What's New in the Law

True Lease vs Security Interest: In General

Park Western Financial Corporation v. Phoenix Equipment Company, Inc. (In re Phoenix Equipment Company, Inc.), 2009 WL 3188684 (Bankr.D.Ariz. Sept. 30, 2009) (not for publication ' electronic docketing only)

In this memorandum decision, the court considers whether a number of leases of trailers (originated through sales of the equipment by the lessee to the finance company followed by leasebacks to the lessee) should be recharacterized as secured transactions. The court seems to be at least somewhat influenced by the fact that these sale-leasebacks were motivated by the lessee's general financing needs and that the transactions were tied together with cross-collateralization agreements. In its legal analysis, the court initially finds that the lessee's requested recharacterizaton cannot be based simply upon the fact that all of the leases were subject to a “nominal” 10% purchase option ' since the lessee had not presented enough valuation evidence to establish that such a purchase option should be considered nominal ' thereby automatically creating a secured transaction. However, in continuing to review all the “facts of the case,” the court finds that since the 10% purchase option was applied to all leases ' regardless of their varying lengths and the differences in the values of the equipment at the outset of the leases (i.e., bearing no relation to the anticipated fair market value of the equipment at the end of the leases) ' the leases should be considered secured transactions inasmuch as both the lessor and lessee expected that the lessee would have no choice but to purchase the equipment in order to stay in business.

Gangloff Industries, Inc. v. Generic Financing and Leasing Corporation, 2009 WL 1674976 (Ct.App.Ind. June 16, 2009)

This appellate court decision against a lessor of a truck reverses a lower court decision. This ruling first finds that the lease created a security interest based on a version of the economic realities test ' indicating that the only sensible course of action would have been for the lessee to exercise its purchase option at the end of the lease. The court cites a New York bankruptcy court decision collecting cases in which purchase option prices ranging from 10% to 25% of the aggregate rental price were found to be nominal. After finding that the lease created a security interest, the court concludes that the appellant's possessory lien for repairs and other services had priority over the lessor's lien ' citing Section 9-333 of the UCC.

Measures of Lessors' Damages

Tango Transport, L.L.C. v. Transport International Pool, L.L.C., 2009 WL 3753559 (U.S.Dist.Ct. W.D.La. Nov. 9, 2009)

This court denies the lessor's motion for partial summary judgment on its claim that the lessee should be required to pay at the lease rate for trailers that it did not return to the lessor at the termination of the lease. Notwithstanding clear language to that effect in the lease, the court notes that the lease also called for the trailers to be returned to a particular “Return Location” set forth on the schedules and that such location was a distribution center that had been closed by the lessor. Thus the court was unwilling to award the lessor with damages on summary judgment without further investigation of the facts regarding possible discussion and agreement as to alternative return locations.

Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 2009 WL 2170999 (U.S.Dist.Ct. D.Minn. July 17, 2009)

While finding for the lessor on its summary judgment motion regarding the lessee's liability for breach of a finance lease (see discussion above in the Ability to Collect Rentals section), the court concludes that it cannot grant summary judgment on the issue of damages. It does so after finding that there was a genuine issue of material fact as to whether the lessor reasonably mitigated its damages. The court admits that the UCC's concept of “commercial reasonableness” in a secured transaction is not directly applicable in this leasing case, but goes on to state that Minnesota courts find it helpful in determining mitigation of damages issues when leased property is repossessed and sold.

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

Petrushonis v. Andrews, 2009 WL 3839304 (Conn.Super. Oct. 20, 2009)(unpublished opinion ' check court rules before citing)

Summary judgment in favor of truck lessor against a plaintiff injured in a motor vehicle accident. The plaintiff had made no allegation that the lessor was liable because of its own direct negligence or criminal actions. Although the court notes that the complaint does not specifically so allege, the court infers that the vicarious liability action against the lessor is premised upon a Connecticut statute providing for such ' a statute that had been termed a “statutory suretyship.” However, the court finds that such statute has been preempted by the federal statute (the Graves amendment) referenced in many recent cases on the subject (including Connecticut cases).

Carton v. General Motors Acceptance Corporation, 2009 WL 2139387 (U.S.Dist.Ct. N.D.Iowa July 14, 2009

In denying various claims by the plaintiff against defendant for vicarious liability with respect to a motor vehicle accident, the court rules against plaintiff's contentions that the federal Graves amendment preempting states' vicarious liability laws is unconstitutional as a violation of the equal protection clauses of the United States and Iowa Constitutions.

Vendor Issues

BBAS, Inc. v. Marlin Leasing Corporation, 289 S.W.3d 153 (Ark.App. 2008)

This appellate court affirms a lower court grant of summary judgment in favor of a lessor which, after its lessee defaulted, learned that the vendor had delivered only a small portion of the equipment to the lessee for which the lessor had paid in full and that the vendor had “refunded” the value of the undelivered equipment to the lessee instead of to the lessor. Rejecting the vendor's argument that awarding the lessor damages would amount to recourse against the vendor ' recourse to which the vendor had never agreed ' the court finds that summary judgment in favor of the lessor for the value of the equipment not delivered to the lessee was appropriate based upon the common law tort of conversion committed by the vendor.

Forum Selection, Jurisdiction and Choice of Law

Merchants and Farmers Bank v. Marquette Equipment Finance, LLC, 2009 WL 2767678 (U.S.Dist.Ct. N.D.Miss. Aug. 27, 2009) In granting a motion by the original lessor's successor-in-interest to transfer venue to Utah of an action regarding a lease option brought by the lessee, this court decides that it should not rely solely on the lease clause providing for venue in Utah. The court finds that the clause at issue did not clearly provide for exclusive venue in Utah. However, after considering convenience factors under the federal statute regarding motions to transfer, it ultimately decides to grant the finance company's motion.

Frontier Leasing Corp. v. Singh, 2009 WL 2782681 (Conn. Super. July 31, 2009) (unpublished opinion)

This Connecticut court grants a motion for summary judgment by the leasing company recognizing a default judgment against the lessee obtained in Polk County, IA. In doing so, the court cites other Connecticut cases that have upheld forum selection clauses absent a showing of fraud or overreaching.

Waivers of Trial by Jury

AEL Financial LLC v. City Auto Parts of Durham, Inc., 2009 WL 2778078 (U.S.Dist.Ct. N.D.Ill. Aug. 31, 2009)

In granting the lessor's motion to strike defendant's jury demand, the court finds that the jury waiver provision in the equipment lease and related guaranty are not unconscionable, notwithstanding the lessee's claims that the provision was inconspicuous and that the lessee did not see the provision. The court goes on to state that evidence of fraud in the inducement by the lessor would not change this result, but appears to leave the issue open in the event that fraud in factum had occurred with respect to defendants' entry into the documents containing such a waiver (in which case the entire agreement could be void).

Lessors' Rights in Bankruptcy Proceedings

Barber v. Reynolds Motor Leasing Company (In re My Type, Inc.), 2009 WL 1705851 (Bankr.C.D.Ill. June 17, 2009)

This bankruptcy court decision begins with the following sentence: “Rearing its ugly head in this case is the issue of whether a lessor of a fleet of trucks whose leases are recharacterized as disguised security agreements is thereby rendered unperfected because the lessor is identified on the titles as owner instead of lienholder.” After certain of the lessor's leases were so recharacterized by the court, the trustee alleged that the lessor was unperfected on such leases. This court, however, agrees with the majority of decisions holding that in cases where leases are determined in fact to create security interests, the lessor/secured party is nevertheless properly perfected in the vehicle when its name appears on the certificate of title as owner and not as lienholder.

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 Under Article 2A Finance Leases or Leases with 'Hell-or-High-Water' and/ or Waiver of Defenses Provisions

Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 2009 WL 2170999 (U.S.Dist.Ct. D.Minn. July 17, 2009)

Although an equipment vendor's representative (alleged by the lessee to have made various misrepresentations regarding the equipment) assisted the lessee in obtaining financing, the lessee did not demonstrate an agency relationship between the rep and the lessor. The court finds here that summary judgment against the lessee on the issue of liability with regard to the finance lease at issue is appropriate. (See discussion below under Measures of Lessors' Damages with regard to the lessor's request for damages.)

True Lease vs Security Interest: In General

Park Western Financial Corporation v. Phoenix Equipment Company, Inc. (In re Phoenix Equipment Company, Inc.), 2009 WL 3188684 (Bankr.D.Ariz. Sept. 30, 2009) (not for publication ' electronic docketing only)

In this memorandum decision, the court considers whether a number of leases of trailers (originated through sales of the equipment by the lessee to the finance company followed by leasebacks to the lessee) should be recharacterized as secured transactions. The court seems to be at least somewhat influenced by the fact that these sale-leasebacks were motivated by the lessee's general financing needs and that the transactions were tied together with cross-collateralization agreements. In its legal analysis, the court initially finds that the lessee's requested recharacterizaton cannot be based simply upon the fact that all of the leases were subject to a “nominal” 10% purchase option ' since the lessee had not presented enough valuation evidence to establish that such a purchase option should be considered nominal ' thereby automatically creating a secured transaction. However, in continuing to review all the “facts of the case,” the court finds that since the 10% purchase option was applied to all leases ' regardless of their varying lengths and the differences in the values of the equipment at the outset of the leases (i.e., bearing no relation to the anticipated fair market value of the equipment at the end of the leases) ' the leases should be considered secured transactions inasmuch as both the lessor and lessee expected that the lessee would have no choice but to purchase the equipment in order to stay in business.

Gangloff Industries, Inc. v. Generic Financing and Leasing Corporation, 2009 WL 1674976 (Ct.App.Ind. June 16, 2009)

This appellate court decision against a lessor of a truck reverses a lower court decision. This ruling first finds that the lease created a security interest based on a version of the economic realities test ' indicating that the only sensible course of action would have been for the lessee to exercise its purchase option at the end of the lease. The court cites a New York bankruptcy court decision collecting cases in which purchase option prices ranging from 10% to 25% of the aggregate rental price were found to be nominal. After finding that the lease created a security interest, the court concludes that the appellant's possessory lien for repairs and other services had priority over the lessor's lien ' citing Section 9-333 of the UCC.

Measures of Lessors' Damages

Tango Transport, L.L.C. v. Transport International Pool, L.L.C., 2009 WL 3753559 (U.S.Dist.Ct. W.D.La. Nov. 9, 2009)

This court denies the lessor's motion for partial summary judgment on its claim that the lessee should be required to pay at the lease rate for trailers that it did not return to the lessor at the termination of the lease. Notwithstanding clear language to that effect in the lease, the court notes that the lease also called for the trailers to be returned to a particular “Return Location” set forth on the schedules and that such location was a distribution center that had been closed by the lessor. Thus the court was unwilling to award the lessor with damages on summary judgment without further investigation of the facts regarding possible discussion and agreement as to alternative return locations.

Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 2009 WL 2170999 (U.S.Dist.Ct. D.Minn. July 17, 2009)

While finding for the lessor on its summary judgment motion regarding the lessee's liability for breach of a finance lease (see discussion above in the Ability to Collect Rentals section), the court concludes that it cannot grant summary judgment on the issue of damages. It does so after finding that there was a genuine issue of material fact as to whether the lessor reasonably mitigated its damages. The court admits that the UCC's concept of “commercial reasonableness” in a secured transaction is not directly applicable in this leasing case, but goes on to state that Minnesota courts find it helpful in determining mitigation of damages issues when leased property is repossessed and sold.

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

Petrushonis v. Andrews, 2009 WL 3839304 (Conn.Super. Oct. 20, 2009)(unpublished opinion ' check court rules before citing)

Summary judgment in favor of truck lessor against a plaintiff injured in a motor vehicle accident. The plaintiff had made no allegation that the lessor was liable because of its own direct negligence or criminal actions. Although the court notes that the complaint does not specifically so allege, the court infers that the vicarious liability action against the lessor is premised upon a Connecticut statute providing for such ' a statute that had been termed a “statutory suretyship.” However, the court finds that such statute has been preempted by the federal statute (the Graves amendment) referenced in many recent cases on the subject (including Connecticut cases).

Carton v. General Motors Acceptance Corporation, 2009 WL 2139387 (U.S.Dist.Ct. N.D.Iowa July 14, 2009

In denying various claims by the plaintiff against defendant for vicarious liability with respect to a motor vehicle accident, the court rules against plaintiff's contentions that the federal Graves amendment preempting states' vicarious liability laws is unconstitutional as a violation of the equal protection clauses of the United States and Iowa Constitutions.

Vendor Issues

BBAS, Inc. v. Marlin Leasing Corporation , 289 S.W.3d 153 (Ark.App. 2008)

This appellate court affirms a lower court grant of summary judgment in favor of a lessor which, after its lessee defaulted, learned that the vendor had delivered only a small portion of the equipment to the lessee for which the lessor had paid in full and that the vendor had “refunded” the value of the undelivered equipment to the lessee instead of to the lessor. Rejecting the vendor's argument that awarding the lessor damages would amount to recourse against the vendor ' recourse to which the vendor had never agreed ' the court finds that summary judgment in favor of the lessor for the value of the equipment not delivered to the lessee was appropriate based upon the common law tort of conversion committed by the vendor.

Forum Selection, Jurisdiction and Choice of Law

Merchants and Farmers Bank v. Marquette Equipment Finance, LLC, 2009 WL 2767678 (U.S.Dist.Ct. N.D.Miss. Aug. 27, 2009) In granting a motion by the original lessor's successor-in-interest to transfer venue to Utah of an action regarding a lease option brought by the lessee, this court decides that it should not rely solely on the lease clause providing for venue in Utah. The court finds that the clause at issue did not clearly provide for exclusive venue in Utah. However, after considering convenience factors under the federal statute regarding motions to transfer, it ultimately decides to grant the finance company's motion.

Frontier Leasing Corp. v. Singh, 2009 WL 2782681 (Conn. Super. July 31, 2009) (unpublished opinion)

This Connecticut court grants a motion for summary judgment by the leasing company recognizing a default judgment against the lessee obtained in Polk County, IA. In doing so, the court cites other Connecticut cases that have upheld forum selection clauses absent a showing of fraud or overreaching.

Waivers of Trial by Jury

AEL Financial LLC v. City Auto Parts of Durham, Inc., 2009 WL 2778078 (U.S.Dist.Ct. N.D.Ill. Aug. 31, 2009)

In granting the lessor's motion to strike defendant's jury demand, the court finds that the jury waiver provision in the equipment lease and related guaranty are not unconscionable, notwithstanding the lessee's claims that the provision was inconspicuous and that the lessee did not see the provision. The court goes on to state that evidence of fraud in the inducement by the lessor would not change this result, but appears to leave the issue open in the event that fraud in factum had occurred with respect to defendants' entry into the documents containing such a waiver (in which case the entire agreement could be void).

Lessors' Rights in Bankruptcy Proceedings

Barber v. Reynolds Motor Leasing Company (In re My Type, Inc.), 2009 WL 1705851 (Bankr.C.D.Ill. June 17, 2009)

This bankruptcy court decision begins with the following sentence: “Rearing its ugly head in this case is the issue of whether a lessor of a fleet of trucks whose leases are recharacterized as disguised security agreements is thereby rendered unperfected because the lessor is identified on the titles as owner instead of lienholder.” After certain of the lessor's leases were so recharacterized by the court, the trustee alleged that the lessor was unperfected on such leases. This court, however, agrees with the majority of decisions holding that in cases where leases are determined in fact to create security interests, the lessor/secured party is nevertheless properly perfected in the vehicle when its name appears on the certificate of title as owner and not as lienholder.

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.