Eureka v. Wentworth: Further Erosion of the 'Hell or High Water' Principle

The “hell or high water” protection of the Code is meant to ensure that the rental payments due to a finance lessor will not be held hostage by the lessee because of a defect in the equipment being financed or a claim by the lessee that the lessor breached a provision of the lease or otherwise. Traditionally, courts have viewed a lessor's “hell or high water” protection as inviolate. Under what circumstances, then, could a lessee cancel the lease and cease making rental payments, and are there any exceptions to the “hell or high water” nature of lessee's obligations? A recent case, Eureka Broadband Corporation v. Wentworth Leasing Corporation, 400 F.3d 62 (1st Cir. 2005), suggests that fraud may be such an exception.

Eureka Broadband Corporation, the lessee, was engaged in the business of installing fiber optics systems in commercial office buildings and, once installed, selling access to companies providing telecommunications services to the buildings' tenants. Eureka wished to acquire certain equipment necessary to its business and negotiated two leases, each for a term of 2 years, with Wentworth Leasing Corporation. The terms of the leases were substantially identical. As is typical in a finance lease, Eureka identified the equipment it needed and instructed Wentworth to purchase the equipment from the vendors. Eureka accepted delivery of the equipment and forwarded executed delivery and acceptance acknowledgments to Wentworth. In the meantime, the primary vendor sent its invoices directly to Wentworth (but, for an unexplained reason, the other vendor sent its invoice to Eureka).