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Equipment Lessors and Bankruptcy

By Michael A. Brandess and Jonathan Friedland
July 01, 2017

Much has been written about the risk that a transaction denominated and documented as an equipment “lease” may be recharacterized a security interest. Indeed, it is old hat that UCC 1-203 is the basis of the analytical framework for determining whether an ostensible lease is actually a disguised security device. And, it is well understood that if the agreement at issue places the benefits and burdens of asset ownership on the so-called lessee, then a reviewing court will treat the transaction as a security interest and will treat the parties as secured lender and debtor, rather than as lessor and lessee. The result of such recharacterization can cause a lot of pain to the would-be lessor, unless that party made a prophylactic filing to comply with Article 9's perfection rules.

Equipment lessors seem, at least in our experience, to understand all of this. Consequently, they tend to make the requisite filing and when an oversight occurs, they tend to understand the consequences of that oversight. Interestingly, equipment lessors commonly seem to not understand all of the rights and remedies they have in the absence of recharacterization.

So, what's a true equipment lessor to do in the face of the Chapter 11 of its lessee?

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