DECEMBER 2007 ISSUE No. 72

Welcome to the December 2007 edition of
Business Leasing and Finance News

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FOUNDER'S NOTE
By David G. Mayer

Last Stretch

How did it get to be December so fast? If you’re my age, and I am not telling, you find that time seems to move even more rapidly. Although 2007 is drawing to an end, this year has been and continues to be punctuated with major news events affecting leasing and finance, not the least of which is the growing credit crunch spawned by the collapse of subprime mortgages.

This year would not be complete without saying thank you to each and every one of you. Thank you for reading BLFN and for sending it to others to read individual articles or the entire publication.

BLFN has taken on a life of its own. It is read in about 35 countries and the subscriber base increases every month. Thank you for your feedback, contributions and subscription to BLFN.

BLFN has covered many topics this year under our theme of providing “leasing and financing strategies for your success.” We look forward to next year and bringing more interesting information to you. But, for the moment, you are probably focused, as I am, on making your numbers for 2007. You realize the importance of finishing off a strong year in 2007 even though you may worry, as I do, that we will face a slowing economy in 2008. We will plan for next year, next year.

For now, good luck with your year-end push. Happy Holidays and see you again in 2008, when we start our 6th consecutive year of publishing BLFN, our 73rd monthly issue in a row.

1. As Solar Energy Heats Up, Leasing Options Shine

Development of solar power is getting red hot in the market place. As with other emerging industries, financing plays a critical role in the development of solar power. Once the exclusive province of venture capital, more developers increasingly rely on conventional financing and leasing.

Lenders and lessors have been encouraged by:

1. continuing policy focus of alternative energy,

2. falling prices of solar energy production,

3. expanding concern of global warming,

4. increasing oil prices, and

5. decreasing technology risk associated with solar energy projects.

These financiers clearly see a rapidly growing industry that offers them the potential to make money on solar projects of all sizes. While early solar project development has largely occurred in Europe and Japan, the United States market is now poised for rapid growth. Further, as solar energy production approaches “grid parity,” industry expects solar projects to enter the mainstream of electrical energy production and compete effectively for enormous energy revenues produced by our growing thirst for energy resources.

*Term to Know: Considered one of the most important economic aspects of solar energy, “Grid Parity” refers to a reduction in cost to generate solar energy to a level that is no more costly than to buy electrical energy at retail from existing energy resources. That energy cost varies from approximately 11¢ - 22¢ per kilowatt hour (KWh). See The Future’s So Bright, I Gotta Wear Shades, Fortune at 163 (Oct. 15, 2007).

Market Growth for “Green Energy”

“Green Energy” is an increasing popular phrase in this new era in which we must discern and address the impact of global warming. It includes four technologies: Solar, wind power, biofuels and fuel cells. Annual revenues for these energy resources grew about 39 percent from 2005 to 2006 – $40 billion to $55 billion. One forecast projects growth in these sectors to reach $226 billion by 2016. Some experts project solar energy will increase in annual revenue from $15.6 billion in 2006 to $69.3 billion in 2016. See Clean Energy Trends 2007, By Clear Edge, Inc. at 1 (2007).

These figures find support in already proposed projects. California holds the lead but solar energy is (or soon will be) evident in other policy-friendly states including New Jersey, Florida, New Mexico, Nevada, Arizona, Colorado and Texas. Developers in these states have proposed a total of 3,524 megawatts (MW) in solar electrical energy projects. In addition, developers have proposed 44 projects in the California “Independent System Operators” interconnection queue as of mid‑September 2007, representing 17,393 MW.

Several bright spots in California have occurred over the last several years with all three major California utilities signing long-term contracts for large-scale solar power projects. Most recently, in July 2007, Pacific Gas and Electric Company signed a 25‑year power purchase agreement (PPA) to buy the output from a “utility scale” project of 553 MW, located in the Mojave Desert. Developers expect to bring numerous other projects to market in the next few years, mostly in the previously mentioned states. See Solar power heats up, fuel by prospects of utility‑scale projects, Platts at 1, Global Power Report (Nov. 1, 2007) (GPR).

Fundamental Drivers for Solar Energy

Three fundamental factors will drive the potential success of solar energy: public policy (including tax incentives), technology and finance.

Public Policy

Policy incentives exist at the federal and state levels. Policy objectives include the reduction of dependence on foreign oil, mitigation of global warming and improvement of environmental health through reduction of carbon emissions, noise and other pollutants. These incentives are critical for solar energy to compete and flourish in energy markets in the future.

Now through 2008 the federal government provides a solar investment tax credit under Section 48 (ITC) of the Internal Revenue Code of 1986, as amended (IRC), together with depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) under Section 168 of the IRC. Congress is currently considering legislation that would extend existing tax benefits that would encourage continued growth in the industry, but some doubt lingers whether the ITC for solar will survive its 2008 expiration date.

*Technical Point: Under MACRS, businesses can recover investments in certain property through depreciation deductions. For solar, property placed in service after 1986 is classified as 5-year property, which means the cost of the project may be deducted from taxable income over a period of five years (six tax years). See Federal Incentives for Renewable Energy, www.dsire.org (Dec. 16, 2006).

States offer various incentives or programs including property tax exemptions or special assessments to encourage the use of solar power. Twenty-five states have adopted renewable portfolio standards (RPS). Twelve states, including New York, New Jersey, Pennsylvania, Maryland, Delaware and Washington, D.C. have established minimum solar targets or customer-sited real estate requirements. See www.dsireusa.org (Sept. 2007). See GPR at 6.

*Term to Know: According to the Department of Energy, the renewable portfolio standards (RPS) is a policy that obligates each retail seller of electricity to include in its resource portfolio (the resources procured by the retail seller to supply its retail customers) a certain amount of electricity from renewable energy resources, such as wind and solar energy. The retailer can satisfy this obligation by either (a) owning a renewable energy facility and producing its own power, or (b) purchasing renewable electricity from someone else's facility.

Currently RPS is only required in a limited number of states, but not on the federal level. A growing number of these states are adding or planning a required specific solar component to their RSP. A federal RPS is under discussion in Washington but faces implementation challenges across the U.S. because renewable resources are not equally available from state to state.

Technology

Solar technology has advanced significantly in efficiency and predictability. However, developers and manufacturers make competing claims as to which technology is the best or best suited for a project. Predictability of energy production, and energy production matching daytime peak energy demand, are often cited as the main reasons for solar to be favored as a technology over wind power. Wind is intermittent and arguably less predictable. However, in most states of the Southwestern U.S. such as Arizona, New Mexico and Texas, the sun shines predictably most days of each year.

Solar technology is divided into two major categories: concentrating solar power (CSP) and photovoltaic (PV). All CSP technology is utility scale and more capital intensive than PV. CSP is designed to capture the sun’s energy (solar radiation) creating high-temperature heat using various mirror technology. The heat is then used to turn a steam turbine thus creating electricity. All CSP uses hydraulic engines to cause mirrors to track the sun. CSP is divided into three major mirror technologies:

1. Trough – a trough, which may, for example, appear in a “U” shape (a solar parabolic trough) that has a pipe in the trough which is filled with liquid and is heated to create thermal energy to turn a turbine and produce electricity;
   

2. Dish – like a radar dish, which directs the sun to an engine which heats fluid to turn a turbine which creates energy; and
   

3. Tower – a tower of mirrors which focuses the sun’s rays on fluid. The fluid heats to a level which, through heat exchange, turns a turbine to create electricity. A compact linear “fresnel” reflector is a variation of trough technology. It concentrates the sun using mirrors arrayed in a trough at a pipe elevated above the trough, to capture energy and turn an engine.

CSP is going through a revival since its early development in the 1980s with three solar CSP projects constructed in the Spain and the US in 2007, and another four under construction in Spain.

*Insight Point: To date, trough technology has been the most frequently constructed and has been the only CSP-type technology financed to date. Tower and dish type projects remain in a prototype stages.

Factors of importance to financing and development of CSP solar projects include:

• efficiency of the technology (a measure of the sun’s input to electricity output where about 20 is considered a good ratio using current technology);

• low parasitic load (power needed to operate system drawn from system output);

• operability (which technology is most appropriate for project specific needs); and

• location for the use of total sunlight. Note: CSP requires direct radiant sunlight.

*Insight Point: For lenders and lessors, the focus is to find the proven technology that will deliver energy as assumed in their performance projections.

The photovoltaic device uses silicon sheets to absorb the sun and convert the sun’s rays to electricity. PV tends to be used in home and commercial/business applications such as rooftop solar projects for big-box retail shops, office buildings, entertainment complexes and distribution centers. However, some utility-scale PV projects of 3MW or greater are actively in the planning stages and should attract third-party financing.

Finance

The third fundamental element is finance. As projects have grown in size to “utility scale,” more traditional leasing and financing has been or is expected to become available to finance solar products. As a result, exclusive financing by venture capitalists has begun to give way to financing by hedge funds, banks and equity funds, which understand the enormous profit potential of solar power.

Among the financing options, leasing has begun to play a prominent role in financing of solar equipment. Leasing can offer 100 percent financing and a shift of depreciation and ITC to the lessor which may have the more efficient use of these tax benefits resulting in lower rents for the lessee. On the other hand, lending, another financing option, requires substantial equity investment or down payment on solar assets. Leasing has other advantages. As projects expand to utility scale, project finance becomes a viable approach, provided a multi-year off-take contract exists that is acceptable to lenders or lessors.

*Term to Know: An “off-take contract” generally refers to a power purchase agreement (PPA), an agreement by a utility or corporation to buy the output of the solar (or other power) project on a multi-year basis, typically for tenors of 10 to 20 years.

To capture more traditional project financing, a reliable fixed price component is essential to pay debt service or lease payments. Utilities enter the PPAs in many cases to satisfy RPS requirements or simply to meet other corporate goals or objectives for deployment of renewable or “green” energy.

Leases of utility-scale projects may merge with project finance concepts by offering a leveraged lease of a large-utility-size solar project (or perhaps smaller projects).

*Term to Know: A “leveraged lease” is an arrangement with three participants: (1) “tax equity” (which typically invests 15 percent to 40 percent in a project or solar facility), (2) lenders to tax equity (which provide the balance of the purchase price in debt of up to 85 percent of project cost) and (3) the lessee (the user of the solar facility and pays rent to the lessor). The lessee enters into the PPA to generate revenue for its rent payments.

The lessee enters into the PPA and assigns its revenues to the lessor (tax equity), which, in turn, assigns it to the lender until the debt is paid in full. The excess, if any, of PPA revenue is used to pay the tax equity a return on its investment. For projects smaller than utility scale, a “single source” lease, including a lessor and lessee only or even a leverage leasing, may be used to finance the project. Even the single source lease can be “back leveraged” by acquiring a loan collateralized by the rent payments. The back leverage may be obtained by finding a willing lender that will finance the rent stream at or shortly after the closing of the lease.

*Technical Point: Leveraged lease documents may contain debt/equity provisions that include “equity squeeze” protection in the event of non-payment by the lessee and cure rights in favor of the equity owner for a limited period of time. The squeeze protection allows the tax equity to pay the rent or take other actions to prevent the debt from foreclosing on a project and thus avoiding tax benefit recapture and loss of the equity by debt actions.

Financiers (lessors and lenders) generally tend to be risk averse, in contrast to the higher risk takers represented by venture capitalists, angel investors and some hedge funds. Accordingly, the financiers closely examine factors that could interfere with getting paid, including the following:

• Loss of policy incentives, such as the expiration of federal investment tax credit;

• Increase in financing costs which consume too much PPA revenue;

• Acceptance of an operations and maintenance strategy;

• Failure of solar technology to provide projected output;

• Lack of a project’s close proximity to the electrical grid; and

• Absence of low costs materials, such as silicon, used to produce solar panels.

Insight Point: Financiers will be less concerned with environmental policy benefits than continued tax benefits, a strong PPA, good location of the project relative to the electrical grid, reliable technology, predictable solar efficiency, solid legal structure and high probability of being paid on time.

Trends

How does all of the energy behind solar power stack up against other energy resources in the near-term? The future is bright, and the following trends should be evident in the next few years:

• Larger players will replace small developers just as occurred in cogeneration in the 1980s;

• Vertical integration of the supply and development chain, as evidenced by the recent consolidation of several suppliers (PV manufacturers), developers and solar constructors;

• Project scale will expand from home and commercial to utility scale;

• More financial players will join venture capital as financial resources in the development of solar power;

• More projects should be approved by regulators;

• RPS programs will encourage development;

• Tax benefits will continue at least through 2008, encouraging development as a policy matter; and

• California, Nevada, Florida, Arizona, New Jersey, Colorado, New Mexico and Texas will continue to be the leading states for development of solar power.

Consequently, the future of solar power seems to be heading in the direction of substantial development and contribution to worldwide energy resources.

Conclusion

Solar energy projects have been growing rapidly during the last several years in the United States, Europe and Japan. The next few years should be even better as financiers expand their involvement in the solar market. Production costs of solar power should continue to drop as development increases. The continuation of policy incentives should encourage development although some doubt exists about the renewal of the U.S. investment tax credit. Solar energy may not yet have hit prime time globally, but its economic promise, favorable environmental benefits and attraction for financiers make its growth and contributions to energy resources almost as certain as the rising sun.

Thanks to Michael Midden of Dexia Credit Local, George Schutzer of the Patton Boggs Tax Group and Jeff Turner of the Patton Boggs Energy and Natural Resources Policy Group for editing this article.

 

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2. Owners of Fractional Shares in LLCs Face Possible Enforcement Actions by the FAA

It is a common practice for a buyer of a fractional interest in an aircraft to place that fractional interest in a single purpose limited liability company (LLC). As this practice developed, the owners often do so knowing that the structure may violate an arcane federal regulation under the Federal Aviation Regulations (FARs). Without fear of enforcement by the Federal Aviation Administration (FAA), the violations have continued without apparent concern by the owners or their counsel—a mistake that could be costly.

Owners of LLCs form them primarily to:

• protect themselves and perhaps their other companies from liability; and
  

• achieve confidentiality by not disclosing the real owner’s name and contact information.

Despite these efforts, a fractional aircraft owner who creates a single purpose LLC to own a fractional interest runs several risks. Why? Owners may violate an important, yet little known and less than understood provision of the FARs, creating the potential for liability as the owner of a fractional share in an aircraft.

Under certain circumstances, section 14. C.F.R. 91.501 of the FARs allow a company such as an LLC, which owns and operates an aircraft, to receive payment for certain ownership and operating costs without being required to obtain an FAA on-demand air carrier certificate. Section 91.501 applies to large airplanes (12,500 pounds Maximum Certificated Take Off Weight), multi-engine turbojets and for members of the National Business Aviation Association (and others who obtain an exemption), small turboprops and helicopters.

*Term to Know: A direct air carrier certificate refers to a person who provides or offers to provide air transportation and who has control over the operational functions performed in providing that transportation. See 14 C.F.R. 119.1 and 119.3.

Section 91.501 Exemptions to Air Carrier Certification

Section 91.501 enumerates ten types of operations exempt from certification – so long as there is no holding out (offer of carriage on an aircraft) and no receipt of a profit – such as time-sharing, interchange agreements, and demonstration flights. The intra-corporate family or affiliated group exemption, section 91.501(b)(5), allows a company to carry its officials, employees, and guests, or those of a parent or subsidiary or affiliate, when the carriage is within the scope of, and incidental to, the company’s business and the compensation does not exceed the costs of owning, operating, and maintaining the airplane. Further, no charge of any kind may be made for the carriage of the guest of a company when the carriage is not within the scope of, and incidental to, the business of the company.”

To understand the regulatory problem, it is important to parse the two key phrases in this exception. First, the transportation must be conducted for company purposes. Personal travel would not qualify. Second, the transportation of the company’s officers, employees, and guests must be incidental to the company’s business. Here lies the problem: a single purpose LLC that receives payment for the costs of transportation from the parent, a subsidiary, affiliate or any other person, falls outside of the exception. The FAA would conclude that the business of the LLC is air transportation, and thus any operation for which a charge is made is a commercial operation requiring an air carrier certificate. Without a certificate, the operation will be treated as one for hire and will violate the FARs.

Traps for LLC Owners

One of the key elements on which to focus is this: The FAA construes the concept of “charge” or payment very broadly. It covers the payment for the transportation, the reimbursement of any costs of owning or operating the aircraft, and the purchase price of the aircraft or even initial capitalization of a LLC. In the case of capitalization of the LLC, the “free” transportation is seen as the consideration for the funds used to capitalize the LLC or purchase price for travel. Any funding of an LLC holding only an aircraft, regardless of when the funding is provided, will be deemed to be compensation for air transportation.

*Technical Point: When the FAA finally published its fractional program rules, it amended section 91.501 to add fractional ownership as another exception permitting payment of certain costs. However, that exception covers only those operations as identified in the other exceptions. It states in part: “Any operation identified in paragraphs (b)(1) through (b)(9) of this section . . ..”

A fractional owner LLC may receive payment for the costs of operating that aircraft only if the transportation is incidental to the business of the LLC. If the only asset in the LLC is the aircraft, air transportation is the LLC’s business!

*Insight Point: The regulations do not define the term “incidental.” An aircraft placed in an LLC that has a pre-existing and substantial business will likely pass muster, even if the value of the aircraft is greater than the other assets of the business. However, placing another asset or a portion of an existing bona fide business in the LLC may or may not be enough to make the use of the aircraft incidental to the LLC’s business.

Personal Use Exemption

A separate exception is provided for flights conducted “by the operator of an airplane for his personal transportation, or the transportation of guests when no charge, assessment, or fee is made for the transportation. See 14 C.F.R. 91.501(b)(4) (cited below as 91.501). In a written interpretation provided earlier this year, the FAA determined that this exception cannot be used by a flight department of a company, whether or not it is a single purpose entity.

The FAA considered a scenario in which a U.S. citizen desired to form an LLC for the purpose of owning and operating an aircraft. The owner would make contributions to the LLC in the amounts needed to pay the costs of owning and operating the aircraft solely for the transportation of the owner, his family members and guests for personal purposes. This fact pattern is similar to a fractional owner who sets up an LLC for sole purpose of holding the aircraft. The FAA concluded that a company whose sole purpose is transportation by air and receives compensation must obtain an air carrier certificate.

Potentially Severe Penalties and Risks to Aircraft and Its Owner

The FAA also has statutory authority to seize an aircraft in security of civil penalty, without notice or hearing and even before liability has been adjudicated. See 49 U.S.C. 46304. The constitutionality of that summary authority was upheld in Aircrane, Inc. v. Butterfield, 369 F. Supp. 598 (E.D. Pa. 1974) (three-judge court).

*Warning: A fractional owner caught by the FAA operating an aircraft through a single purpose LLC faces civil penalty exposure of up to $25,000 per violation.

The FAA may seek a civil penalty from the aircraft owner in rem, which makes the aircraft subject to a lien for the civil penalty. The FAA sought in rem civil penalties against aircraft used by Platinum and AlphaJet arising out of its investigation of the February 2005 Challenger crash at Teterboro.

*Insight Point: Except in egregious cases, however, the FAA is unlikely to resort to seizure, when a civil penalty or cease and desist order will accomplish its purposes. Whether the FAA would pursue the pilot and seek certificate action might depend on the pilot’s knowledge of the arrangement – and of the FAA’s interpretation of the rules. Whatever protection a fractional owner believes he or she received from placing the aircraft in a single purpose LLC may in fact be illusory. Should a passenger be injured, the violation of the FARs may assist a plaintiff in establishing negligence per se. Depending on state law, the plaintiff may be able to pierce the corporate veil and sue the person who set up the LLC.

Perhaps more importantly, an insurance carrier may disclaim liability coverage due to the violation. Fractional owners who have put their aircraft in a single purpose LLC should examine their insurance coverage. The policy may be limited to operations under Part 91 (including fractional operations under Subpart K of Part 91). It might not, however, cover commercial operations. So a finding by the FAA that the operation was commercial may result in a denial of insurance coverage.

How does a fractional owner avoid this trap? Obtaining a Part 135 certificate is not an attractive option. Certification costs time and money, subjects the company to tighter safety standards, and raises tax and insurance issues.

*Tip: As a fractional owner, you can also place the aircraft in an existing subsidiary or affiliate if that company has as its business something other than air transportation. As a fractional owner, one of the simplest methods to avoid this risk is to make the election under Subpart K to fly under Part 135.

Regulatory Solution

There is of course a regulatory solution. The Aviation Rulemaking Committee (ARC), an FAA advisory committee, submitted a proposal to the FAA well over a year ago. ARC Recommendation 41 would allow a wholly-owned or super-majority-owned (75%) affiliated flight department to receive reimbursement from a parent company, and would also allow reimbursement in other wholly-owned and super-majority situations. This proposal, if promulgated, would solve the regulatory problem now facing fractional and other owners.

If the FAA agrees, it will publish a proposal rule. There is good reason to change the rules. The LLC concept was unknown at the time section 91.501 was originally promulgated in 1972, yet today it is frequently used by businesses and individuals to own and operate assets. Indeed, the FAA agrees in principle with this proposal:

The FAA has also held that a subsidiary corporation may not lease an aircraft with crew to its parent corporation, even though the actual operating expenses of the flight are the only charges made. With the growth of the conglomerates and the use of various legal artifices to provide transportation for compensation this policy is becoming increasingly difficult to apply. Safety wise, neither the relationship of the corporations nor the type of compensation received for the services rendered should be relevant or controlling for such operations.

Unfortunately, this quote is taken from the preamble to the proposed rule to add section 91.501, published in October 1971. Without a push from Congress or the Administration, the regulatory solution is probably more than a year away (if not longer). For fractional owners, the approach must be one of awareness of regulatory risk, proper structuring of owning fractional shares and support for change in the regulations. Without change, the regulations will continue to leave fractional owners at risk of enforcement by the FAA.

Thanks to Greg Walden of the Aviation Team and Transportation and Infrastructure Group at Patton Boggs for contributing this article.

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3. BLFN’s Case & Comment: Fixing Lapsed Financing Statements – In re Aliquippa Machine

As a lender, finding out that you failed to keep a security interest perfected can send chills down your back. Although as to the debtor you may retain a properly granted security interest, other holders of liens may gain priority over your security interest after the lapse of a financing statement you filed to perfect your security interest. See Uniform Commercial Code (UCC) Section 9-201(a)(39). This situation occurred in In re Aliquippa Machine Co., 343 B.R. 145, 59 UCC Rep Serv 2d 773 (Bankr. W.D. Pa. 2006). In this case, the debtor argued that the creditor could not remedy the lapse by making a second filing. In effect, the debtor wanted to leave the lender in the lurch – unable to correct an unintended lapse of a normal filing of a financing statement.

BACKGROUND: A financing statement has the function of perfecting an enforceable security interest under UCC Section 9-203. The “perfection” usually lasts five years under UCC Section 9-515(a). At the end of the five-year period, the financing statement lapses, but can be amended and extended for additional five-year periods under Section 9-515(e). If perfection ends, the security interest remains enforceable, but the security interest becomes subordinate to perfected security interests. In this case, that is exactly what happened. The financing statement lapsed but the security interest remained effective, and Bank One re-filed to correct the lapse, as described below.

FACTS OF CASE: This case arose in a Chapter 7 bankruptcy proceeding of the debtor. Bank One entered into a secured loan agreement with the debtor and properly perfected its security interest by filing a financing statement. After the expiration of the initial financing statement, its financing statement lapsed. Almost a year later, Bank One discovered the lapse and filed a new financing statement. As described by the court, the loan agreement expressly stated that Bank One could take actions to file financing statements:

[The] Debtor (a) “irrevocably appoint[ed] Lender [(i.e., Bank One)] as its attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in th[ese Security] Agreement[s],” and (b) agreed that “the Lender [(i.e., Bank One)] may at any time, and without further authorization from Grantor [(i.e., the Debtor)], file a carbon, photographic or other reproduction of any financing statement or of th[ese Security] Agreement[s] for use as a financing statement.” See p. 4.

During the gap period from lapse to re-filing, two government entities filed liens. Bank One admitted that these liens could have priority over its security interest lien, but argued that it could reperfect by filing another financing statement. The debtor argued it could not reperfect because the second filing did not represent an initial filing as permitted by the UCC and in any event debtor only authorized the first filing of a financing statement.

ISSUE: Was Bank One entitled and authorized by the debtor to reperfect its security interest in the debtor’s assets by filing a new (second) financing statement?

OUTCOME: Yes. Bank One was entitled and authorized to reperfect its security interest and did so correctly as permitted by the UCC.

LAW OF CASE: Under prior UCC 9-402(1), in effect at the time of the original loan transaction, the financing statement had to be signed by the debtor. Under Section 9-402(2)(c), a secured party could sign in place of the debtor when a financing statement lapsed. The debtor also specifically authorized in the loan documentation for Bank One to sign financing statements on its behalf. When revised Article 9 became effective, the drafters eliminated the requirement for the signature of the debtor. Under Revised Section 9-509(b), the UCC provides that “[b]y authenticating or becoming bound as debtor by a security agreement, a debtor… authorizes the filing of an initial financing statement.” The filing by Bank One constituted an initial filing (a new second filing) and was authorized by the comprehensive language permitting Bank One to act for the debtor in regard to filing financing statements.

*Comment: It is clearly undesirable to allow a financing statement to lapse while a secured transaction remains in effect. In any event, a secured party should include, in its loan documents, provisions clearly authorizing the secured party to file and re-file financing statements to avoid disputes like this one. In the end, the debtor advanced hyper-technical arguments in the face of clear rights of Bank One to reperfect its security interest. Although arguably a waste of resources for both parties, the case sends up warning signals about the importance of keeping financing statements in effect throughout the term of a secured transaction.

Thanks to Ken Vesledahl of the Patton Boggs Corporate Finance Group for editing this article.

 

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4. BLFN’S Finance 101: What Is a “Guaranty”?

A “guaranty” is an agreement by one party in favor of another party to accept responsibility for, or pay the debt or obligation of, another person or entity that is the primarily liable party. For example, a sister or parent company could guaranty the obligations of a subsidiary to repay a loan or to pay rent for equipment under a lease.

A guaranty is not a “guarantee.” A guarantee is a pledge to do something such as an assurance to complete a project: We guarantee the power point will be completed by next Tuesday.”

As an example, a typical guaranty has language like this for a lease:

The Guarantor absolutely, unconditionally and irrevocably guarantees, as a primary obligor and not merely as a surety, the due and punctual payment by the Lessee of any and all amounts owed to Lessor (including, without limitation, all Rental Payments, and any Casualty Loss Values, termination values, late payment interest, premiums (if any), indemnities, fees and expenses), and the due and punctual performance of all covenants, agreements, obligations and liabilities of the Lessee, under or pursuant to the Lease Documents (as defined in the Lease) to which Lessee is a party and any and all other instruments and agreements executed and delivered by Lessee in connection herewith and therewith (collectively, the “Transaction Documents”). All obligations of the Lessee guaranteed by the Guarantor in this Section 1 shall be individually referred to as an “Obligation” and collectively as the “Obligations.” The Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of an Obligation.

A guarantor is a surety, a back-up party, but note that this guaranty makes the guarantor “as a primary obligor and not merely as a surety,” which is typical of strong guaranties. What this means is that, despite the surety or back-up status, a lender or lessor could look to the guarantor first to pay the obligation of the guaranteed person or entity.

*Warning: Do not attempt to draft a guaranty without the assistance of knowledgeable counsel, as many pitfalls exist that may cause all or part of the guaranty to be unenforceable.

Thanks to Ken Vesledahl of the Patton Boggs Corporate Finance Group for editing this article.

 

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About Patton Boggs LLP; Publications

About Patton Boggs LLP

Patton Boggs LLP is a law firm of more than 600 attorneys and other professionals located throughout the United States and internationally in Doha, Qatar.

Patton Boggs has major practice areas in Business, Intellectual Property, Public Policy, and Litigation. These areas are composed of many practice groups designed specifically to meet client needs and the trends in developing legal markets. David G. Mayer often focuses on aviation, power, transportation, infrastructure, and technology matters.

The firm provides a broad array of skills in domestic and international business transactions, including equipment finance and leasing, corporate finance, secured transactions, syndications, mezzanine finance, federal leasing, project finance, real estate, health care, pharmaceuticals, technology transactions, and public policy work.

Publications

The following list offers a partial list of articles by David G. Mayer:

• Navigating the New Reality of Equipment Leasing and CERCLA Liability, by Russell V. Randle and David G. Mayer, LNJ Leasing Newsletter (Two Parts: Nov. & Dec. 2007).
  
  
• Managed Service Providers Use Innovative Capital Structures to Fund CAPEX, Financier Worldwide, by David G. Mayer (May 2007).
  
  
• The USA PATRIOT Act Renewed: Reassessing Money Laundering Risk in Finance Transactions, by Stephen J. McHale and David G. Mayer, LNJ Leasing Newsletter (Two Parts: Nov. & Dec. 2006).
  
  
• Unique Pad Gas Lease Supports Project Financing and Development of Gas Storage Facility in U.S., by David G. Mayer (with Fortis Capital Corp.), Asset-Based Lending Review, Financier Worldwide (Nov. 2006).

 

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Thanks to BLFN’s Team

I would like to thank BLFN’s team at Patton Boggs LLP. The team includes Bryon Wilems, an associate in the firm’s business transactions group; the Patton Boggs staff editor, Paul Dumansky; our Marketing Manager, Mark Holub; our Project Manager, Melissa Green; and our designer, Winston Jackson. Thanks also to Douglas C. Boggs, a Business Group/Securities partner and web site reviewer for BLFN, and our Marketing Chief, Mary Kimber, for assisting BLFN through our firm’s editing, design, and posting process.

All the best,

David

David G. Mayer
Founder: Business Leasing and Finance News
(formerly Business Leasing News)
Partner: Patton Boggs LLP
2001 Ross Avenue
Suite 3000
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