What's New in the Law

Forum Selection, Jurisdiction and Choice of Law

S & L Birchwood, LLC v. LFC Capital, Inc., 2010 WL 4052187 (U.S. Dist. Ct. E.D.N.Y. Oct. 13, 2010)

In deciding whether to dismiss a lessee plaintiff's suit against its lessor or to transfer the suit to a different forum, this court has occasion to discuss the differences between mandatory and permissive forum selection clauses and to analyze the language in the lease to decide which was intended. After the lessor had accelerated the remaining balance of lease payments following an alleged lessee default, the lessee filed suit in New York seeking a declaratory judgment that it was not in default. The lease contained a provision stating that “Lessee irrevocably submits to the jurisdiction of any federal or state court located therein [Illinois] ' .” The lessee argued that since this provision does not explicitly state that suits must be brought in Illinois, it should be construed as permissive and its suit should be heard in New York. After noting that the lease provision used neither the word “must” nor the word “may,” the court holds that the words “irrevocably submits” indicated that the parties intended Illinois to be the venue for any dispute, and so decides to transfer the suit to Illinois.

Lessors' Rights in Bankruptcy Proceedings

In re Double G Trucking of the Arlatex, Inc., 2010 WL 5525387 (Bankr. W.D. Ark. Dec. 20, 2010)

After the bankruptcy court ruled that a TRAC lease of three tractors was a true lease, the lessee in bankruptcy (which had argued that the lease was instead a secured transaction and therefore that the lessor was entitled to adequate protection payments only) rejected the lease and, a month later, surrendered the tractors to the lessor. The lessor attempted to obtain administrative expense treatment (with its special priority) for all obligations owing as to all three tractors ' both during the first 59 days after the bankruptcy filing (the period after which the Bankruptcy Code generally requires fulfillment of all obligations under the lease until the lease is rejected) and for all the time thereafter until it obtained possession of the tractors. The court rules that since one of the tractors was inoperative during the entire period after the filing and therefore benefit to the estate resulted only from the actual use of the other two operable tractors, the lessor was entitled to administrative expense treatment for only those two tractors for the initial 59-day period. With respect to the subsequent period of time, the court holds that the bankruptcy statute requires payment of the full lease rental for all three tractors (i.e., regardless of benefit to the estate) until rejection of the lease (not, as the lessor had argued, until the equipment was surrendered).

Ali v. CIT Technology Financing Services, Inc., 6 A.3d 890 (Md. Ct. App. 2010)

This case concerns a lessor's rights after bankruptcy. After defaulting on its lease with the plaintiff/lessor (more precisely, the successor to the original lessor), the lessee filed a petition in bankruptcy, which case was subsequently dismissed after the lessee had not complied with bankruptcy procedures in completing an acceptable plan of reorganization. When the lessor filed suit to enforce its rights under the lease six months after the dismissal of the bankruptcy case, the lessee argued that the suit was barred under Maryland's three-year statute of limitations. This appellate court upholds decisions in two lower courts and concludes ' in what is apparently a case of first impression in Maryland ' that a federal bankruptcy petition constitutes “a petition in insolvency” under a very old (but repeatedly recodified) Maryland statute serving to toll the statute of limitations such that the lessor could maintain this action against the lessee.

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.

Purchase Option Provisions

House of Flavors, Inc. v. TFG-Michigan, L.P. , 719 F.Supp.2d 100 (D. Maine 2010)

In this case, the court concludes that a lessee was fraudulently induced to enter into a lease with a particular lessor when, after considerable negotiation regarding the lessee's request for a fixed price purchase option, the lessor ' claiming it was unable to clearly provide what the lessee wanted because doing so might jeopardize the lessor's tax benefits ' gave the lessee a somewhat vaguely worded side letter of intent meant to assure the lessee. When the lessee attempted to exercise its purchase option at the price it thought had been agreed to, the lessor refused. After determining that the lessee had been defrauded, the court went on to determine damages due the lessee from the lessor that would put the lessee in the position it should have been in had the lessor honored what the lessee thought had been promised by the lessor.

Forum Selection, Jurisdiction and Choice of Law

S & L Birchwood, LLC v. LFC Capital, Inc., 2010 WL 4052187 (U.S. Dist. Ct. E.D.N.Y. Oct. 13, 2010)

In deciding whether to dismiss a lessee plaintiff's suit against its lessor or to transfer the suit to a different forum, this court has occasion to discuss the differences between mandatory and permissive forum selection clauses and to analyze the language in the lease to decide which was intended. After the lessor had accelerated the remaining balance of lease payments following an alleged lessee default, the lessee filed suit in New York seeking a declaratory judgment that it was not in default. The lease contained a provision stating that “Lessee irrevocably submits to the jurisdiction of any federal or state court located therein [Illinois] ' .” The lessee argued that since this provision does not explicitly state that suits must be brought in Illinois, it should be construed as permissive and its suit should be heard in New York. After noting that the lease provision used neither the word “must” nor the word “may,” the court holds that the words “irrevocably submits” indicated that the parties intended Illinois to be the venue for any dispute, and so decides to transfer the suit to Illinois.

Lessors' Rights in Bankruptcy Proceedings

In re Double G Trucking of the Arlatex, Inc., 2010 WL 5525387 (Bankr. W.D. Ark. Dec. 20, 2010)

After the bankruptcy court ruled that a TRAC lease of three tractors was a true lease, the lessee in bankruptcy (which had argued that the lease was instead a secured transaction and therefore that the lessor was entitled to adequate protection payments only) rejected the lease and, a month later, surrendered the tractors to the lessor. The lessor attempted to obtain administrative expense treatment (with its special priority) for all obligations owing as to all three tractors ' both during the first 59 days after the bankruptcy filing (the period after which the Bankruptcy Code generally requires fulfillment of all obligations under the lease until the lease is rejected) and for all the time thereafter until it obtained possession of the tractors. The court rules that since one of the tractors was inoperative during the entire period after the filing and therefore benefit to the estate resulted only from the actual use of the other two operable tractors, the lessor was entitled to administrative expense treatment for only those two tractors for the initial 59-day period. With respect to the subsequent period of time, the court holds that the bankruptcy statute requires payment of the full lease rental for all three tractors (i.e., regardless of benefit to the estate) until rejection of the lease (not, as the lessor had argued, until the equipment was surrendered).

Ali v. CIT Technology Financing Services, Inc. , 6 A.3d 890 (Md. Ct. App. 2010)

This case concerns a lessor's rights after bankruptcy. After defaulting on its lease with the plaintiff/lessor (more precisely, the successor to the original lessor), the lessee filed a petition in bankruptcy, which case was subsequently dismissed after the lessee had not complied with bankruptcy procedures in completing an acceptable plan of reorganization. When the lessor filed suit to enforce its rights under the lease six months after the dismissal of the bankruptcy case, the lessee argued that the suit was barred under Maryland's three-year statute of limitations. This appellate court upholds decisions in two lower courts and concludes ' in what is apparently a case of first impression in Maryland ' that a federal bankruptcy petition constitutes “a petition in insolvency” under a very old (but repeatedly recodified) Maryland statute serving to toll the statute of limitations such that the lessor could maintain this action against the lessee.

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.