Classifying the Right to Rental Payment Streams Stripped Off a Lease: An Examination of the Issues Not Discussed in Commercial Money Center*

Summary

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Assignee beware: those securitized payment streams stripped off equipment leases may have already been sold to another purchaser. These carry no assurance after the Bankruptcy Appellate Panel of the Ninth Circuit's recent holding that payment streams stripped off equipment leases are payment intangibles and not chattel paper. Classified as payment intangibles, assigned rental payment streams automatically perfect under Article 9 of the Uniform Commercial Code. This Note presents an in-depth examination of the proper classification of lease rental payment streams. The Commercial Money Center case impacts the growing securitization market, simplifying the perfection process for securitizations of lease rental payment streams. When this secured interest is combined with the monetary obligation of the lease rental payments and the existence of lease documents, the elements of chattel paper are met. Both the accounts and chattel-paper categories present viable options for the classification of lease rental payment streams.

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Classifying the Right to Rental Payment Streams Stripped Off a Lease: An Examination of the Issues Not Discussed in Commercial Money Center*

I. Introduction

Assignee beware: those securitized payment streams stripped off equipment leases may have already been sold to another purchaser. Take no comfort in the seller having the underlying lease documents in hand or in your diligent search for a notice filing. These carry no assurance after the Bankruptcy Appellate Panel (B.A.P.) of the Ninth Circuit's recent holding that payment streams stripped off equipment leases are payment intangibles and not chattel paper.1 Classified as payment intangibles, assigned rental payment streams automatically perfect under Article 9 of the Uniform Commercial Code (U.C.C.).2 As a result, the parties involved in typical lease-assignment transactions-where numerous lease rental payment streams are securitized or pooled into new marketable securities3-are excused from the administrative burden of perfecting by filing or possession. Vocal participants in the lease-securitization industry viewed this task of perfection as onerous and applauded the automatic-perfection outcome of the Commercial Money Center4 opinion.5

Although a victory for the lease-securitization industry, the Commercial Money Center opinion did not adequately consider the ostensible-ownership ramifications of classifying lease rental payment streams as automatically perfecting payment intangibles.6 Nor did the opinion undertake the necessary inquiry into the bundle of rights that the various classification categories represent within the Article 9 scheme-an analysis that would have revealed the error in classifying lease rental payment streams as payment intangibles. Instead, the Commercial Money Center opinion relied solely on the literal (and misapplied) language of the definition of chattel paper.7

In light of the opinion's circumscribed analysis and negative ostensibleownership ramifications, this Note presents an in-depth examination of the proper classification of lease rental payment streams. The analysis takes a rights-based approach and considers the putative classification categories of chattel paper, payment intangibles, and accounts (a category not considered in Commercial Money Center because it was not raised by either party at the trial level8). The definitions of these classification categories, as representative of sets of rights, along with the sets of rights transferred in transactions prototypical of the particular classification categories are used as benchmarks against which to compare the rights actually transferred in the assignment of lease rental payment streams. This analysis reveals that through the appropriate, but previously overlooked, application of the "collateral follows right to payment rule," the rights transferred in the assignment of lease rental payment streams match, in all functional respects, those transferred in the assignment of an entire lease-a classic chattel-paper transaction. Based primarily on this comparison, and augmented by a review of the Article 9 drafters' intentions in creating the alternatively considered classifications of payment intangibles and accounts, this Note concludes that chattel paper (or, as a second-best alternative...

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