What's New in the Law

Artists & Framers, Inc. v. Lease Finance Group, LLC, 2011 WL 345883 (U.S. Dist. Ct. D. Md. Feb. 2, 2011) (slip copy)

This decision denies a lessor's motion to dismiss a lessee's suit claiming that the lessee had no obligation to make payments under what was stated to be a non-cancelable lease. The court is clearly sympathetic to the lessee's claims that an alleged agent for the lessor grossly misled the lessee regarding the nature ' in particular, the possibility of cancellation ' of a possibly illegible lease of equipment for processing credit cards. The lessee's allegations, if ultimately proven to be true, provide an example of how lessors ought not to induce customers to sign leases.

GreatAmerica Leasing Corp. v. Davis-Lynch, Inc., 2011 WL 167248 (U.S. Dist. Ct. N.D. Iowa Jan. 19, 2011) (slip copy)

Pursuant to a Private Label Vendor Agreement, the plaintiff purchased leases on a non-notification basis from a vendor of office equipment. After the defendant/lessee stopped making lease payments to the plaintiff (who billed the lessee in the name of the vendor), claiming that the equipment vendor had engaged in fraudulent activity, the plaintiff filed a motion for summary judgment. In granting the motion, the court has occasion to discuss the nature of both the hell-or-high-water and waiver-of-defenses provisions in the lease. Although it distinguishes between the two types of provisions and correctly indicates that a waiver-of-defenses can only be enforced by an assignee qualifying as a holder in due course, the court makes some other statements that are potentially confusing. For example, the court states that the effect of a hell-or-high-water clause is generally to make the assignee of a lease a “quasi holder in due course” and also notes that a defense of fraud in the factum is a defense against a contract that includes a hell-or-high-water provision. What those statements fail to recognize is that although even a lesser kind of fraud ' fraud in the inducement ' may be a defense to enforcement of a hell-or-high-water clause by the original lessor, such a defense should not be available against enforcement of a waiver of defenses by an assignee qualifying as a holder in due course. In other words, a hell-or-high-water-clause in the absence of a waiver of defenses will not itself place an assignee in the position of a holder in due course who can be defeated only by the most egregious type of fraud. Although not discussed in this decision, it can be noted that the fact that the lessee did not have any notice of the assignment until it defaulted had no effect on the assignee's ability to enforce the waiver of defenses.

Measures of Lessors' Damages

G.E. Capital Information Technology Solutions, Inc. v. The Myler Company, Inc., 2011 WL 649684 (U.S. Dist. Ct. S.D. Ind. Feb. 11, 2011) (slip copy)

After defaulting under its lease, the defendant/lessee unsuccessfully asserted a creative argument to avoid summary judgment in favor of the lessor. The lessee contended that the liquidated damages provision in the lease was unenforceable as a penalty because it did not require the lessor to mitigate its damages. Rejecting this argument, the court indicates both: 1) that the lease would have required the lessor to mitigate if the equipment had been returned by the lessee (instead the lessee had retained the equipment after default), and 2) that the general rule is that while the nonbreaching party must mitigate, the burden is on the breaching party to demonstrate failure to do so (which this lessee was apparently unable to do).

Textron Financial Corp. v. Seven Falls Golf and River Club, LLC, 2011 WL 251115 (U.S. Dist. Ct. W.D.N.C. Jan. 25, 2011) (slip copy)

In this case, the court grants a lessor's motion for summary judgment as to a defaulting lessee's liability and damages owed under the lease. Inasmuch as the lease clearly set forth how to calculate the amounts that would be owing after a lessee default (past dues, estimated property tax to be owed by the lessor, future rentals discounted to present value, recovery and storage fees, and a credit to the lessee for proceeds of sale of the equipment), a considerable portion of this decision is spent on the calculation of reasonable attorneys' fees to be awarded to the lessor based upon a number of factors enumerated in the Rhode Island (the law governing this lease) Supreme Court Rules of Professional Conduct.

End-of-Term Lease Provisions

Republic Bank v. Ethos Environmental, Inc., 2011 WL 587772 (U.S. Dist. Ct. D. Utah Feb. 9, 2011)

After the lessee had defaulted under a lease, the assignee of the original lessor moved for summary judgment. In granting this motion, the court considered and rejected a number of lessee arguments for not enforcing the lease. Among the more interesting was the lessee claim that the end-of-term provisions in the lease constituted the sort of perpetual obligation to endlessly renew the lease found to be unenforceable in another case. The court correctly distinguishes this provision from the one cited by the lessee by noting that one of the end-of-lease alternatives ' purchase for a price to be agreed upon; terminate the lease and return the equipment, but then enter into a required new lease of equipment replacing the returned equipment; or continue for additional 12- then six-month terms at the same rental followed by additional six-month terms unless notice of termination is given by either party ' eventually permitted the lessee to terminate.

Forum Selection, Jurisdiction and Choice of Law

Canon Financial Services, Inc. v. GR Graphics, Inc., 2011 WL 734860 (U.S. Dist. Ct. D.N.J. Feb. 18, 2011)

This decision denies a defaulting lessee's request to transfer the case to its home state after the lessor brought suit in New Jersey, the venue named in the lease's forum selection clause. The court's denial is based on its finding that the lessee had failed to demonstrate that litigation in New Jersey would be so gravely difficult that the defendant would be effectively deprived of its day in court.

Assignments of Leases

Standard Office Systems of Atlanta, Inc. v. U.S. Express Leasing, Inc., 2011 WL 223472 (U.S. Dist. Ct. D.N.J. Jan. 24, 2011) (slip copy)

This case raises more questions than it answers, but the questions are interesting. The plaintiff/original lessor entered into leases of office equipment with its customers and sold them and the related equipment to defendant/finance company under a master purchase agreement. After a lessee defaulted under two leases, the finance company discovered that the actual vendor of the equipment was not the plaintiff, but a different distributor of office equipment. The finance company argued that this breached a representation made by the plaintiff in the master purchase agreement ' that the plaintiff was to be the owner of the equipment when it sold the lease to the defendant ' entitling the defendant to demand a repurchase of the transaction by the plaintiff (the master purchase agreement provided for repurchase as a remedy for a breach as opposed to a simple indemnity for losses resulting from the breach). When the defendant set off this repurchase amount against other amounts owed to the plaintiff by the defendant, the plaintiff brought suit. In deciding in favor of the defendant that it suffered a material breach of representation by the plaintiff, the court never makes clear the flow of title to the equipment. For example, if the plaintiff only “brokered” (a term used by the plaintiff and accepted by the court without a clear description of what this in fact meant) the transaction between the actual equipment distributor and the lessee, what sense can be given to the existence of a lease between the plaintiff and the lessee? If the lease was a true lease, title at some point must have passed to the plaintiff ' e.g., either from the other distributor or from the lessee (via a sale/leaseback). If the lease only created a security interest, then perhaps title passed directly from the other distributor to the lessee ' in which case the plaintiff would have held a security interest in the equipment. The case contains no such analysis. The court also ruled against the plaintiff's argument that the master purchase agreement only required that the defendant would obtain either good title to the equipment (regardless of how title flowed) or a first priority security interest in the equipment (which could have been the result of the lease creating a security interest). The court cites the statement in the lease (found in many lease forms) that the plaintiff/lessor owns the equipment as an indication that the plaintiff was representing such to the defendant. Whether or not the court accurately interpreted the master purchase agreement or understood the flow of title to the equipment, the case demonstrates the advantages of having a repurchase remedy for breach of representations rather than a simple indemnity.

Ability to Collect Rentals

C & J Vantage Leasing Co. v. Wolfe, 2011 WL 7434633 (Iowa Sup. Ct. March 4, 2011)

In another of a line of cases involving financing of golf course beverage carts (see “What's New in the Law” in the January 2011 issue of LJN's Equipment Leasing Newsletter), the Iowa Supreme Court reverses a lower court grant of summary judgment in favor of the assignee of the lease used for the financing. When Royal Links, the company that was paying the lessee for advertising on the cart (in the same amounts owed by the lessee under the lease), stopped making those payments, the lessee ceased making payments under its lease. After determining that the $1 option lease was a security agreement under the law, the court holds that the hell-or-high-water provision in the agreement is nevertheless enforceable ' rejecting any notion that such provisions are only enforceable in the context of a true lease. The court then notes that the lease did not have a waiver-of-defenses provision, but then considers whether an assignee must be a holder in due course to enforce a hell-or-high-water payment obligation. Though perhaps not as clearly stated as it could have been, the court's position is that such is not necessary (these two types of provisions, recognized as distinct by the court, are quite different with respect to the requirements on the parties seeking to enforce them ' if there is no waiver of defenses provision, the question of holder in due course status simply does not arise). Since the assignee in this case could only stand in the shoes of the original lessor, when the court concludes 1) that there are material issues of fact regarding whether Royal Links was acting as an agent for the original lessor when Royal Links allegedly misled the lessee, and 2) that an integration clause in the lease does not preclude the introduction of evidence of such misrepresentations by Royal Links, the court finds that it must deny the assignee summary judgment. It should be noted that the outcome would likely have been different had the lease contained a waiver of defenses.

Artists & Framers, Inc. v. Lease Finance Group, LLC, 2011 WL 345883 (U.S. Dist. Ct. D. Md. Feb. 2, 2011) (slip copy)

This decision denies a lessor's motion to dismiss a lessee's suit claiming that the lessee had no obligation to make payments under what was stated to be a non-cancelable lease. The court is clearly sympathetic to the lessee's claims that an alleged agent for the lessor grossly misled the lessee regarding the nature ' in particular, the possibility of cancellation ' of a possibly illegible lease of equipment for processing credit cards. The lessee's allegations, if ultimately proven to be true, provide an example of how lessors ought not to induce customers to sign leases.

GreatAmerica Leasing Corp. v. Davis-Lynch, Inc., 2011 WL 167248 (U.S. Dist. Ct. N.D. Iowa Jan. 19, 2011) (slip copy)

Pursuant to a Private Label Vendor Agreement, the plaintiff purchased leases on a non-notification basis from a vendor of office equipment. After the defendant/lessee stopped making lease payments to the plaintiff (who billed the lessee in the name of the vendor), claiming that the equipment vendor had engaged in fraudulent activity, the plaintiff filed a motion for summary judgment. In granting the motion, the court has occasion to discuss the nature of both the hell-or-high-water and waiver-of-defenses provisions in the lease. Although it distinguishes between the two types of provisions and correctly indicates that a waiver-of-defenses can only be enforced by an assignee qualifying as a holder in due course, the court makes some other statements that are potentially confusing. For example, the court states that the effect of a hell-or-high-water clause is generally to make the assignee of a lease a “quasi holder in due course” and also notes that a defense of fraud in the factum is a defense against a contract that includes a hell-or-high-water provision. What those statements fail to recognize is that although even a lesser kind of fraud ' fraud in the inducement ' may be a defense to enforcement of a hell-or-high-water clause by the original lessor, such a defense should not be available against enforcement of a waiver of defenses by an assignee qualifying as a holder in due course. In other words, a hell-or-high-water-clause in the absence of a waiver of defenses will not itself place an assignee in the position of a holder in due course who can be defeated only by the most egregious type of fraud. Although not discussed in this decision, it can be noted that the fact that the lessee did not have any notice of the assignment until it defaulted had no effect on the assignee's ability to enforce the waiver of defenses.

Measures of Lessors' Damages

G.E. Capital Information Technology Solutions, Inc. v. The Myler Company, Inc., 2011 WL 649684 (U.S. Dist. Ct. S.D. Ind. Feb. 11, 2011) (slip copy)

After defaulting under its lease, the defendant/lessee unsuccessfully asserted a creative argument to avoid summary judgment in favor of the lessor. The lessee contended that the liquidated damages provision in the lease was unenforceable as a penalty because it did not require the lessor to mitigate its damages. Rejecting this argument, the court indicates both: 1) that the lease would have required the lessor to mitigate if the equipment had been returned by the lessee (instead the lessee had retained the equipment after default), and 2) that the general rule is that while the nonbreaching party must mitigate, the burden is on the breaching party to demonstrate failure to do so (which this lessee was apparently unable to do).

Textron Financial Corp. v. Seven Falls Golf and River Club, LLC, 2011 WL 251115 (U.S. Dist. Ct. W.D.N.C. Jan. 25, 2011) (slip copy)

In this case, the court grants a lessor's motion for summary judgment as to a defaulting lessee's liability and damages owed under the lease. Inasmuch as the lease clearly set forth how to calculate the amounts that would be owing after a lessee default (past dues, estimated property tax to be owed by the lessor, future rentals discounted to present value, recovery and storage fees, and a credit to the lessee for proceeds of sale of the equipment), a considerable portion of this decision is spent on the calculation of reasonable attorneys' fees to be awarded to the lessor based upon a number of factors enumerated in the Rhode Island (the law governing this lease) Supreme Court Rules of Professional Conduct.

End-of-Term Lease Provisions

Republic Bank v. Ethos Environmental, Inc., 2011 WL 587772 (U.S. Dist. Ct. D. Utah Feb. 9, 2011)

After the lessee had defaulted under a lease, the assignee of the original lessor moved for summary judgment. In granting this motion, the court considered and rejected a number of lessee arguments for not enforcing the lease. Among the more interesting was the lessee claim that the end-of-term provisions in the lease constituted the sort of perpetual obligation to endlessly renew the lease found to be unenforceable in another case. The court correctly distinguishes this provision from the one cited by the lessee by noting that one of the end-of-lease alternatives ' purchase for a price to be agreed upon; terminate the lease and return the equipment, but then enter into a required new lease of equipment replacing the returned equipment; or continue for additional 12- then six-month terms at the same rental followed by additional six-month terms unless notice of termination is given by either party ' eventually permitted the lessee to terminate.

Forum Selection, Jurisdiction and Choice of Law

Canon Financial Services, Inc. v. GR Graphics, Inc., 2011 WL 734860 (U.S. Dist. Ct. D.N.J. Feb. 18, 2011)

This decision denies a defaulting lessee's request to transfer the case to its home state after the lessor brought suit in New Jersey, the venue named in the lease's forum selection clause. The court's denial is based on its finding that the lessee had failed to demonstrate that litigation in New Jersey would be so gravely difficult that the defendant would be effectively deprived of its day in court.

Assignments of Leases

Standard Office Systems of Atlanta, Inc. v. U.S. Express Leasing, Inc., 2011 WL 223472 (U.S. Dist. Ct. D.N.J. Jan. 24, 2011) (slip copy)

This case raises more questions than it answers, but the questions are interesting. The plaintiff/original lessor entered into leases of office equipment with its customers and sold them and the related equipment to defendant/finance company under a master purchase agreement. After a lessee defaulted under two leases, the finance company discovered that the actual vendor of the equipment was not the plaintiff, but a different distributor of office equipment. The finance company argued that this breached a representation made by the plaintiff in the master purchase agreement ' that the plaintiff was to be the owner of the equipment when it sold the lease to the defendant ' entitling the defendant to demand a repurchase of the transaction by the plaintiff (the master purchase agreement provided for repurchase as a remedy for a breach as opposed to a simple indemnity for losses resulting from the breach). When the defendant set off this repurchase amount against other amounts owed to the plaintiff by the defendant, the plaintiff brought suit. In deciding in favor of the defendant that it suffered a material breach of representation by the plaintiff, the court never makes clear the flow of title to the equipment. For example, if the plaintiff only “brokered” (a term used by the plaintiff and accepted by the court without a clear description of what this in fact meant) the transaction between the actual equipment distributor and the lessee, what sense can be given to the existence of a lease between the plaintiff and the lessee? If the lease was a true lease, title at some point must have passed to the plaintiff ' e.g., either from the other distributor or from the lessee (via a sale/leaseback). If the lease only created a security interest, then perhaps title passed directly from the other distributor to the lessee ' in which case the plaintiff would have held a security interest in the equipment. The case contains no such analysis. The court also ruled against the plaintiff's argument that the master purchase agreement only required that the defendant would obtain either good title to the equipment (regardless of how title flowed) or a first priority security interest in the equipment (which could have been the result of the lease creating a security interest). The court cites the statement in the lease (found in many lease forms) that the plaintiff/lessor owns the equipment as an indication that the plaintiff was representing such to the defendant. Whether or not the court accurately interpreted the master purchase agreement or understood the flow of title to the equipment, the case demonstrates the advantages of having a repurchase remedy for breach of representations rather than a simple indemnity.