Brief Fact Summary. Nationwise Automotive, Inc. entered into two leases with IBM Credit Corporation, (IBM Credit) for 279 sets of computer equipment. Eventually Nationwise Automative, Inc. filed for bankruptcy. Nationwise Automotive, Inc. objects to four applications filed by IBM requesting payment of administrative expenses on the grounds that the two leases were actually a financing arrangement for the purchase of the computer equipment.
Synopsis of Rule of Law. The court must consider four factors in determining whether a lease or a purchase is involved: 1) whether the obligation created by the agreement is subject to termination by the obligor; 2) whether the original term of the agreement is equal to or greater than the remaining economic life of the goods; 3) whether the obligor is bound to become the owner of the goods; and 4) whether the obligor has the option to become owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the terms of the agreement.
It is an absolute requirement for administrative expense priority that the liability at issue arise post-petition.View Full Point of Law
Issue. Whether the leases between Nationwise Automitve, Inc. and IBM should be construed as an unsecured installment purchase contract or a lease.
Held. The leases should be construed as an unsecured installment purchase contract rather than a lease.
Discussion. The debtor had no meaningful right to terminate the agreement, the term of which consumed nearly all the useful life of the equipment. The consideration paid by the debtor in the exercise of its right to purchase the equipment was nominal when compared to the original value of the equipment. These costs economically compelled the debtor to become the owner of the equipment. Therefore this agreement should be construed as an unsecured installment purchase contract rather than a lease. Further, since this agreement did not substantially benefit the bankruptcy estate, the Debtor’s objection is sustained.