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Perfecting Lease Payment Streams
In August 2006, the U.S. Bankruptcy Appellate panel of the Ninth Circuit Court of Appeals (the 'panel') decided In re Commercial Money Center, 2006 Bankr. LEXIS 1080, *11 (9th Cir. 2006) ('CMC'). The panel held that payment streams stripped from equipment leases constituted payment intangibles under the Uniform Commercial Code (the 'UCC'). By thus expanding the collateral classification 'payment intangibles' under the UCC, this decision raised significant questions of law related to secured transactions and increased the risk associated with the securitization of lease payment streams.
More specifically, the decision in the CMC case is significant for two reasons: 1) by misconstruing an interest as either chattel paper or a payment intangible, it is now possible for a holder to unassumingly fail to perfect its interest in such chattel paper or payment intangible; and 2) it is now much easier for subsequent purchasers of securitized lease payment streams or of the associated chattel paper, or lenders taking a security interest therein, to fall victim to duplicate fraudulent transactions involving such payment streams or associated chattel paper. Since the prior sale of securitized lease payment streams which are classified as payment intangibles will be perfected automatically (without filing a UCC financing statement or taking possession of the underlying lease documents)there will be no notice to subsequent purchasers or lenders of such prior automatically perfected interests in the same lease payment stream. While attorneys, business professionals, and scholars discuss possible responses to these problems, it is up to legal practitioners to protect their clients in the interim. This article reviews the CMC case and its practical implications, provides an overview of some proposed amendments to the UCC with respect to such problems, and discusses suggestions of how to protect clients in the post-CMC environment.
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