What's New in the Law

GATX Corp. v. Appalachian Fuels, LLC, 2011 WL 2260695 (U.S.Dist.Ct. E.D.Ky. June 7, 2011)

This case contains a very interesting, thorough discussion of damage claims made by the holder of two leases with the same lessee ' one acquired from another lessor and one entered into directly with the lessee. The leases were stated to be governed by California and Kentucky law, respectively. Much of the discussion centers on the provisions for liquidated damages ' a stipulated loss value in the former lease calculated by present valuing future rentals at a discount rate of 3% and stipulated loss values in the latter calculated using percentages of the original equipment cost. In assessing the reasonableness of these liquidated damages provisions, the court refers to Article 2A as in effect in both states. However, California's version of Article 2A also refers to a different provision of its civil code regarding liquidated damages ' pertaining to reasonability under the circumstances existing at the time the contract was made. The court also takes into account provisions of both federal law and the applicable state law regarding pre- and post-judgment interest. The decision is instructive with respect to possible differences in state law regarding the calculation of damages.

Farnam Street Financial, Inc. v. Balaton Group, Inc., 2011 WL 1258512 (U.S.Dist.Ct. D.Minn. March 30, 2011)

In granting a lessor's motion for summary judgment against a defaulting lessee, this court gives the lessor all the damages listed in the lease without tempering them in a manner that other courts have employed ' whether based on Article 2A or common law principles ' to ease the lessee's burden. For instance, the lessor is awarded accelerated future rentals without provision for present valuing them, and the lessee is ordered to return the equipment without provision as to whether any sales proceeds should be applied to mitigate the other amounts awarded the lessor.

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

Vreeland v. Ferrer, 2011 WL 2652187 (Fla.Sup.Ct. July 8, 2011)

Less than three months after holding that federal law clearly pre-empts Florida statutory law imposing vicarious liability on motor vehicle lessors (see the Vargas case below), the Florida Supreme Court holds that federal law concerning vicarious liability of aircraft lessors does not pre-empt the Florida common law doctrine of dangerous instrumentality imposing vicarious liability on such aircraft lessors with respect to certain classes of injured parties. Overturning lower Florida court decisions in favor of an aircraft lessor being sued by the estate of a passenger on the aircraft, this court holds that the federal law limiting liability (49 U.S.C. 44112 (1994)) neither explicitly nor implicitly pre-empts Florida law ' in particular because the federal statute is worded to apply only to personal injury, death or property loss of people or property located “on land or water” ' i.e., only underneath and not on the aircraft. Notwithstanding a dissenting opinion stating that such a narrow interpretation of the federal statute “defies reality,” the court cites federal legislative history and certain cases from other jurisdictions in support of its view (acknowledging that there are cases holding otherwise).

Lester v. Patinkin, 2011 WL 2479593 (Conn.Super. May 25, 2011) (unpublished opinion, check court rule before citing)

A plaintiff injured in a motor vehicle accident brought suit against the motor vehicle lessor as well as the driver/lessee. This decision holds that the Graves Amendment does not pre-empt claims of negligent conduct by the lessor, such as failure to check whether the brakes were in good working order, and therefore denies the lessor's motion for summary judgment on such negligence claims.

Donnelly v. Rental Car Finance Corp., 2011 WL 2417317 (Conn.Super. May 17, 2011) (unpublished opinion, check court rules before citing)

The issue in this case is whether the Graves Amendment entirely precludes a negligent entrustment suit. After commenting that the issue has not yet been addressed by Connecticut appellate courts nor by the U.S. District Court for Connecticut or by the federal Second Circuit Court of Appeals, the court concludes that an action for negligent entrustment may be pursued against a rental car company in some circumstances ' i.e., that the rental company has an obligation to do at least some basic (not stringent) screening such as checking whether facts readily available would indicate the potential customer's unfitness to drive.

Vargas v. Enterprise Leasing Company, 2011 WL 1496474 (Fla.Sup.Ct April 21, 2011)

The Florida Supreme Court (with one dissent) here emphatically decides that provisions of Florida's statutes imposing vicarious liability on motor vehicle lessors are pre-empted by the Graves Amendment and do not fall under the financial responsibility law exception of the Graves Amendment that would preclude pre-emption. The federal pre-emption applies even though Florida had eliminated vicarious liability for certain categories of lessors and limited it for other categories.

End-of-Term Lease Provisions

TFG-North Carolina, L.P. v. Performance Fibers, Inc., 2011 WL 2010002 (U.S.Dist.Ct. D.Utah May 23, 2011)

Plaintiff/lessor and defendant/lessee entered into a lease having end-of-term options providing for either the purchase of the equipment for a price to be agreed upon by both parties or, in the event of no agreement to purchase, then a 12-month extension at the rate in the lease followed by successive six-month renewals at the same rate subject to termination by either party by giving prior notice 180 days before the end of the renewal period. The lessee argued that its obligations came to an end at the end of the initial term of the lease, but the court agrees with the lessor that the parties viewed the transaction as a lease and that the lessee was obligated under the end-of-term provisions.

Forum Selection, Jurisdiction and Choice of Law

De Lage Landen Financial Services, Inc. v. New Life Anointed Ministries International, Inc., 2011 WL 2601542 (U.S.Dist.Ct. E.D.Pa. June 30, 2011)

After the lessee defaulted, the assignee of the original lessor brought suit in a federal district court in Pennsylvania, although the lease contained a clause providing for the parties' submission to the non-exclusive jurisdiction of New York state and federal courts. This court dismisses the suit for lack of jurisdiction, agreeing with the lessee ' a corporation organized in Delaware and located in Virginia ' that its promise to make payments to the lessor in Pennsylvania was not sufficient to support personal jurisdiction.

Lessors' Rights in Bankruptcy Proceedings

In re Smith, 449 B.R. 35 (Bankr. E.D.Pa. 2011)

The individual debtor in bankruptcy attempted to assume a motor vehicle lease and then purchase it in his Chapter 13 plan by making payments over the five-year life of the plan. Agreeing with the objecting lessor, the court finds that ' 365 of the Bankruptcy Code requires that in order to assume the lease and exercise an option under the lease to purchase the vehicle, the purchase price would have to be paid in a lump sum. Additionally, a necessary condition of assuming the lease under ' 365 would be to cure his monetary default under the lease (or provide adequate assurance of a prompt cure) as well as provide adequate assurance of future performance under the lease.

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 Cristina Richards and Ed Gross of Vedder Price P.C. in the preparation of this update.

Measures of Lessors' Damages

Andersons, Inc. v. LaFarge North America, Inc., 2011 WL 2357895 (U.S.Dist.Ct. N.D.Ohio June 9, 2011)

This decision holds that the lessor was entitled to damages with respect to leased railroad cars that were not returned at the end of the lease in the condition required by the lease. According to the court, the trial centered on a battle of the experts as to the expenses that would be required to return the cars to serviceable condition. Rather than simply deciding in favor of one of the four experts, the court's conclusion reflects an average of the estimates of two of the four ' the two (one hired by the lessor and one by the lessee) found most credible by the court.

GATX Corp. v. Appalachian Fuels, LLC, 2011 WL 2260695 (U.S.Dist.Ct. E.D.Ky. June 7, 2011)

This case contains a very interesting, thorough discussion of damage claims made by the holder of two leases with the same lessee ' one acquired from another lessor and one entered into directly with the lessee. The leases were stated to be governed by California and Kentucky law, respectively. Much of the discussion centers on the provisions for liquidated damages ' a stipulated loss value in the former lease calculated by present valuing future rentals at a discount rate of 3% and stipulated loss values in the latter calculated using percentages of the original equipment cost. In assessing the reasonableness of these liquidated damages provisions, the court refers to Article 2A as in effect in both states. However, California's version of Article 2A also refers to a different provision of its civil code regarding liquidated damages ' pertaining to reasonability under the circumstances existing at the time the contract was made. The court also takes into account provisions of both federal law and the applicable state law regarding pre- and post-judgment interest. The decision is instructive with respect to possible differences in state law regarding the calculation of damages.

Farnam Street Financial, Inc. v. Balaton Group, Inc., 2011 WL 1258512 (U.S.Dist.Ct. D.Minn. March 30, 2011)

In granting a lessor's motion for summary judgment against a defaulting lessee, this court gives the lessor all the damages listed in the lease without tempering them in a manner that other courts have employed ' whether based on Article 2A or common law principles ' to ease the lessee's burden. For instance, the lessor is awarded accelerated future rentals without provision for present valuing them, and the lessee is ordered to return the equipment without provision as to whether any sales proceeds should be applied to mitigate the other amounts awarded the lessor.

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

Vreeland v. Ferrer, 2011 WL 2652187 (Fla.Sup.Ct. July 8, 2011)

Less than three months after holding that federal law clearly pre-empts Florida statutory law imposing vicarious liability on motor vehicle lessors (see the Vargas case below), the Florida Supreme Court holds that federal law concerning vicarious liability of aircraft lessors does not pre-empt the Florida common law doctrine of dangerous instrumentality imposing vicarious liability on such aircraft lessors with respect to certain classes of injured parties. Overturning lower Florida court decisions in favor of an aircraft lessor being sued by the estate of a passenger on the aircraft, this court holds that the federal law limiting liability (49 U.S.C. 44112 (1994)) neither explicitly nor implicitly pre-empts Florida law ' in particular because the federal statute is worded to apply only to personal injury, death or property loss of people or property located “on land or water” ' i.e., only underneath and not on the aircraft. Notwithstanding a dissenting opinion stating that such a narrow interpretation of the federal statute “defies reality,” the court cites federal legislative history and certain cases from other jurisdictions in support of its view (acknowledging that there are cases holding otherwise).

Lester v. Patinkin, 2011 WL 2479593 (Conn.Super. May 25, 2011) (unpublished opinion, check court rule before citing)

A plaintiff injured in a motor vehicle accident brought suit against the motor vehicle lessor as well as the driver/lessee. This decision holds that the Graves Amendment does not pre-empt claims of negligent conduct by the lessor, such as failure to check whether the brakes were in good working order, and therefore denies the lessor's motion for summary judgment on such negligence claims.

Donnelly v. Rental Car Finance Corp., 2011 WL 2417317 (Conn.Super. May 17, 2011) (unpublished opinion, check court rules before citing)

The issue in this case is whether the Graves Amendment entirely precludes a negligent entrustment suit. After commenting that the issue has not yet been addressed by Connecticut appellate courts nor by the U.S. District Court for Connecticut or by the federal Second Circuit Court of Appeals, the court concludes that an action for negligent entrustment may be pursued against a rental car company in some circumstances ' i.e., that the rental company has an obligation to do at least some basic (not stringent) screening such as checking whether facts readily available would indicate the potential customer's unfitness to drive.

Vargas v. Enterprise Leasing Company, 2011 WL 1496474 (Fla.Sup.Ct April 21, 2011)

The Florida Supreme Court (with one dissent) here emphatically decides that provisions of Florida's statutes imposing vicarious liability on motor vehicle lessors are pre-empted by the Graves Amendment and do not fall under the financial responsibility law exception of the Graves Amendment that would preclude pre-emption. The federal pre-emption applies even though Florida had eliminated vicarious liability for certain categories of lessors and limited it for other categories.

End-of-Term Lease Provisions

TFG-North Carolina, L.P. v. Performance Fibers, Inc., 2011 WL 2010002 (U.S.Dist.Ct. D.Utah May 23, 2011)

Plaintiff/lessor and defendant/lessee entered into a lease having end-of-term options providing for either the purchase of the equipment for a price to be agreed upon by both parties or, in the event of no agreement to purchase, then a 12-month extension at the rate in the lease followed by successive six-month renewals at the same rate subject to termination by either party by giving prior notice 180 days before the end of the renewal period. The lessee argued that its obligations came to an end at the end of the initial term of the lease, but the court agrees with the lessor that the parties viewed the transaction as a lease and that the lessee was obligated under the end-of-term provisions.

Forum Selection, Jurisdiction and Choice of Law

De Lage Landen Financial Services, Inc. v. New Life Anointed Ministries International, Inc., 2011 WL 2601542 (U.S.Dist.Ct. E.D.Pa. June 30, 2011)

After the lessee defaulted, the assignee of the original lessor brought suit in a federal district court in Pennsylvania, although the lease contained a clause providing for the parties' submission to the non-exclusive jurisdiction of New York state and federal courts. This court dismisses the suit for lack of jurisdiction, agreeing with the lessee ' a corporation organized in Delaware and located in Virginia ' that its promise to make payments to the lessor in Pennsylvania was not sufficient to support personal jurisdiction.

Lessors' Rights in Bankruptcy Proceedings

In re Smith, 449 B.R. 35 (Bankr. E.D.Pa. 2011)

The individual debtor in bankruptcy attempted to assume a motor vehicle lease and then purchase it in his Chapter 13 plan by making payments over the five-year life of the plan. Agreeing with the objecting lessor, the court finds that ' 365 of the Bankruptcy Code requires that in order to assume the lease and exercise an option under the lease to purchase the vehicle, the purchase price would have to be paid in a lump sum. Additionally, a necessary condition of assuming the lease under ' 365 would be to cure his monetary default under the lease (or provide adequate assurance of a prompt cure) as well as provide adequate assurance of future performance under the lease.

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 Cristina Richards and Ed Gross of Vedder Price P.C. in the preparation of this update.