Thus, to determine whether an agreement that contends to be a lease is a true lease or a security agreement, the Court must look to state law. United Airlines, 416 F.3d at 614 (explaining that "[b]ecause nothing in the Bankruptcy Code says which economic features of a transaction have what consequences, we turn to state law"); Powers v. Royce (In re Powers), 983 F.2d 88, 90 (7th Cir. 1993) (noting that "the existence, nature and extent of a security interest in property is governed by state law"); In re Buehne Farms, Inc., 321 B.R. 239, 242 (Bankr. S.D. Ill. 2005); Direct Air, Inc. v. Fairchild Aircraft, Inc. (In re Direct Air, Inc.), 189 B.R. 444, 450 (Bankr. N.D. Ill. 1995) ( citing Powers); In re Lerch, 147 B.R. 455, 457 (Bankr. C.D. Ill. 1992); Rent-A-Center, Inc. v. Spears (In re Spears), 146 B.R. 772, 773 (Bankr. S.D. Ill. 1992). Paragraph 21(1) of the Agreement in this matter states that the laws of Illinois shall govern, and the parties do not dispute that Illinois law applies here. Under Illinois law, Uniform Commercial Code § 1-201(37) controls the determination of whether a contract that purports to be a lease is a true lease or a security agreement.
Thus, to determine whether an agreement that contends to be a lease is a true lease or a security agreement, the Court must look to state law. United Airlines, 416 F.3d at 614 (explaining that "[b]ecause nothing in the Bankruptcy Code says which economic features of a transaction have what consequences, we turn to state law"); Powers v. Royce (In re Powers), 983 F.2d 88, 90 (7th Cir. 1993) (noting that "the existence, nature and extent of a security interest in property is governed by state law"); In re Buehne Farms, Inc., 321 B.R. 239, 242 (Bankr. S.D. Ill. 2005); Direct Air, Inc. v. Fairchild Aircraft, Inc. (In re Direct Air, Inc.), 189 B.R. 444, 450 (Bankr. N.D. Ill. 1995) ( citing Powers); In re Lerch, 147 B.R. 455, 457 (Bankr. C.D. Ill. 1992); Rent-A-Center, Inc. v. Spears (In re Spears), 146 B.R. 772, 773 (Bankr. S.D. Ill. 1992). Paragraph 21(f) of the Agreement in this matter states that the laws of Illinois shall govern, and the parties do not dispute that Illinois law applies here. Under Illinois law, Uniform Commercial Code § 1-201(37) controls the determination of whether a contract that purports to be a lease is a true lease or a security agreement.
The Court, then, must evaluate the nature of the agreement by consideration of the following additional factors: (1) whether the lessee has an option to renew the lease or to become the owner of the property; (2) whether the useful life of the property exceeds the length of the term of the lease; (3) whether the amount of rent exceeds the fair market value of the property; and (4) whether the debtor is responsible for the payment of taxes, insurance and other costs incident to ownership. See In re Marhoefer Packing Co., Inc., 674 F.2d 1139 (7th Cir. 1982); In re Spears, 146 B.R. 772 (Bankr.S.D.Ill. 1992). While the agreement does grant debtor a renewal option, as well as an option to become the owner of the property, § 1-201(37) provides that "[a] transaction does not create a security interest merely because it provides that . . . the lessee has an option to renew the lease or to become the owner of the goods. . . ."
E.D. Ark. 1999) ; Central Rents, Inc. v. Johnson (In re Johnson) , 203 B.R. 498, 503 (Bankr. S.D. Ga. 1996) ; Rent–A–Center v. Spears (In re Spears) , 146 B.R. 772, 774 (Bankr. S.D. Ill. 1992) (quoting In re Marhoefer Packing Co. Inc. , 674 F.2d 1139, 1142–43 (7th Cir. 1982) ). A widely respected treatise on the Uniform Commercial Code also sides with this interpretation of 1-203(b):
Other courts and authorities also have held that a transaction is a true lease notwithstanding the other factors in the case if the lessee may terminate a lease at will. In re Yarbrough, 211 B.R. 654, 657-58 (Bankr.W.D.Tenn. 1997); Central Rents, Inc. v. Johnson (In re Johnson), 203 B.R. 498, 502 (Bankr.S.D.Ga. 1996) (citing Smith v. ABC Rental Systems, of New Orleans, Inc., 491 F. Supp. 127 (E.D.La. 1978)); Rent-A-Center v. Spears (In re Spears), 146 B.R. 772, 774 (Bankr.S.D.Ill. 1992) (quoting In re Marhoefer Packing Co. Inc., 674 F.2d 1139, 1142-43 (7th Cir. 1982)). Other courts reject the "one factor" test.
In re Meeks, No. 95-40734, slip op. at 5 (Bankr.S.D.Ill.Dec. 15, 1995). See also Marhoefer, 674 F.2d 1139; In re Spears, 146 B.R. 772 (Bankr.S.D.Ill. 1992). Although the agreement in this case does not grant the debtor a renewal option, it does grant the debtor an option to become the owner of the equipment.
While there is apparently no Arizona case law to support this conclusion, the same conclusion has been reached in numerous other jurisdictions. See generally, Powers v. Royce Rentals (In re Powers), 983 F.2d 88 (7th Cir.1993) (construing Illinois law); In re Allen, 174 B.R. 293 (Bankr.D.Or.1994) (construing Oregon law); Rent-A-Center, Inc. v. Mahoney (In re Mahoney), 153 B.R. 174 (E.D.Mich.S.D.1992) (construing Michigan law); In re Morris, 150 B.R. 446, 449 (Bankr.E.D.Mo.1992) (construing Missouri law); Rent-A-Center, Inc. v. Spears (In re Spears), 146 B.R. 772 (Bankr.S.D.Ill.1992) (construing Illinois law); In re Frady, 141 B.R. 600 (Bankr.W.D.N.C.1991) (construing North Carolina law); In re Taylor, 130 B.R. 849 (Bankr.E.D.Ark.1991) (construing Arkansas law); In re Mitchell, 108 B.R. 166 (Bankr.S.D.Ohio 1989) (construing Ohio law). Given this conclusion, it follows that the present rental agreements are terminable leases
1992); In re Morris, 150 B.R. 446, 448-49 (Bankr.E.D.Mo.1992); In re Spears, 146 B.R. 772 (S.D.Ill.1992); cf. In re Jarrells, 205 B.R. 894 (Bankr.M.D.Ga.1997) (holding rent-to-own lease a true lease after examining facts of the case).