My firm just submitted a post-trial brief in a commercial case where we argued that a sale agreement which had a leaseback and an option to repurchase was intended to be a financing arrangement and loan between the parties. \u00a0Here is the relevant excerpt from the brief:\u00a0<\/p>\n
In Liona Corp.v. PCH Assoc., 804 F.2d 193 (2d. 1986) the Second Circuit summarized the
\napplicable law in this area and concluded that a sale leaseback agreement was not a true lease but a\u00a0financing transaction:
\n\u201cThe district court was correct in looking beyond the form of the Sale-
\nLeaseback Agreement and Ground Lease for clarification of the true nature of the
\ntransaction. The documents specified that the relationship between Liona and PCH
\nwas that of landlord\/tenant and provided that the documents represented the entire
\nagreement of the parties. However, the terms of the agreements, i.e., the percentage
\nrent provision, Liona’s option to become a 50% equity partner, and the numerous
\ncontrols given to Liona, conflict with the titles placed on the instruments.
\nConsequently, we are not bound to the four corners of the documents merely
\nbecause they purport to be a sale and lease, when the contents of the documents
\nindicate a different transaction. It is precisely this ambiguity in the terms of the
\ncontract that requires the admission of parol evidence to determine the true intent of
\nthe parties in entering into the transaction.\u201d
\n* * *
\n\u201cWhile there is a \u201cstrong presumption that a deed and lease … are what they
\npurport to be\u201d, Fox v. Peck Iron & Metal Co., 25 B.R. 674, 688
\n(Bankr.S.D.Cal.1982), here there was substantial evidence upon which the
\nbankruptcy court and the district court could rely to find that the transaction is
\nsomething other than a true lease. Based on the circumstances of the negotiations
\nand the economic substance of the transaction, it was not error to conclude that the
\nparties intended to impose obligations and confer rights significantly different from
\nthose arising from the ordinary landlord\/tenant relationship\u201d.
\n\u201cWe are faced with a transaction cast as a sale\/leaseback arrangement, a
\n“relatively modern, and clever, structure of financing which affords significant
\nadvantages to both purchaser-lessor and seller-lessee.” Id. at 688\u201d\u2026
\n\u201cIt seems clear that no true lease was contemplated by the parties here. It is
\nundisputed that Bernstein, acting for PCH, initiated the entire transaction, including
\nthe purchase of the land by Liona. In In re Winston Mills, Inc., 6 B.R. 587, 598
\n(Bankr.S.D.N.Y.1980), the court stated that the fact that property is “purchased by
\nthe lessor specifically for the lessee’s use” tends to prove that no true lease exists.
\nSee also, In re Keydata Corp., 18 B.R. 907, 909 (Bankr.D.Mass.1982) (no true lease
\nwhere lessee “selected, inspected, contracted for, and received” the property). In
\nFox v. Peck Iron & Metal Co., 25 B.R. 674, 681, 690 (Bankr.S.D.Cal.1982), the
\ncourt found no true lease where the “lessee” had originally requested a loan and the
\ntransaction was structured as a lease solely to secure tax advantages\u201d.
\n\u201cAnother factor indicating that this transaction does not involve a true lease
\nis that the purchase price was not related to the value of the land. A large inequality
\nor discrepancy in values has been characterized as a “strong circumstance” tending
\nto show that a transaction was a disguised financing scheme. Id. at 689; see also, In
\nre 716 Third Avenue Holding Corp., 340 F.2d 42, 47 (2d Cir.1964), cert. den., 381
\nU.S. 913, 85 S.Ct. 1535, 14 L.Ed.2d 434 (1965). Furthermore, PCH assumed many
\nof the obligations associated with outright ownership of the property, including
\nresponsibility for paying property taxes and insurance\u201d. As noted in the Senate
\nReport on Section 502 (b)(6) of the Bankruptcy Code:
\n\u201cThe fact that the lessee assumes and discharges substantially all the risks
\nand obligations ordinarily attributed to the outright ownership of the property is
\nmore indicative of a financing transaction than of a true lease. The rental payments
\nin such cases are in substance payments of principal and interest either on a loan
\nsecured by the leased real property or on the purchase of the leased real property.
\nSee, e.g., Financial Accounting Standards Board Statement No. 13 and SEC Reg. SX,
\n17 C.F.R. section 210.3-16(g) (1977); cf., First National Bank of Chicago v.
\nIrving Trust Co., 74 F.2d 263 (2d Cir.1934); and Albenda and Lief, ‘Net Lease
\nFinancing Transactions Under the Proposed Bankruptcy Act of 1973,’ 30 Business
\nLawyer 713 (1975)\u201d.
\n\u201cS.Rep. No. 598, 95th Cong., 2d Sess. 64, reprinted in 1978 U.S.Code Cong.
\n& Ad.News 5787, 5850. Therefore, we find that PCH’s significant indicia of
\nownership tend toward a finding that there is no true lease. Additionally, the
\nprovisions allowing Liona to recover its investment if the hotel were refinanced,
\nand giving PCH the power to pre-pay Liona’s investment, at which time Liona
\nwould share solely in profits, strongly suggest a transaction other than a lease\u201d.
\nOther jurisdictions also recognize that a deed absolute coupled with a repurchase option creates a\u00a0mortgage when the parties so intend. See, e.g., In Re Ellis ,674 F2d 1238 (9th Cir. 1982).
\nThe IRS has summarized the law in this area on its website, including an explanation of the
\nstandards that have been applied by the United States Supreme Court:
\n\u201cThe substance of a transaction, not its form, governs its tax\u00a0treatment. Gregory v. Helvering, 293 U.S. 465 (1935). In Frank Lyon Co. v.\u00a0United States, 435 U.S. 561, 573 (1978), the Supreme Court stated that \u201c[i]n\u00a0applying the doctrine of substance over form to recharacterize a sale and\u00a0repurchase of federal securities as a loan, finding that the economic realities\u00a0of the transaction did not support the form chosen by the taxpayer. The
\nCourt has looked to the objective economic realities of a transaction rather\u00a0than to the particular form the parties employed.\u201d The Court evaluated the\u00a0substance of the particular transaction in Frank Lyon to determine that it\u00a0should be treated as a sale-leaseback rather than a financing arrangement.\u00a0The Supreme Court described the transaction in Frank Lyon as \u201ca genuine\u00a0multiple-party transaction with economic substance which is compelled or\u00a0encouraged by business or regulatory realities, is imbued with tax\u00a0independent considerations, and is not shaped solely by tax-avoidance\u00a0features that have meaningless labels attached.\u201d Frank Lyon, 435 U.S. at\u00a0584. The Court subsequently relied on its approach in Frank Lyon to\u00a0recharacterize a sale and repurchase of federal securities as a loan, finding\u00a0that the economic realities of the transaction did not support the form chosen
\nby the taxpayer. Nebraska Dep\u2019t of Revenue v. Loewenstein, 513 U.S. 123\u00a0(1994).
\nA sale-leaseback will not be respected unless the owner\/lessor acquires and
\nretains \u201csignificant and genuine attributes\u201d of a traditional owner, including
\n\u201cthe benefits and burdens of ownership.\u201d Coleman v. Commissioner, 16
\nF.3d 821, 826 (7th Cir. 1994) (citing, Frank Lyon, 435 U.S. at 582-84).\u201d
\nSee, IRS Notice 2005-13 – Tax-Exempt Leasing Involving Defeasance,
\nhttp:\/\/www.irs.gov\/businesses\/article\/0,,id=135286,00.html.<\/p>\n
If you have any legal questions or need help litigating a sale agreement which\u00a0<\/span>constrains<\/span><\/span>\u00a0a leaseback and\u00a0repurchase option, please contact Attorney Scott Lanin at (212) 764-7250 x 201 or use the contact form in the right sidebar.<\/span><\/strong>
\n<\/span><\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"My firm just submitted a post-trial brief in a commercial case where we argued that a sale agreement which had a leaseback and an option to repurchase was intended to be a financing arrangement and loan between the parties. \u00a0Here … Continue reading