Summary of a Recent
Judicial
Development in
Bankruptcy
Dairy Cattle "Lease" Determined
To Be Disguised Secured Transaction
Jeffrey A. PetersonNational AgLaw Center Graduate Assistant
In In re Buehne Farms, Inc., 321 B.R. 239 (Bankr. S.D. Ill. 2005), the debtor Buehne Farms, Inc. (ADebtor@) entered into two ADairy Cattle Lease@ agreements with Ag Lease or Loan, L.L.C. (AFinancier@) for the acquisition of dairy cattle. Id at 240. Under the leases, the Debtor would make monthly payments for a fifty-month term, with an option to purchase the cattle upon the expiration of the agreement. Id. at 240-41. The Bankruptcy Court held that the Agreements were disguised security agreements rather than true leases, as defined by Illinois' Uniform Commercial Code ' 1-201(37). Id. at 246. ' 1-201(37) provides, in part:
... a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee; and Y the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement. Id. at 242-43. (emphasis added).
Section 1-201(37)(x) provides, in pertinent part, that additional consideration is nominal if "it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised." Id. at 245. As the court further explained, if only a fool would fail to exercise the option, the option price is considered nominal and the transaction is revealed to be a disguised sale. Id. at 245. The court held that it would be foolish for the Debtor to not exercise his right because it was economically compelling for the Debtor to do so; the option price constituted merely six percent of the total rental cost. Id. Furthermore, the Debtor had agreed to replace any cows removed from the herd at its own expense and that female calves born during the fifty-month term become subject to the agreements. Id. at 246. The court noted that these two obligations would be a tremendous cost to the Debtor, creating an additional reason for the Debtor to exercise the purchase option. Id.
The case was decided on January 26, 2005; this summary was posted July 20, 2007.