Reforming Characteristics of Maintenance Deposits to Avoid Treatment as Cash Collateral

One of the common issues facing businessmen and lawyers in the lease financing of complicated equipment such as aircraft, is how to impose an obligation upon the lessee to pay and segregate funds sufficient to assure aircraft maintenance expenses, while preventing these funds from being treated as property of a debtor and cash collateral within the meaning of Bankruptcy Code Section 363 (11 U.S.C. '363). If a lessee is asked in a written lease agreement to deposit, from time to time, contemplated amounts of cash by which to assure the lessor that certain long-term maintenance obligations will be funded and completed, or that rent will be paid, then there is a risk that these deposits might be treated as cash collateral and property of the estate. This subjects the lessor to the risk that the bargained-for cash set-aside funds, might, in a bankruptcy case context, not be available for the purposes for which they were originally intended. This article addresses a risk avoidance approach to that problem.

26 minute read March 01, 2004 at 10:19 AM

By

Thatcher A. Stone and Paul H. Silverman