September 2014

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38 | www.cedmag.com | Construction Equipment Distribution | September 2014 Rental A True Story An equipment owner/lessor in North Carolina leases equip- ment under a master lease agreement to a local business in two segments. In the first, the lessee (customer) leases approximately $25,000 worth of equipment (identified on Schedule 1 attached to the master lease) on a two-year term. Schedule 1 sets forth a buyout option price equal to the anticipated fair market value of the equipment at the end of the lease term. Later, the owner leases an additional $155,000 worth of equipment to the same customer. The additional equip- ment is identified on a new schedule (Schedule 2), which provides for payments over a five-year period, and a buyout option price of one dollar. The master lease states that the attached schedules create "operating leases" (not "capital leases") and are "noncancelable" until their terms expire. In case the second lease is somehow viewed as a "disguised loan," however, the owner files a UCC-1 Financing Statement with the Secretary of State 23 days after the customer takes posses- sion of the additional (Schedule 2) equipment. Two years later, the customer files bankruptcy. The owner files a "Motion for Relief From Stay" with the bankruptcy court seeking to repossess its equipment. The customer's lender (bank), which had previously taken a blanket security interest in all of the customer's property, disputes the owner's claim with respect to Sched- ule 2. The bank claims that its interest is superior to the owner's with respect to the $155,000 worth of equipment. Who won? Answer Is? Answer: The bank! The owner cannot repossess its $155,000 worth of equipment; that equipment is now part of the bankruptcy estate, to be administered in favor of the customer's creditors, which may or may not ultimately allow the owner to recover some portion of its $155,000 loss. If you're like most people, the first question that comes to mind is: How did that happen? Didn't the owner still "own" its equipment? The answer, at least under the Uniform Commercial Code, is: No. What every equipment lessor needs to know about rent-to-own agreements and lease/rental purchase options. BY JAMES WAITE (continued on page 40) Don't Get Burned on Buyouts

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