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In re Johnson

571 B.R. 167 (2017)

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In re Johnson

United States Bankruptcy Court for the Eastern District of North Carolina

571 B.R. 167 (2017)

Facts

Michael Johnson (debtor) filed a Chapter 13 bankruptcy petition on January 16, 2017. On March 8, 2016, Johnson signed a rental contract with RTO National, LLC (RTO) (creditor). Johnson agreed to buy or lease a 10-foot by 12-foot storage shed or small barn for 57 monthly payments of $61.27. At the end of the payment period, Johnson could make a final balloon payment of three regular payments ($183.81), at which point he would own the barn. Johnson could purchase the barn at any point during the agreement by paying 65 percent of the remaining payments owed. Johnson also could terminate the agreement at any time by returning the barn and paying all amounts due as of the time of termination. The barn was not a permanent building but was secured by pins in the ground or on a pad and was personal property, not a fixture. RTO did not file a financing statement in regard to the barn. RTO argued that the agreement was a true lease and that RTO remained the actual owner of the barn. Johnson argued that he owned the barn and that RTO had an unperfected security interest in it. Johnson had a right to terminate the agreement, so RTO fell short of meeting the bright-line test for a true lease under the Uniform Commercial Code (UCC). However, a lease could be found if RTO retained a meaningful reversionary interest in the barn. That determination concerned whether the purchase-option price was nominal and whether the debtor acquired equity in the collateral. No evidence was provided regarding the fair market value of the barn at the time of filing or the scheduled end of the agreement. Johnson filed a motion seeking a declaration that the agreement was in fact a purchase agreement with a security interest for RTO. Accordingly, Johnson had the burden of proof to establish that the agreement was not a true lease.

Rule of Law

Issue

Holding and Reasoning (Callaway, J.)

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