What's New in the Law

While not involving the assignment of leases specifically, this case may be of interest to finance companies that assign their leases but continue to collect the payments from lessees and then remit such payments to the assignees. In this case, a bankruptcy trustee for an obligor on a loan attempted to recover payments made by the obligor to a bank that had sold participations in such loan to a number of other banks. Although the lead bank had remitted to each of the participants their share of each payment, the trustee argued that the lead bank was liable for the recovery of all payments which qualified as preferential under the Bankruptcy Code as “the initial transferee of such transfer.” Rejecting various arguments of the trustee and of the participants, the court holds that under the terms of the participation agreements, the lead bank was merely a conduit and should not be deemed the initial transferee (a term not defined by the Code). Under the participation agreements, the lead did not have true dominion and control over the funds even though the funds received from the obligor were commingled with the lead's other funds.

Robert W. Ihne is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating and providing advice related to direct transactions, syndications, vendor financing arrangements, and various forms of credit enhancements such as guaranties and letters of credit. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Cristina Richards and Ed Gross of Vedder Price in the preparation of this update

True Lease vs. Security Interest: In General

In re Miller Brothers Lumber Company, Inc., 2012 WL 1601316 (Bankr. M.D.N.C. May 8, 2012)

The threshold issue in this case of lease versus security interest was easily resolved inasmuch as the lease contained a $1 purchase option. Illustrating that this determination has important consequences, the court goes on to consider the fact that the “lessor” ' as a secured creditor rather than the owner of the equipment ' had permitted a financing statement to lapse after the “lessee” had filed for bankruptcy. Under revised Article 9, a bankruptcy filing no longer tolls the amount of time before lapse as it had under former Article 9. Because the “lessor” did not continue the filing during the bankruptcy, it became unperfected with the consequence that its security interest could be avoided under the Bankruptcy Code.

Brenner Financial, Inc. v. Cinemacar Leasing, 2012 WL 1448048 (N.J.Super. A.D. April 27, 2012) (unpublished opinion, check court rules before citing)

This is another case illustrating the different legal rights of various parties when a purported lease in fact creates a security interest. This case involved the lease of a motor vehicle containing a nominal purchase option of $106.05 ' readily determined to be a lease creating a security interest. After the consummation of a sale/leaseback transaction, the lessor/secured party obtained a certificate of title in New Jersey with itself named as owner and its financing source listed as lienholder. Shortly thereafter, the lessee fraudulently obtained a certificate of title in Michigan listing itself as owner with two other parties listed as first and second lienholders. After determining that although the lessor/secured party was not named as a lienholder on the New Jersey title, it had nevertheless perfected its security interest (under the majority rule throughout the United States holding that listing oneself as owner substantially complies with perfection requirements), this appellate court reverses the holding of the trial court and finds that this lessor/secured party's interest had priority over the lienholders listed on the other title. However, since the rights of the various parties are governed by Article 9 (not Article 2A), the court remands to the trial court to apply the rules of Article 9 relating to enforcement of a security interest to determine whether the repossession activity by the lessor/secured party was done according to these rules designed to preserve the rights of all parties involved.

Lessors' Damages: Measures and Entitlement

TBF Financial, LLC v. DRF Services, Inc., 2012 WL 1570141 (Minn. App. May 7, 2012) (unpublished opinion, see Minnesota rules before citing)

After entering into a lease forbidding the lessee from transferring the equipment or assigning its rights under the lease without lessor consent, the lessee did both of those things and the transferee began making lease payments instead of the lessee. When the lessor sued the lessee seeking damages for the breach, the lessee attempted to argue that it had a statutory right to assign its lease obligations under UCC 2A-303 concerning alienability of a party's interest under a lease. This appellate decision affirms a trial court's summary judgment in favor of the lessor in which the same statute is cited giving the lessor the rights and remedies (including damages) under UCC 2A-501(2) (which provides for rights and remedies under 2A as well as under the lease [unless limited by 2A]).

Philips Medical Capital, LLC v. P & L Contracting, Inc., 2012 WL 860324 (U.S.Dist.Ct. N.D.Miss. March 13, 2012)

This decision illustrates a relatively straightforward calculation of damages provided in a lease following a lessee default ' including acceleration of remaining payments due plus a booked residual value, but without any discounting of such amounts to present value. There is also provision for pre-judgment interest under state law in this federal diversity action and for post-judgment interest allowable under federal law.

End-of-Term Lease Provisions

Graphic Pallet and Transport, Inc. v. Balboa Capital Corp., 2012 WL 1952745 (U.S.Dist.Ct. N.D. Ill. May 30, 2012)

After entering into a number of leases with the lessor, the lessee alleged that an employee of the lessor had told the lessee that it could acquire the equipment at the end of each lease term for $1. Since the leases themselves indicated otherwise, the lessee claimed that
various exceptions to the parol evidence rule (e.g., fraud and mistake) should apply and cause the court to decide in favor of the lessee/plaintiff. This court instead grants the lessor/defendant's motion to dismiss.

Forum Selection, Jurisdiction and Choice of Law

Financial Planning Alternatives, Inc. v. De Lage Landen Financial Services, Inc., 2012 WL 2588553 (Mass.App.Div. June 28, 2012)

This decision affirms a dismissal by a trial court of an action by a lessee against a lessor after the lessor had obtained a default judgment in a Pennsylvania court predicated upon a clause in the lease consenting to the jurisdiction of Pennsylvania courts. This appellate court notes both that Massachusetts generally enforces forum selection clauses and also notes that the lessee is a sophisticated entity in the business of financial planning. However, in a footnote, this court states that “While recognizing and applying the established law that compels the decision in this matter, we are not unmindful of the inequities potentially created by De Lage's use of a boilerplate forum selection clause.” In this footnote, the court goes on to mention a decade-old dispute between Leasecomm, based in Massachusetts and a “standard bearer for the use of forum selection clauses in finance equipment leases with small businesses,” and the Massachusetts attorney general, which resulted in a settlement in which Leasecomm abandoned its use of such clauses and agreed to bring its collection suits “where the consumer resided or did business.”

Canon Financial Services, Inc. v. Eufaula School District, 2012 WL 1989225 (N.J.Super. A.D. June 4, 2012) (unpublished opinion, check court rules before citing)

This appellate decision affirms a trial court's dismissal of a lessee's motion to dismiss a complaint by a lessor. The lessee/defendant, a school district in Oklahoma, had allegedly defaulted on four photocopier lease agreements containing a clause in which the lessee agreed to the jurisdiction of New Jersey courts. Noting that forum selection clauses are generally enforced in New Jersey, this decision holds that none of the exceptions cited by the lessee ' including serious inconvenience ' applied.

Waivers of Trial By Jury

Hitachi Capital America Corp. v. Shiloh Imaging Center, LLC, 2012 WL 876778 (U.S.Dist.Ct. W.D.Okla. March 14 2012)

Illustrating, perhaps, a potential for extreme sympathy from the bench, this court refuses to enforce a jury trial waiver found in a lease that was part of a provision printed in all capital letters ' and also refuses to enforce the same waiver in related guaranties printed in all capitals and in bold. Although stating that such printing indicated that the lessor did not attempt to bury the waiver provisions, the court holds that a “gross disparity in bargaining power between the parties” made the waiver unenforceable. The court characterizes the lessor as a “large national corporation” while referring to the defendant as a “small local limited liability corporation” (and referring to the guarantors as a “small town doctor” and other “unsophisticated” individuals). The court notes that the waiver was never brought to the attention of the defendants, who were not represented by counsel.

Assignments of Leases

In re Brooke Corporation (Northern Capital, Inc. v. The Stockton National Bank and Brooke Capital Advisors, Inc.), 458 B.R. 579 (Bankr.D.Kan. Sept. 28, 2011)

While not involving the assignment of leases specifically, this case may be of interest to finance companies that assign their leases but continue to collect the payments from lessees and then remit such payments to the assignees. In this case, a bankruptcy trustee for an obligor on a loan attempted to recover payments made by the obligor to a bank that had sold participations in such loan to a number of other banks. Although the lead bank had remitted to each of the participants their share of each payment, the trustee argued that the lead bank was liable for the recovery of all payments which qualified as preferential under the Bankruptcy Code as “the initial transferee of such transfer.” Rejecting various arguments of the trustee and of the participants, the court holds that under the terms of the participation agreements, the lead bank was merely a conduit and should not be deemed the initial transferee (a term not defined by the Code). Under the participation agreements, the lead did not have true dominion and control over the funds even though the funds received from the obligor were commingled with the lead's other funds.

Robert W. Ihne is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating and providing advice related to direct transactions, syndications, vendor financing arrangements, and various forms of credit enhancements such as guaranties and letters of credit. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Cristina Richards and Ed Gross of Vedder Price in the preparation of this update