What's New in the Law

Xerox Corporation v. Digital Express Graphic, LLC, 2008 WL 2278492 (Tenn.Ct.App. May 22, 2008)(slip copy)

Although the lease in this case does not qualify as an Article
2A finance lease and although the lessor had entered into a maintenance agreement with the lessee in connection with the lease, the decision illustrates the importance of employing lease provisions whose enforceability is supported by Article 2A. This decision upholds the lessor's right to restrict the lessee to an exclusive remedy ' replacement of the equipment by the lessor in the event the lessor was unable to maintain the equipment ' and to enforce its remedy of acceleration of the remaining balance in the event the lessee defaulted in its scheduled payments. The decision also finds that the terms of the lease adequately disclaimed implied warranties of merchantability (in this instance the equipment was not sold by the lessor in the ordinary course of its business and had been selected by the lessee) and fitness for a particular purpose.

Popular Leasing USA, Inc. v. Mortgage Sense, Inc., 2008 WL 1952380 (Cal.App. May 6, 2008) (not reported in Cal.Reptr.3d)

Although this decision may not be able to be cited as precedent (California rules of court must be consulted), it strongly affirms a NorVergence assignee's ability to rely on a waiver of defenses clause ' even in the face of lessees' claims (accepted by the trial court, whose decision is reversed here) that the equipment was never installed and thus the lease allegedly never commenced. The court cites in particular its own 2006 decision in Wells Fargo Bank Minnesota N.A. v. B.C.B.U. that explained the commercial importance of enforcing such waiver of defense clauses. The decision also highlights the difference between: 1) the type of fraud that may have induced the lessees to sign leases and certificates of acceptance even before the equipment had been installed; and 2) the only type of fraud available as a defense against a holder in due course (in which the signer had neither knowledge nor opportunity to learn of the character and essential terms of the instrument it was signing).

Pludeman v. Northern Leasing Systems, Inc., 2008 WL 1944567 (N.Y.Ct.App. May 6, 2008) (subject to revision before publication in the New York Reports)

In this split decision by New York's highest court, the majority finds that a number of small business owners have sufficiently pleaded, under New York law, a cause of action for fraud against individuals comprising the lessor's top management. While this decision does not directly address the liability of the lessees to make payments under their allegedly fraudulently procured leases, it interestingly highlights practices of the salespeople employed by the lessor's equipment vendor that could conceivably come back to haunt the lessor and even its individual managers: concealing subsequent pages of the lease containing important provisions while having the lessee sign the front page; rushing the lessees into signing; and not providing the lessees with a copy of the lease (unless they called a 1-800 phone number). The dissenting judge points out that the first page of the lease indicates that it is “Page 1 of 4;” that most people entering into relatively small transactions (e.g., a car rental) do not bother to read the entire agreement; that the majority's real reasons for objecting to the inside pages of the lease were apparently not that they were concealed, but that the provisions there were arguably unduly harsh; and that the salespeople who presented the leases to the lessees for signature were not employees of the lessor.

In re NorVergence, Inc. (Diversified Aerospace Services, LLC v. IFC Credit Corp.), 2008 WL1901114 (Bankr.D.N.J. April 25, 2008)

A number of lessees under NorVergence leases brought an action in the NorVergence bankruptcy proceedings against IFC Credit, which had been assigned the leases by NorVergence, to have the leases found void and unenforceable. In this decision, the bankruptcy court finds that it does not have jurisdiction to hear the lessees' claims due to the fact that NorVergence's bankruptcy estate is administratively insolvent. If the lessees were successful in this proceeding, IFC would have an indemnification claim against NorVergence based upon its agreement with NorVergence. Since, however, the bankruptcy estate is administratively insolvent, the outcome of the lessees' claims could have no effect on the administration of the estate and thus jurisdiction in the bankruptcy proceedings does not exist.

IFC Credit Corporation v. Specialty Optical Systems, Inc., 252 S.W.3d 761 (Tex.App. 2008)

Although vacating a trial court's order of sanctions (including ordering that letters regarding the assignee's agreements with NorVergence be sent to all other NorVergence lessees against which the assignee had made claims) against this NorVergence assignee, this appellate court affirms the trial court's holdings that: 1) the lessee had been fraudulently induced by NorVergence into signing its lease (when NorVergence falsely promised to see that a contract with a competing telecommunications provider would be cancelled before countersigning the lease) ' making the lease unenforceable (presumably by NorVergence in particular, though the decision does not make this clear) ' and 2) IFC was not entitled to holder in due course status with regard to enforcing the lease's waiver of defenses provision because it was aware that, among other things, NorVergence was promising lessees savings in connection with its leases with no intent to deliver.

True Lease versus Security Interest: In General

Automotive Leasing Specialists, L.L.C. v. Little, 2008 WL 2369145 (U.S.Dist.Ct. W.D.La. June 10, 2008)

After the individual lessee under a motor vehicle lease agreement filed for bankruptcy protection, she argued that the lease was not a true lease, but instead created a security interest. After finding that the lease did not afford the lessee with the right to terminate its obligations (without payment of a substantial amount) and that the lessee had been given an option to purchase the vehicle at the end of the lease term for $206, the court looked to Louisiana's UCC provisions distinguishing leases from security interests (the same as in the uniform version of the UCC in effect in most states) and to cases in other jurisdictions (not finding any cases in either Louisiana or the Fifth Circuit on point) to determine that this lease creates a security interest. While this holding seems rather unremarkable in view of the lease provisions and facts, the court notes that while it does not have to decide any other issue ' such as who owns the vehicle ' at this time, there is a Louisiana statute that grants the lessor under a “financed lease” creating a security interest “full legal and equitable title and ownership” until a lessee has actually exercised a purchase option under such lease. The ramifications of such a statute ' contrary to what would be concluded under the laws of other states ' will evidently need to wait for another time.

Liability ' Vicarious and Otherwise ' of Lessors (Mostly Motor Vehicle Lessors) for Equipment-Related Injuries And Damages

Brookins v. Ford Credit Titling Trust, 2008 WL 2744335 (Fla.App. July 16, 2008)

Acknowledging that its views are different than other Florida appellate court decisions on the subject (certifying conflict with such other decisions), this appellate court affirms the summary judgment granted by a trial court in favor of a motor vehicle lessor against a plaintiff injured by the lessee-operator, but only on the ground that the lessor was in compliance with Florida law requiring the maintenance of certain amounts of insurance in order to avoid the imposition of liability for injuries caused by its lessees. Contrary to the other appellate court decisions, this court holds that the federal Graves Amendment does not completely preempt either the Florida common law dangerous instrumentality doctrine or Florida statutes imposing vicarious liability if the lessor has failed to meet certain conditions. The court emphasizes the language of the Graves Amendment disclaiming any intention to supersede state laws imposing financial responsibility or insurance requirements on motor-vehicle lessors.

Avelino v. Williams, 2008 WL 2252529 (Conn.Super. May 8, 2008)(unpublished opinion, not reported in A.2d)

Brief decision dismissing plaintiff's argument that the Graves Amendment is an unconstitutional exercise of power under the commerce clause, which argument was supported only by the original Graham v. Dunkley New York trial count decision, which was subsequently reversed, and by a U.S. District Court decision from the Southern District of Florida which has been criticized by other District Courts in the same Circuit.

Forum Selection, Jurisdiction And Choice of Law

In re Lyon Financial Services, Inc., 2008 WL 2487092 (Tex.Sup.Ct. June 20, 2008) (not released for publication, subject to revision or withdrawal)

After a trial court had rejected a lessor's motion to dismiss in an action by the lessee asserting various claims against the lessor, which motion to dismiss was based upon forum selection clauses in the lease and subsequent restructuring agreement that selected courts in Pennsylvania, the lessor sought a writ of mandamus from the Texas Supreme Court directing the trial court to vacate its order denying the lessor's motion to dismiss. The Texas Supreme Court agreed with the lessor that there was no reason not to enforce the forum selection clause inasmuch as there was no showing that the clause itself had been procured by fraud or that it was so inconvenient, unfair or subversive of Texas public policy as to warrant its not being enforced.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. 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 Under Article 2A Finance Leases or Leases With 'Hell or High Water' and/or Waiver
Of Defenses Provisions

CN Funding, LLC v. The Ensig Group, Ltd., 2008 WL 2340660 (N.Y.App.Div. June 10, 2008)

This brief decision partially overturns a questionable trial court decision holding that a lease was not enforceable due to lack of consideration since the equipment had not been delivered by a vendor that had filed for bankruptcy. The appellate court notes that although the lease did not qualify as an Article 2A finance lease, the parties had agreed to treat it as such and the lessee agreed to pay the lessor notwithstanding any failure by the vendor to deliver the equipment. This decision, however, declines to award summary judgment to the lessor since the record presented an issue of fact as to whether the lessor was aware of the vendor's bankruptcy before signing the lease, in which case the lessee may have a defense to payment.

Xerox Corporation v. Digital Express Graphic, LLC, 2008 WL 2278492 (Tenn.Ct.App. May 22, 2008)(slip copy)

Although the lease in this case does not qualify as an Article
2A finance lease and although the lessor had entered into a maintenance agreement with the lessee in connection with the lease, the decision illustrates the importance of employing lease provisions whose enforceability is supported by Article 2A. This decision upholds the lessor's right to restrict the lessee to an exclusive remedy ' replacement of the equipment by the lessor in the event the lessor was unable to maintain the equipment ' and to enforce its remedy of acceleration of the remaining balance in the event the lessee defaulted in its scheduled payments. The decision also finds that the terms of the lease adequately disclaimed implied warranties of merchantability (in this instance the equipment was not sold by the lessor in the ordinary course of its business and had been selected by the lessee) and fitness for a particular purpose.

Popular Leasing USA, Inc. v. Mortgage Sense, Inc., 2008 WL 1952380 (Cal.App. May 6, 2008) (not reported in Cal.Reptr.3d)

Although this decision may not be able to be cited as precedent (California rules of court must be consulted), it strongly affirms a NorVergence assignee's ability to rely on a waiver of defenses clause ' even in the face of lessees' claims (accepted by the trial court, whose decision is reversed here) that the equipment was never installed and thus the lease allegedly never commenced. The court cites in particular its own 2006 decision in Wells Fargo Bank Minnesota N.A. v. B.C.B.U. that explained the commercial importance of enforcing such waiver of defense clauses. The decision also highlights the difference between: 1) the type of fraud that may have induced the lessees to sign leases and certificates of acceptance even before the equipment had been installed; and 2) the only type of fraud available as a defense against a holder in due course (in which the signer had neither knowledge nor opportunity to learn of the character and essential terms of the instrument it was signing).

Pludeman v. Northern Leasing Systems, Inc., 2008 WL 1944567 (N.Y.Ct.App. May 6, 2008) (subject to revision before publication in the New York Reports)

In this split decision by New York's highest court, the majority finds that a number of small business owners have sufficiently pleaded, under New York law, a cause of action for fraud against individuals comprising the lessor's top management. While this decision does not directly address the liability of the lessees to make payments under their allegedly fraudulently procured leases, it interestingly highlights practices of the salespeople employed by the lessor's equipment vendor that could conceivably come back to haunt the lessor and even its individual managers: concealing subsequent pages of the lease containing important provisions while having the lessee sign the front page; rushing the lessees into signing; and not providing the lessees with a copy of the lease (unless they called a 1-800 phone number). The dissenting judge points out that the first page of the lease indicates that it is “Page 1 of 4;” that most people entering into relatively small transactions (e.g., a car rental) do not bother to read the entire agreement; that the majority's real reasons for objecting to the inside pages of the lease were apparently not that they were concealed, but that the provisions there were arguably unduly harsh; and that the salespeople who presented the leases to the lessees for signature were not employees of the lessor.

In re NorVergence, Inc. (Diversified Aerospace Services, LLC v. IFC Credit Corp.), 2008 WL1901114 (Bankr.D.N.J. April 25, 2008)

A number of lessees under NorVergence leases brought an action in the NorVergence bankruptcy proceedings against IFC Credit, which had been assigned the leases by NorVergence, to have the leases found void and unenforceable. In this decision, the bankruptcy court finds that it does not have jurisdiction to hear the lessees' claims due to the fact that NorVergence's bankruptcy estate is administratively insolvent. If the lessees were successful in this proceeding, IFC would have an indemnification claim against NorVergence based upon its agreement with NorVergence. Since, however, the bankruptcy estate is administratively insolvent, the outcome of the lessees' claims could have no effect on the administration of the estate and thus jurisdiction in the bankruptcy proceedings does not exist.

IFC Credit Corporation v. Specialty Optical Systems, Inc., 252 S.W.3d 761 (Tex.App. 2008)

Although vacating a trial court's order of sanctions (including ordering that letters regarding the assignee's agreements with NorVergence be sent to all other NorVergence lessees against which the assignee had made claims) against this NorVergence assignee, this appellate court affirms the trial court's holdings that: 1) the lessee had been fraudulently induced by NorVergence into signing its lease (when NorVergence falsely promised to see that a contract with a competing telecommunications provider would be cancelled before countersigning the lease) ' making the lease unenforceable (presumably by NorVergence in particular, though the decision does not make this clear) ' and 2) IFC was not entitled to holder in due course status with regard to enforcing the lease's waiver of defenses provision because it was aware that, among other things, NorVergence was promising lessees savings in connection with its leases with no intent to deliver.

True Lease versus Security Interest: In General

Automotive Leasing Specialists, L.L.C. v. Little, 2008 WL 2369145 (U.S.Dist.Ct. W.D.La. June 10, 2008)

After the individual lessee under a motor vehicle lease agreement filed for bankruptcy protection, she argued that the lease was not a true lease, but instead created a security interest. After finding that the lease did not afford the lessee with the right to terminate its obligations (without payment of a substantial amount) and that the lessee had been given an option to purchase the vehicle at the end of the lease term for $206, the court looked to Louisiana's UCC provisions distinguishing leases from security interests (the same as in the uniform version of the UCC in effect in most states) and to cases in other jurisdictions (not finding any cases in either Louisiana or the Fifth Circuit on point) to determine that this lease creates a security interest. While this holding seems rather unremarkable in view of the lease provisions and facts, the court notes that while it does not have to decide any other issue ' such as who owns the vehicle ' at this time, there is a Louisiana statute that grants the lessor under a “financed lease” creating a security interest “full legal and equitable title and ownership” until a lessee has actually exercised a purchase option under such lease. The ramifications of such a statute ' contrary to what would be concluded under the laws of other states ' will evidently need to wait for another time.

Liability ' Vicarious and Otherwise ' of Lessors (Mostly Motor Vehicle Lessors) for Equipment-Related Injuries And Damages

Brookins v. Ford Credit Titling Trust, 2008 WL 2744335 (Fla.App. July 16, 2008)

Acknowledging that its views are different than other Florida appellate court decisions on the subject (certifying conflict with such other decisions), this appellate court affirms the summary judgment granted by a trial court in favor of a motor vehicle lessor against a plaintiff injured by the lessee-operator, but only on the ground that the lessor was in compliance with Florida law requiring the maintenance of certain amounts of insurance in order to avoid the imposition of liability for injuries caused by its lessees. Contrary to the other appellate court decisions, this court holds that the federal Graves Amendment does not completely preempt either the Florida common law dangerous instrumentality doctrine or Florida statutes imposing vicarious liability if the lessor has failed to meet certain conditions. The court emphasizes the language of the Graves Amendment disclaiming any intention to supersede state laws imposing financial responsibility or insurance requirements on motor-vehicle lessors.

Avelino v. Williams, 2008 WL 2252529 (Conn.Super. May 8, 2008)(unpublished opinion, not reported in A.2d)

Brief decision dismissing plaintiff's argument that the Graves Amendment is an unconstitutional exercise of power under the commerce clause, which argument was supported only by the original Graham v. Dunkley New York trial count decision, which was subsequently reversed, and by a U.S. District Court decision from the Southern District of Florida which has been criticized by other District Courts in the same Circuit.

Forum Selection, Jurisdiction And Choice of Law

In re Lyon Financial Services, Inc., 2008 WL 2487092 (Tex.Sup.Ct. June 20, 2008) (not released for publication, subject to revision or withdrawal)

After a trial court had rejected a lessor's motion to dismiss in an action by the lessee asserting various claims against the lessor, which motion to dismiss was based upon forum selection clauses in the lease and subsequent restructuring agreement that selected courts in Pennsylvania, the lessor sought a writ of mandamus from the Texas Supreme Court directing the trial court to vacate its order denying the lessor's motion to dismiss. The Texas Supreme Court agreed with the lessor that there was no reason not to enforce the forum selection clause inasmuch as there was no showing that the clause itself had been procured by fraud or that it was so inconvenient, unfair or subversive of Texas public policy as to warrant its not being enforced.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. 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.