Thus, if a lease is properly terminated under its provisions or under state law, the lessor can pursue return of the equipment and prevent a bankrupt lessee from assuming the lease in bankruptcy. Unfortunately, terminating a lease prior to bankruptcy does not necessarily mean a bankrupt lessee has no interest in the leased equipment. Two situations can arise to cause the lessor difficulty. First, the lessee will likely have a possessory interest which will, at a minimum, require a lessor to seek relief from the Bankruptcy Code's automatic stay. Secondly, if the lease is not a true lease, but rather a financing or conditional sale agreement, then the lessee may assert an ownership interest in the equipment, thereby making it property of the estate.
State law governs whether a document is regarded as a true lease or purchase agreement.
As a general rule, payment of nominal consideration for the equipment upon expiration of a lease is indicative of purchase agreement rather than a true lease. Nominal consideration is a sum being so trifling so as to be consideration in name only. If the agreement is not a true lease, then the lessor's rights are the same as a secured lender assuming the lessor has a security interest in the equipment. Adequate protection includes the lessee making monthly post-petition payments and maintaining insurance and service for the equipment so its value is not at risk or diminished. A hearing on relief from the automatic stay is required within 30 days from filing the appropriate motion.