Unpublished Dispositionnotice: Tenth Circuit Rule 36.3 States That Unpublished Opinions and Orders and Judgments Have No Precedential Value and Shall Not Be Cited Except for Purposes of Establishing the Doctrines of the Law of the Case, Res Judicata, or Collateral Estoppel.in Re Donald Myron Cress and Barbara Lu Cress, Debtors.donald Myron Cress, Barbara Lu Cress, Appellants, v. Agristor Leasing, Inc., Appellee, 930 F.2d 32 (10th Cir. 1991)

The issue in this case is whether a transaction between debtors and certain agricultural machinery purveyors was a true lease or a disguised secured transaction. If the transaction was a true lease, debtors will be required to cure all defaults and comply with all of the provisions of the lease agreement in order to retain the property. 11 U.S.C. § 365 (1978). If, alternatively, the arrangement here was a sale with a lease as security, debtors will be allowed to keep the equipment upon payment of the present market value over an appropriate period of time. 11 U.S.C. § 1222. Because we find that the purchase option available at the end of the lease term requires payment of the fair market value of the equipment, an amount more than a nominal payment, we affirm the district court and hold that this transaction was a true lease.¹ 

As drawn from the findings of the district court, the facts of this case reveal that Donald Cress (referred to here with his wife as "debtors") and Mid-America Harvestore, Inc. (Mid-America) executed two purchase orders for a 2560 Harvestore with Goliath unloader, an auger, a conveyor, belts and bunks (equipment). The purchase was facilitated through a "lease" of the equipment from AgriStor Leasing, Inc. AgriStor is a party to a dealer agreement with Mid-America.

On April 11, 1980, debtors and Lee and Ruth Alice Bertholf executed an agricultural equipment lease on the equipment. The term of the lease ran from April 11, 1980, to May 1, 1988, and the lessee was required to make eight consecutive annual payments of $16,162.78, commencing on May 1, 1981. The lease designated AgriStor as the lessor and the Bertholfs and debtors as lessees.

Paragraph seventeen of the lease granted the debtors an option to purchase:

Provided that this Lease has not been earlier terminated and that no default under this Lease has occurred and is continuing, Lessee may, by written notice to Lessor not less than ninety (90) days prior to the end of the term or any renewal term pertaining therein, elect to purchase all, but not less than all, the Equipment at the end of such term for a purchase price equal to Fair Market Value of all such Equipment as of the end of such term. Fair Market Value shall mean and shall be determined on the basis of and shall be equal in amount to the value which should obtain in an arm's length transaction between an informed and willing buyer-user (other than (i) a lessee currently in possession and (ii) a used equipment dealer) and an informed and willing seller under no compunction to sell. Such Fair Market Value is to be determined by agreement between Lessor and Lessee, or if they cannot agree, by an independent appraiser selected by Lessor, but satisfactory to lessee. The cost of any such appraisal shall be borne equally by Lessor and Lessee.

On July 2, 1987, debtors filed their petition for relief under Chapter 12 of Title 11 of the United States Code. At the time of the bankruptcy filing, debtors were in possession of the equipment but were in default under the terms of the agreement. AgriStor filed notice of an unsecured claim, arguing that the equipment was leased to debtors and that it could be repossessed since not all of the lease payments had been made. Debtors claimed that they were purchasing the equipment, that the lease was intended as security and that they could retain the equipment by paying AgriStor its value. Both the bankruptcy court and the district court found the arrangement at issue to be a true lease. We agree.

Kansas law controls whether the interest here is a disguised security or a true lease. See, e.g., Jester v. Firkins (In re Jester), 31 Bankr. 189, 191 (Bankr.W.D. Ky. 1983); United General Leasing, Inc. v. Gehrke Enters., Inc. (In re Gehrke Enters., Inc.), 1 Bankr. 647, 649-50 (Bankr.W.D. Wis. 1979). In making this determination, Kansas courts examine the "economic realities" of the transaction. K-B Trucking Co. v. Riss Int'l Corp., 763 F.2d 1148, 1164 (10th Cir. 1985). One important factor in this analysis is whether the lessee can exercise an option to purchase at the end of the term for no consideration or for nominal consideration. Id. The Kansas Uniform Commercial Code reflects the importance of the size of the purchase price. In pertinent part, Kan.Stat.Ann. Sec. 84-1-201(37) (1983 & Cum.Supp.1989) provides:

Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security.

Since the "lease" at issue here provided that the debtors could purchase the equipment at the end of the lease term for fair market value, alleged by the debtors to be $10,000,²  we must determine under Kansas law whether that value is nominal, rendering this arrangement a disguised secured transaction. Two Kansas cases indicate that a purchase price set at fair market value will not be nominal, as a matter of law.

In Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 715 P.2d 381 (1986), the Kansas Supreme Court found the transaction at issue to be a financing arrangement subject to the UCC after accepting the appellant's admission that the option price for the tractors involved in the transaction was "nominal as compared to their anticipated fair market value at the end of the lease term."³  Id. at 384. Similarly, in a case involving the application of Kansas' Lemon Law to a leased automobile, the Court of Appeals of Kansas found the indicia of a true lease, noting that " [a]lthough [the lessee] had the option to purchase the car, at the end of the lease term he would have had to buy the car for its then agreed fair market value. He would not have acquired ownership for a nominal sum." Ford Motor Credit Co. v. Sims, 12 Kan.App.2d 363, 743 P.2d 1012, 1015 (1987). We conclude, therefore, that Kansas courts would agree that an option purchase price for fair market value is not nominal and that the arrangement here is a true lease.

The judgment of the United States District Court for the District of Kansas is AFFIRMED.

SEYMOUR, Circuit Judge, dissenting.

I respectfully dissent. While I agree with the majority in this case that a party's ability to purchase at the end of the lease term for a nominal fee is an important consideration in determining the true nature of a transaction of this type, see K-B Trucking Co. v. Riss Int'l Corp., 763 F.2d 1148, 1164 (10th Cir. 1985), Kansas law requires that the overall economic reality of a situation be assessed before the ultimate determination as to the character of a transaction is made. Atlas Indus., Inc. v. National Cash Register Co., 216 Kan. 213, 531 P.2d 41, 47 (1975). The size of the option purchase price is only one of a number of factors to be considered in evaluating economic reality.

When the factors identified in Atlas Industries are applied to the facts of this case, the transaction here more closely resembles a sale with a lease as security than a true lease: (1) Mid-America, not AgriStor, shipped and installed the equipment; (2) AgriStor did not select or inspect the equipment; (3) AgriStor was not a manufacturer or dealer in like equipment; (4) the payments to AgriStor totalled the purchase price, interest and sales tax; (5) the fact that the debtors could continue to use the equipment for the remainder of its useful life (at least seven more years) for a payment of only $10,000 after having invested nearly $130,000 for the use of the equipment for the first eight years, as well as the high cost of removing the equipment and installing it in another location, indicates that the parties probably did not contemplate that the equipment would be returned to AgriStor; and (6) the "renewal" rate was for a nominal amount because, for each year after the exercise of the option, and assuming a conservative seven more useful years in the life of the equipment, the debtors would pay approximately 8.8% of what they had paid during the year immediately prior to exercise. When viewed as a whole, the economic reality of this transaction more clearly points to a secured sale than to a true lease.