Fatty casts form when lipids accumulate within renal tubular cells due to conditions that increase lipid filtration or reabsorption. These lipids are then incorporated into cellular debris that is secreted into the tubular lumen. The debris, in turn, becomes enmeshed in a Tamm-Horsfall protein matrix, which is secreted by renal tubular cells. This matrix solidifies to form the cast. The presence of fatty casts indicates that lipids are being filtered through damaged glomeruli and reabsorbed by renal tubular cells, leading to their appearance in the urine.