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What's New in the Law
Vendor Issues
NCMIC Finance Corporation v. Brican America, Inc., 2010 WL 543339 (U.S.Dist.Ct. S.D.Fla. Feb. 9, 2010)
In this brief decision the court denies cross motions for summary judgment in a dispute between a finance company and a vendor for which the finance company provided lease financing for the vendor's customers. In the vendor agreement between the two parties, the vendor represented that it had entered into no agreements with lessees other than the lease documents of which the finance company was aware. At some time after the finance company learned that the vendor had entered into undisclosed marketing agreements with the lessees and a third party, the finance company claimed breach of warranty and demanded repurchase of the leases according to the terms of the vendor agreement. The court denies summary judgment to the finance company inasmuch as it finds that there was a genuine issue of material fact as to whether the finance company had waived its right to demand repurchase because it continued to fund leases for some time after learning of the marketing agreements. According to the vendor, the finance company only made its repurchase demand after the finance company's lender expressed a desire for the finance company to diversify its portfolio by reducing its concentration of business with that particular vendor.
Capital Solutions, LLC v. Konica Minolta Business Solutions U.S.A., Inc., 2010 WL 446936 (D.Kan. Feb. 5, 2010)
Although this decision describes few of the facts that underlie the dispute, it can generally be inferred that the main parties are a lessor that either originates equipment leases for the customers of a vendor of such equipment or perhaps takes assignment of such leases originated by the vendor (the vendor also apparently services the leases for the lessor) and a bank which in turn funds the leases of the lessor by making loans to the lessor and taking back a security interest in the leases and equipment. After the lessor apparently defaulted under its financing agreements with the bank, the bank attempted to enforce its security interest in its collateral (which the court finds to have been properly perfected), but was opposed by the vendor, which claimed a prior right to the equipment resulting from its having bought back equipment pursuant to a buy-back obligation with the lessor. Notwithstanding the bank's knowledge of such obligation, the court holds that the bank had not authorized the sale of the equipment to the vendor free of the bank's security interest, and thus the bank retains the right to enforce such security interest against the equipment in the hands of the vendor.
Susquehanna Commercial Finance, Inc. v. Vascular Resources, Inc., 2010 WL 95127 (U.S.Dist.Ct. M.D.Pa. Jan. 6, 2010)
This case is more interesting for its facts and yet-to-be-resolved issues than for the specific decisions rendered. The lessor funded nearly $3 million to the vendor to finance a lease of medical equipment by a lessee medical practice. The vendor, however, had not delivered the equipment more than a year later, alleging both that the lessee was not yet prepared to accept the equipment and that the lessee has continued to make payments under its lease. After noting the “curious posture of this case,” in which neither the lessor nor the vendor availed itself of the opportunity to join the lessee as an indispensable party, the court denies both the lessor's request for a preliminary injunction requiring the vendor to freeze and set aside the amount of money funded by the lessor and the vendor's request to dismiss the case for failure to state a claim.
Forum Selection, Jurisdiction and Choice of Law
O'Neill Farms, Inc. v. Reinert, 2010 WL 819819 (S.D.Sup.Ct. March 10, 2010)
This South Dakota Supreme Court decision examines whether a very brief forum selection clause in a two-page lease should be enforced under the circumstances of this case. In reversing a lower court's finding that the clause was unreasonable based upon a set of factors mentioned in an earlier Supreme Court decision, this decision holds that a simple weighing of the factors used by the lower court was not enough, and that a strong showing of unreasonableness must be made before finding that the clause is unreasonable. In this case, the fact that the lessor's business involved leasing equipment throughout the Midwest helped lead to the court's conclusion that the clause's inclusion in the lessor's contracts was reasonable.
Assignments of Leases
Overland Leasing Group, LLC v. First Financial Corporate Services, Inc., 2009 WL 4981632 (U.S.Dist.Ct. D.N.J. Dec. 17, 2009)
After an assignee purchased a lease and related equipment from a lessor, the lessee filed for bankruptcy and the assignee brought suit against the lessor for fraud and breach of contract ' for misrepresenting the condition (that it was in good working order) and cost of the equipment to the assignee and for failing to repurchase the lease and equipment from the assignee as a result of such misrepresentations. This decision denies the lessor's motions for summary judgment, finding that there are genuine issues of material fact regarding the assignee's claims. (The assignee had also sued accountants who had done work for the lessee, but the court granted the accountants' motions for summary judgment.)
Gaia Leasing LLC v. Wendelta, Inc., 2009 WL 4810685 (D.Minn. Dec. 11, 2009)
An assignee of a lease and the related equipment had sued the lessee following the lessee's default. Prior to the lessee's default, however, the original lessor entered bankruptcy proceedings (involuntarily) and the lessee filed a motion claiming that the assignment had not taken place until after the bankruptcy filing, and therefore the lease and leased equipment remained property of the bankruptcy estate to be dealt with in the lessor's bankruptcy proceedings. Notwithstanding considerable ambiguity with respect to the dates of assignment of the lease assignment agreement and related bill of sale for the equipment (a four-and-one-half-month difference between what the assignee argued was the actual assignment date and wording on the lease assignment agreement concerning what was to be the
“effective date” of the assignment), this court agrees with the assignee and denies the lessee's motion. In particular, the court refers to language in the bill of sale (” ' does hereby unconditionally and irrevocably sell ' “ ) as “absolute language” indicating an immediate assignment. While this decision is limited simply to picking the actual date of effectiveness of the assignment, it should cause leasing attorneys to consider the consequences of a lessor's bankruptcy as it relates to the language and legal structure of an assignee's prior assignment from that lessor. If the assignee's financing takes the form of a non-recourse loan secured by the lease and equipment, such collateral remains property of the lessor and part of its bankruptcy estate. On the other hand, a lease assignment ' whether or not accompanied by a transfer of some interest in the equipment ' can be structured as an absolute sale of such lease, rather than a mere security interest. Article 9 treats both structures similarly for certain purposes, but leaves it up to other law to decide whether a true sale has taken place.
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. 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.
Vendor Issues
NCMIC Finance Corporation v. Brican America, Inc., 2010 WL 543339 (U.S.Dist.Ct. S.D.Fla. Feb. 9, 2010)
In this brief decision the court denies cross motions for summary judgment in a dispute between a finance company and a vendor for which the finance company provided lease financing for the vendor's customers. In the vendor agreement between the two parties, the vendor represented that it had entered into no agreements with lessees other than the lease documents of which the finance company was aware. At some time after the finance company learned that the vendor had entered into undisclosed marketing agreements with the lessees and a third party, the finance company claimed breach of warranty and demanded repurchase of the leases according to the terms of the vendor agreement. The court denies summary judgment to the finance company inasmuch as it finds that there was a genuine issue of material fact as to whether the finance company had waived its right to demand repurchase because it continued to fund leases for some time after learning of the marketing agreements. According to the vendor, the finance company only made its repurchase demand after the finance company's lender expressed a desire for the finance company to diversify its portfolio by reducing its concentration of business with that particular vendor.
Capital Solutions, LLC v. Konica Minolta Business Solutions U.S.A., Inc., 2010 WL 446936 (D.Kan. Feb. 5, 2010)
Although this decision describes few of the facts that underlie the dispute, it can generally be inferred that the main parties are a lessor that either originates equipment leases for the customers of a vendor of such equipment or perhaps takes assignment of such leases originated by the vendor (the vendor also apparently services the leases for the lessor) and a bank which in turn funds the leases of the lessor by making loans to the lessor and taking back a security interest in the leases and equipment. After the lessor apparently defaulted under its financing agreements with the bank, the bank attempted to enforce its security interest in its collateral (which the court finds to have been properly perfected), but was opposed by the vendor, which claimed a prior right to the equipment resulting from its having bought back equipment pursuant to a buy-back obligation with the lessor. Notwithstanding the bank's knowledge of such obligation, the court holds that the bank had not authorized the sale of the equipment to the vendor free of the bank's security interest, and thus the bank retains the right to enforce such security interest against the equipment in the hands of the vendor.
Susquehanna Commercial Finance, Inc. v. Vascular Resources, Inc., 2010 WL 95127 (U.S.Dist.Ct. M.D.Pa. Jan. 6, 2010)
This case is more interesting for its facts and yet-to-be-resolved issues than for the specific decisions rendered. The lessor funded nearly $3 million to the vendor to finance a lease of medical equipment by a lessee medical practice. The vendor, however, had not delivered the equipment more than a year later, alleging both that the lessee was not yet prepared to accept the equipment and that the lessee has continued to make payments under its lease. After noting the “curious posture of this case,” in which neither the lessor nor the vendor availed itself of the opportunity to join the lessee as an indispensable party, the court denies both the lessor's request for a preliminary injunction requiring the vendor to freeze and set aside the amount of money funded by the lessor and the vendor's request to dismiss the case for failure to state a claim.
Forum Selection, Jurisdiction and Choice of Law
O'Neill Farms, Inc. v. Reinert, 2010 WL 819819 (S.D.Sup.Ct. March 10, 2010)
This South Dakota Supreme Court decision examines whether a very brief forum selection clause in a two-page lease should be enforced under the circumstances of this case. In reversing a lower court's finding that the clause was unreasonable based upon a set of factors mentioned in an earlier Supreme Court decision, this decision holds that a simple weighing of the factors used by the lower court was not enough, and that a strong showing of unreasonableness must be made before finding that the clause is unreasonable. In this case, the fact that the lessor's business involved leasing equipment throughout the Midwest helped lead to the court's conclusion that the clause's inclusion in the lessor's contracts was reasonable.
Assignments of Leases
Overland Leasing Group, LLC v. First Financial Corporate Services, Inc., 2009 WL 4981632 (U.S.Dist.Ct. D.N.J. Dec. 17, 2009)
After an assignee purchased a lease and related equipment from a lessor, the lessee filed for bankruptcy and the assignee brought suit against the lessor for fraud and breach of contract ' for misrepresenting the condition (that it was in good working order) and cost of the equipment to the assignee and for failing to repurchase the lease and equipment from the assignee as a result of such misrepresentations. This decision denies the lessor's motions for summary judgment, finding that there are genuine issues of material fact regarding the assignee's claims. (The assignee had also sued accountants who had done work for the lessee, but the court granted the accountants' motions for summary judgment.)
Gaia Leasing LLC v. Wendelta, Inc., 2009 WL 4810685 (D.Minn. Dec. 11, 2009)
An assignee of a lease and the related equipment had sued the lessee following the lessee's default. Prior to the lessee's default, however, the original lessor entered bankruptcy proceedings (involuntarily) and the lessee filed a motion claiming that the assignment had not taken place until after the bankruptcy filing, and therefore the lease and leased equipment remained property of the bankruptcy estate to be dealt with in the lessor's bankruptcy proceedings. Notwithstanding considerable ambiguity with respect to the dates of assignment of the lease assignment agreement and related bill of sale for the equipment (a four-and-one-half-month difference between what the assignee argued was the actual assignment date and wording on the lease assignment agreement concerning what was to be the
“effective date” of the assignment), this court agrees with the assignee and denies the lessee's motion. In particular, the court refers to language in the bill of sale (” ' does hereby unconditionally and irrevocably sell ' “ ) as “absolute language” indicating an immediate assignment. While this decision is limited simply to picking the actual date of effectiveness of the assignment, it should cause leasing attorneys to consider the consequences of a lessor's bankruptcy as it relates to the language and legal structure of an assignee's prior assignment from that lessor. If the assignee's financing takes the form of a non-recourse loan secured by the lease and equipment, such collateral remains property of the lessor and part of its bankruptcy estate. On the other hand, a lease assignment ' whether or not accompanied by a transfer of some interest in the equipment ' can be structured as an absolute sale of such lease, rather than a mere security interest. Article 9 treats both structures similarly for certain purposes, but leaves it up to other law to decide whether a true sale has taken place.
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. 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
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