Leases of Equipment and Some Other Unconventional Security Devices: An Analysis of UCC Section 1-201(37) and Article 9

Although leases, consignments, and sales of accounts and chattel paper annually result in commercial transactions involving many billions of dollars, the Uniform Commercial Code, which establishes the legal framework for these transactions, provides only a few sentences of guidance for the practitioner or judge seeking to determine whether a transaction denominated as a lease, consignment, or sale of accounts or chattel paper is in fact a secured transaction subject to all provisions of article 9 of the Code. In this Article, Mr. Peter F. Coogan, a consultant to the Committee To Review Article 9, examines in detail the provisions of section 1-201(37), which defines a security interest, and develops the history of this section. Concluding that the standards established by section 1-201(37) are lacking in the precision and clarity needed to make the difficult decision of when a transaction is indeed a true lease as opposed to a disguised secured transaction, Mr. Coogan considers whether leases-like sales of account and chattel paper-should be subjected to some or all of the provisions of article 9 in order to make this determination. The author finds the application of these provisions to leases unsatisfactory; and he consequently turns to the standards of the Uniform Conditional Sales Act, the tax bar, and the accounting profession in an effort to establish useful standards in this area. Finally, Mr. Coogan recommends that, at a minimum, a more direct treatment of this problem should be incorporated into the Code, indicating that the standards and precedents of the UCSA provide the best guidelines for determining whether a transaction is a true lease or a secured transaction