What's New in the Law

GE Capital Information Technology Solutions, Inc. v, Campbell Ads LLC, 2011 WL 5835909 (U.S.Dist.Ct. N.D.Ind. Nov. 21, 2011)

After the lessee ceased making payments owed on a lease for a copier machine, the lessor brought suit and the lessee: 1) counterclaimed that the lessor had breached the lease agreement by failing to provide a proper working copy machine, and also 2) affirmatively defended by arguing that the lessor had breached warranties regarding the equipment. In this brief decision, the court rules in favor of the lessor by pointing out that in the lease, the lessor had disclaimed warranties, and the lessee had waived rights and remedies under Article 2A. The court did grant a lessee motion to file a third-party complaint against the manufacturer of the copier.

De Lage Landen Financial Services, Inc. v. Rasa Floors, LP, 792 F.Supp.2d 812 (E.D.Pa. 2011)

A lessor entered into lease agreements with two lessees in connection with a program operated by certain vendors (Capital 4 and 3Com) who offered customers telephone and Internet services requiring networking and telephone equipment, the financing of which took the form of the subject lease agreements. After the service provider failed, the lessees ceased making lease payments and the lessor filed suit. This court grants summary judgment in favor of the lessor ' both on it claims against the lessees and on the counterclaims asserted by the lessees. The lease agreements made clear that although the rental payments might include the cost of services being provided (which the lessor would forward to the service provider) in addition to the amount for equipment rental, the lessor was not responsible for providing the services or maintaining the equipment. The court notes that after the failure of the service provider, the lessor decreased the amount of the rental payments to eliminate the portion for the services. The decision strongly supports the enforceability of lease provisions placing a “hell or high water” obligation on lessees to make all payments (both under Article 2A and under contract law), and finds no evidence that the lessor was in any agency relationship with the vendors such that alleged fraudulent conduct on their part could be attributed to the lessor. See “C&J Vantage Leasing Co. v. Wolfe: One Year Later,” at p. 7 for more information on the De Lage Landen case.

True Lease vs. Security Interest: In General

VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio Aug. 5, 2011)

Following a default by the lessee, the lessor repossessed and sold the four trucks being leased. In evaluating the lessee's claim that the lessor was not entitled to a deficiency judgment because the lessor had not complied with Article 9's requirement of commercial reasonability with regard to the sale, the court had to decide whether Article 9 applied at all ' i.e., whether the lease created a security interest. Finding that the purchase option of 8.84% of the equipment's original cost was close to the parties' stated stipulated loss value at the end of the lease, the court concludes that the purchase option did not constitute nominal additional consideration and that the lease was a true lease.

In re KY USA Energy, Inc., 449 B.R. 745 (Bankr.W.D.Ky. May 31, 2011)

Whether a lease of trucks created a security interest was a relatively simple issue for this court inasmuch as the lease contained a $1 purchase option. Although the lessor apparently admitted that the lease constituted a security interest, it also attempted to argue that the lease was an executory contract for bankruptcy purposes. The basis for this argument was that there were no certificates of title bearing the lessee's name. The court denies the lessor's claim by pointing out that under Kentucky law a conditional lessee of a motor vehicle is considered the owner and permitted to register the vehicle even if its name is not on the title.

In re Warne, 2011 WL 1303425 (Bankr.D.Kan. April 4, 2011)

This court holds that a lease of a truck was a true lease, in large part because the fixed price purchase option had been stipulated by the parties to represent the estimated fair market value of the truck at the end of the lease term and thus did not constitute nominal additional consideration. The lessee attempted to argue that its payment of a security deposit at the outset of the lease equaling exactly the amount of the purchase option turned this transaction into a security agreement, since the lessee could purchase the truck for no additional consideration at the end of the lease if the lessor simply retained the deposit. As the court observes, that argument ignores the function of a security deposit and also does not lead to the conclusion that the lessee will buy the truck at the end of the lease. The lessee could instead decide that its most sensible option would be to return the truck and receive the return of its security deposit (assuming, of course, that there was no lessee default).

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

In the Matter of HB Logistics, LLC, 2011 WL 4625198 (Bankr.N.D.Ala. Sept. 29, 2011)

In this bankruptcy case, four different lessors sought to have their TRAC leases (three of which seem to have contained standard TRAC provisions, with the fourth possibly containing a “split” TRAC provision under which the lessor assumes some of the risk) declared to be true leases entitled to the appropriate protection under the Bankruptcy Code. These leases were governed by the laws of four different states, and the court references TRAC statutes enacted in three of these states ' Alabama, Texas and Minnesota. With respect to the fourth state, the court indicates that the lessor did not argue that Mississippi had passed a TRAC statute similar to those in the other states, and the court does not itself cite such a statute. (Mississippi did in fact enact such a statute in 1994 ' apparently still in effect.) Nevertheless, the court holds that the TRAC lease governed by Mississippi law is a true lease under the Mississippi UCC. The court appears to feel generally that TRAC leases do not give the lessees “any equity” in the equipment and should be considered true leases based on the “economic realities.”

Measures of Lessors' Damages

Lyon Financial Services, Inc. v. Jude's Medical Center, Ltd., 2011 WL 6029195 (U.S.Dist.Ct. N.D.Ill. Dec. 5, 2011)

Following the lessee's default, the lessor repossessed and sold the equipment being leased and then brought suit against the lessee for the deficiency. After rejecting a claim by the lessee that the lease created a security interest, the court nevertheless holds that even though Minnesota's Article 2A does not expressly require that a sale of leased goods following a default be commercially reasonable, Minnesota courts have found that concept helpful in determining mitigation of damages issues. Stating that there was insufficient information regarding the circumstances of the sale of equipment in this case to determine whether the sale was commercially reasonable, the court denies the lessor's motion for summary judgment.

Wells Fargo Bank Northwest, N.A. v. US Airways, Inc., 2011 WL 6141034 (N.Y.Sup.Ct. Dec. 1, 2011) (unreported disposition)

This decision upholds a provision in an aircraft lease providing for the payment of twice the ordinary monthly rental for the period following a default until the lessee returned the aircraft in the condition required by the lease. The court comments that liquidated damages for rental holdovers in multiples of the monthly rent have been upheld as not unreasonable in other New York cases and also notes that the lease in this case, like the leases in the other New York cases, was negotiated by sophisticated persons in the airline industry with experienced counsel.

VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio Aug. 5, 2011)

After a lessee default, the lessor repossessed and sold the four trucks that were subject to the lease. The lessee argued that since the lease created a security interest, it was an Article 9 transaction under which the lessor had a duty, among other things, to dispose of the equipment in a commercially reasonable manner. However, the court held that the lease was a true lease governed by Article 2A and that no commercial reasonableness requirement applied to the truck sale under North Carolina law.

Vendor Issues

Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 2012 WL 401493 (U.S.Dist.Ct. N.D.Ill. Feb. 6, 2012)

This brief decision raises a critical question concerning what representations and warranties given by a vendor to its lessor/financing partner are enforceable. In this case, the lessor had entered into a financing agreement with the vendor in which the vendor warranted that all lease transactions presented to the lessor for review are valid and fully enforceable. A couple of years after the lessor entered into a six-year lease of copy machines with an Illinois municipality, that lessee ceased making payments, contending that the lease was unenforceable because it violated an Illinois statute limiting municipalities to five-year equipment leases. Instead of suing the municipality, the lessor filed suit against the vendor (Illinois Paper and Copier) for breach of its warranty. This court finds in favor of the vendor, stating that a party is not entitled to rely on a representation of law inasmuch as both parties are presumed to be equally capable of knowing and interpreting the law. In other words, a representation that the leases are valid and fully enforceable could not form the basis of a breach of warranty claim. To the extent this questionable decision is good law, the same reasoning would also seem applicable to representations and warranties made by an assignor of a lease to its assignee.

Indemnity Clauses

XTRA Lease LLC v. Pacer International, Inc., 2012 WL 10491 (U.S.Dist.Ct. E.D.Mo. Jan. 3, 2012)

This case illustrates how important it can be for an indemnity clause in a lease to be very clear as to whether the lessee is obligated to indemnify and defend a lessor for the lessor's own negligence. The court finds that under Missouri law, the language “indemnify ' for any and all losses” did not clearly include losses that might have arisen due to the lessor's own negligence. For an indemnity provision to cover the lessor's own negligence, such intention must be expressed in clear and unequivocal terms.

Forum Selection, Jurisdiction and Choice of Law

U.S. Bancorp Equipment Finance, Inc. v. Healing Earth Rejuvination Center, LLC, 2012 WL 254494 (Minn.App. Jan. 30, 2012)

This court affirms a trial court's judgment in favor of a lessor. The lessee did not appear at trial and on appeal argued that the district court should not have exercised personal jurisdiction over the lessee since the minimum contacts requirement had not been satisfied. This brief decision notes simply that: 1) the lease contained a forum selection clause agreeing to jurisdiction in Minnesota, 2) such clause was not unreasonable, and therefore 3) the minimum contacts requirement was irrelevant.

DeLage Landen Financial Services, Inc. v. Leighton K. Lee Law Office, 2011 WL 6304226 (N.J.Super.App.Div. Dec. 19, 2011) (unpublished opinion, check court rules before citing)

This appellate decision reverses a trial court's dismissal of an action filed by the lessor based upon a lack of personal jurisdiction over the defendants. The lease contained a consent to jurisdiction in New Jersey that was explicitly non-exclusive. The court distinguishes a prior case in which a floating selection clause was held to be invalid for failure to provide any notice of where an action might be instituted. Unlike in that case, the court states that here defendants were on notice that they were subject to being sued in New Jersey.

Waivers of Trial By Jury

In re Key Equipment Finance Inc., 2012 WL 669043 (Tex.App. Feb. 27, 2012)

This appellate court grants relief to an assignee of a business equipment lease from a lower court's denial of a motion to strike the lessee's demand for a jury trial. The court finds that although the jury waiver provision was not conspicuous in comparison with any other provision in the lease contract, the assignee had met its burden of showing that the lessee, a sophisticated party whose practice it was to have its in-house counsel review all contracts, had knowingly accepted the provision.

Lease Formation; Authority to Bind a Lessee Under a Lease

De Lage Landen Financial Services v. St. Bernard's Episcopal Church, 2012 WL 489149 (N.J.Super.A.D. Feb. 16, 2012)

This appellate court affirms the grant of summary judgment by a trial court in favor of the assignee of a lease of a copy machine. After entering into a five-year lease, a church made payments for more than two years before a new treasurer determined that a much lower-cost copier would be adequate for its needs. The church obtained such a lower-cost machine and packed the one it had used to be picked up by the assignee. Instead, the assignee brought suit for the amount of remaining lease payments. Among the lessee's arguments was that the executive assistant who signed the lease on behalf of the church had neither the actual nor apparent authority to bind the church. This decision rejects that argument, finding that the use of the machine and payment of the rentals for more than two years ratified the lease even if the person who had signed was not authorized.

Hybrid Transactions

C9 Ventures v. SVC-West, L.P., 136 Cal.Rptr.3d 550 (Cal.App. 2012)

One company ordered helium-filled tanks and balloons from a second company in connection with an event planned by the first company. The tanks and balloons were delivered with a standard form invoice on the reverse side of which was an indemnification provision. After a boy was injured by one of the tanks, both companies were sued and both paid the same amount to settle the case. However, the supplier of the tanks had cross-claimed for indemnity against the other company based on the unsigned indemnity provision, and the trial court decided this issue in favor of the supplier after construing the transaction as a sale (of helium) governed by Article 2. This appellate decision reverses the trial court, holding that the essence of the transaction was a lease of the tanks, rather than a sale of helium, and therefore should be analyzed under Article 2A. Noting that Article 2A's rules are different from those of Article 2 with regard to what terms are enforceable in the context of an oral agreement, the court holds that the indemnity provision was not enforceable in the context of the facts of this case. Interestingly, this court goes on to comment that the trial court was incorrect even if Article 2 were held to govern ' which means that under the facts of this case, which UCC Article governed did not matter. One lesson of this case is that to the extent the rules of Article 2 and Article 2A would lead to different outcomes, how a “hybrid” transaction is characterized ' as a sale or as a lease ' can be of considerable importance.

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 in the preparation of this update.

Ability to Collect Rentals

Simington v. Lease Finance Group, LLC, 2012 WL 651130 (U.S.Dist.Ct. S.D.N.Y. Feb. 28, 2012)

A pair of small businesses brought a class action suit ' against a group of defendants in the business of processing electronic payments (for credit and debit cards) ' that involved the leasing of electronic point-of-sale equipment by plaintiffs. At this early stage in the suit, the court grants some of the defendants' motions to dismiss certain of the plaintiffs' claims, but denies other defendant motions with regard to other plaintiff claims. While not at the stage where the court might have discussed lessor/defendant arguments based on “hell or high water” leases, the case illustrates examples of purported outrageous conduct by the defendants, such as hiding most of the provisions on relatively expensive leases for inexpensive equipment, which plaintiffs were talked into signing in return for unfulfilled promises of huge savings on the costs of the payment processing services.

GE Capital Information Technology Solutions, Inc. v, Campbell Ads LLC, 2011 WL 5835909 (U.S.Dist.Ct. N.D.Ind. Nov. 21, 2011)

After the lessee ceased making payments owed on a lease for a copier machine, the lessor brought suit and the lessee: 1) counterclaimed that the lessor had breached the lease agreement by failing to provide a proper working copy machine, and also 2) affirmatively defended by arguing that the lessor had breached warranties regarding the equipment. In this brief decision, the court rules in favor of the lessor by pointing out that in the lease, the lessor had disclaimed warranties, and the lessee had waived rights and remedies under Article 2A. The court did grant a lessee motion to file a third-party complaint against the manufacturer of the copier.

De Lage Landen Financial Services, Inc. v. Rasa Floors, LP , 792 F.Supp.2d 812 (E.D.Pa. 2011)

A lessor entered into lease agreements with two lessees in connection with a program operated by certain vendors (Capital 4 and 3Com) who offered customers telephone and Internet services requiring networking and telephone equipment, the financing of which took the form of the subject lease agreements. After the service provider failed, the lessees ceased making lease payments and the lessor filed suit. This court grants summary judgment in favor of the lessor ' both on it claims against the lessees and on the counterclaims asserted by the lessees. The lease agreements made clear that although the rental payments might include the cost of services being provided (which the lessor would forward to the service provider) in addition to the amount for equipment rental, the lessor was not responsible for providing the services or maintaining the equipment. The court notes that after the failure of the service provider, the lessor decreased the amount of the rental payments to eliminate the portion for the services. The decision strongly supports the enforceability of lease provisions placing a “hell or high water” obligation on lessees to make all payments (both under Article 2A and under contract law), and finds no evidence that the lessor was in any agency relationship with the vendors such that alleged fraudulent conduct on their part could be attributed to the lessor. See “C&J Vantage Leasing Co. v. Wolfe: One Year Later,” at p. 7 for more information on the De Lage Landen case.

True Lease vs. Security Interest: In General

VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio Aug. 5, 2011)

Following a default by the lessee, the lessor repossessed and sold the four trucks being leased. In evaluating the lessee's claim that the lessor was not entitled to a deficiency judgment because the lessor had not complied with Article 9's requirement of commercial reasonability with regard to the sale, the court had to decide whether Article 9 applied at all ' i.e., whether the lease created a security interest. Finding that the purchase option of 8.84% of the equipment's original cost was close to the parties' stated stipulated loss value at the end of the lease, the court concludes that the purchase option did not constitute nominal additional consideration and that the lease was a true lease.

In re KY USA Energy, Inc., 449 B.R. 745 (Bankr.W.D.Ky. May 31, 2011)

Whether a lease of trucks created a security interest was a relatively simple issue for this court inasmuch as the lease contained a $1 purchase option. Although the lessor apparently admitted that the lease constituted a security interest, it also attempted to argue that the lease was an executory contract for bankruptcy purposes. The basis for this argument was that there were no certificates of title bearing the lessee's name. The court denies the lessor's claim by pointing out that under Kentucky law a conditional lessee of a motor vehicle is considered the owner and permitted to register the vehicle even if its name is not on the title.

In re Warne, 2011 WL 1303425 (Bankr.D.Kan. April 4, 2011)

This court holds that a lease of a truck was a true lease, in large part because the fixed price purchase option had been stipulated by the parties to represent the estimated fair market value of the truck at the end of the lease term and thus did not constitute nominal additional consideration. The lessee attempted to argue that its payment of a security deposit at the outset of the lease equaling exactly the amount of the purchase option turned this transaction into a security agreement, since the lessee could purchase the truck for no additional consideration at the end of the lease if the lessor simply retained the deposit. As the court observes, that argument ignores the function of a security deposit and also does not lead to the conclusion that the lessee will buy the truck at the end of the lease. The lessee could instead decide that its most sensible option would be to return the truck and receive the return of its security deposit (assuming, of course, that there was no lessee default).

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

In the Matter of HB Logistics, LLC, 2011 WL 4625198 (Bankr.N.D.Ala. Sept. 29, 2011)

In this bankruptcy case, four different lessors sought to have their TRAC leases (three of which seem to have contained standard TRAC provisions, with the fourth possibly containing a “split” TRAC provision under which the lessor assumes some of the risk) declared to be true leases entitled to the appropriate protection under the Bankruptcy Code. These leases were governed by the laws of four different states, and the court references TRAC statutes enacted in three of these states ' Alabama, Texas and Minnesota. With respect to the fourth state, the court indicates that the lessor did not argue that Mississippi had passed a TRAC statute similar to those in the other states, and the court does not itself cite such a statute. (Mississippi did in fact enact such a statute in 1994 ' apparently still in effect.) Nevertheless, the court holds that the TRAC lease governed by Mississippi law is a true lease under the Mississippi UCC. The court appears to feel generally that TRAC leases do not give the lessees “any equity” in the equipment and should be considered true leases based on the “economic realities.”

Measures of Lessors' Damages

Lyon Financial Services, Inc. v. Jude's Medical Center, Ltd., 2011 WL 6029195 (U.S.Dist.Ct. N.D.Ill. Dec. 5, 2011)

Following the lessee's default, the lessor repossessed and sold the equipment being leased and then brought suit against the lessee for the deficiency. After rejecting a claim by the lessee that the lease created a security interest, the court nevertheless holds that even though Minnesota's Article 2A does not expressly require that a sale of leased goods following a default be commercially reasonable, Minnesota courts have found that concept helpful in determining mitigation of damages issues. Stating that there was insufficient information regarding the circumstances of the sale of equipment in this case to determine whether the sale was commercially reasonable, the court denies the lessor's motion for summary judgment.

Wells Fargo Bank Northwest, N.A. v. US Airways, Inc., 2011 WL 6141034 (N.Y.Sup.Ct. Dec. 1, 2011) (unreported disposition)

This decision upholds a provision in an aircraft lease providing for the payment of twice the ordinary monthly rental for the period following a default until the lessee returned the aircraft in the condition required by the lease. The court comments that liquidated damages for rental holdovers in multiples of the monthly rent have been upheld as not unreasonable in other New York cases and also notes that the lease in this case, like the leases in the other New York cases, was negotiated by sophisticated persons in the airline industry with experienced counsel.

VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio Aug. 5, 2011)

After a lessee default, the lessor repossessed and sold the four trucks that were subject to the lease. The lessee argued that since the lease created a security interest, it was an Article 9 transaction under which the lessor had a duty, among other things, to dispose of the equipment in a commercially reasonable manner. However, the court held that the lease was a true lease governed by Article 2A and that no commercial reasonableness requirement applied to the truck sale under North Carolina law.

Vendor Issues

Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 2012 WL 401493 (U.S.Dist.Ct. N.D.Ill. Feb. 6, 2012)

This brief decision raises a critical question concerning what representations and warranties given by a vendor to its lessor/financing partner are enforceable. In this case, the lessor had entered into a financing agreement with the vendor in which the vendor warranted that all lease transactions presented to the lessor for review are valid and fully enforceable. A couple of years after the lessor entered into a six-year lease of copy machines with an Illinois municipality, that lessee ceased making payments, contending that the lease was unenforceable because it violated an Illinois statute limiting municipalities to five-year equipment leases. Instead of suing the municipality, the lessor filed suit against the vendor (Illinois Paper and Copier) for breach of its warranty. This court finds in favor of the vendor, stating that a party is not entitled to rely on a representation of law inasmuch as both parties are presumed to be equally capable of knowing and interpreting the law. In other words, a representation that the leases are valid and fully enforceable could not form the basis of a breach of warranty claim. To the extent this questionable decision is good law, the same reasoning would also seem applicable to representations and warranties made by an assignor of a lease to its assignee.

Indemnity Clauses

XTRA Lease LLC v. Pacer International, Inc., 2012 WL 10491 (U.S.Dist.Ct. E.D.Mo. Jan. 3, 2012)

This case illustrates how important it can be for an indemnity clause in a lease to be very clear as to whether the lessee is obligated to indemnify and defend a lessor for the lessor's own negligence. The court finds that under Missouri law, the language “indemnify ' for any and all losses” did not clearly include losses that might have arisen due to the lessor's own negligence. For an indemnity provision to cover the lessor's own negligence, such intention must be expressed in clear and unequivocal terms.

Forum Selection, Jurisdiction and Choice of Law

U.S. Bancorp Equipment Finance, Inc. v. Healing Earth Rejuvination Center, LLC, 2012 WL 254494 (Minn.App. Jan. 30, 2012)

This court affirms a trial court's judgment in favor of a lessor. The lessee did not appear at trial and on appeal argued that the district court should not have exercised personal jurisdiction over the lessee since the minimum contacts requirement had not been satisfied. This brief decision notes simply that: 1) the lease contained a forum selection clause agreeing to jurisdiction in Minnesota, 2) such clause was not unreasonable, and therefore 3) the minimum contacts requirement was irrelevant.

DeLage Landen Financial Services, Inc. v. Leighton K. Lee Law Office, 2011 WL 6304226 (N.J.Super.App.Div. Dec. 19, 2011) (unpublished opinion, check court rules before citing)

This appellate decision reverses a trial court's dismissal of an action filed by the lessor based upon a lack of personal jurisdiction over the defendants. The lease contained a consent to jurisdiction in New Jersey that was explicitly non-exclusive. The court distinguishes a prior case in which a floating selection clause was held to be invalid for failure to provide any notice of where an action might be instituted. Unlike in that case, the court states that here defendants were on notice that they were subject to being sued in New Jersey.

Waivers of Trial By Jury

In re Key Equipment Finance Inc., 2012 WL 669043 (Tex.App. Feb. 27, 2012)

This appellate court grants relief to an assignee of a business equipment lease from a lower court's denial of a motion to strike the lessee's demand for a jury trial. The court finds that although the jury waiver provision was not conspicuous in comparison with any other provision in the lease contract, the assignee had met its burden of showing that the lessee, a sophisticated party whose practice it was to have its in-house counsel review all contracts, had knowingly accepted the provision.

Lease Formation; Authority to Bind a Lessee Under a Lease

De Lage Landen Financial Services v. St. Bernard's Episcopal Church, 2012 WL 489149 (N.J.Super.A.D. Feb. 16, 2012)

This appellate court affirms the grant of summary judgment by a trial court in favor of the assignee of a lease of a copy machine. After entering into a five-year lease, a church made payments for more than two years before a new treasurer determined that a much lower-cost copier would be adequate for its needs. The church obtained such a lower-cost machine and packed the one it had used to be picked up by the assignee. Instead, the assignee brought suit for the amount of remaining lease payments. Among the lessee's arguments was that the executive assistant who signed the lease on behalf of the church had neither the actual nor apparent authority to bind the church. This decision rejects that argument, finding that the use of the machine and payment of the rentals for more than two years ratified the lease even if the person who had signed was not authorized.

Hybrid Transactions

C9 Ventures v. SVC-West, L.P. , 136 Cal.Rptr.3d 550 (Cal.App. 2012)

One company ordered helium-filled tanks and balloons from a second company in connection with an event planned by the first company. The tanks and balloons were delivered with a standard form invoice on the reverse side of which was an indemnification provision. After a boy was injured by one of the tanks, both companies were sued and both paid the same amount to settle the case. However, the supplier of the tanks had cross-claimed for indemnity against the other company based on the unsigned indemnity provision, and the trial court decided this issue in favor of the supplier after construing the transaction as a sale (of helium) governed by Article 2. This appellate decision reverses the trial court, holding that the essence of the transaction was a lease of the tanks, rather than a sale of helium, and therefore should be analyzed under Article 2A. Noting that Article 2A's rules are different from those of Article 2 with regard to what terms are enforceable in the context of an oral agreement, the court holds that the indemnity provision was not enforceable in the context of the facts of this case. Interestingly, this court goes on to comment that the trial court was incorrect even if Article 2 were held to govern ' which means that under the facts of this case, which UCC Article governed did not matter. One lesson of this case is that to the extent the rules of Article 2 and Article 2A would lead to different outcomes, how a “hybrid” transaction is characterized ' as a sale or as a lease ' can be of considerable importance.

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 in the preparation of this update.