## Facts

- Commercial Money Center, Inc. (CMC) entered bankruptcy proceedings in the Southern District of California after the collapse of an equipment-lease financing program alleged to involve widespread fraud.
- CMC originated or packaged equipment “leases,” often involving high-risk lessees, and marketed interests in pools of those leases to financial institutions and other investors.
- The transaction structure commonly included assignments or participations in the lease pools, cash-management arrangements for collecting payments, and surety bonds or guarantees intended to reduce default risk.
- After the program failed, disputes arose among the bankruptcy estate (through a trustee or estate representative), investors, sureties, and related service entities over ownership of payment streams, enforceability of bond obligations, and the priority of competing claims.
- Adversary proceedings in the bankruptcy court addressed whether the instruments labeled “leases” were, in substance, true leases or disguised secured financings, and how that characterization affected rights in the bankruptcy case.
- The bankruptcy court issued rulings determining the legal characterization of the transactions and the resulting allocation of interests and payments; parties appealed within the Ninth Circuit bankruptcy appellate structure.

## Issues

1. Whether the instruments structured and labeled as equipment “leases” should be treated as true leases or recharacterized as secured financing arrangements based on their economic substance.
2. How the characterization of the transactions affects ownership of lease payment streams and the status, perfection, and priority of asserted security interests.
3. To what extent surety bonds or guarantees associated with the lease pools are enforceable according to their terms, including the availability of defenses based on fraud, misrepresentation, or unmet conditions.
4. How bankruptcy distribution rules limit attempts by investors or sureties to obtain priority beyond contract terms and properly perfected interests.

## Decision

- The appellate court affirmed the use of a substance-over-form analysis to determine whether the purported leases functioned as true leases or as secured financings.
- The court held that transaction labels were not controlling; the allocation of risk, residual value, and economic realities governed characterization.
- The court ruled that characterization directly affected whether investors held enforceable, perfected interests in the payment streams under applicable commercial law principles and, if so, the scope of those rights in bankruptcy.
- The court treated surety obligations as defined by the bond text and recognized that defenses based on material misrepresentation, fraud, or failure of contractual conditions could limit or defeat asserted bond-based recovery.
- The court rejected efforts to use equitable theories to obtain bankruptcy priority inconsistent with the parties’ contractual allocations and applicable perfection and priority rules.

## Legal Principles

- Courts determine whether a transaction is a true lease or a secured financing by examining economic substance, including risk allocation and whether the lessor retains a meaningful residual interest.
- Recharacterization as secured financing brings the transaction within secured-transaction rules, making perfection and priority dependent on compliance with applicable filing and attachment requirements.
- Ownership of cash flows in bankruptcy depends on enforceable assignments and properly perfected security interests; residual or unassigned interests remain property of the estate.
- Surety bonds and guarantees are construed according to their written terms, and a claimant cannot expand a surety’s liability beyond the bond’s conditions and scope.
- In bankruptcy, contractual risk allocation and valid perfection determine priority; equitable arguments cannot confer distribution advantages that bypass statutory priority and avoidance principles.

## Conclusion

The decision applied a substance-based approach to determine whether CMC’s purported equipment leases were true leases or secured financings and tied that characterization to bankruptcy ownership and priority outcomes, while limiting bond-based recovery to the text of the surety instruments and recognized defenses.


In re Commercial Money Center, Inc. (In re Commercial Money Ctr., Inc.), 350 B.R. 465 (B.A.P. 9th Cir. 2006)