Features

Highlights of the latest equipment leasing news from around the country.

Features

As described last month, the lease is the second element of the tripartite lease transaction. (The tripartite transaction in question consists of two elements and three parties: the first element involves the transfer of equipment from a supplier to a finance lessor, and the second element consists of the lease of such equipment from the finance lessor to the lessee with a supplier support guarantee.) The hidden recharacterization risk is embedded in the first element, that is the transfer of title of the equipment from the supplier to the finance lessor. Depending upon the nature and extent of a supplier guarantee that may be required to support the lease in these tripartite transactions, this transfer may be considered by a reviewing court as a loan instead of a sale.

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Many firms take on the quest for a lease partner without first conducting a careful review at this very important starting point. Who you will work with on your lease project is critical and crucial to the success of your lease.

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Last month's article discussed the effect that FASB Interpretation No. 46 will have on leasing and other variable interest entities. This month, we continue our analysis of FIN 46 in relation to how and when to consolidate, who qualifies as a related party, what the impact will be on private companies and multi-lessor entitites, and the overall impact of FIN 46 on leasing transactions.

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Section 1110 of the Bankruptcy Code, 11 U.S.C. ' 1110, provides a special exemption from the automatic stay provisions of the Code, permitting a lessor to take possession of certain equipment 60 days after the lessee files for bankruptcy. This obtains unless the lessee's trustee performs the lessee's obligations, and cures all pre-bankruptcy defaults within the 60-day period. Lessors of aircraft are familiar with the myriad cases that have interpreted the application of Section 1110 to such equipment (see Section 1110(a)(3)(A)(i)).

Highlights of the latest equipment leasing news from around the country.

For the first time in at least 7 years, the equipment leasing industry has failed to recognize net portfolio growth for a calendar year, according to the Equipment Leasing Association's Quarterly Performance Indicators Report (PIR). Although the participants in the survey differ from year to year, it is not an encouraging sign that portfolio growth for the fourth quarter of 2002 decreased 1.7% from the same period in 2001. In line with the weak economic climate, disappointing results were also seen in employment and charge-offs, while new business ended the year up slightly after an otherwise down year.

To the unwary, Revised Article 9 of the Uniform Commercial Code may pose significant risks. The Article is intended to cover all transactions, <i>regardless of form</i>, that in economic substance create a security interest. Using this broad policy mandate, courts have frequently disregarded many different transaction forms that, on their face, were documented to appear to be outside the scope of Revised Article 9. When this occurs the party that is deemed a secured lender in the recharacterized transaction will face losing substantial rights &mdash; unless that party complied with Article 9's perfection rules, which typically require the filing of a financing statement.