Prospect ECHN, Inc. v. Winthrop Resources Corporation

Winthrop Resources Corporation (Winthrop) (defendant) leased computers and other equipment to Eastern Connecticut Health Network, Inc. (ECHN) under a master-lease agreement. The agreement granted ECHN the right to use the equipment specified in subsequent lease schedules. ECHN was required to make unconditional payments during each schedule’s initial term. However, either party could terminate a schedule without cause at the end of its initial term or at the end of any renewal term. Between 2007 and 2012, Winthrop and ECHN executed several lease schedules with four- or five-year initial terms. Internal communications showed that ECHN understood these arrangements as operating leases, not ownership transactions. Indeed, Winthrop refused to offer $1 buyouts and retained an average residual interest of about 12.5 percent, as it intended to retain ownership and either re-lease or resell the equipment at the end of each term. In 2016, Prospect ECHN, Inc. (Prospect) (plaintiff) purchased ECHN’s assets and assumed its rights and obligations under the leases. Prospect sought release from its remaining payment obligations. When negotiations failed, Prospect stopped making full payments but continued using—and in some cases disposing of—the leased equipment. Prospect sued Winthrop, seeking a declaration that the schedules were not true leases but security interests, making Prospect the owner of the equipment under Article 9 of the Uniform Commercial Code (UCC). Winthrop counterclaimed for breach of contract. The district court granted summary judgment in favor of Winthrop, holding that the leases were true leases and that Prospect had breached the agreements. Prospect appealed.