What's New in the Law

After a lessee returned 200 railcars to a lessor at the end of a 10-year lease, the lessor deemed the cars to require substantial repairs in order to bring them into the condition required by the lease and, after being unable to agree with the lessee as to the repair costs, sued the lessee for damages consisting of the cost of repair, holdover rent, prejudgment interest and attorneys' fees. The Court of Appeals affirms the District Court's awards of the cost of repair and holdover rent and its denial of prejudgment interest and attorneys' fees. Of greatest interest is the description of the District Court's reasoning regarding the cost of repairs (disregarding the highest and lowest estimates of repair costs and averaging the two intermediate estimates) and the discussion of the award of holdover rent. With respect to the latter, the lease gave the lessor the right to demand holdover rent at the rate of one and one-half times the lease rate if the cars were not delivered in the specified condition within 30 days of lease expiration.

The court finds that because the lessor did not have the use of the cars during the six-month period following lease expiration while it attempted a settlement with the lessee, the lessor was entitled to holdover rent for that period of time ' and that such amount was not unreasonable in light of the difficulty of quantifying the damage and did not constitute an unenforceable penalty as argued by the lessee. The court also agrees with the trial court's finding that the lessor was not entitled to holdover rent for the period beyond the six months in that the lessor should have realized that settlement with the lessee would not be achieved and should have taken steps to mitigate its damages.

Motor Vehicle Lessors' Liability for Equipment-Related Injuries and Damages

Khan v. MMCA Lease Ltd.

, 2012 WL 5870341 (N.Y.App.Div. Nov. 21, 2012)

This appellate decision reverses a trial court's denial of a motion by a motor vehicle lessor to dismiss the complaint of someone whose vehicle was struck by the vehicle owned by the lessor and operated by its lessee. The plaintiff alleged that the lessor had negligently maintained its vehicle and thus could be held liable under the negligence exception in the Graves Amendment (which generally bars recovery against lessors in the business of leasing motor vehicles on grounds of vicarious liability). The court finds that the lessor does not engage in the repair and maintenance of vehicles that it leases, but instead such maintenance was the sole responsibility of the lessee.

Whitmore v. American Dream Logistics, Inc.

, 2012 WL 3872022 (U.S.Dist.Ct. E.D.Mo. Sept. 6, 2012)

Relatives of an individual killed by a tractor trailer sued the company leasing the truck as lessee and its driver and also sued the lessor on the ground that it had negligently failed to collect driver trip records from the driver. Doing so allegedly would have revealed violations of regulations regarding the number of hours permitted for driving, which violations purportedly resulted in the individual's death. This court grants the lessor's summary judgment motion on the ground that the negligence savings clause contained in the Graves Amendment (which clause states that an owner can be held directly liable for harm caused by a lessee if the owner is itself guilty of negligence or criminal wrongdoing) would not apply since nothing in the lease or law required the owner to monitor driver trip records for compliance with such driving hours rules.

Conflicting Interests Under Article 2A

Textainer Equipment Management Limited v. The United States

, 2012 WL 5465983 (U.S.Ct.Fed.Cl. Nov. 6, 2012)

This case from the U.S. Court of Federal Claims is interesting and unusual in that the United States (specifically, the Army) was able to take advantage of Article 2A to avoid a takings claim under the Constitution's Fifth Amendment. The Army had entered into a master lease agreement as lessee with a company that leased intermodal shipping containers. Under the terms of that master lease, the Army would take title to any containers that were lost or deemed lost 90 days after the end of the lease term.

After the end of the master lease term, the government paid the lessor for approximately 1,000 containers that the government claimed it could not find. The issues in this case arose because the containers leased to the Army were obtained by the lessor under lease agreements with a number of other companies (which can be referred to as the prime lessors). When these prime lessors were either not paid or only partially paid for the lost containers by the Army's lessor (which went out of business), they sued the government and claimed that their containers had been taken by the Army without paying the prime lessors just compensation in violation of the Fifth Amendment. After examining the facts, including the time at which the government was notified by the prime lessors that the Army's lessor was in default to them under their leases of the containers, this court holds that the government qualified as a buyer in the ordinary course under 2A-305, taking the containers free of the existing prime leases inasmuch as it bought the containers from someone in the business of selling goods of that kind without knowledge at such time that the sale violated the rights of the prime lessors. The decision indicates that if it had not qualified as a buyer in the ordinary course, the government would have been deemed to have taken the containers without having paid just compensation.

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.

Lessors' Damages: Measures and Entitlement

Andersons, Inc. v. Lafarge North America, Inc.

, 2012 WL 5259149 (U.S.Ct.App. 6th Cir. Oct. 25, 2012) (not for publication)

After a lessee returned 200 railcars to a lessor at the end of a 10-year lease, the lessor deemed the cars to require substantial repairs in order to bring them into the condition required by the lease and, after being unable to agree with the lessee as to the repair costs, sued the lessee for damages consisting of the cost of repair, holdover rent, prejudgment interest and attorneys' fees. The Court of Appeals affirms the District Court's awards of the cost of repair and holdover rent and its denial of prejudgment interest and attorneys' fees. Of greatest interest is the description of the District Court's reasoning regarding the cost of repairs (disregarding the highest and lowest estimates of repair costs and averaging the two intermediate estimates) and the discussion of the award of holdover rent. With respect to the latter, the lease gave the lessor the right to demand holdover rent at the rate of one and one-half times the lease rate if the cars were not delivered in the specified condition within 30 days of lease expiration.

The court finds that because the lessor did not have the use of the cars during the six-month period following lease expiration while it attempted a settlement with the lessee, the lessor was entitled to holdover rent for that period of time ' and that such amount was not unreasonable in light of the difficulty of quantifying the damage and did not constitute an unenforceable penalty as argued by the lessee. The court also agrees with the trial court's finding that the lessor was not entitled to holdover rent for the period beyond the six months in that the lessor should have realized that settlement with the lessee would not be achieved and should have taken steps to mitigate its damages.

Motor Vehicle Lessors' Liability for Equipment-Related Injuries and Damages

Khan v. MMCA Lease Ltd.

, 2012 WL 5870341 (N.Y.App.Div. Nov. 21, 2012)

This appellate decision reverses a trial court's denial of a motion by a motor vehicle lessor to dismiss the complaint of someone whose vehicle was struck by the vehicle owned by the lessor and operated by its lessee. The plaintiff alleged that the lessor had negligently maintained its vehicle and thus could be held liable under the negligence exception in the Graves Amendment (which generally bars recovery against lessors in the business of leasing motor vehicles on grounds of vicarious liability). The court finds that the lessor does not engage in the repair and maintenance of vehicles that it leases, but instead such maintenance was the sole responsibility of the lessee.

Whitmore v. American Dream Logistics, Inc.

, 2012 WL 3872022 (U.S.Dist.Ct. E.D.Mo. Sept. 6, 2012)

Relatives of an individual killed by a tractor trailer sued the company leasing the truck as lessee and its driver and also sued the lessor on the ground that it had negligently failed to collect driver trip records from the driver. Doing so allegedly would have revealed violations of regulations regarding the number of hours permitted for driving, which violations purportedly resulted in the individual's death. This court grants the lessor's summary judgment motion on the ground that the negligence savings clause contained in the Graves Amendment (which clause states that an owner can be held directly liable for harm caused by a lessee if the owner is itself guilty of negligence or criminal wrongdoing) would not apply since nothing in the lease or law required the owner to monitor driver trip records for compliance with such driving hours rules.

Conflicting Interests Under Article 2A

Textainer Equipment Management Limited v. The United States

, 2012 WL 5465983 (U.S.Ct.Fed.Cl. Nov. 6, 2012)

This case from the U.S. Court of Federal Claims is interesting and unusual in that the United States (specifically, the Army) was able to take advantage of Article 2A to avoid a takings claim under the Constitution's Fifth Amendment. The Army had entered into a master lease agreement as lessee with a company that leased intermodal shipping containers. Under the terms of that master lease, the Army would take title to any containers that were lost or deemed lost 90 days after the end of the lease term.

After the end of the master lease term, the government paid the lessor for approximately 1,000 containers that the government claimed it could not find. The issues in this case arose because the containers leased to the Army were obtained by the lessor under lease agreements with a number of other companies (which can be referred to as the prime lessors). When these prime lessors were either not paid or only partially paid for the lost containers by the Army's lessor (which went out of business), they sued the government and claimed that their containers had been taken by the Army without paying the prime lessors just compensation in violation of the Fifth Amendment. After examining the facts, including the time at which the government was notified by the prime lessors that the Army's lessor was in default to them under their leases of the containers, this court holds that the government qualified as a buyer in the ordinary course under 2A-305, taking the containers free of the existing prime leases inasmuch as it bought the containers from someone in the business of selling goods of that kind without knowledge at such time that the sale violated the rights of the prime lessors. The decision indicates that if it had not qualified as a buyer in the ordinary course, the government would have been deemed to have taken the containers without having paid just compensation.

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.