Substance, Not Form, Dictates Characterization of Assignment of Lease

The Stillwater case involves a dispute between the plaintiff Stillwater National Bank and Trust Company (“Stillwater”) and defendant CIT Group/Equipment Financing, Inc. (“CIT”) regarding their respective rights to proceeds from the sale of certain equipment (the “Equipment”) that was once owned by a third party Sabre International, Inc. (“Sabre”). Stillwater was a secured creditor with a properly perfected blanket lien on all of Sabre's assets. CIT was the assignee of a lease by which Sabre leased the Equipment to a third party. The determination of priorities as between Stillwater and CIT depended upon whether the assignment of lease transaction between Sabre and CIT was a secured transaction or a true sale.

In Feb. 1999, Sabre executed a lease assignment by which it assigned the lease and Equipment to CIT. At that time, Sabre also executed a repurchase agreement (“Repurchase Agreement”) by which Sabre agreed to: 1) make any lease payment in the event of a default by the lessee, and 2) repurchase the leased Equipment if the lessee did not exercise its option to do so under the lease. The Repurchase Agreement further provided that CIT would retain title to the Equipment until Sabre paid the repurchase price in full. A few months later, in June 1999, the parties executed a second assignment (which superseded the first assignment) pursuant to which: 1) Sabre conveyed its interest in the lease and transferred the Equipment to CIT, and 2) Sabre granted CIT a security interest in the Equipment. At that time, Sabre also executed a bill of sale that purported to convey title to the Equipment to CIT.