What's New in the Law

Financial Pacific Leasing, LLC v. Law Offices of David A. Sharp, P.A., 2012 WL 4857214 (Wash.App.Div.1 Oct. 15, 2012) (unpublished opinion)

This case raises interesting questions about the meaning of “acceptance” ' both under Article 2A and in the context of the terms of a lease agreement. Here, the lease provided that the assignee of the lease could verify by phone that the equipment had been examined by the lessee, was in good operating order and was accepted for all purposes under the lease. Although the equipment vendor never actually delivered the equipment that was to be subject to the lease, when the lessee was called by the assignee, the lessee saw a truck delivering a large box and told the assignee that the equipment was “just being delivered.” The lease also stated that a phone confirmation of acceptance by the lessee would authorize the assignee to pay the vendor ' which the assignee did following the phone call. After finding that the parties to the lease agreed that the lease was intended to qualify as an Article 2A statutory finance lease (as stated in the lease) and also commenting that Article 2A's definition of “finance lease” provides that the lessee's obligations become irrevocable upon the lessee's acceptance of the equipment, the court concludes ' perhaps questionably ' that the lessee was not entitled to rely on its argument that the lease did not qualify as a finance lease because it never actually accepted the equipment. The court reasons that the lease contained waivers of lessee rights under 2A-508 through 522, which includes 2A-515, Acceptance of Goods (providing, among other things, that acceptance occurs after a reasonable opportunity to inspect the goods). This court, however, goes on to reverse a trial court's summary judgment against the lessee and remands for trial on the issue of whether the lessee's stating that the equipment was just being delivered constituted acceptance under the terms of the lease. This decision makes clear that the manner in which a lease indicates when a lessee will be deemed to have accepted the equipment is critical to commencing the lessee's unconditional obligations to pay. This can be crucial whether or not the court properly decided that a lessee's waivers of certain provisions of Article 2A mean that the lessee cannot defend itself from finance lease claims by stating that it had not actually accepted the equipment.

In re Equipment Acquisition Resources, Inc. (Brandt v. The CIT Group/Equipment Financing, Inc.), 2012 WL 4754957 (Bankr.N.D. Ill. Sept. 28, 2012)

This case is one of 11 cases decided on the same date arising out of the bankruptcy of Equipment Acquisition Resources. In each of these cases, William A. Brandt, Jr., the Plan Administrator for EAR, brought suit against a different finance company to recover lease payments made by EAR to the finance company as fraudulent transfers. It was alleged that an individual had caused EAR to enter into leases of equipment acquired by the finance companies at grossly inflated prices from another company that had just purchased the equipment from EAR. The Administrator claimed that all of these circular transfers amounted to a Ponzi scheme in which funds from financing companies entering into leases later in time were used to pay EAR's earlier inflated lease obligations ' to the eventual detriment of EAR and its other creditors. The court concludes that the Administrator's claims will be dismissed in one month unless the Administrator is able to provide more specific evidence of actual fraudulent intent on the part of the finance company.

True Lease vs. Security Interest: In General

In re Waltman, 2012 WL 5828717 (Bankr.S.D.Ala. Nov. 16, 2012)

This case illustrates how certain types of state laws can be decisive in determining whether a lease creates a security interest. The lessee/debtor in bankruptcy had entered into rental purchase agreements with a lessor of portable storage buildings. The agreements provided that the property was owned by the lessor and for a lease term of one month, which the lessee could extend on a month-to-month basis by making monthly payments in advance of the next monthly period. They also provided that the lessee would acquire ownership of the goods after making 36 monthly payments and otherwise complying with the leases. Agreeing with the lessor that these agreements should not be construed as security agreements (as contended by the lessee), the court looks to a Tennessee statute governing rental purchase agreements which states that rental purchase agreements are not to be construed as security interests as defined in Tennessee's UCC. The court points to decisions in other states with similar statutes coming to similar conclusions, and concludes that the agreements should be treated as executory contracts or unexpired leases under the Bankruptcy Code.

In the Matter of Cherry, 2012 WL 3252231 (Bankr.N.D.Ala. Aug. 7, 2012)

The lessor under an automobile lease attempted to receive true lease treatment in the lessee's bankruptcy by arguing that the lease gave the lessee the right to terminate early. This court holds that because the lease provisions concerning early termination, although ambiguous, included language that the lessee would be required to pay a “substantial charge” which “may be up to several thousand dollars,” the lessee could not effectively terminate her obligations under the lease. That finding, plus an end-of-term purchase option of $650, which the court termed “nominal,” leads the court to conclude that the lease created a security interest.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with more than 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

TBF Financial, LLC v. Petrenko, 2012 WL 5292826 (Wash.App.Div.1 Oct. 29, 2012)

The same court that decided the Financial Pacific Leasing v. Law Offices of David A. Sharp case below reverses a trial court summary judgment in favor of an assignee of the original lessor on grounds that might cause some concern. After a lessee entered into a lease of a copy machine with the manufacturer of the copier (or an affiliate of the manufacturer) that contained a provision prohibiting modifications unless in writing, the lessee allegedly received non-conforming equipment and then spoke over the phone with a manufacturer's representative and agreed to an oral modification of the lease terms in consideration for not rejecting the equipment. In reversing the trial court's summary judgment in favor of the assignee and remanding for trial, this appellate court refers to the no-modification-except-in-writing clause and states that “Despite this clause, it is well settled in Washington that parties to a contract may modify or abrogate contract terms in any manner they choose, regardless of provisions that prohibit modifications or abrogation except in a particular manner. Indeed, Washington courts have consistently held no-oral-modification clauses unenforceable.” Whether or not the assignee might have some recourse against its assignor (the equipment manufacturer or its affiliate), such statements by this appellate court may give financing companies pause.

Financial Pacific Leasing, LLC v. Law Offices of David A. Sharp, P.A., 2012 WL 4857214 (Wash.App.Div.1 Oct. 15, 2012) (unpublished opinion)

This case raises interesting questions about the meaning of “acceptance” ' both under Article 2A and in the context of the terms of a lease agreement. Here, the lease provided that the assignee of the lease could verify by phone that the equipment had been examined by the lessee, was in good operating order and was accepted for all purposes under the lease. Although the equipment vendor never actually delivered the equipment that was to be subject to the lease, when the lessee was called by the assignee, the lessee saw a truck delivering a large box and told the assignee that the equipment was “just being delivered.” The lease also stated that a phone confirmation of acceptance by the lessee would authorize the assignee to pay the vendor ' which the assignee did following the phone call. After finding that the parties to the lease agreed that the lease was intended to qualify as an Article 2A statutory finance lease (as stated in the lease) and also commenting that Article 2A's definition of “finance lease” provides that the lessee's obligations become irrevocable upon the lessee's acceptance of the equipment, the court concludes ' perhaps questionably ' that the lessee was not entitled to rely on its argument that the lease did not qualify as a finance lease because it never actually accepted the equipment. The court reasons that the lease contained waivers of lessee rights under 2A-508 through 522, which includes 2A-515, Acceptance of Goods (providing, among other things, that acceptance occurs after a reasonable opportunity to inspect the goods). This court, however, goes on to reverse a trial court's summary judgment against the lessee and remands for trial on the issue of whether the lessee's stating that the equipment was just being delivered constituted acceptance under the terms of the lease. This decision makes clear that the manner in which a lease indicates when a lessee will be deemed to have accepted the equipment is critical to commencing the lessee's unconditional obligations to pay. This can be crucial whether or not the court properly decided that a lessee's waivers of certain provisions of Article 2A mean that the lessee cannot defend itself from finance lease claims by stating that it had not actually accepted the equipment.

In re Equipment Acquisition Resources, Inc. (Brandt v. The CIT Group/Equipment Financing, Inc.), 2012 WL 4754957 (Bankr.N.D. Ill. Sept. 28, 2012)

This case is one of 11 cases decided on the same date arising out of the bankruptcy of Equipment Acquisition Resources. In each of these cases, William A. Brandt, Jr., the Plan Administrator for EAR, brought suit against a different finance company to recover lease payments made by EAR to the finance company as fraudulent transfers. It was alleged that an individual had caused EAR to enter into leases of equipment acquired by the finance companies at grossly inflated prices from another company that had just purchased the equipment from EAR. The Administrator claimed that all of these circular transfers amounted to a Ponzi scheme in which funds from financing companies entering into leases later in time were used to pay EAR's earlier inflated lease obligations ' to the eventual detriment of EAR and its other creditors. The court concludes that the Administrator's claims will be dismissed in one month unless the Administrator is able to provide more specific evidence of actual fraudulent intent on the part of the finance company.

True Lease vs. Security Interest: In General

In re Waltman, 2012 WL 5828717 (Bankr.S.D.Ala. Nov. 16, 2012)

This case illustrates how certain types of state laws can be decisive in determining whether a lease creates a security interest. The lessee/debtor in bankruptcy had entered into rental purchase agreements with a lessor of portable storage buildings. The agreements provided that the property was owned by the lessor and for a lease term of one month, which the lessee could extend on a month-to-month basis by making monthly payments in advance of the next monthly period. They also provided that the lessee would acquire ownership of the goods after making 36 monthly payments and otherwise complying with the leases. Agreeing with the lessor that these agreements should not be construed as security agreements (as contended by the lessee), the court looks to a Tennessee statute governing rental purchase agreements which states that rental purchase agreements are not to be construed as security interests as defined in Tennessee's UCC. The court points to decisions in other states with similar statutes coming to similar conclusions, and concludes that the agreements should be treated as executory contracts or unexpired leases under the Bankruptcy Code.

In the Matter of Cherry, 2012 WL 3252231 (Bankr.N.D.Ala. Aug. 7, 2012)

The lessor under an automobile lease attempted to receive true lease treatment in the lessee's bankruptcy by arguing that the lease gave the lessee the right to terminate early. This court holds that because the lease provisions concerning early termination, although ambiguous, included language that the lessee would be required to pay a “substantial charge” which “may be up to several thousand dollars,” the lessee could not effectively terminate her obligations under the lease. That finding, plus an end-of-term purchase option of $650, which the court termed “nominal,” leads the court to conclude that the lease created a security interest.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with more than 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.