A Lease Is a Lease Is a ' Loan? Avoiding Recharacterization

The topic of recharacterizing leases as secured loans is not a new one, and is a staple of programs on yearly developments in commercial law. The drafters of the revisions to the 1978 Official Text of the UCC recognized that the focus on whether a lease was “intended as security” in the definition of security interest in ' 1-201(37) had the “unfortunate result” of courts looking to inconsistent factors to discover the intent of the parties. (See the Official Comment to UCC ' 1-203.) The drafters put forward the current definition of security interest in ' 1-201(35) with no reference to the parties' intent, and moved the rules distinguishing leases from security interests to ' 1-203, hoping to achieve “greater certainty” for commercial transactions. Yet, practitioners and courts alike continue to ignore the statutory bright-line tests and persist in applying a variety of other tests and interpretations that have resulted in conflicting decisions as to what is a lease and what is a disguised security interest. The applicability of UCC Article 9 to transactions styled as leases is a question that is debated in courts repeatedly year after year, with recent years being no exception. This article explores the impact of recharacterization, and discusses the tests developed by courts to determine whether a lease will be considered to be a secured loan. Then, a review of the most recent cases shows the characterization tests in practice.