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In August 2006 the U.S. Bankruptcy Appellate Panel of the Ninth Circuit rendered a decision in a case titled In Re: Commercial Money Center, Inc. (Netbank, FSB v. Kipperman), U.S. Bankruptcy Appellate Panel of the Ninth Circuit, BAP No. SC-05-1238-MoTB; Bk.No. 02-09721-H7; Adv. No. 03-90331-H7, holding that payment streams stripped from equipment leases are payment intangibles, not chattel paper, and thereby overturning the bankruptcy court decision. Accordingly, the assignment of the payment streams could be automatically perfected under '9-309(3) of Revised Article 9. Additionally, the court agreed with the bankruptcy court and held that the transactions in this case were loans, not sales, so there was no automatic perfection. Finally, the court held that there were unresolved factual and legal issues as to whether the lender had perfected its security interest in the leases by taking possession through a third-party agent, and therefore remanded the case for further proceedings.
The facts are relatively straightforward. The debtor, Commercial Money Center, leased equipment to lessees with sub-prime credit and assigned its contractual rights to future lease payments to NetBank. As part of the transaction, the debtor obtained a surety bond guaranteeing the payments and assigned its rights under the surety bond to NetBank. In addition, the debtor granted to NetBank a security interest in the underlying leases and other property. Each transaction involved a Sale and Servicing Agreement ('SSA') among NetBank, the debtor, and the surety.
Language in the SSA pointed to both a sale and a loan. For example, in one section of the SSA, the parties stated that they intend each assignment and transfer to constitute a sale and assignment outright, and not for security. On the other hand, another section of the SSA indicated that the parties structured the transaction with the intention that it qualify as indebtedness of the debtor secured by the leases for tax purposes. The SSA appointed the surety as 'servicer' and the debtor as 'sub-servicer.' NetBank was under no obligation to pay any servicing fee. Regardless of the amounts collected under the leases, the surety/debtor were required to pay a fixed monthly amount to NetBank including a final payment of any remaining 'Principal Balance' and 'Interest.' If a lessee fell behind, the surety/debtor could call on the surety bond or make a 'Servicer Advance' to NetBank to cover the shortfall. When all 'Principal' and 'Interest' payments were made, the SSA provided for any residual assets to be transferred back to the debtor. The governing law was that of Nevada. However, the court recognized that there were no material differences between the Nevada UCC and the uniform versions of the relevant provisions.
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The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
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