Equipment Financing Risks in Bankruptcy: Implications of Lease vs. Secured Transaction

Treatment of Equipment Leases in Bankruptcy and Recharacterization of Lease as a Sale

Recording of a 90-minute CLE webinar with Q&A

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Conducted on Tuesday, September 22, 2015

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Course Materials

This CLE course will examine the risks equipment lenders or lessors face following a borrower/lessee’s bankruptcy. The program will review the treatment of an equipment finance loan under the UCC and in bankruptcy as well as the treatment of an equipment lease in bankruptcy. The panel will discuss the risks for equipment lessors when the lease is challenged by the debtor and the transaction is recharacterized as a sale, including factors the courts will consider in determining whether a transaction is a sale or a lease.

Description

Seemingly simple equipment financing transactions may not be as straightforward for the lender/lessor when a borrower/lessee files for bankruptcy. The rights of the parties are wholly dependent on whether the transaction is a true lease or a secured transaction.

If the transaction is deemed a secured financing or a sale, rather than a true lease, then assuming the lender perfected a security interest in the collateral under Article 9 of the UCC, the lender is afforded important protections under the Bankruptcy Code and the UCC. If the transaction is a true lease, then the rights of both parties are governed by Section 365(d)(5) of the Bankruptcy Code and, as an executory contract, the debtor/lessee has the right to assume or reject the contract. The lessor is also afforded certain protections for its lease payments.

If the transaction is couched as a lease, however, the debtor may challenge the transaction arguing that the lease should be recharacterized as a financing transaction. If the lease is recharacterized and the lessor has not perfected its interest in the equipment, it will be an unsecured creditor.

Even if the lessor perfected a security interest, its secured interest may be limited to the actual value of the equipment, which may be less than what the lease payments were. The issue of what constitutes a true lease vs. a sale has been vigorously litigated in recent years. There are many factors that courts will consider in examining the transaction, generally focusing on the economic substance of the deal.

Listen as our authoritative panel of bankruptcy practitioners analyzes risks faced by equipment lenders or lessors in the event of the borrower/lessee’s bankruptcy. The panel will review a secured lender’s rights in bankruptcy under the UCC as well as how the Bankruptcy Code treats equipment leases as an executory contract. The panel will then discuss the risks facing an equipment lessor if the lease is challenged by the debtor and recharacterized as a sale, including factors courts consider in determining whether the transaction is a sale vs. a lease.

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Outline

  1. Overview of equipment financing: lease vs. sale
  2. Perfecting a security interest in equipment under UCC Article 9
    1. Secured lender’s rights in bankruptcy
  3. Treatment of equipment leases in bankruptcy
    1. Assumption vs. rejection of executory contracts
    2. Cure of defaults
    3. Protections for the lessor
  4. Recharacterization of an equipment lease as a financing transaction
    1. Factors courts will look at to determine the true nature of transaction
    2. Legal ramifications for the lender/lessor if the lease is recharacterized
    3. Best practices for lenders and lessors to protect their interest in the collateral

Benefits

The panel will review these and other key issues:

  • What are the lender’s rights under the UCC with respect to its security interest in the equipment in the event of the borrower’s bankruptcy?
  • What are the lessor’s and debtor/lessees’s rights in bankruptcy with respect to an equipment lease?
  • What are the pitfalls for an equipment lessor if the lease is recharacterized as a sale?
  • What factors will the bankruptcy court consider in determining whether the transaction is a lease or a financing?
  • What proactive measures can equipment lessors take to protect their interests in a subsequent bankruptcy proceeding?

Faculty

George K. Miller
George K. Miller
Partner
Mayer Brown

Mr. Miller is a member of the firm’s Global Projects, Infrastructure and Asset Finance Practices. He concentrates...  |  Read More

Craig M. Price
Craig M. Price
Partner
Chapman and Cutler

Mr. Price has represented large Chapter 11 debtors, various creditors’ and equity committees, hedge funds,...  |  Read More

Franklin H. Top, III
Franklin H. Top, III
Partner
Chapman and Cutler

Mr. Top is Co-Practice Group Leader of the firm’s Litigation, Bankruptcy and Restructuring Group. He has...  |  Read More

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