IN RE ARNEY

GERALD FINES, Chief Judge, Bankruptcy

This matter having come before the Court for hearing on confirmation of the Debtors' Chapter 13 Plan, Objection to Chapter 13 Plan, Motion of CitiCapital Leasing Corporation to Compel Assumption or Rejection of Lease, and Objection to Motion of CitiCapital Leasing Corporation to Compel Assumption or Rejection of Lease; the Court, having heard arguments of counsel, having reviewed written memoranda of the parties, and being otherwise fully advised in the premises, makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

In their Chapter 13 Plan, the Debtors seek to treat creditor, CitiCapital Leasing Corporation (CitiCapital) as a secured creditor on a 2000 Peterbilt 379 semi-tractor, which the Debtors allege as having a value of $50,000. Under the Debtors' Chapter 13 Plan, the Debtors seek to pay the sum of $50,000, plus 8% interest, with the C reditor, CitiCapital, to release its lien upon the vehicle once the value and interest have been paid. Creditor, CitiCapital, has objected to the Debtors' Chapter 13 Plan and has also filed a Motion of CitiCapital Leasing Corporation to Compel Assumption or Rejection of Lease, arguing that the transaction between the Debtors and CitiCapital is not a secured transaction, but is rather a true lease. CitiCapital states that, as such, pursuant to the provisions of 11 U.S.C. § 365, the Debtors must either assume or reject the lease, and that the Debtors do not have the option to pay the value of the secured vehicle, plus interest, in order to obtain clear title.

The issue of whether or not a transaction constitutes a true lease or a security agreement is governed by 810 ILCS 5/1-201(37). See: In re Lerch, 147 B.R. 455 (Bankr. C.D. Ill. 1992); In re Powers, 983 F.2d 88 (7th Cir. 1993), citing In re Marhoefer Packing Company, Inc., 674 F.2d 1139 (7th Cir. 1982). Section 5/1-201(37), of the Illinois Commercial Code, provides as follows:

Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee; and

(a) the original term of the lease is equal to or greater than the remaining economic life of the goods;

(b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;

(c) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or

(d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.

A transaction does not create a security interest merely because it provides that:

(a) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;

(b) the lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance, filing, recording, or registration fees, or service or maintenance costs with respect to the goods;

(c) the lessee has an option to renew the lease or become the owner of the goods;

(d) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or

(e) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.

In examining the factors set out in the Commercial Code and inIn re Powers, supra, the Court concludes that the agreement between the Debtors and Creditor, CitiCapital, in this case is, in fact, a true lease. First, the Court finds that the residual value stated in the lease contract of $20,265.65, is not a nominal value. The lease in question has another year to go, and the collateral presently has a value of $50,000 to $55,000. In another year, that value will clearly decrease such that the residual value stated in the lease agreement will be near or exceeding the actual value of the collateral at that time. Second, the Court notes that either party to the lease agreement has the right to terminate the lease upon written notice at any time. Third, the Debtors were not required to make a down payment at the inception of the lease; rather, the Debtors were only required to pay regular monthly lease payments following delivery of the vehicle. Fourth, the lease does not require the execution of a financing statement; rather, the certificate of title continues to identify CitiCapital as the owner of the vehicle. Fifth, there is nothing in the lease agreement that indicates that the Debtors are acquiring any equity in the vehicle during the term of the lease. Sixth, there is no option to purchase at the end of the lease, and the lease agreement makes no mention of purchase at the end of the lease term. Seventh, the term of the lease is 60 months, and there is no evidence that this 60-month period exceeds the economic life of the vehicle. In fact, it is quite possible that the vehicle will have value and use remaining well after the original 60-month term.

For all of the above reasons, and the additional reasons stated in the Memorandum of Law in Support of CitiCapital's Motion to Assume or Reject Lease, the Court must conclude that the agreement between the parties in this case is a true lease and that the treatment afforded to Creditor, CitiCapital, in Debtors' Chapter 13 Plan is unacceptable. The Debtors must, pursuant to 11 U.S.C. § 365, either assume or reject the lease in question, cure all defaults, and maintain regular payments through an amended Chapter 13 plan. Thus, the Objection to Chapter 13 Plan filed by CitiCapital Leasing Corporation is sustained, and the Motion of CitiCapital Leasing Corporation to Compel Assumption or Rejection of Lease is allowed.

ORDER

For the reasons set forth in an Opinion entered on the 2nd day of June 2004;

IT IS HEREBY ORD ERED that:

A. Confirmation of Chapter 13 Plan filed by the Debtors on February 10, 2004, is DENIED;

B. Objection to Chapter 13 Plan filed by Creditor, CitiCapital Leasing Corporation, on April 6, 2004, is ALLOWED;

C. Motion of CitiCapital Leasing Corporation to Compel Assumption or Rejection of Lease is ALLOWED; and,

D. Debtors are directed to file an amended Chapter 13 plan comm ensurate with the terms of this Opinion and Order within 14 days.