(a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
(b) A transaction in the form of a lease creates a security interest if the consideration that 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 and is not subject to termination by the lessee, and:
(1) The original term of the lease is equal to or greater than the remaining economic life of the goods;
(2) 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;
(3) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
(4) The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
(c) A transaction in the form of a lease does not create a security interest merely because:
(1) 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;
(2) The lessee assumes risk of loss of the goods;
(3) The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
(4) The lessee has an option to renew the lease or to become the owner of the goods;
(5) 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
(6) 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.
(d) Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.
Additional consideration is not nominal if:
(1) When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
(2) When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
(e) The “remaining economic life of the goods” and “reasonably predictable” fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.
(Prior version of this section added by Acts 1965, No. 549, p. 811; repealed by Act 2004-524, p. 1070, §§1, 3; current section added by Act 2004-524, p. 1070, §1.)
Notes of Decisions
Cited in
15
cases (
1 in the last 5 years), 1981–2022 · leading case:
In Re Hb Logistics, LLC, 460 B.R. 291 (Bankr. N.D. Ala. 2011).
In Re Hb Logistics, LLC, 460 B.R. 291 (Bankr. N.D. Ala. 2011).
· cites it 13× “Subsection (b) of Ala.Code § 7-1-203 creates a “bright line” test to determine “when a transaction in the form of a lease creates a security interest as a matter of law based upon the terms of the transaction.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
· cites it 20× “Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
Johnny E. Walker v. S. Co. Servs., 279 F.3d 1289 (11th Cir. 2002).
“Ala.Code § 7-1-203. As the Supreme Court observed, the effect of the law of bad faith is not on the terms of the contract but on the nature of the remedy: the tort allows a plaintiff to recover punitive damages.”
Brown-Marx Assocs., Ltd. v. Emigrant Sav. Bank, 527 F. Supp. 277 (N.D. Ala. 1981).
· cites it 2× “" Ala.Code § 7-1-203 (1975). That which is implied in the language of a contract is as much a part of the contract as that which is expressed.”
Farmers & Merchants Bank of Centre v. Hancock, 506 So. 2d 305 (Ala. 1987).
“1984): "`The principal limitation on the secured party's right to dispose of collateral is the requirement that he proceed in good faith (Section 7-1-203) and in a commercially reasonable manner.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
· cites it 20× “Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
McGrady v. Nissan Motor Acceptance Corp., 40 F. Supp. 2d 1323 (M.D. Ala. 1998).
““The principal limitation on the secured party’s right to dispose of collateral is the requirement that he proceed in good faith (Section 7-1-203) and in a commercially reasonable manner.”
First Nat. Bank of Dothan v. Rikki Tikki Tavi, Inc., 445 So. 2d 889 (Ala. 1984).
“"The principal limitation on the secured party's right to dispose of collateral is the requirement that he proceed in good faith (Section 7-1-203) and in a commercially reasonable manner.”
First Alabama Bank of Montgomery v. Parsons, 426 So. 2d 416 (Ala. 1983).
“Code § 7-9-507 (1975), to the requirement that the secured party "proceed in good faith (Section 7-1-203) and in a commercially reasonable manner.”
Gina Marie Byers & Jeremy Michael Byers (Bankr. S.D. Ala. 2020).
· cites it 9× “Specifically, it states in pertinent part: (b) A transaction in the form of a lease creates a security interest if the consideration that 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 and is not…”
— Ala. Code § 7-1-203(b) — 3 cases
In Re Hb Logistics, LLC, 460 B.R. 291 (Bankr. N.D. Ala. 2011).
“Subsection (b) of Ala.Code § 7-1-203 creates a “bright line” test to determine “when a transaction in the form of a lease creates a security interest as a matter of law based upon the terms of the transaction.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
— Ala. Code § 7-1-203(b)(1) — 2 cases
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
— Ala. Code § 7-1-203(b)(4) — 2 cases
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
Pipkin v. Sun State Oil, Inc., 273 So. 3d 828 (Ala. 2018).
“Pipkin's argument that the PSA is actually a disguised security transaction is based upon § 7-1-203, Ala. Code 1975, a part of the UCC titled "Lease distinguished from security interest.”
— Ala. Code § 7-1-203(c) — 1 case
In Re Hb Logistics, LLC, 460 B.R. 291 (Bankr. N.D. Ala. 2011).
“Subsection (b) of Ala.Code § 7-1-203 creates a “bright line” test to determine “when a transaction in the form of a lease creates a security interest as a matter of law based upon the terms of the transaction.”
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