State Licensing: A Trap for the Unwary?

Other states require licensing as part of their taxing of leasing transactions, such as Alabama (”40-12-221 – 40-12-222) which requires licensure for a person “engaging or continuing” in the business of leasing or renting tangible personal property in the state, or the making of loans generally, and such as Minnesota ('56.01) which requires a license in order to make loans not exceeding $100,000.

For the most part, lending and leasing licenses are either required for small-sized transactions or are limited to those having a place of business within the state. The laws, however, are far from uniform. Table 1 lists certain statutes that should be checked in each of the indicated jurisdictions.

Table 1

[IMGCAP(1)]

Motor Vehicle Dealers

Motor vehicle dealerships and lessors, including any financing arrangements related to the dealership, often trigger state regulation and require licensure. These statutes do not generally distinguish between consumer and commercial motor vehicle finance. Table 2 contains a partial listing of statutes requiring licenses for motor vehicle financings in select states.

Table 2

[IMGCAP(2)]

The Pennsylvania Motor Vehicle Sales Finance Act (69 P.S. ”601-637) serves as an example of the regulations that may be placed upon dealers and lessors of motor vehicles. Certain states, such as Connecticut ('14-15), specifically delineate lessors of motor vehicles as requiring licensure. The type of vehicle may also be relevant. Massachusetts (90 '32H), for example, requires licensure specifically for the leasing of motorcycles.

In many instances, the license is required before any motor vehicle may be titled in the state. This can present problems because the wording of many of the statutes requires reference to a “place of business” within the state, placing out-of-state lessors in a Catch-22 situation. For example, a technical reading of the Louisiana statutes, ”32-1252 – 32-1254, would indicate that a local place of business is required. Those who have dealt with the Louisiana statutes, however, report that discussions with appropriate state officials will broaden the reading of the statutes to allow an out-of-state office location to be substituted for a local place of business.

Note that some state motor vehicle finance statutes, such as Mississippi's '63-19-1 et al., exempt banks from the licensure requirement.

A related issue is the requirement of registration or titling, which is the case in 11 states: North Carolina, Florida, Maine, Missouri, South Carolina, Utah, Mississippi, New York, New Jersey, Massachusetts and Wisconsin. These states require User or Access Codes, Account Numbers and similar codes to be provided and are in addition to motor vehicle financing licenses. Information re-garding the requirements may be obtained through contacts listed in Table 3.

Table 3

[IMGCAP(3)]

Loan Broker Statutes

Many states restrict “loan brokers,” which are often defined to include those who arrange the “loan of property.” Some of these states require annual registration. Others require the posting of a bond or prohibit the taking of “advance fees” (which are often broadly defined so as to include, arguably, security deposits or advance rents). Certain statutes, such as New Jersey ('17:10B-17) exempt banks and other types of entities licensed under another statute. The laws in question vary widely and the statute for a given state should be consulted. Table 4 contains a partial list of state statutes regulating loan brokers.

Table 4

[IMGCAP(4)]

Qualification to Do Business

No discussion of state laws affecting lessors would be complete without at least mentioning the issue of qualification to do business as a foreign corporation. New Jersey ('14A:13-14 – 14A:13-23), for example, precludes a foreign entity which is carrying on any activity or maintaining any property in the state which has not obtained a Certificate of Authority to do business from being able to enforce contracts in state court.

Despite legislative efforts, Alabama has stubbornly refused to permit retroactive cure for qualification to do business. An appellate court ruling in 1989, AllState Leasing Company v. Scroggins 541 So.2d 17 (Ala. App. 1989) indicates the dangers faced by leasing companies. In Scroggins, the court found that because the lessor owned “many machines” leased to Alabama residents, it was “doing business” for state law purposes. The lease in question was held voidable by the lessee because the leasing company had not obtained a certificate of authority to transact business in Alabama.

In North Carolina, LeaseComm Corporation v. Renaissance Auto Care, 122 N.C. App. 119, 468 S.E.2d 562 (N.C. App. 1996) added an interesting issue where the lease originator was not qualified to do business. Although the assignee had obtained a certificate of authority in North Carolina, the originator had not and never “cured” its original failure to qualify. The court held that the assignee could not sue in North Carolina.

The requirements for qualification to do business as a foreign corporation and the repercussions of the failure to do so vary widely from state to state.

Conclusion

While commercial lease transactions generally enjoy more freedom from regulation than consumer lending and leasing transactions, it is not an unfettered freedom. Many states have laws on the books that are germane to commercial lessors. This article has touched upon certain of the more prominent areas which states are prone to regulate and where some form of licensure may be required. While merely a cursory review of some of the requirements, it is designed to bring to the reader's attention the importance of che-cking the statutes and understanding the regulatory licensing scheme of a given jurisdiction in which it may conduct business. The failure to do so could result in fines, and in some jurisdictions even criminal charges, which could be both costly and burdensome. As the requirements vary widely from jurisdiction to jurisdiction, lessors are encouraged to look at the requirements in each and every state in which they may conduct business.

Unlike consumer lenders and real estate mortgage brokers, lessors of business equipment have generally enjoyed freedom from state licensing requirements. A survey of state laws presented at this year's Equipment Leasing Association Legal Forum, however, has revealed that certain state licensing requirements do exist for commercial lessors, especially where motor vehicle leasing is concerned. This article describes certain of these requirements and highlights some of the areas in which there are statutes pertaining to licensure; the reader is advised to check the law in each state where he or she is doing business and never take freedom from licensing for granted.

General Licensing Requirements

Most lessors are aware that California requires a license under its Finance Lenders Law. Fin. C. '22100. The California law includes “commercial loans” as well as consumer transactions and applies to brokers as well as direct lenders. Banks, however, are exempt. Fin. C. '22050.

Other states require licensing as part of their taxing of leasing transactions, such as Alabama (”40-12-221 – 40-12-222) which requires licensure for a person “engaging or continuing” in the business of leasing or renting tangible personal property in the state, or the making of loans generally, and such as Minnesota ('56.01) which requires a license in order to make loans not exceeding $100,000.

For the most part, lending and leasing licenses are either required for small-sized transactions or are limited to those having a place of business within the state. The laws, however, are far from uniform. Table 1 lists certain statutes that should be checked in each of the indicated jurisdictions.

Table 1

[IMGCAP(1)]

Motor Vehicle Dealers

Motor vehicle dealerships and lessors, including any financing arrangements related to the dealership, often trigger state regulation and require licensure. These statutes do not generally distinguish between consumer and commercial motor vehicle finance. Table 2 contains a partial listing of statutes requiring licenses for motor vehicle financings in select states.

Table 2

[IMGCAP(2)]

The Pennsylvania Motor Vehicle Sales Finance Act (69 P.S. ”601-637) serves as an example of the regulations that may be placed upon dealers and lessors of motor vehicles. Certain states, such as Connecticut ('14-15), specifically delineate lessors of motor vehicles as requiring licensure. The type of vehicle may also be relevant. Massachusetts (90 '32H), for example, requires licensure specifically for the leasing of motorcycles.

In many instances, the license is required before any motor vehicle may be titled in the state. This can present problems because the wording of many of the statutes requires reference to a “place of business” within the state, placing out-of-state lessors in a Catch-22 situation. For example, a technical reading of the Louisiana statutes, ”32-1252 – 32-1254, would indicate that a local place of business is required. Those who have dealt with the Louisiana statutes, however, report that discussions with appropriate state officials will broaden the reading of the statutes to allow an out-of-state office location to be substituted for a local place of business.

Note that some state motor vehicle finance statutes, such as Mississippi's '63-19-1 et al., exempt banks from the licensure requirement.

A related issue is the requirement of registration or titling, which is the case in 11 states: North Carolina, Florida, Maine, Missouri, South Carolina, Utah, Mississippi, New York, New Jersey, Massachusetts and Wisconsin. These states require User or Access Codes, Account Numbers and similar codes to be provided and are in addition to motor vehicle financing licenses. Information re-garding the requirements may be obtained through contacts listed in Table 3.

Table 3

[IMGCAP(3)]

Loan Broker Statutes

Many states restrict “loan brokers,” which are often defined to include those who arrange the “loan of property.” Some of these states require annual registration. Others require the posting of a bond or prohibit the taking of “advance fees” (which are often broadly defined so as to include, arguably, security deposits or advance rents). Certain statutes, such as New Jersey ('17:10B-17) exempt banks and other types of entities licensed under another statute. The laws in question vary widely and the statute for a given state should be consulted. Table 4 contains a partial list of state statutes regulating loan brokers.

Table 4

[IMGCAP(4)]

Qualification to Do Business

No discussion of state laws affecting lessors would be complete without at least mentioning the issue of qualification to do business as a foreign corporation. New Jersey ('14A:13-14 – 14A:13-23), for example, precludes a foreign entity which is carrying on any activity or maintaining any property in the state which has not obtained a Certificate of Authority to do business from being able to enforce contracts in state court.

Despite legislative efforts, Alabama has stubbornly refused to permit retroactive cure for qualification to do business. An appellate court ruling in 1989, AllState Leasing Company v. Scroggins 541 So.2d 17 (Ala. App. 1989) indicates the dangers faced by leasing companies. In Scroggins, the court found that because the lessor owned “many machines” leased to Alabama residents, it was “doing business” for state law purposes. The lease in question was held voidable by the lessee because the leasing company had not obtained a certificate of authority to transact business in Alabama.

In North Carolina, LeaseComm Corporation v. Renaissance Auto Care , 122 N.C. App. 119, 468 S.E.2d 562 (N.C. App. 1996) added an interesting issue where the lease originator was not qualified to do business. Although the assignee had obtained a certificate of authority in North Carolina, the originator had not and never “cured” its original failure to qualify. The court held that the assignee could not sue in North Carolina.

The requirements for qualification to do business as a foreign corporation and the repercussions of the failure to do so vary widely from state to state.

Conclusion

While commercial lease transactions generally enjoy more freedom from regulation than consumer lending and leasing transactions, it is not an unfettered freedom. Many states have laws on the books that are germane to commercial lessors. This article has touched upon certain of the more prominent areas which states are prone to regulate and where some form of licensure may be required. While merely a cursory review of some of the requirements, it is designed to bring to the reader's attention the importance of che-cking the statutes and understanding the regulatory licensing scheme of a given jurisdiction in which it may conduct business. The failure to do so could result in fines, and in some jurisdictions even criminal charges, which could be both costly and burdensome. As the requirements vary widely from jurisdiction to jurisdiction, lessors are encouraged to look at the requirements in each and every state in which they may conduct business.