American Family Mutual Ins. Co. v. Jepson, 1998 WL 348413 (8th Cir. S.D. 7/1/98). SALES CONTRACT WITH INSTALLMENTS OR LEASE WITH OPTION TO BUY?- The key lesson here is that courts will look to substance over form when determining the ownership of items covered by an agreement entitled "Lease with Option to Purchase." In this case one of the three partners decided to retire and arranged to sell his interest to the other two partners. Those two partners did not have enough money for an outright purchase so the three individuals arranged for the remaining partners to buy the retiring partner's share in an agreement entitled "Lease with an Option to Buy." Four years later, an employee who was driving a truck which was covered in the agreement collided with and injured plaintiff's daughter. Since the retiring partner had a one million dollar umbrella insurance policy, an issue arose as to who owned the truck.
The court noted that the retiring partner's name was on the title to the truck but held that the vehicle's title was not dispositive. Rather, the court ignored the formalities and examined the payment structure of the "lease agreement" to determine whether the agreement was a lease or a purchase contract. The court noted (i) that the payments declined over the four years; (ii) that the payments were precisely the same as if they were made on the purchase price of equipment amortized at 8%; and (iii) that the remaining partners would acquire the property upon final payment. All of these factors indicated that the agreement was really a purchase contract, since a true lease is indicated by a purchase option for fair market value and rental charges used to compensate the lessor for any loss of value over the lease term. As such, the agreement was a contract for purchase, the retiring partner no longer owned the truck, and his insurance was not obligated to cover the damages.