## Facts

- Winthrop leased computer and related equipment to ECHN under a 2007 master lease governed by Minnesota law; the agreement identified itself as a finance lease under UCC Article 2A.
- ECHN selected the equipment and suppliers; Winthrop funded and acquired the equipment for leasing under schedule agreements with defined payment terms and multi-year initial terms.
- ECHN requested a $1 buyout option during negotiations; Winthrop refused and structured the transactions to retain ownership and a meaningful residual interest (about 12.5%) for re-leasing or resale after term end.
- In 2016, Prospect acquired ECHN’s assets and assumed rights and obligations under the master lease and schedules.
- Prospect sought to exit remaining payment obligations; after negotiations failed, it stopped making full payments while continuing to use the equipment and, in some instances, disposed of it.
- Prospect sued asserting the schedules were disguised security agreements (not true leases), seeking relief tied to an ownership characterization; Winthrop counterclaimed for breach of contract.
- The district court granted summary judgment to Winthrop, found the agreements were true leases, held Prospect in breach, and awarded damages plus contractual attorneys’ fees and costs.

## Issues

1. Whether the master lease and schedules were true leases under Minnesota’s UCC (including Minn. Stat. § 336.1-203 and Article 2A), or security interests governed by Article 9.
2. If true leases, whether Prospect’s underpayment, continued use, and disposal of equipment constituted breach warranting damages and contractual attorneys’ fees and costs.

## Decision

- The Eighth Circuit affirmed summary judgment for Winthrop.
- The court held the agreements were true leases, not security interests, because the statutory indicators of a security interest were not met.
- The court held Prospect breached by failing to make required payments and by disposing of equipment owned by Winthrop.
- The court affirmed the award of damages and the determination that Winthrop was entitled to attorneys’ fees and costs under the contracts.

## Legal Principles

- Under Minn. Stat. § 336.1-203, whether a transaction is a lease or creates a security interest depends on the transaction’s economic substance and whether the lessee is effectively compelled or entitled to become the owner for no or nominal additional consideration.
- A true lease is supported where the lessee is not bound to become owner, lacks a nominal-price purchase option, and the lessor retains a meaningful residual interest at the end of the term.
- A finance lease under UCC Article 2A commonly involves the lessee selecting the goods and supplier while the lessor funds and acquires the goods for lease; that structure is consistent with true-lease treatment when residual value remains with the lessor.
- After classification as a true lease, failure to make required payments while retaining use of the goods, and disposing of goods owned by the lessor, constitutes breach supporting contractual damages and fee-shifting remedies when provided by the agreement.

## Conclusion

The court affirmed that the equipment schedules were true finance leases under Minnesota’s UCC because the lessee lacked any obligation or nominal option to acquire ownership and the lessor retained meaningful residual value; Prospect’s nonpayment and disposal of leased equipment therefore constituted breach justifying damages and contractual attorneys’ fees and costs.


Prospect ECHN, Inc. v. Winthrop Res. Corp., 75 F.4th 885 (8th Cir. 2023)