What's New in the Law

In this suit involving a claim against a car rental company for injuries sustained by the plaintiff allegedly caused by the lessee of the automobile, the court disposes of the plaintiff's allegation that the Graves Amendment is unconstitutional by citing a recent Connecticut Supreme Court case, Rodriguez v. Testa, 296 Conn. 1 (2010), holding that the amendment's pre-emption of the state's vicarious liability statute was constitutional. The decision goes on to hold that the rental company was not independently negligent in the manner contemplated by the savings clause in the Graves Amendment permitting claims against motor vehicle lessors on grounds other than vicarious liability. The court holds that there is no legal authority for concluding that Connecticut imposes a duty on rental companies to investigate a lessee's driving record ' e.g., to determine whether there may have been past convictions for alcohol-related offenses or reckless driving.

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. This update is dedicated to Ed Groobert, soon-to-be ELFA General Counsel Emeritus.

Ability to Collect Rentals Under Article 2A Finance Leases or Leases with 'Hell-or-High-Water' And/or Waiver of Defenses Provisions

Direct Capital Corp. v. Babatunde Osunbayo, 104546/98, NYLJ 1202472562632, at *1 (Civ., RI, Sept. 21, 2010)

The court grants a lessor's motion for summary judgment against a lessee in default, finding that the lease satisfied the requirements for an Article 2A finance lease and that the lessee had accepted the equipment. Notwithstanding the lessee's defense that the equipment vendor had failed to disclose certain information about the equipment, the court holds that the lessor had only arranged for the financing and was not responsible in any way for the equipment.

C & J Vantage Leasing Co. v. Outlook Farm Golf Club, LLC, 2010 WL 2629824 (Iowa Sup. Ct. July 2, 2010) (not released for publication in permanent law reports)

If this decision is released for publication, perhaps its reasoning can be clarified and/or corrected. This is an appeal to Iowa's highest court of a decision involving facts common to a number of other cases ' leases of beverage carts
to golf courses with respect to which an advertising company had represented that advertising on the carts would pay for the costs of leasing. When the advertising company stopped paying, the lessee stopped paying the lessor or assignee of the lessor, and suit was brought against the lessee. The Iowa Supreme Court reverses the lower court's summary judgment against the lessee ' finding that there were genuine issues of material fact regarding whether the advertising company, which may have fraudulently induced the lessee to enter into the lease, had acted as agent for the lessor. The problem with this decision is its apparent confusion of a defense of fraudulent misrepresentation concerning facts regarding the lease transaction (sometimes referred to simply as fraud in the inducement) ' which could be a valid defense to paying the lessor under the hell-or-high-water clause contained in the lease ' with the type of fraud that afforded the lessee neither the knowledge nor reasonable opportunity to learn of the essential character of the transaction (sometimes referred to as fraud in factum) ' which is one of the few defenses to enforcement by a lessor's assignee of a waiver of defenses contained in the lease. The court does not appear to understand the significant distinction between the legal rights of the lessor, on the one hand, and its assignee, on the other: ” ' defenses to contract formation, such as fraud in the inducement, may be asserted even where a party has agreed to a hell-or-high-water clause or a waiver-of-defenses provision.” Other elements of the decision concerning some common practices in vendor-related business (e.g., placing the vendor's logo on the lease, having the vendor arrange for the signing of the lease) and concerning the distinction between leases and secured transactions could also stand further and better thought.

Edison Generator Exchange, Inc. v. Quality Business Communications, Inc., 2010 WL 2696637 (N.J.Super.App.Div. July 1, 2010) (unpublished opinion ' check rules before citing)

This decision affirms a summary judgment granted by the trial court against a lessee alleging, among other things, that the equipment was not “correct” and did not perform properly. Since the lease was correctly found to be a finance lease as defined in Article 2A and because the lessee had signed a delivery and acceptance certificate, the court holds that the lessee could not successfully raise these defenses to making all its payments.

Jet Acceptance Corp. v. Quest Mexicana, S.A. DE C.V., 2010 WL 2651641 (N.Y.Sup. June 23, 2010) (Unreported disposition ' will not appear in a printed volume)

This case involves four identical leases for commercial aircraft. Although only one of the aircraft was accepted by the lessee as evidenced by its signing an acceptance certificate, the court grants the lessor's motion for summary judgment as to the lessee's liability for all four leases ' based primarily on the hell-or-high-water clauses contained in the leases. While the details for finding liability on the other three leases
are not made totally clear, a factor probably influencing this decision was the fact that the lessor had invested nearly $8 million readying the four aircraft for delivery to the lessee ' a fact probably contemplated in the lease agreements.

True Lease vs. Security Interest: In General

In re Southeastern Materials, Inc., 2010 WL 2836360 (Bankr.M.D.N.C. July 15, 2010)

This case illustrates neatly some of the stark legal differences between true leases and leases creating a security interest. The lessee had entered into two schedules with the lessor under the same master lease ' one with a $1 purchase option and one with a fair market value purchase option. After finding that the former created a security interest, the court holds that since the lessor had not perfected its security interest within the 20-day period after delivery of the equipment, its priority was junior to a bank's prior filed lien. With regard to the latter, since no party contested that it constituted a true lease, the court granted the lessor relief from the automatic stay and ordered that the lease be rejected. The differences in rights and obligations of “lessor” financiers under both the UCC and Bankruptcy Code cannot be overemphasized.

True Lease vs. Security Interest: TRAC Leases and TRAC Statutes

Hitchin Post Steak Co. v. General Electric Capital Corporation (In re HP Distribution, LLP), 2010 WL 3699240 (Bankr.D.Kan. Sept. 3, 2010)

The court grants the lessor's motion for summary judgment (and denies lessee's motion) requiring the lessee to assume or reject leases after deciding that the leases ' TRAC leases of truck tractors and trailers ' were true leases. After a discussion of Article 1's distinction between true leases and secured transactions and references to cases and commentary that have supplied concepts to aid in making the distinction, the court acknowledges disagreements regarding the status of TRAC leases. While mentioning the existence of a so-called TRAC-neutral statute in the state law governing the transaction, the court states that such a statute should not alone drive the analysis and apparently agrees with those who found TRAC leases to be true leases even in the absences of such TRAC statutes. The court spends some time attempting (arguably unsuccessfully) to distinguish a TRAC-like lease discussed in In re Grubbs Construction Company, 319 B.R. 698 (Bankr.M.D.Fla. 2005), in which that court characterized the TRAC provision as economically equivalent to a balloon payment at the end of a loan transaction. Apart from the existence of a TRAC statute requiring that the TRAC provision not be determinative of the creation of a security interest, one must wonder how a transaction in which the lessor has neither upside potential nor downside risk with respect to potential changes in value caused only by market conditions can be characterized as one in which the lessor maintains a meaningful residual interest or entrepreneurial stake in the equipment being leased.

In re Double G Trucking of The Arklatex, Inc., 432 B.R. 789 (Bankr.W.D.Ark. 2010)

In considering a lessor's motion requiring the lessee in bankruptcy to assume or reject leases of three motor vehicles containing a typical TRAC provision, the court finds that the lessee was unable to carry its burden of proving that the lease was in fact a secured transaction. After acknowledging a split of authority concerning the status of TRAC leases, the court relies most heavily on the addition to Arkansas' UCC of a TRAC statute provision stating that a security interest is not created merely because the lease contains a TRAC clause. Since the lessee had been unable otherwise to prove that the lessor did not retain a reversionary interest or that the lessee had acquired equity in the goods, the court grants the lessor's motion.

Measures of Lessors' Damages

PNCEF, LLC v. Hendricks Building Supply LLC, 2010 WL 3672257 (S.D.Ala. Sept. 10, 2010)

The court denies entry of a default judgment against a lessee and orders the plaintiff (a successor to the original lessor) to submit further evidence to establish its claim for money damages. The plaintiff had requested damages equal to stipulated loss value ' defined in the lease to equal total delinquent rent (including late fees), all future rent and the estimated fair market value of the equipment at the end of the lease term. While the plaintiff had claimed monetary amounts for each of these categories, it had submitted no evidence in the form of backup documentation showing the due dates and amounts of the past due and future payments nor evidence for its estimate of the equipment's fair market value.

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

Carton v. General Motors Acceptance Corp., 2010 WL 2732874 (U.S.Ct.App. 8th Cir. July 13, 2010)

After affirming a U.S. District Court's decision that the Graves Amendment precludes a finding of vicarious liability against a motor vehicle lessor, the Court of Appeals also affirms the District Court's dismissal of the claim that the lessor was negligent in continuing to entrust the vehicle that had caused the plaintiffs' injuries to the lessee (i.e., by not repossessing the vehicle) after the lessee had defaulted in its lease payments and failed to maintain required insurance coverage, and after the lessor had won a judgment for replevin. This decision finds that the lessee's fiscal irresponsibility and failure to obtain insurance did not itself pose an unreasonable risk of physical harm to others such that the lessor had a duty to repossess the vehicle.

Chapman v. Herren, 2010 WL 2927377 (Conn.Super. June 24, 2010) (unpublished opinion ' check court rules before citing)

In this suit involving a claim against a car rental company for injuries sustained by the plaintiff allegedly caused by the lessee of the automobile, the court disposes of the plaintiff's allegation that the Graves Amendment is unconstitutional by citing a recent Connecticut Supreme Court case, Rodriguez v. Testa , 296 Conn. 1 (2010), holding that the amendment's pre-emption of the state's vicarious liability statute was constitutional. The decision goes on to hold that the rental company was not independently negligent in the manner contemplated by the savings clause in the Graves Amendment permitting claims against motor vehicle lessors on grounds other than vicarious liability. The court holds that there is no legal authority for concluding that Connecticut imposes a duty on rental companies to investigate a lessee's driving record ' e.g., to determine whether there may have been past convictions for alcohol-related offenses or reckless driving.

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. This update is dedicated to Ed Groobert, soon-to-be ELFA General Counsel Emeritus.