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Bankruptcy Commercial Law Creditors' and Debtors' Rights Litigation

Equipment Lessors and Bankruptcy

Much has been written about the risk that a transaction denominated and documented as an equipment "lease" may be recharacterized a security interest. Equipment lessors seem to understand. 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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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.

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