In re QDS Components, Inc.

QDS Components, Inc. (QDS) (debtor) entered into two identical written agreements with Intech Funding Corporation (Intech). Each agreement was entitled “Lease Agreement.” Under each agreement, QDS was required to make 60 monthly payments to Intech in exchange for use of machinery known as lathes. The total payment amount in each agreement was $110,425. The agreements granted lease-purchase options to QDS. In addition, QDS could opt to terminate the agreement before the 60-month term and purchase the lathes for a price calculated by a formula in the agreements. However, even if QDS terminated the lease and purchased the lathes, the agreement required QDS to pay the balance due under the agreements. The agreements stated that if QDS did not exercise the purchase option, QDS must either return the lathes to Intech or continue to make monthly rental payments. The agreements authorized Intech to file copies of the agreements as financing statements. After entering into the agreements, Intech recorded separate financing statements covering the lathes. Later, QDS filed for bankruptcy. The bankruptcy court authorized the sale of QDS’s assets to Lakin Manufacturing Company (Lakin) (creditor). The court’s sale order excluded any asset that was subject to a capital lease. Lakin asserted that the lathes must be included in the court’s sale order on the ground that the agreements between QDS and Intech were not capital leases but were instead disguised security agreements.