In re Opelika Manufacturing Corp.

On May 1, 1971, Opelika Manufacturing Corporation (Opelika) (debtor) entered into a lease agreement with the Pulaski County-Hawkinsville Development Authority (the authority). The lease agreement provided that the authority would purchase and construct a plant in Hawkinsville, Georgia, and would acquire and install machinery and equipment within the plant for Opelika’s use. The purchase of the property and installation of equipment would be funded by tax-exempt bonds issued by the authority. The lease agreement provided that when the bonds were repaid, Opelika would purchase the property for $10.00. Additional provisions of the lease agreement included Opelika’s ability to terminate the lease by redeeming the bonds and Opelika’s unconditional payment of rent for as long as the bonds remained due. In addition, the lease agreement granted Opelika a number of rights and responsibilities ordinarily reserved for the landlord, such as the ability to improve the plant in Opelika’s sole discretion, the ability to sell or scrap equipment in Opelika’s sole discretion, and the ability for Opelika to assign the agreement without the authority’s consent. Moreover, the rental amount set forth in the agreement did not correspond with the fair market rental value of the property but rather with the value of bonds issued. On the same day as Opelika and the authority entered into the lease agreement, the authority and the First National Bank of Chicago (the bank) entered into a trust indenture whereby Opelika’s interests in the lease agreement with the authority were assigned to the bank as trustee. As part of its bankruptcy action, Opelika petitioned the United States Bankruptcy Court for the Northern District of Illinois to determine as a matter of law whether the lease agreement with the authority was a true lease agreement or whether it was a security agreement. Opelika argued that the lease agreement should be treated as a security agreement because Opelika borrowed money from the authority that was secured by a deed to the plant. The bank, in an attempt to clarify assumption rights, maintained that the agreement was a lease agreement.