Leases and Consignments

Question 1

What is the bright line test to determine if a lease is a secure transaction?

Answer 1

1. Lessee of the property is obligated to pay the full obligation under the lease – cannot be terminated early

AND

2. Lessee uses up the goods/keeps the goods at end of term

Ex: Lessee has option to renew lease for the remaining economic life of goods with no additional consideration
Ex: Lessee has the option to become the owner of the goods for no or little additional consideration

Question 2

What happens if the bright line test for a lease is met?

Answer 2

Secure transaction governed by Article 9.

Lessor = secured party, needs to file or perfect interest in goods

Question 3

True or false: if a lease does not meet the bright line test, it cannot be treated as a secure transaction

Answer 3

False. Courts will determine whether it is one by looking at the facts of the case

Question 4

True or false: Consignments as secured transactions requiring perfection are reserved for big ticket items and merchants only

Answer 4

True.

Value = $100
Merchant = substantially engaged in the business of selling the goods of others