Welcome to the April 2008 edition of
Business Leasing and Finance News

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FOUNDER'S NOTE
By David G. Mayer

No Rules

Would you have predicted that, in a matter of 96 hours, the Federal Reserve, led by Chairman Bernanke, would toss a $29 billion life rope to Bear Stearns and arrange a sale of the Bear to JPMorgan Chase? That bold and atypical action shows that the Federal Reserve threw out the existing rules and took decisive action to prevent the collapse of an investment bank for the first time. The Federal Reserve recognized the serious consequences for of a bankruptcy of Bear Sterns. As a controversy brews over its actions, the Federal Reserve has argued that the failure of a large investment bank, such as the Bear, could destabilize the U.S. financial system and thereby hurt the U.S. economy.

Apart from the high-stakes, no-rules game played by the Fed, I must say that I am saddened by the Bear’s fate. From the time (many years ago) I was a young lawyer in New York, I watched the firm grow from an “also ran” to a powerhouse in the investment banking world. The recent disclosures show that, like so many institutions that profited from subprime mortgages, good things in this industry can, and in this case, did come to an abrupt end.

What has not come to an end is the troublesome condition of our economy. As Chairman Bernanke nearly said a short time ago, we could be entering a recession or a serious risk exists that we may soon do so. He, of course, can move markets by what he says and how he says it. But, if your perspective is like mine, the recession is clearly here, and, like the fate of the Bear, the robust market for growth and profitability seems, for now, to have come to an end.

At this point, all of us should know that we must work harder and smarter in this sluggish economy. We must scrutinize the types of deals we do, have done and will do. We must do a better job atmanaging risk and losses. We should try to apply lessons we can glean from the broken credit markets and the near-death experience of Bear Stearns. All of this effort, of course, sounds great, but as you know, it is easier said than done. Nonetheless, do we really have any choice but to meet these challenges? I think not if we are going to move through the recession and revive the ailing U.S. economy. Your efforts, however small, may be part of the solution; it certainly beats having an experience anything remotely like that of Bear Stearns.

Thanks for reading BLFN and good luck as you start the second quarter.

1. Texas Wind Energy Tops Market as Transmission Capacity Falls Short

Texas blew past California in 2006 to become the largest producer of wind power in the United States. With about 25 percent of the entire capacity of wind power in the U.S., Texas developers slate even larger projects in the next few years that will keep Texas in the lead. According to The New York Times: “After breakneck growth the last three years, Texas has reached the point that more than 3 percent of its electricity, enough to supply power to one million homes, comes from wind turbines.” See Move Over, Oil, There’s Money in Texas Wind, The New York Times (online) (Feb. 23, 2008) (Money in Texas Wind).

Despite this enormous growth and progress in building wind farms in Texas, the Lone Star State may not be able to deliver the power to consumers due to a lack of transmission lines and infrastructure. The situation creates a conundrum: If Texas developers build the wind energy, will the transmission lines exist to carry all the power to market? The State of Texas is taking steps to assure it will have the infrastructure to transmit wind power. See Texas Receives $10B Commitment to Wind Power; Pledges Needed Transmission Lines, Business Leasing and Finance News, by David G. Mayer (Nov. 2006).

Booming Development

In January alone, developers in Texas placed in service wind farms representing $700 million of investment, sufficient power for 100,000 homes. See Money in Texas Wind.

As of November 2007, Texas developers had placed in-service about 4,150-megawatts (MW) of installed wind generation capacity. Another 2,629-MW of prospective wind power generators have signed interconnection agreements.

The future of wind power development in Texas holds great promise. In July 2007, Shell WindEnergy Inc. and Luminant, a TXU Corp. subsidiary, announced a joint development arrangement to build a 3,000-MW wind project in the Texas Panhandle. In mid-March 2008, Tejas Transmission LLC, a subsidiary of Babcock and Brown announced its intent to establish a new utility business unit to construct, own and operate transmission facilities in Texas. In one of the most high-profile projects that may be developed, T. Boone Pickens has indicated that he will build a 4,000-MW wind farm in Pampa, Texas, valued at around $10 billion. If he completes all phases of the project, Pickens’ project will be the largest in the world. He believes that he can make money in this new venture and is working with consultants to plan the initial phases of the wind farm.

The Production Tax Credit (Section 45 of the Internal Revenue Code) (PTC) is generally viewed as an essential component of raising capital and generating acceptable returns on investment. The PTC lowers the cost of capital by providing a direct credit against federal income tax, which is viewed as essential to make wind projects economically viable. However, the credit expires at the end of this year. See As PTC Languishes in Congress, the Wind Power Industry Feels the Heat, By David G. Mayer with Amy Koch, Business Leasing and Finance News (March 2008).

*Action Point: For any stakeholder or professional involved in developing or financing wind power, the time is now to contact legislators to extend to PTC for a substantial period of time.

Transmission Limitations

Although wind energy has contributed a small fraction of the power requirements in the U.S., the importance of wind energy is becoming more widely recognized. It is generally viewed as an environmentally friendly way to replace fossil fuel used to produce electrical energy. However, the growth of the energy resource seems to be outstripping the capacity of transmission lines to carry the power to the grid and to markets that need the power. According to the Electrical Reliability Council of Texas, “more eye-popping growth in 2008 is expected to push generation past transmission capacity by 65% by year's end,” according to Bill Bojorquez, Vice President, System Planning at ERCOT. See Wind energy confronts shortage of transmission lines, USA Today (online) (Feb. 26, 2008).

*Term to Know: The Electric Reliability Council of Texas (ERCOT) manages the flow of electric power to approximately 20 million Texas customers – representing 85 percent of the state’s electric load and 75 percent of the Texas land area. As the independent system operator for the region, ERCOT schedules power on an electric grid that connects 38,000 miles of transmission lines and more than 500 generation units. ERCOT's members include consumers, cooperatives, independent generators, independent power marketers, retail electric providers, investor-owned electric utilities (transmission and distribution providers), and municipal-owned electric utilities. See also ERCOT Quick Facts.

ERCOT is currently studying the impact of increasing wind generation on its system. In 2008, ERCOT recognized that the system is insufficient to handle the electrical energy load:

ERCOT is expected to have over 4,500 MW of installed wind generation – approximately 7 percent of the peak demand forecast for 2008 – by the summer of 2008. At increasing levels of penetration, the impact of wind generation will affect the reliability of the ERCOT system.

The system planning division is currently tracking 197 active generation interconnection requests totaling over 85,000 MW, including more than 39,000 MW of wind generation, according to the October System Planning Report.

ERCOT has said that it needs more than 6,00 MW of bulk transmission capacity in the near term and is studying the impact of about 35,000 MW of additional wind energy production on the ERCOT transmission system. The transmission lines in West Texas, an active area of wind energy development, are already significantly congested. Adding bulk transmission capacity is problematic due to the distance and costs of installing transmission lines. See Nuts and Bolts and Connecting Projects to ERCOT, a presentation by Bill Bojorquez, Vice President, System Planning at ERCOT (Nov. 28, 2007).

ERCOT Planning For More Transmission and Generation

In 2005, the Texas Senate passed Senate Bill No. 20 (S.B. 20), which established a process for the Texas Public Utility Commission (PUCT) to pre-approve transmission for renewable energy projects, including wind power, through the designation of zones for development. S.B. 20 referred to these zones as Competitive Renewable Energy Zones (CREZs).

A portion of the future development of wind power is expected to occur in the locations nominated under the CREZ program. After ERCOT completed studies of wind development areas in late 2006, the PUCT, in October 2007, issued interim CREZ zone designations in five locations in the Texas Panhandle and in West Texas. The designations contemplated optimal transmission lines and financial commitments of developers to the CREZ concept and development of transmission infrastructure. On April 2, 2006, ERCOT submitted its CREZ transmission optimization study (CTO Study) to the PUCT. The PUCT's interim final order outlines four scenarios for building transmission from 10,000 MW to 22,806 MW, depending on cost and the number of wind farms that are built. On March 18, 2008, the PUCT issued an order to continue the CREZ rulemaking process and also to initiate a parallel process by ordering a settlement conference regarding the selection of transmission providers for the CREZ transmission facilities. The PUCT stated its goals are to “encourage new entrants and interject an element of competition into the Texas transmission market.” In each of these efforts, ERCOT and the PUCT makes strides toward the creation of a reliable transmission system with adequate capacity for all renewable energy facilities to be built in the coming years.

*Tip: To follow the developments of the CREZ initiative, you can sign up for a distribution list at http://lists.ercot.com. As a stakeholder in this initiative, you can participate in the CREZ Task Force, which is a subgroup of the Regional Planning Group (RPG). The RPG-CREZ facilitates discussion and gathers input and comments related to the study of transmission improvements to implement the CREZ scenarios ordered by the PUCT in the interim order in Docket 33672. Membership is open to all market participants, transmission and distribution service providers, PUCT staff and other stakeholders.

Complex Process – The Transmission Challenge

The process of building the needed transmission facilities to carry power to wind farms has taken years to formulate. See Analysis of Transmission Alternatives for Competitive Renewable Energy Zones in Texas. ERCOT System Planning (Dec. 2006). Texas has taken this aspect of developing renewable energy seriously. The ERCOT region is employing economic analysis in their planning processes to integrate new generation sources, while at the same time employing a cost allocation methodology to broadly assign the transmission improvement costs to system users instead of specific generator developers. See National Grid –US (Sept. 2006). The continuing efforts will require years of analysis, planning and investment by stakeholders to achieve the goals of providing capacity to transmit energy from renewable resources. To make this effort more challenging, the regulatory and technical aspects of building transmission lines are extremely complex and time consuming. Nevertheless, Texas appears to be in a great position to meet these challenges.

During the week of March 4, 2008, energy lawyers from Patton Boggs attended the Washington International Renewable Energy Conference held in Washington D.C. (WIREC2008). Patrick Wood, III, former Chairman of the Federal Energy Regulatory Commission (FERC), talked about what is going on in Texas from his perspective at Hunt Power. He stated that a robust power transmission grid and a regional energy market/pool to spill into or buy from is clearly needed for renewables. However, Mr. Wood stressed that the problem with building transmission infrastructure to serve renewables is “regulatory, NOT physical.” Having continuous grid expansions since 1999, a single regulator for rates and permitting, clear transmission rate recovery, bipartisan political commitment to robust renewable development, and open wholesale and retail markets have all served Texas well to develop its best wind resources, according to Mr. Wood.

As wind energy generation increases, the PUCT and ERCOT must continue to create the stable regulatory framework required to encourage the continued building of transmission lines necessary to carry the power from wind-rich areas to those who need it. And in Texas, future investment in transmission facilities appears bright. They must continue to address the significant regulatory aspects, together with the design, construction and operation of the lines. They must help to prove the economic case to justify the investment. If they fail to do so, the boom in wind energy generation may lead to a bust, especially for those like T. Boone Pickens who plan to make money in the emerging field of renewable energy.

Thanks to Amy Koch and Douglas Everette for editing this article.

2. Financiers Use Four Ways to Close Paperless Transactions

Go green! Improve efficiency, minimize errors, reduce administrative costs, and, of course, increase profitability of your deals. These are just a few of the benefits associated with going paperless. What is the true return on investment? How does a traditional, paper-intensive organization implement this lofty sounding project of eliminating paper?

*Term to Know: There are many ways that organizations define “going paperless” and over the past several years we have seen a gradual trend of eliminating paper most commonly by scanning the paper version of documents once they are fully executed.

Unfortunately, scanning transactions adds another step to an already burdensome and error-ridden paper process. There is a need for additional staff or devotion of current staff’s time to scan the many pages of the deal and then index and store them in a document management system. The day has come when an original document is never rendered to paper. The deal starts digital and stays digital.

The following four steps are a guideline to implementing paperless processes. It is also critical to gather the proper internal resources and create a “working group” of participants from legal, IT and operations. This working group should include any external funding sources involved in your current paper process. These are important stakeholders in creating the framework and understanding the requirements for a successful product launch.

These four steps are applicable to either hosted solutions or those deployed “behind the firewall."

Step One, Creation: Today, most leasing and financial services organizations create their contracts and supporting documentation through a loan origination system such as Lease Team’s “Sales Manager”, International Decision System’s “InfoLease” or a custom, proprietary product. The documents are created electronically and in most transactions forwarded to the clients and guarantors by courier or e-mail for printing and “blue ink” signatures. The components of eContracting (electronically signing and vaulting) can be integrated with your loan origination system. Integration is not required nor is a change to your current automated document generation process. An electronically originated Adobe .pdf document is necessary for eContracting.

Step Two, eSign (Adding eSignatures): Instead of e-mailing or sending documents by courier, the electronically created documents are generated as usual using your loan origination system and uploaded into a secure portal where the signing participants are invited by email to register and execute their documents. The signers execute electronically after authentication of each user and a final fully executed document is created. Each of the signatories and anyone denoted as a carbon copy recipient receives a notification when the document is finalized with all required signatures and provided with a link to view or print copies of the final, fully executed contract.

Step Three, Protect: The addition of electronic vaulting (“eVaulting” or “eVault”) for compliance and security.

*Term to Know: What is an eVault? Legislation establishes the necessity for financial institutions to manage, maintain, and protect electronically signed documents. eVaulting is a means to that end. In order for the validity of any electronic document to be upheld in a court of law, or for any electronic document to be sold or transferred to a new secured party, the financial institution must be able to show the documents under its control to be the legally binding “authoritative copies” – the electronic equivalent to the original negotiable paper promissory note under UETA, ESIGN and Section 9-105 of the Uniform Commercial Code. For example, there must be a unique copy of the eContract, which can be proven to be unaltered since the time of signing. To ensure that an electronic contract remains negotiable and legally enforceable, the eVault permanently binds the electronic signatures to the document and creates a tamper-evident audit trail demonstrating ownership (control) and compliance. In the paper world, possession of a negotiable instrument is ownership. In the electronic world, “control” of “eChattel” replaces the need for physical possession.

Step Four, Manage: This step requires the parties to control access, audit documentation and ensure the potential to buy and sellthe paper and the asset it covers. Once a transaction is closed, electronically depositing the papers into an eVault enables the parties to monitor compliance with the underlying agreements, enforce legal protection, and meet the often more stringent requirements for resale within the secondary market that arise in e-documentation transactions. An eVault manages the legally binding authoritative copy of an electronically signed contract or other documents in a secure location where it is held and transitioned during the entirety of its lifecycle.

An eVault can prove that the document in the institution’s possession is the original, unaltered document. As document interaction occurs throughout multiple stages along the electronic transaction lifecycle, the vault controls access and tracks all document activity from closing, through servicing, and finally to sale or payoff.

All activity is tracked including any and all access to the document and any copies made, by whom, and for what purposes. Movement is tracked as well. For instance, the audit trail includes any transfer of ownership or custody of the document and transfer of location.

Legal Enforceability of Electronically Created Documents

There are concrete steps Lessors and funding sources should be taking to protect the legal enforceability and negotiability of eContracts and other electronic loan documentation. One of them is eVaulting. Already widely used in other industries with similar business needs, including automotive finance and mortgage, eContracting affords financial institutions the necessary protections to securely manage eContracts and other electronically signed documents. The very same legal counsels and ratings agencies that support mortgage-backed securities have already established and accepted advanced eVaulting solutions as meeting all of their requirements for securitization purposes.

What Is the True Return on Investment -- “ROI”?

The ROI measurement of implementing a paperless process contains a vast array of cost savings. A true end-to-end paperless process will help eliminate the costly and inefficient byproducts of paper. which include…

• Long sales cycle – get the deal off the street faster;
• Courier charges – save your company or your client’s courier fees – customer benefit and a bottom line savings;
• Mistakes and omissions – customers, signers, guarantors no longer miss a signature, sign in the wrong place or lose documents forcing you to re-send;
• Elimination of costly long-term custodial storage for originals; and
• Streamline the closing crunch hours… signatures are applied and the deals are closed within minutes.

The Burden of Proof is Yours

The intent of e-commerce legislation was to establish that electronic signatures and records carry the same legal weight as their paper counterparts. Proving that an eContract is the original unaltered version and what has happened to it since its creation may come down to a question of the vaulting process.

Thanks to Samantha Moritz of eOriginal, Inc. for contributing this article. eOriginal Inc.’s advanced electronic vaulting solutions enable finance sources and investors. For more information about how to turn their experience into your advantage, visit www.eoriginal.com or call us at 410-625-5147.

3. BLFN’s Case & Comment: True Lease Questioned in Hindsight in Wickes Inc. v. NMHG Fin. Servs. Inc.

A bankruptcy court in Chicago recently considered whether a debtor could seek to re-characterize an equipment lease as a disguised secured financing after earlier “rejecting” the lease and turning over the equipment to the lessor. Few if any courts have directly considered this issue. In Wickes Inc. v. NMHG Fin. Servs. Inc., Wickes, Inc. (“Wickes” or “Debtor”) rejected a lease and later asked the bankruptcy court to re-characterize the lease as a secured financing and to recover both the post-bankruptcy lease payments and the equipment proceeds received by the lessor. See Wickes Inc. v. NMHG Fin. Servs. Inc., Adv. Pro. No. 06-0428 (Bankr. N.D. Ill.) and NMHG Fin. Servs. Inc. v. Wickes Inc., 2007 U.S. Dist. Lexis 77886 (N.D. Ill. 2007)(opinion dated October 17, 2007).

*Warning: Lessors should be aware that based on this case the rejection of a lease and turnover of the leased personal property by a debtor in bankruptcy may not close the door to a later challenge that the lease was a disguised financing.

BACKGROUND: In 1994, NMHG and Wickes Inc. entered into a master lease agreement (the Lease). The Lease eventually covered over 185 individual schedules for forklifts. The Lease schedules did not contain identical terms. Some schedules described the particular schedule as a true lease with a fair market value purchase option, others described lease purchases with a fair market value purchase option, and still others described leases with a $1 purchase option. NMHG also filed UCC-1s in most states where the forklifts were located. But according to the Debtor’s complaint, MNHG failed to include a security interest grant in either the Lease or individual schedules.

Wickes filed for bankruptcy in January 2004 and paid NMHG post-bankruptcy monthly lease payments in excess of $500,000. Wickes listed the Lease on its asset schedules as a personal property lease, but included several notes to its schedules. One note provided that listing a contract as a lease was not intended to concede or agree that a contract was actually a lease and all contracts listed as leases might be challenged as disguised secured financings.

*Insight Point: It is common for Debtors to include such a reservation of rights in their schedules.

In April 2004, Wickes filed a motion to “reject” two forklift schedules along with various other leases. See 11 U.S.C. § 365. In the motion, Wickes alleged the listed leases were not necessary for its operations and the leases did not provide any value to the bankruptcy estate. NMHG initially objected to the request, arguing its entire Lease had to be assumed or rejected and individual schedules could not be rejected piecemeal. NMHG later agreed that Wickes could reject the two schedules and the bankruptcy court entered an order rejecting those schedules. Wickes then turned over the two forklifts to NMHG.

Shortly afterwards in July 2004, Wickes sought to sell substantially all its assets. Wickes listed all the remaining forklifts as assets to be sold and once again NMHG objected. It argued Wickes could not sell the equipment, because NMHG owned the equipment. Because NMHG asserted ownership of the leased equipment, it objected that Wickes could only (a) assume and assign the Lease or (b) reject the Lease. Eventually, Wickes filed a motion to reject the Lease and all the remaining lease schedules. The bankruptcy court granted the motion and entered an order rejecting the Lease. After the rejection was approved, Wickes turned over to NMHG all the remaining forklifts. NMHG then mitigated its damages by selling the forklifts and filed a claim for its Lease damages.

Almost two years after filing its case and one and one-half years after rejecting the Lease, Wickes filed an adversary proceeding against NMHG to re-characterize the Lease. Wickes claimed that (a) the Lease was a disguised secured financing, (b) NMHG failed to include a security grant in its master lease, and (c) NMHG was merely an unsecured creditor who was not entitled to keep the post-petition lease payments or the forklift sales proceeds.

In response to these claims, NMHG filed a summary judgment motion asking the Court to deny all the claims. It asserted that Wickes had conceded the Lease was a true lease when it rejected the Leases and turned over the forklifts. Consequently, NMHG claimed that Wickes was barred by law from later taking a different position to its advantage and to NMHG’s detriment.

ISSUE: Is a debtor (or trustee) in a bankruptcy case barred as a matter of law from asking a court to re-characterize a lease as a secured financing agreement if it filed and won a motion to reject the lease (after which the debtor turned the property over to the lessor)?

*Terms to Know: “Rejection” happens when a debtor “rejects” a personal property lease (as well as other types of contracts and leases) in a bankruptcy case and relieves itself of the ongoing lease obligations. The lease or contract is then treated as if the debtor materially breached the agreement immediately before the bankruptcy filing date. However, rejection does not result in an automatic termination of a contract or a lease. After rejection, the lessor may retake the personal property and file an unsecured claim for a deficiency or breach claim. See 11 U.S.C. § 365(g) and (p).

“Lease re-characterization” occurs when a court (most often a bankruptcy court) determines a lease (despite its title) is a disguised secured financing. Courts look to UCC § 1-203 (or in this instance its predecessor, the former UCC § 1-201(37) from before the 2003 amendments), relevant case law, and the specific facts of the agreement to determine if the agreement is a lease or a disguised secured financing. In making that determination, courts generally ignore the titles and labels assigned by the parties and look at the actual agreement terms. In a bankruptcy case, a debtor may seek to re-characterize a lease to do many things, including the following: (1) not making post-bankruptcy lease payments; (2) restructuring the obligations, including changing the term, changing the interest rate, and splitting the debt into a secured and unsecured portion while retaining the “leased” property; and (3) challenging whether the lessor/secured party properly perfected a security interest (or the lien priority) in the leased goods.

OUTCOME/DECISION: The bankruptcy court denied the lessor’s motion for summary judgment (to end Wickes’ second bite at the apple to re-characterize the lease as a secured financing). The court denied the motion because it found, technically, Wickes’ lease rejection motion and the rejection order did not stop the court from allowing Wickes’ to ask (again) whether the court would re-characterize the Lease as a disguised secured financing. As a result, Wickes could proceed with the Lease re-characterization litigation.

NMHG then requested the Federal District Court to hear an interlocutory appeal of the denied summary judgment motion, which the court denied.

*Term to Know: An interlocutory appeal is an appeal before a final judgment is issued and is not often granted for denial of a summary judgment motion.

While the matter has been returned to the bankruptcy court, no decision has been issued regarding the nature of the lease or individual schedules.

LAW OF THE CASE: When a debtor (or trustee) in a bankruptcy rejects a lease of personal property and turns over the property to the lessor, the debtor (or trustee) can still seek to re-characterize a lease as a disguised secured financing, challenge lien perfection, and seek to recover post-bankruptcy lease payments as well as the proceeds of leased property.

At least one other bankruptcy court reached the opposite result. That court held when a debtor assumes a lease under 11 U.S.C. § 365, it is barred from later attempting to challenge the lease as a disguised secured financing. See In re Snelson, 305 B.R. 255 (Bankr. N.D. Tex. 2004). It could be assumed that court would also hold the rejection of a lease under 11 U.S.C. § 365 baring any future challenge to the lease as a disguised secured financing.

While not conclusively changing the result in the Wickes case, Congress added Section 365(p) to the Bankruptcy Code in 2005. Section 365(p) clarifies that a debtor’s rejection of a personal property lease terminates the bankruptcy automatic stay and removes the leased personal property from the bankruptcy estate. Section 365(p) was not applicable to or considered in the Wickes case, because Wickes filed bankruptcy in 2004 before the 2005 amendment.

*Comment: The Wickes’ ruling exposes lessors to the risk that, even after rejection of a lease, a debtor or trustee might seek to re-characterize the rejected lease as a disguised secured financing and attempt to recover lease payments and leased property proceeds. When considering its options and strategies regarding a lease and the related equipment in a bankruptcy case, the lessor should remember that lease rejection might not cut off future re-characterization challenges. Lessors have little choice but to face this particular risk and to mitigate the risk in creative ways to avoid the absurd result of this case.

Thanks to Jeff LeForce of the Dallas office of the Patton Boggs bankruptcy department for contributing this article.

4. Finance 101: What Is a “Springing Lien”?

A “springing lien” refers to lien granted in the future by a debtor (borrower or lessee) in favor of its creditors. The grant could occur upon certain events or occurrences such as:

• a material adverse change in a debtor’s financial condition,
• a loss of an investment grade credit rating,
• a default under a credit facility,
• a delisting from a stock exchange, or
• any indicator of a forthcoming bankruptcy filing.

A lien, which is a grant of an interest in property, “springs” into effect upon the occurrence of any one or more of these events (or others limited only by the imagination of the parties). These events trigger rights that allow creditors to acquire rights in property (that is to morph from an unsecured creditor to a secured creditor) and/or to leap frog over other creditors into superior position to collect money from the debtor.

*Warning: The creation of a lien in the future to secure an antecedent debt creates a serious risk of being avoided as a preference in a bankruptcy proceeding.

One of the highest profile examples of a springing lien occurred in the structuring of the bail out of E*Trade late last year. In that transaction, E*Trade issued “12.5% Springing Lien Notes” to an affiliate of Citadel Limited Partnership. At closing, the notes had the same rights as E*Trades senior unsecured debt. However, the notes said that they would “spring” from unsecured notes to secured notes (a lien on assets of E*Trade) after E*Trade paid off outstanding 8 percent notes due in 2011. In other words, Citadel’s notes became secured upon the occurrence of the future event, namely, the pay off of other notes of E*Trade. That change upon the occurrence of an event put Citadel in a superior position to the other senior unsecured creditors. See E*Trade springs a surprise, Fortune Daily Briefing (Dec. 5, 2007).

Contractual language grantinga springing lien could look similar in concept to the following clause:

Subject to the next sentence, Debtor hereby grants Secured Party an interest in all currently existing and hereafter acquired or arising property and proceeds thereof (“Collateral”) to secure prompt payment and performance of all its Obligations under the Loan Documents. The foregoing grant of security interest shall not be effective unless or until an Event of Default occurs and is continuing past applicable grace periods (“Trigger Event”). Upon the occurrence of a Trigger Event, the foregoing grant shall automatically be effective and Bank shall have the right to file financing statements on Form UCC-1 under the applicable Uniform Commercial Code. Debtor hereby authorizes Bank to make such filings immediately upon the occurrence of a Trigger Event and will, upon Bank’s request, take such further actions and execute and deliver such other documents, at its expense, as Bank may request to perfect and protect its security interest granted hereby. For more form language, see ONECLE.

In general, springing liens convert the unsecured creditors or other subordinated creditors into secured creditors or priority creditors, respectively, or both. In uncertain times, as we now experience in a fragile economy, a creditor can buttress its interests and rights under an unsecured note by obtaining a lien from a debtor that may take effect in the future. In that way a creditor can spring into action to protect its loans before it is too late.

About Patton Boggs LLP; Publication

About Patton Boggs LLP

Patton Boggs LLP is a law firm of approximately 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.

Partial List of Publications

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

‘Perfect Pay’ Provisions In Troubled Credit Markets, by Chuck Cross and David G. Mayer, LNJ Leasing Newsletter (Feb. 2007)

Equipment Leasing and CERCLA Liability, by Russell V. Randle and David G. Mayer, LNJ Leasing Newsletter (Dec. 2007).

Navigating the New Reality of Equipment Leasing and CERCLA Liability, by Russell V. Randle and David G. Mayer, LNJ Leasing Newsletter (Nov. 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).

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; and the Patton Boggs staff: 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
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)

E-Mail: dmayer@pattonboggs.com

© David G. Mayer 2008

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