C&J Vantage Leasing Co. v. Wolfe: One Year Later

Fortunately, while the C&J Vantage opinion may have closed a door for equipment finance companies, it opened a window. The decision's mischief-making potential is mitigated by another holding in the same opinion: that “when a secured transaction contains an express hell-or-high-water clause, courts must grant the provision full effect.” Put differently, despite the court's refusal to honor the parties' intent to create a finance lease ' thereby stripping the transaction of the automatic protection that attaches under Article 2A of the UCC ' the parties can achieve essentially the same result by including a provision that the end user's obligation to make its lease payments is absolute and unconditional, i.e., that such payments are due “come hell or high water.”

Because well-counseled lease finance companies routinely utilize a “belt-and-suspenders” approach, in which their standard contract documents include both a hell-or-high-water provision and a statement that the parties' intend to have their transaction construed as an Article 2A finance lease, the Iowa court's misguided decision is likely to have limited practical impact on commercial lease finance companies. Indeed, in order for the C&J Vantage decision to lead to truly pernicious results, a court would need to accept the Iowa Supreme Court's decision that a transaction cannot be a finance lease without first qualifying as a true lease, while simultaneously rejecting its conclusion regarding the enforceability of a hell-or-high-water provision.

The C&J Vantage case is also potentially problematic in that the decision permitted an end user to survive summary judgment, in an action to enforce its payment obligations, based upon fraudulent misrepresentation and other affirmative defenses. For instance, the court held that the defendant could present extrinsic evidence that it was fraudulently induced into believing that it would receive the leased equipment at no cost. Such reasoning, if adopted, could be troubling to finance lease companies, because it appears to apply a somewhat liberal standard for avoiding summary judgment. However, most states have their own well-developed body of case law in this area. Consequently, there is no reason to believe that the Iowa Supreme Court's decision would be particularly influential in cases applying the law of other states.

Subsequent Opinions Citing C&J Vantage

Because of the factors discussed above, there is reason to expect that the C&J Vantage decision will not cause any significant shift in existing leasing law. Consistent with this prediction, in the year that has passed since the C&J Vantage opinion issued, the case has been cited in only two reported decisions outside of Iowa's state and federal courts. In In re Matter of Del-Maur Farms, 2011 WL 2847709 (Bkrtcy.D.Neb. July 14, 2011), a Nebraska bankruptcy court concluded that the transaction at issue constituted a secured transaction, rather than a true lease, and therefore was not entitled to the preferential treatment afforded to a lessor under ' 365 of the Bankruptcy Code. The court noted the C&J Vantage decision in a string cite of cases analyzing whether the purchase price contained in a lease agreement should be considered “nominal.” The court did not discuss whether the parties intended for the transaction to constitute a finance lease or referred to UCC Article 2A in their agreement.

The other case to have cited C&J Vantage ' De Lage Landen Financial Services, Inc. v. Rasa Floors, L.P., 792 F. Supp.2d 812 (E.D. Pa. 2011) ' offers considerable comfort to lease finance companies worried about the possible impact of the Iowa decision. In De Lage Landen, a case in which the authors of this article represented the lessor, a Pennsylvania federal court cited to C&J Vantage to support the proposition that if an agreement qualifies as a finance lease under Article 2A of the UCC, an express hell-or-high-water provision is unnecessary. However, the court reached a far different result as to the types of transactions that qualify as Article 2A finance leases.

The dispute in De Lage Landen arose out of a concept known as the “Power of $Zero” solution. As marketed by the vendor, customers would be able to obtain public access services (e.g., dial-tone and Internet service) and a new telephone system (or money back for their existing telephone system) for one monthly payment that would not increase over the term of the multi-year contract. Customers were required to enter into two “separate and distinct” contracts: a Customer Agreement with Capital 4 relating to the public access services and a lease or rental agreement with an equipment finance company, such as De Lage Landen (“DLL”). The Lease Agreements contained “hell or high water” provisions stating generally that the obligation to make lease payments was “absolute and unconditional” and could not be canceled.

In 2007, Capital 4 became insolvent and stopped providing telephone and Internet services. As a result, many customers stopped making their lease payments, causing DLL to institute collection actions in Pennsylvania state and federal court. The lessees filed a number of counterclaims against DLL, based upon the general theme that Capital 4, DLL and the equipment supplier (3Com) had marketed the Power of $Zero program in a false and deceptive manner.

The court granted summary judgment in DLL's favor on all claims and counterclaims in a lengthy opinion containing several key legal findings, including the following:

• The lease agreements were separate and distinct contracts from the customer agreements and, therefore, must be enforced in accordance with their own clear and unambiguous terms.
• By their explicit terms and structure, the lease agreements constituted valid finance leases under Article 2A of the UCC.
• Defendants' defenses (including fraud, unconscionability and mistake) were unavailing because, among other things, defendants were commercial parties who had meaningful choices available to them and were bound by the terms of their own clear and unambiguous contracts, regardless of whether they read or understood the contracts before signing them.
• Defendants' counterclaims failed because they did not establish fraud on behalf of Capital 4 and, even if they had, such conduct could not be imputed to DLL. Specifically, DLL did not manifest an intent for Capital 4 to act as an agent and, to the contrary, the program agreement between DLL and Capital 4 expressly disclaimed an agency relationship.

In subsequent orders regarding damages, the court determined that DLL was entitled to collect 18% interest and reasonable attorneys' fees, as provided in the lease agreements, and that reasonable attorneys' fees included those incurred in defending the counterclaims and defeating class certification.

Lessons from C&J Vantage

While lease finance companies and their counsel are correct to view the C&J Vantage decision with some level of consternation, early indications support the conclusion that the decision's impact should not be particularly significant, at least with respect to cases that do not require application of Iowa law. Nevertheless, unexpected decisions, such as what occurred in C&J Vantage, naturally give rise to the question of what, if anything, the lessor should have done differently. Perhaps the biggest takeaway is that the type of “belt and suspenders” contract draftsmanship that might sometimes be disparaged as “over-lawyering” exists for a reason. One might have thought, based upon decisions rendered in other jurisdictions, that a contractual “hell or high water” provision was superfluous in an agreement that expressly states that it is intended to be an Article 2A finance lease. However, had the lessor in C&J Vantage relied solely upon the protection provided by Article 2A, the outcome of that case might have been far worse.

A second lesson can be drawn from a circumstance common to the C&J Vantage and De Lage Landen cases. In both cases, the vendor utilized marketing pitches and side agreements that arguably resulted in the end user misunderstanding the nature of the relationship it was entering into. In C&J Vantage, the end user leased golf carts in conjunction with a side agreement concerning advertising revenue that the lessee would receive for placing ads on the golf carts. The lessee was apparently led to believe that it would always receive advertising revenue sufficient to cover the lease payments and, therefore, would essentially be receiving the golf carts at no cost. Similarly, in De Lage Landen many end users purportedly thought that they were obtaining telephone equipment and public access services as a “package deal” or, in some cases, that they were receiving telephone equipment for free.

In both cases, it is not clear that the lessor fully understood the manner in which the program was being marketed by its vendor, or the content of the separate agreement between the vendor and the end user. While it is obvious that a lease finance company cannot know everything that is being said during sales pitches, if the lessors in those cases had better understood the nature of the program at issue, they could have insisted that the vendor include language in its standard sales pitch, customer agreements and written marketing materials that would have ensured that the lessees better understood the absolute and unconditional nature of their obligation to the lessor. If the lessees had better understood their obligation to the lessor (and still chose to enter into the transaction), they may have responded differently when the vendor failed to live up to its separate and independent promises to the lessee.

Note: The authors were co-counsel for De Lage Landen Financial Services, Inc. in the case of De Lage Landen Financial Services, Inc. v. Rasa Floors, LP, et al. discussed in this article.

Patrick M. Northen is a partner at Dilworth Paxson LLP and a member of the Litigation Department's Operating Committee. Northen concentrates his practice on commercial and complex litigation, including extensive representation of equipment leasing companies in matters involving allegations of programatic lease fraud. C. Lawrence Holmes is a partner in Dilworth Paxson's Litigation Department and deputy managing partner of the firm. Holmes focuses his practice on representing leasing companies and insurance companies, including advising his leasing clients on litigation strategies and issues prior to and instead of litigating. They may be contacted at [email protected] or [email protected].

In March 2011, the Iowa Supreme Court sent ripples of concern, if not terror, throughout the equipment lease finance industry with an unprecedented decision refusing to afford finance lease status to a contract between a finance company and a commercial end user, notwithstanding the fact that the parties had expressly agreed to such treatment in their written documents. In C&J Vantage Leasing Co. v. Wolfe , 795 N.W.2d 65 (Iowa Mar. 4, 2011), the court reasoned that “a transaction must first qualify as a lease before it can qualify as a finance lease.” The court found that because the contract at issue permitted the end user to purchase the financed equipment for $1 at the end of the lease term (in essence, any capital lease), the transaction was in fact a sale with a security interest rather than a lease. The court specifically refused to give effect to the parties' expressed intent, as stated in the contract provision that: “[t]his agreement is, and is intended, to be a Lease.”

The Iowa court's holding on this point caused justifiable concern in the equipment leasing community. Indeed, entire seminars have been devoted to discussing the C&J Vantage case and its possible ramifications. One particular concern was that the case might be invoked by defaulting lessees in other jurisdictions as a springboard for attacking finance lease treatment of written leases on the basis that one or more of the requirements set forth in Article 2A of the Uniform Commercial Code (“UCC”) were not met. Such argument could be raised not only in the context of “dollar out” leases, but in other factual scenarios, such as where it is alleged that the lessor did not actually receive the leased goods despite executing a Delivery and Acceptance certificate, or where some other technical requirement of UCC ' 2A-103(a)(3) was not met. Plainly, such a result could defeat a finance company's justified expectation that its agreements will be treated as a finance lease as provided in the written contract language.

A compelling argument can be made that the Iowa Supreme Court was wrong. The court's holding on this issue is seemingly inconsistent with the official comments to Article 2A. Specifically, UCC ' 2A-103, comment (g), provides that “[i]f a transaction does not qualify as a finance lease, the parties may achieve the same result by agreement; no negative implications are to be drawn if the transaction does not qualify.” Other courts, including the Pennsylvania Superior Court and a New York trial court, have relied upon comment (g) to conclude that where the parties' agreement specifically states that it is intended to be a finance lease, as defined in Article 2A of the UCC, that intention will be enforced even though the transaction would not otherwise qualify. See generally De Lage Landen Financial Services, Inc. v. M.B. Management Co., Inc. , 888 A.2d 895 (Pa. Super. 2005); General Electric Capital Corporation v. National Tractor Trailer School, Inc. , 175 Misc.2d 20, 667 N.Y.S.2d 614 (1997). Indeed, the opinion in C&J Vantage appears to miss the central point that equipment finance leases, as expressly endorsed by UCC Article 2A, are a unique type of financial instrument that is neither a “true” lease nor a security interest. The court's reasoning also disregards and undermines one of the UCC's principal purposes: to encourage commercial parties to define their own relationship through the language of their contracts.

Fortunately, while the C&J Vantage opinion may have closed a door for equipment finance companies, it opened a window. The decision's mischief-making potential is mitigated by another holding in the same opinion: that “when a secured transaction contains an express hell-or-high-water clause, courts must grant the provision full effect.” Put differently, despite the court's refusal to honor the parties' intent to create a finance lease ' thereby stripping the transaction of the automatic protection that attaches under Article 2A of the UCC ' the parties can achieve essentially the same result by including a provision that the end user's obligation to make its lease payments is absolute and unconditional, i.e., that such payments are due “come hell or high water.”

Because well-counseled lease finance companies routinely utilize a “belt-and-suspenders” approach, in which their standard contract documents include both a hell-or-high-water provision and a statement that the parties' intend to have their transaction construed as an Article 2A finance lease, the Iowa court's misguided decision is likely to have limited practical impact on commercial lease finance companies. Indeed, in order for the C&J Vantage decision to lead to truly pernicious results, a court would need to accept the Iowa Supreme Court's decision that a transaction cannot be a finance lease without first qualifying as a true lease, while simultaneously rejecting its conclusion regarding the enforceability of a hell-or-high-water provision.

The C&J Vantage case is also potentially problematic in that the decision permitted an end user to survive summary judgment, in an action to enforce its payment obligations, based upon fraudulent misrepresentation and other affirmative defenses. For instance, the court held that the defendant could present extrinsic evidence that it was fraudulently induced into believing that it would receive the leased equipment at no cost. Such reasoning, if adopted, could be troubling to finance lease companies, because it appears to apply a somewhat liberal standard for avoiding summary judgment. However, most states have their own well-developed body of case law in this area. Consequently, there is no reason to believe that the Iowa Supreme Court's decision would be particularly influential in cases applying the law of other states.

Subsequent Opinions Citing C&J Vantage

Because of the factors discussed above, there is reason to expect that the C&J Vantage decision will not cause any significant shift in existing leasing law. Consistent with this prediction, in the year that has passed since the C&J Vantage opinion issued, the case has been cited in only two reported decisions outside of Iowa's state and federal courts. In In re Matter of Del-Maur Farms, 2011 WL 2847709 (Bkrtcy.D.Neb. July 14, 2011), a Nebraska bankruptcy court concluded that the transaction at issue constituted a secured transaction, rather than a true lease, and therefore was not entitled to the preferential treatment afforded to a lessor under ' 365 of the Bankruptcy Code. The court noted the C&J Vantage decision in a string cite of cases analyzing whether the purchase price contained in a lease agreement should be considered “nominal.” The court did not discuss whether the parties intended for the transaction to constitute a finance lease or referred to UCC Article 2A in their agreement.

The other case to have cited C&J Vantage ' De Lage Landen Financial Services, Inc. v. Rasa Floors, L.P. , 792 F. Supp.2d 812 (E.D. Pa. 2011) ' offers considerable comfort to lease finance companies worried about the possible impact of the Iowa decision. In De Lage Landen, a case in which the authors of this article represented the lessor, a Pennsylvania federal court cited to C&J Vantage to support the proposition that if an agreement qualifies as a finance lease under Article 2A of the UCC, an express hell-or-high-water provision is unnecessary. However, the court reached a far different result as to the types of transactions that qualify as Article 2A finance leases.

The dispute in De Lage Landen arose out of a concept known as the “Power of $Zero” solution. As marketed by the vendor, customers would be able to obtain public access services (e.g., dial-tone and Internet service) and a new telephone system (or money back for their existing telephone system) for one monthly payment that would not increase over the term of the multi-year contract. Customers were required to enter into two “separate and distinct” contracts: a Customer Agreement with Capital 4 relating to the public access services and a lease or rental agreement with an equipment finance company, such as De Lage Landen (“DLL”). The Lease Agreements contained “hell or high water” provisions stating generally that the obligation to make lease payments was “absolute and unconditional” and could not be canceled.

In 2007, Capital 4 became insolvent and stopped providing telephone and Internet services. As a result, many customers stopped making their lease payments, causing DLL to institute collection actions in Pennsylvania state and federal court. The lessees filed a number of counterclaims against DLL, based upon the general theme that Capital 4, DLL and the equipment supplier (3Com) had marketed the Power of $Zero program in a false and deceptive manner.

The court granted summary judgment in DLL's favor on all claims and counterclaims in a lengthy opinion containing several key legal findings, including the following:

• The lease agreements were separate and distinct contracts from the customer agreements and, therefore, must be enforced in accordance with their own clear and unambiguous terms.
• By their explicit terms and structure, the lease agreements constituted valid finance leases under Article 2A of the UCC.
• Defendants' defenses (including fraud, unconscionability and mistake) were unavailing because, among other things, defendants were commercial parties who had meaningful choices available to them and were bound by the terms of their own clear and unambiguous contracts, regardless of whether they read or understood the contracts before signing them.
• Defendants' counterclaims failed because they did not establish fraud on behalf of Capital 4 and, even if they had, such conduct could not be imputed to DLL. Specifically, DLL did not manifest an intent for Capital 4 to act as an agent and, to the contrary, the program agreement between DLL and Capital 4 expressly disclaimed an agency relationship.

In subsequent orders regarding damages, the court determined that DLL was entitled to collect 18% interest and reasonable attorneys' fees, as provided in the lease agreements, and that reasonable attorneys' fees included those incurred in defending the counterclaims and defeating class certification.

Lessons from C&J Vantage

While lease finance companies and their counsel are correct to view the C&J Vantage decision with some level of consternation, early indications support the conclusion that the decision's impact should not be particularly significant, at least with respect to cases that do not require application of Iowa law. Nevertheless, unexpected decisions, such as what occurred in C&J Vantage, naturally give rise to the question of what, if anything, the lessor should have done differently. Perhaps the biggest takeaway is that the type of “belt and suspenders” contract draftsmanship that might sometimes be disparaged as “over-lawyering” exists for a reason. One might have thought, based upon decisions rendered in other jurisdictions, that a contractual “hell or high water” provision was superfluous in an agreement that expressly states that it is intended to be an Article 2A finance lease. However, had the lessor in C&J Vantage relied solely upon the protection provided by Article 2A, the outcome of that case might have been far worse.

A second lesson can be drawn from a circumstance common to the C&J Vantage and De Lage Landen cases. In both cases, the vendor utilized marketing pitches and side agreements that arguably resulted in the end user misunderstanding the nature of the relationship it was entering into. In C&J Vantage, the end user leased golf carts in conjunction with a side agreement concerning advertising revenue that the lessee would receive for placing ads on the golf carts. The lessee was apparently led to believe that it would always receive advertising revenue sufficient to cover the lease payments and, therefore, would essentially be receiving the golf carts at no cost. Similarly, in De Lage Landen many end users purportedly thought that they were obtaining telephone equipment and public access services as a “package deal” or, in some cases, that they were receiving telephone equipment for free.

In both cases, it is not clear that the lessor fully understood the manner in which the program was being marketed by its vendor, or the content of the separate agreement between the vendor and the end user. While it is obvious that a lease finance company cannot know everything that is being said during sales pitches, if the lessors in those cases had better understood the nature of the program at issue, they could have insisted that the vendor include language in its standard sales pitch, customer agreements and written marketing materials that would have ensured that the lessees better understood the absolute and unconditional nature of their obligation to the lessor. If the lessees had better understood their obligation to the lessor (and still chose to enter into the transaction), they may have responded differently when the vendor failed to live up to its separate and independent promises to the lessee.

Note: The authors were co-counsel for De Lage Landen Financial Services, Inc. in the case of De Lage Landen Financial Services, Inc. v. Rasa Floors, LP, et al. discussed in this article.

Patrick M. Northen is a partner at Dilworth Paxson LLP and a member of the Litigation Department's Operating Committee. Northen concentrates his practice on commercial and complex litigation, including extensive representation of equipment leasing companies in matters involving allegations of programatic lease fraud. C. Lawrence Holmes is a partner in Dilworth Paxson's Litigation Department and deputy managing partner of the firm. Holmes focuses his practice on representing leasing companies and insurance companies, including advising his leasing clients on litigation strategies and issues prior to and instead of litigating. They may be contacted at [email protected] or [email protected].