What's New in the Law

True Lease vs. Security Interest: In General

Gibralter Financial Corp. v. Prestige Equipment Corp., 925 N.E.2d 751 (Ind.App. 2010)

Eight months after an equipment user bought a punch press, it entered into a sale/leaseback transaction with a lessor containing an early buyout option. After the user defaulted on the lease, the lessor sold the equipment and later was sued by a secured lender of the user for conversion. This appellate court upholds a lower court's summary judgment against the secured creditor. While finding that the EBO price was nearly 80% of the equipment's estimated value at the time that the EBO was to be exercised, the court states that this can hardly be said to be nominal additional consideration and cites the In re Gateway Ethanol court's mention of the opinion of 4 White & Summers, Uniform Commercial Code ' 30-3(e) (5th ed. 2002 & 2008 Supp.) that any option price above 50% should not be considered nominal. The court also finds that the cost of exercising the EBO was more than the cost to the user of finishing the lease and returning the equipment ' not satisfying one of the criteria for nominality found in the statute. In addition, the court determines that the fact that the payments to be made during the lease term provided the lessor with a full return on its investment is not dispositive in favor of the secured party ' citing the full payout lease as one of the factors listed in the statute as not necessarily creating a secured interest. Finally, the court also notes that the lack of a bill of sale or purchase agreement in connection with the sale/leaseback was not an indication that the ownership of the equipment had not be transferred to the lessor.

Assignments of Leases

Bremer Bank, National Association v. John Hancock Life Insurance Company, 2009 WL 702009 (U.S.Dist.Ct. D.Minn. March 13, 2009), aff'd 601 F.3d 824 (8th Cir. 2010)

This case, a U.S. District Court decision affirmed by the Eighth Circuit Court of Appeals, illustrates a number of the issues that can arise when a lessor finances a lease transaction by assigning its interests in the lease and granting a security interest in the equipment to another financing source ' commonly referred to as a “leveraged lease.” This particular matter is one involving very expensive equipment (an aircraft leased to Northwest Airlines) and a set of relatively complex documents (a participation agreement, an indenture, a trust agreement, an assignment agreement, etc., in addition to the lease); but the same issue can arise in much simpler instances of lease financing as well ' i.e., following a default by the lessee, are there restrictions on what an assignee of the lease and holder of a security interest in the equipment may do in enforcing its interests in the equipment that serve to protect the lessor's residual interest in the equipment? Here, the court rejected the equipment owner's arguments based upon what the owner claimed was: 1) an “equity squeeze protection” clause in the documents and 2) the lender's alleged violation of standards imposed by the UCC (Article 9's commercial reasonableness requirements with respect to foreclosures and, in general, the implied covenant of good faith and fair dealing). While legal requirements often cannot be varied, the negotiated provisions of the agreements comprising the transaction should be carefully assessed with respect to the rights under various circumstances of those parties with an interest in the equipment.

Lease Formation: Authority to Bind a Lessee Under a Lease

Frontier Leasing Corporation v. Links Engineering, LLC, 2010 WL 1838406 (Iowa Supreme Ct. May 7, 2010) (not yet released for publication)

In an action by a leasing company to enforce a defaulted lease, the lessee argued that the person signing the lease on its behalf did not have authority to do so. The lessee owned a golf course, and the signatory was a golf professional hired to run the golf course's day-to-day operations. The lessee asserted that the golf professional did not have the authority to enter into financing arrangements on its behalf. While a lower court had granted summary judgment in favor of the leasing company, the Iowa Supreme court reverses, finding that the facts (to be further investigated on remand) could have supported a conclusion that the signatory had neither actual nor apparent authority ' the latter predicated on common law principles (e.g., estoppel, ratification) that might lead to a conclusion that an agent had the authority to bind its principal.

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.

Ability to Collect Rentals

Leaf Financial Corp. v. ACS Services, Inc., 2010 WL 1740884 (Del.Super. April 30, 2010) (unpublished opinion, check court rules before citing)

The court grants a lessor's motion for summary judgment against a lessee for breach of a lease. The court finds that the statutory requirements for creating a finance lease exist, but also goes on to cite an Article 2A Official Comment stating that even if all aspects of the statutory definition are not met, the parties may create such a lease by agreement. The court rejects the lessee's argument that the lessor had established a partnership with the vendor. The court also notes that the lessee could not rely on certain defenses under Article 2A because the lease form had the lessee waive any rights and remedies it might have under 2A-508 through 2A-522. One potentially interesting point not mentioned (possibly not really an issue under the less-than-perfectly-clear facts of this case or, even if an issue, not raised by the lessee or the court) was whether the transaction qualified as a lease under Article 2A at all. While the decision sometimes refers to goods, the “System” that was the subject of the contract appears to be comprised primarily of software. If this system were to have been all software (or perhaps even primarily software), the contract would not qualify as a lease of goods governed by Article 2A.

True Lease vs. Security Interest: In General

Gibralter Financial Corp. v. Prestige Equipment Corp., 925 N.E.2d 751 (Ind.App. 2010)

Eight months after an equipment user bought a punch press, it entered into a sale/leaseback transaction with a lessor containing an early buyout option. After the user defaulted on the lease, the lessor sold the equipment and later was sued by a secured lender of the user for conversion. This appellate court upholds a lower court's summary judgment against the secured creditor. While finding that the EBO price was nearly 80% of the equipment's estimated value at the time that the EBO was to be exercised, the court states that this can hardly be said to be nominal additional consideration and cites the In re Gateway Ethanol court's mention of the opinion of 4 White & Summers, Uniform Commercial Code ' 30-3(e) (5th ed. 2002 & 2008 Supp.) that any option price above 50% should not be considered nominal. The court also finds that the cost of exercising the EBO was more than the cost to the user of finishing the lease and returning the equipment ' not satisfying one of the criteria for nominality found in the statute. In addition, the court determines that the fact that the payments to be made during the lease term provided the lessor with a full return on its investment is not dispositive in favor of the secured party ' citing the full payout lease as one of the factors listed in the statute as not necessarily creating a secured interest. Finally, the court also notes that the lack of a bill of sale or purchase agreement in connection with the sale/leaseback was not an indication that the ownership of the equipment had not be transferred to the lessor.

Assignments of Leases

Bremer Bank, National Association v. John Hancock Life Insurance Company, 2009 WL 702009 (U.S.Dist.Ct. D.Minn. March 13, 2009), aff'd 601 F.3d 824 (8th Cir. 2010)

This case, a U.S. District Court decision affirmed by the Eighth Circuit Court of Appeals, illustrates a number of the issues that can arise when a lessor finances a lease transaction by assigning its interests in the lease and granting a security interest in the equipment to another financing source ' commonly referred to as a “leveraged lease.” This particular matter is one involving very expensive equipment (an aircraft leased to Northwest Airlines) and a set of relatively complex documents (a participation agreement, an indenture, a trust agreement, an assignment agreement, etc., in addition to the lease); but the same issue can arise in much simpler instances of lease financing as well ' i.e., following a default by the lessee, are there restrictions on what an assignee of the lease and holder of a security interest in the equipment may do in enforcing its interests in the equipment that serve to protect the lessor's residual interest in the equipment? Here, the court rejected the equipment owner's arguments based upon what the owner claimed was: 1) an “equity squeeze protection” clause in the documents and 2) the lender's alleged violation of standards imposed by the UCC (Article 9's commercial reasonableness requirements with respect to foreclosures and, in general, the implied covenant of good faith and fair dealing). While legal requirements often cannot be varied, the negotiated provisions of the agreements comprising the transaction should be carefully assessed with respect to the rights under various circumstances of those parties with an interest in the equipment.

Lease Formation: Authority to Bind a Lessee Under a Lease

Frontier Leasing Corporation v. Links Engineering, LLC, 2010 WL 1838406 (Iowa Supreme Ct. May 7, 2010) (not yet released for publication)

In an action by a leasing company to enforce a defaulted lease, the lessee argued that the person signing the lease on its behalf did not have authority to do so. The lessee owned a golf course, and the signatory was a golf professional hired to run the golf course's day-to-day operations. The lessee asserted that the golf professional did not have the authority to enter into financing arrangements on its behalf. While a lower court had granted summary judgment in favor of the leasing company, the Iowa Supreme court reverses, finding that the facts (to be further investigated on remand) could have supported a conclusion that the signatory had neither actual nor apparent authority ' the latter predicated on common law principles (e.g., estoppel, ratification) that might lead to a conclusion that an agent had the authority to bind its principal.

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.