## Facts

- On August 18, 1989, Tishomingo County, Mississippi (acting through its Board of Supervisors) entered into a memorandum agreement with 20th Century Enterprises, Inc. (20th Century), a manufacturing business.
- The County agreed to purchase a manufacturing facility from a third party for $850,000; the acquisition included real property, buildings, and certain equipment used in the facility.
- The same day, after purchasing the facility, the County entered into a lease-purchase agreement with 20th Century on the memorandum’s terms.
- Under the lease-purchase, 20th Century agreed to pay annual “rent” over a 15-year term in amounts sufficient to repay the County’s acquisition costs plus interest (reported as 4%).
- At the end of the 15-year term, the County agreed to sell the facility, including the equipment, to 20th Century for $100.
- In October 1989, the lease-purchase agreement was recorded in the county land records.
- The County did not file a UCC financing statement covering the equipment.
- In 1990, 20th Century borrowed from Peoples Bank & Trust Company (Peoples Bank) and executed a promissory note and security agreement granting Peoples Bank a security interest in, among other collateral, the equipment at issue.
- Peoples Bank filed UCC financing statements describing the equipment to perfect its security interest.
- After 20th Century filed bankruptcy, the County and Peoples Bank asserted competing interests in the equipment and sought summary judgment on characterization and priority.

## Issues

1. Whether the County’s lease-purchase agreement, though labeled a lease, created a security interest in the equipment under UCC § 1-201(37) (as adopted in Mississippi) because 20th Century could buy the equipment for nominal consideration at the end of the term.
2. If the agreement created a security interest, whether Mississippi’s former UCC Article 9 exclusion for “transfers by a government or governmental subdivision or agency” (former UCC § 9-104(e)) removed the transaction from Article 9 when the government is the secured creditor.
3. If Article 9 applied, whether the County’s recordation of the lease-purchase agreement in county land records perfected its interest in the equipment, and if not, whether Peoples Bank’s perfected security interest had priority over the County’s unperfected interest.

## Decision

- The court held that the lease-purchase agreement, as to the equipment, was a lease intended as security (a disguised secured transaction), not a true lease, because the payment structure repaid the County’s costs plus interest and the end-of-term purchase option price ($100) was nominal.
- The court rejected the County’s argument that the governmental-transfer exclusion (former UCC § 9-104(e)) excused it from Article 9; the exclusion applies when the governmental unit is the debtor/borrower, not when it is acting as a secured creditor.
- The court held that recording the lease-purchase agreement in county land records did not perfect a security interest in the equipment under Article 9’s filing rules.
- Because the County did not file a UCC financing statement, its security interest in the equipment was unperfected.
- Peoples Bank’s security interest was perfected by its UCC filings and therefore had priority over the County’s unperfected security interest.
- Summary judgment was granted in favor of Peoples Bank on the priority dispute as to the equipment.

## Legal Principles

- Under UCC § 1-201(37), a transaction in the form of a lease is treated as creating a security interest when, based on the economic terms, the “lessee” is effectively paying the purchase price and may become the owner for nominal consideration.
- When a lease is recharacterized as a secured transaction, Article 9 governs perfection and priority for the personal-property collateral covered by the agreement.
- Former UCC § 9-104(e)’s exclusion for transfers “by” a governmental unit does not remove Article 9 filing and perfection rules when the governmental unit is the secured creditor rather than the debtor/borrower.
- Recording an agreement in real-property records does not, by itself, perfect a security interest in equipment; perfection generally requires a UCC financing statement filed in the proper Article 9 filing office.
- As between competing security interests in the same collateral, a perfected security interest has priority over a conflicting unperfected security interest.

## Conclusion

The bankruptcy court treated Tishomingo County’s lease-purchase as secured financing because the debtor’s payments amortized the County’s costs plus interest and the debtor could obtain title for $100 at term end; the County could not avoid Article 9 by invoking the governmental-transfer exclusion and did not perfect its equipment interest by UCC filing, so Peoples Bank’s later but perfected security interest had priority.


Peoples Bank & Trust Co. v. Applewhite (In re 20th Century Enterprises, Inc.), 152 B.R. 119 (1992)