Brankle Brokerage leased six Volvo tractor trucks from Volvo Financial Services pursuant to a single “Master Lease Agreement.” The base lease term for the tractor trucks was for a period of 60 months. During this time, Brankle Brokerage could not terminate the agreement for any reason whatsoever, and at the end of the 60-month lease term, Brankle Brokerage had three options:

a. it could buy the tractor trucks for a “purchase price” that was equal to 20 percent of Volvo Financial’s cost for the vehicles; or

b. it could sell the tractor trucks on Volvo Financial’s behalf, as long as the net sale proceeds were not less than the 20 percent purchase price due if the purchase option was exercised; or

c. it could return the tractor trucks to Volvo Financial, and upon doing so, pay an amount equal to the 20 percent-option purchase price, whereupon Volvo Financial would endeavor to sell them.

Thus, regardless of which option Brankle Brokerage chose—purchase, sell, or have Volvo Financial sell—at the end of each 60-month lease Brankle Brokerage was required to pay Volvo Financial the 20 percent purchase price of the tractor trucks. As a result, Brankle Brokerage stood to benefit only if, at the end of the 60-month lease term, the tractor trucks were worth more than the 20 percent purchase price, but Brankle Brokerage also bore the risk that the vehicles might be worth less than that amount.

CASE QUESTIONS

1. Was the transaction in this case a true lease or a secured transaction?

2. Why would the parties want to “disguise” this transaction as a lease?