What's New in Leasing Law

CN Funding LLC v. Ensig Group Ltd., 2007 WL 3275202 (N.Y. Sup. Ct. Oct. 31, 2007): In this questionable decision, the court holds that a lease is not enforceable due to lack of consideration because the equipment was never delivered (evidently caused by the vendor's bankruptcy).

While '2A-407 could not be invoked by the lessor inasmuch as the lessee never actually accepted the goods (though the lessor had the lessee sign an acceptance certificate), the court goes to the trouble of explaining why the lease did not qualify as a 'finance lease' (finding that the lease lacked some of the required information regarding the lessee's rights), but does not explain why the lessee's contractual promises to pay notwithstanding non-delivery of the equipment should not be enforced (along with the lessee's acknowledgment that non-delivery was the lessee's responsibility alone). Although the lessor had made partial payment to the vendor for the equipment, the court comments that the lease agreement was silent as to the lessor's rights with respect to the vendor.

Measures of Lessors' Damages

Leasecomm Corporation v. Akpaf-fiong, 2007 WL 3309455 (Mass. App.Div. Oct. 31, 2007) (not reported in N.E.2d): This appellate court reverses a trial court decision in favor of a lessee who had continued to use equipment past the end of the lease term without making renewal payments. Finding that the transaction was clearly a commercial one and that the lease documents clearly spelled out the lessee's end-of-term responsibilities, the appellate court rejects the trial court's finding that the lease was unconscionable and holds that Leasecomm's entry into a consent decree regarding the non-cancelability of its leases and where it would institute collection suits has no effect on this lessee's obligations.

Lessor Liability for Equipment-Related Injuries and Damages

Ross v. Richardson, 2007 WL 3261558 (Conn.Super. Oct. 19, 2007) (not reported in A.2d); Kumarsingh v. PV Holding Corp., 2007 WL 2847956 (Fla.App. Oct. 3, 2007).

These two decisions find against plaintiffs attempting to hold automobile-leasing companies liable for injuries based upon state vicarious liability laws ' due to the pre-emptive effect of a federal statute. The Connecticut court also holds against the plaintiff's argument that the leasing company did not comply with the federal statute's section indicating that the federal statute does not supersede state law imposing financial responsibility or liability insurance requirements, inasmuch as the plaintiff had not raised the issue in her complaint.

Poirier v. Papadopoulos, 2007 WL 2245893 (Conn.Super. July 19, 2007)(unpublished): The plaintiff sued both the driver of a motor vehicle and the leasing company (Volvo Finance North America), from which the driver leased the vehicle, for injuries caused to the plaintiff. This court grants Volvo's motion for summary judgment based upon both a federal pre-emptive statute (the plaintiff attempted to argue that such statute was an unconstitutional violation of the commerce clause ' an argument rejected by this court) as well as a Connecticut statute excepting lessors of private passenger motor vehicles where the lease term is one year or more and the leased vehicle is insured for bodily injury liability in amounts meeting that statute's minimum requirements.

Buyers, Ordinary Course and Otherwise, from Lessees

Farm Credit Leasing Services Corp. v. Ferguson Packaging Machinery, Inc., 2007 WL 4276841 (U.S.Dist.Ct. E.D.Pa. Dec. 3, 2007): This suit was brought by a lessor's assignee (of both the lease and the equipment) against the buyer of the equipment from the lessee. The lease, as might be expected, prohibited such a transfer by the lessee, but the buyer apparently was unaware of the existence of the lease. This court agrees that the assignee may have a valid case for recovery of monetary damages against the buyer based upon claims of conversion and unjust enrichment, and thus denies the defendant's motion to dismiss such claims (left undecided was a possible ground for dismissal based upon the statute of limitations). It is not clear whether the plaintiff/assignee had considered enforcing the lease against the buyer under '2A-305, which indicates that the buyer took the equipment subject to the lease (inasmuch as it could not qualify as a buyer in the ordinary course from a merchant/lessee).

Forum Selection, Jurisdiction, and Choice of Law

National City Commercial Capital Corp. v. Gateway Pacific Contractors, Inc., 2007 WL 3232440 (U.S.Dist.Ct. S.D.Ohio Oct. 31, 2007) (slip copy): This court follows the Sixth Circuit's Sarasota Kennel Club decision (see below) in holding the NorVergence 'floating' forum selection clause to be unenforceable against an Ohio lessee under Ohio law ' the facts in this case not being distinguish-able from those in the Ohio Supreme Court's Power Engineering Group decision.

Frontier Leasing Corporation v. Shah, 931 A.2d 676 (Pa.Super. 2007): This lessor initially obtained a default judgment in Iowa against an individual doing business in Pennsylvania pursuant to a lease containing a forum selection clause that simply provided that any suit pertaining to the lease would be 'proper' if filed in Iowa. After the lessor filed this judgment in a Pennsylvania county court, which denied the lessee's petition to strike the judgment, the Pennsylvania Superior Court reversed and granted the lessee's motion to strike. The decision purports to apply Iowa law in finding that because the lessee was an inexperienced individual (a Pakistani immigrant with no formal training in English) and because the forum selection clause was inconspicuous (not highlighted as other clauses were), it would be unreasonable and unjust to enforce it.

Preferred Capital, Inc. v. Sarasota Kennel Club, Inc., 489 F.3d 303 (6th Cir. 2007): The assignee of a NorVergence lease containing its typical 'floating' forum selection clause initially brought suit against the lessee (a Florida corporation) in an Ohio state court. After the lessee removed the case to an Ohio federal District Court, that court held that the clause was unenforceable under both Ohio and federal law because of fraud and overreaching by NorVergence. Although the Sixth Circuit had previously held such a clause to be enforceable under both federal and Ohio law, because 1) the Ohio Supreme Court subsequently found the clause to be invalid under Ohio law, and 2) this Sixth Circuit panel now determines that Ohio law should apply to the issue in this case, this decision dismisses the assignee's claim due to lack of personal jurisdiction (affirming the federal District Court's judgment, but on different grounds).

Seymour Lodge, No. 462 v. Frontier Leasing Corp., 872 N.E.2d 703 (Ind.App. 2007) (unpublished memorandum decision): Affirmation of an Indiana trial court's entry of summary judgment in favor of an Iowa lessor based upon a default judgment that had been obtained by the lessor in Iowa pursuant to a forum selection clause in the lease whereby the Indiana lessee agreed to venue in Iowa. Notwithstanding the lessee's objections, the court holds that such clauses are enforceable and that judgments in other states pursuant to such clauses should be given full faith and credit unless enforcement of the clause would be unjust or the lessee's agreement to the clause had been procured by fraud.

Studebaker-Worthington Leasing, Corp. v. New Concepts Realty, Inc., 16 Misc. 3d 1119(A) (N.Y.Dist.Ct. 2007) (unpublished slip opinion): This New York court does not accept a Colorado lessee's argument that the NorVergence 'floating' forum selection clause is invalid and unenforceable. Acknowledging that serious questions concerning the use of fraud in procuring the lease had been raised, the court notes that no evidence was presented that specifically addressed whether the forum selection clause ' appearing in bold font ' had been itself procured by fraud. The court also strongly rejects an argument ' purportedly supported by legal scholars and attorneys general around the country ' that the agreement constituted a consumer lease (requiring 10-point type to be enforceable under New York law). This argument is dismissed based upon the definition of 'consumer' and 'consumer lease' found in Article 2A of the UCC as requiring use of the goods being leased for personal, family, or household purposes ' not the case in this commercial context.

OFC Capital v. Colonial Distributors, Inc., 648 S.E.2d 140 (Ga.App. 2007): This court reverses a trial court's dismissal of a lessor's suit brought pursuant to the NorVergence 'floating' forum selection clause. Although the lessee argued that the lease agreement was procured by fraud, this court notes that the lessee had not produced any evidence that the forum selection clause was itself so procured. The court also notes that the forum selection clause was highlighted in bold and that the lessee's executive director had initialed the page of the lease containing that clause.

Susquehanna Patriot Commercial Leasing Co., Inc. v. Holper Industries, Inc., 928 A.2d 278 (Pa.Super. 2007): This decision reverses the decision of a trial court that found the NorVergence 'floating' forum selection clause to be unenforceable. Recognizing a split of authority around the country regarding this issue, this court holds the clause to be enforceable to the extent, among other considerations (e.g., it is not so unfair or inconvenient as to deprive a party of the opportunity to be heard and it does not violate public policy), that it was not itself induced by fraud or overreaching.

Lessors' Rights in Bankruptcy Proceedings

In re Student Finance Corporation, 2007 WL 4225573 (Bankr.D.Del. Nov. 28, 2007): After the lessee filed for bankruptcy, the lessor undertook a number of different actions (including drawing on a letter of credit and sending a letter accelerating the balance under the lease), the effect of which ' according to the bankrupt lessee's trustee ' was to breach or terminate the lease and thus prevent the lessor from recovering lease rejection damages pursuant to Bankruptcy Code '365(d)(5). Inter-estingly, this court finds that the exercise of certain of these remedies by the lessor was void ' as a violation of the automatic stay ' and therefore the lease was not terminated before the relevant date with regard to the lessor's claim for lease rejection damages. The court thus denies the trustee's summary judgment motion and orders a status hearing to examine the claims further.

Lease Formation; Authority to Bind a Lessee under a Lease

First Union Rail Corporation v. Heller Performance Polymers, Inc., 2007 WL 4224341 (U.S.Dist.Ct. N.D.Ill. Nov. 27, 2007): Without reference to Article 2A, this decision employs certain basic elements of contract law (e.g., offer and acceptance, consideration, and definiteness of terms) that can be found in Article 2A to determine whether an agreement to renew leases for rail cars had been reached. Notwith-standing the facts that: 1) proposal letters and riders sent by the lessor to the lessee refer to a requirement for entry into 'appropriate lease documentation' and 2) such documentation was never signed, this court finds that the combination of documents such as the original master lease agreement, certain unsigned riders and related proposal letters, and the actions of the parties, served to create a binding lease agreement.

G.E. Capital Information Technol-ogy Solutions, Inc. v. Oklahoma City Public Schools, 2007 WL 4259509 (Okla.Civ.App. Nov. 1, 2007): This case illustrates some of the special issues that can arise in the municipal leasing context. After the lessor of copy machines to public schools in Oklahoma City sued the school district with respect to leases that had not been paid and equipment that had not been returned (all evidently due to financial hardships suffered by the district), the school district attempted to defend by claiming that those who signed the leases did not have the requisite authority to do so. Both the trial court and this appellate court ruled that the actions of the district in approving the payments made to the lessor served to ratify the lease contracts ' at least to some extent. However, this court also distinguished between ratification of certain renewal terms on the one hand and limits imposed by non-appropriation requirements that would restrict the extension of leases past the end of a fiscal year. The court also highlighted the difference between ratification of renewal terms and the consequences of default (resulting from the district's not returning certain copiers).

Robert W. Ihne is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating, and providing advice related to direct transactions, syndications, vendor financing arrangements, and various forms of credit enhancements such as guaranties and letters of credit. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Erin Staton and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.

Ability to Collect Rentals

Republic Bank v. AMTEC Precision Products, 2007 WL 2220521 (U.S. Dist Ct. D. Utah July 27, 2007): Although not a decision predicated upon principles of leasing law or waiver of defenses, this case illustrates the absolute obligation of a debtor/ lessee under a progress payment agreement intended to lead to a leasing arrangement.

The debtor/lessee had signed both a master progress payment agreement and a master lease agreement pursuant to terms under which the former obligations would be transformed into the latter only upon the execution and delivery of a 'final' acceptance and delivery certificate. After a number of progress payments had been made to vendors, with respect to which the debtor/lessee executed 'partial' acceptance and delivery certificates, the original lessor/ lender (apparently servicing the transaction on behalf of its assignee) demanded repayment in full due to an alleged default under the documents related to the debtor/ lessee's deteriorating financial condition. The debtor/lessee attempted to argue that the last executed partial acceptance and delivery certificate should have been treated as a final certificate and therefore that its future obligations should consist only of ordinary periodic payment obligations under the lease. This court holds, however, that the documentation does not support such a conclusion and that progress payment obligations and related charges could be accelerated.

CN Funding LLC v. Ensig Group Ltd., 2007 WL 3275202 (N.Y. Sup. Ct. Oct. 31, 2007): In this questionable decision, the court holds that a lease is not enforceable due to lack of consideration because the equipment was never delivered (evidently caused by the vendor's bankruptcy).

While '2A-407 could not be invoked by the lessor inasmuch as the lessee never actually accepted the goods (though the lessor had the lessee sign an acceptance certificate), the court goes to the trouble of explaining why the lease did not qualify as a 'finance lease' (finding that the lease lacked some of the required information regarding the lessee's rights), but does not explain why the lessee's contractual promises to pay notwithstanding non-delivery of the equipment should not be enforced (along with the lessee's acknowledgment that non-delivery was the lessee's responsibility alone). Although the lessor had made partial payment to the vendor for the equipment, the court comments that the lease agreement was silent as to the lessor's rights with respect to the vendor.

Measures of Lessors' Damages

Leasecomm Corporation v. Akpaf-fiong, 2007 WL 3309455 (Mass. App.Div. Oct. 31, 2007) (not reported in N.E.2d): This appellate court reverses a trial court decision in favor of a lessee who had continued to use equipment past the end of the lease term without making renewal payments. Finding that the transaction was clearly a commercial one and that the lease documents clearly spelled out the lessee's end-of-term responsibilities, the appellate court rejects the trial court's finding that the lease was unconscionable and holds that Leasecomm's entry into a consent decree regarding the non-cancelability of its leases and where it would institute collection suits has no effect on this lessee's obligations.

Lessor Liability for Equipment-Related Injuries and Damages

Ross v. Richardson, 2007 WL 3261558 (Conn.Super. Oct. 19, 2007) (not reported in A.2d); Kumarsingh v. PV Holding Corp., 2007 WL 2847956 (Fla.App. Oct. 3, 2007).

These two decisions find against plaintiffs attempting to hold automobile-leasing companies liable for injuries based upon state vicarious liability laws ' due to the pre-emptive effect of a federal statute. The Connecticut court also holds against the plaintiff's argument that the leasing company did not comply with the federal statute's section indicating that the federal statute does not supersede state law imposing financial responsibility or liability insurance requirements, inasmuch as the plaintiff had not raised the issue in her complaint.

Poirier v. Papadopoulos, 2007 WL 2245893 (Conn.Super. July 19, 2007)(unpublished): The plaintiff sued both the driver of a motor vehicle and the leasing company (Volvo Finance North America), from which the driver leased the vehicle, for injuries caused to the plaintiff. This court grants Volvo's motion for summary judgment based upon both a federal pre-emptive statute (the plaintiff attempted to argue that such statute was an unconstitutional violation of the commerce clause ' an argument rejected by this court) as well as a Connecticut statute excepting lessors of private passenger motor vehicles where the lease term is one year or more and the leased vehicle is insured for bodily injury liability in amounts meeting that statute's minimum requirements.

Buyers, Ordinary Course and Otherwise, from Lessees

Farm Credit Leasing Services Corp. v. Ferguson Packaging Machinery, Inc., 2007 WL 4276841 (U.S.Dist.Ct. E.D.Pa. Dec. 3, 2007): This suit was brought by a lessor's assignee (of both the lease and the equipment) against the buyer of the equipment from the lessee. The lease, as might be expected, prohibited such a transfer by the lessee, but the buyer apparently was unaware of the existence of the lease. This court agrees that the assignee may have a valid case for recovery of monetary damages against the buyer based upon claims of conversion and unjust enrichment, and thus denies the defendant's motion to dismiss such claims (left undecided was a possible ground for dismissal based upon the statute of limitations). It is not clear whether the plaintiff/assignee had considered enforcing the lease against the buyer under '2A-305, which indicates that the buyer took the equipment subject to the lease (inasmuch as it could not qualify as a buyer in the ordinary course from a merchant/lessee).

Forum Selection, Jurisdiction, and Choice of Law

National City Commercial Capital Corp. v. Gateway Pacific Contractors, Inc., 2007 WL 3232440 (U.S.Dist.Ct. S.D.Ohio Oct. 31, 2007) (slip copy): This court follows the Sixth Circuit's Sarasota Kennel Club decision (see below) in holding the NorVergence 'floating' forum selection clause to be unenforceable against an Ohio lessee under Ohio law ' the facts in this case not being distinguish-able from those in the Ohio Supreme Court's Power Engineering Group decision.

Frontier Leasing Corporation v. Shah, 931 A.2d 676 (Pa.Super. 2007): This lessor initially obtained a default judgment in Iowa against an individual doing business in Pennsylvania pursuant to a lease containing a forum selection clause that simply provided that any suit pertaining to the lease would be 'proper' if filed in Iowa. After the lessor filed this judgment in a Pennsylvania county court, which denied the lessee's petition to strike the judgment, the Pennsylvania Superior Court reversed and granted the lessee's motion to strike. The decision purports to apply Iowa law in finding that because the lessee was an inexperienced individual (a Pakistani immigrant with no formal training in English) and because the forum selection clause was inconspicuous (not highlighted as other clauses were), it would be unreasonable and unjust to enforce it.

Preferred Capital, Inc. v. Sarasota Kennel Club, Inc., 489 F.3d 303 (6th Cir. 2007): The assignee of a NorVergence lease containing its typical 'floating' forum selection clause initially brought suit against the lessee (a Florida corporation) in an Ohio state court. After the lessee removed the case to an Ohio federal District Court, that court held that the clause was unenforceable under both Ohio and federal law because of fraud and overreaching by NorVergence. Although the Sixth Circuit had previously held such a clause to be enforceable under both federal and Ohio law, because 1) the Ohio Supreme Court subsequently found the clause to be invalid under Ohio law, and 2) this Sixth Circuit panel now determines that Ohio law should apply to the issue in this case, this decision dismisses the assignee's claim due to lack of personal jurisdiction (affirming the federal District Court's judgment, but on different grounds).

Seymour Lodge, No. 462 v. Frontier Leasing Corp., 872 N.E.2d 703 (Ind.App. 2007) (unpublished memorandum decision): Affirmation of an Indiana trial court's entry of summary judgment in favor of an Iowa lessor based upon a default judgment that had been obtained by the lessor in Iowa pursuant to a forum selection clause in the lease whereby the Indiana lessee agreed to venue in Iowa. Notwithstanding the lessee's objections, the court holds that such clauses are enforceable and that judgments in other states pursuant to such clauses should be given full faith and credit unless enforcement of the clause would be unjust or the lessee's agreement to the clause had been procured by fraud.

Studebaker-Worthington Leasing, Corp. v. New Concepts Realty, Inc., 16 Misc. 3d 1119(A) (N.Y.Dist.Ct. 2007) (unpublished slip opinion): This New York court does not accept a Colorado lessee's argument that the NorVergence 'floating' forum selection clause is invalid and unenforceable. Acknowledging that serious questions concerning the use of fraud in procuring the lease had been raised, the court notes that no evidence was presented that specifically addressed whether the forum selection clause ' appearing in bold font ' had been itself procured by fraud. The court also strongly rejects an argument ' purportedly supported by legal scholars and attorneys general around the country ' that the agreement constituted a consumer lease (requiring 10-point type to be enforceable under New York law). This argument is dismissed based upon the definition of 'consumer' and 'consumer lease' found in Article 2A of the UCC as requiring use of the goods being leased for personal, family, or household purposes ' not the case in this commercial context.

OFC Capital v. Colonial Distributors, Inc., 648 S.E.2d 140 (Ga.App. 2007): This court reverses a trial court's dismissal of a lessor's suit brought pursuant to the NorVergence 'floating' forum selection clause. Although the lessee argued that the lease agreement was procured by fraud, this court notes that the lessee had not produced any evidence that the forum selection clause was itself so procured. The court also notes that the forum selection clause was highlighted in bold and that the lessee's executive director had initialed the page of the lease containing that clause.

Susquehanna Patriot Commercial Leasing Co., Inc. v. Holper Industries, Inc., 928 A.2d 278 (Pa.Super. 2007): This decision reverses the decision of a trial court that found the NorVergence 'floating' forum selection clause to be unenforceable. Recognizing a split of authority around the country regarding this issue, this court holds the clause to be enforceable to the extent, among other considerations (e.g., it is not so unfair or inconvenient as to deprive a party of the opportunity to be heard and it does not violate public policy), that it was not itself induced by fraud or overreaching.

Lessors' Rights in Bankruptcy Proceedings

In re Student Finance Corporation, 2007 WL 4225573 (Bankr.D.Del. Nov. 28, 2007): After the lessee filed for bankruptcy, the lessor undertook a number of different actions (including drawing on a letter of credit and sending a letter accelerating the balance under the lease), the effect of which ' according to the bankrupt lessee's trustee ' was to breach or terminate the lease and thus prevent the lessor from recovering lease rejection damages pursuant to Bankruptcy Code '365(d)(5). Inter-estingly, this court finds that the exercise of certain of these remedies by the lessor was void ' as a violation of the automatic stay ' and therefore the lease was not terminated before the relevant date with regard to the lessor's claim for lease rejection damages. The court thus denies the trustee's summary judgment motion and orders a status hearing to examine the claims further.

Lease Formation; Authority to Bind a Lessee under a Lease

First Union Rail Corporation v. Heller Performance Polymers, Inc., 2007 WL 4224341 (U.S.Dist.Ct. N.D.Ill. Nov. 27, 2007): Without reference to Article 2A, this decision employs certain basic elements of contract law (e.g., offer and acceptance, consideration, and definiteness of terms) that can be found in Article 2A to determine whether an agreement to renew leases for rail cars had been reached. Notwith-standing the facts that: 1) proposal letters and riders sent by the lessor to the lessee refer to a requirement for entry into 'appropriate lease documentation' and 2) such documentation was never signed, this court finds that the combination of documents such as the original master lease agreement, certain unsigned riders and related proposal letters, and the actions of the parties, served to create a binding lease agreement.

G.E. Capital Information Technol-ogy Solutions, Inc. v. Oklahoma City Public Schools, 2007 WL 4259509 (Okla.Civ.App. Nov. 1, 2007): This case illustrates some of the special issues that can arise in the municipal leasing context. After the lessor of copy machines to public schools in Oklahoma City sued the school district with respect to leases that had not been paid and equipment that had not been returned (all evidently due to financial hardships suffered by the district), the school district attempted to defend by claiming that those who signed the leases did not have the requisite authority to do so. Both the trial court and this appellate court ruled that the actions of the district in approving the payments made to the lessor served to ratify the lease contracts ' at least to some extent. However, this court also distinguished between ratification of certain renewal terms on the one hand and limits imposed by non-appropriation requirements that would restrict the extension of leases past the end of a fiscal year. The court also highlighted the difference between ratification of renewal terms and the consequences of default (resulting from the district's not returning certain copiers).

Robert W. Ihne is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating, and providing advice related to direct transactions, syndications, vendor financing arrangements, and various forms of credit enhancements such as guaranties and letters of credit. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Erin Staton and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.