security interest (not a lease) if the lessee cannot terminate the obligation and one of the statutory conditions is met, including an option for the lessee to become the owner for nominal or no additional consideration.
- A $1 end-of-term purchase option is nominal consideration and is strong evidence that the lessor retained no meaningful residual interest, indicating a secured transaction.
- Once the arrangement is treated as a security interest, the creditor’s rights turn on Article 9 perfection and priority rules; a prior perfected security interest can defeat a later or unperfected interest.

## Conclusion

In In re Southeastern Materials, the bankruptcy court held that TCP’s irrevocable equipment “lease,” coupled with a $1 purchase option, met UCC § 1-203’s security-interest test. As a result, TCP was treated as a secured creditor rather than a true lessor, could not obtain relief based on lease status, and held an interest subordinate to First Bank’s perfected lien in the equipment.


In re Southeastern Materials, 433 B.R. 177 (2010)