Payment Streams Stripped From Equipment Leases Are "Payment Intangibles"
Question: Are payment streams stripped from bundled equipment leases chattel paper or "payment intangibles" eligible for automatic perfection?
Answer: Payment intangibles, according to the Bankruptcy Appellate Panel (Ninth Circuit) in In re Commercial Money Center, Inc., 06 C.D.O.S. 8391 (Aug. 25, 2006).
In this case, the bankruptcy Debtor had leased equipment to lessees with sub-prime credit, packaged groups of leases together, and assigned its rights to payment to various entities such as Net.Bank, Inc. Debtor also granted Net.Bank a security interest in the underlying leases.
When the Debtor filed bankruptcy, the trustee sought to avoid Net.Bank's security interest on the grounds that the payment streams were chattel paper. The bankruptcy court agreed and granted partial summary judgment for the trustee. The BAP reversed, holding that the payment streams were payment intangibles that were eligible for automatic perfection under UCC § 9-309(3). Resolving what it characterized as a question of first impression, the BAP held this conclusion followed from the plain meaning of the statute and not in conflict with the underlying statutory purpose.
However, the BAP noted that automatic perfection applied only if the transfer of payment streams was sale, not a security device; and it held that in this case, the transactions were not sales. It remanded to determine whether Net.Bank had nonetheless perfected its security interest by taking possession of the underlying leases through a third party agent.
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