What's New in the Law

Finance Companies' Rights to Collect

The following cases are about finance companies' rights to collect, including the ability to collect rentals under article 2A finance leases or leases with “Hell or High Water” and/or Waiver of Defenses provisions. They illustrate some of the potential difficulties in a triangular relationship involving a vendor, its customers and a financing source.

In re Brican America LLC Equipment Lease Litigation, 2013 WL 3967920 (U.S.Dist.Ct. S.D.Fla. Aug.1, 2013)

In In re Brican America, a multidistrict litigation, a number of dentists and optometrists alleged that they had been victimized after entering into marketing agreements with a vendor (Brican) that promised payments for advertising in the plaintiffs' offices on flat-screen televisions and related equipment. The latter were to be financed by leases between the plaintiffs and either: 1) a lessor/finance company (NCMIC); or 2) Brican itself (which leases were subsequently assigned to NCMIC). The marketing agreements between Brican and the plaintiffs had different versions of a cancellation provision, applicable in the event that Brican failed to honor its commitments, which provision stated that
either: 1) the leases could be cancelled by the plaintiffs; or 2) Brican would, or could be requested by the plaintiffs to, buy the leases from the plaintiffs.

According to the court, the central questions involved the wording of the cancellation provisions, the relation of such provisions to the leases, and the relationship of the vendor to the lessor (including whether the lessor was aware of the cancellation provisions). With regard to the marketing agreements with cancellation provisions stating simply that the leases would be cancelled, the court refuses to grant summary judgment in favor of the lessor since undisputed facts did not establish: 1) that the lessor did not know of these provisions; and 2) that there was not some apparent agency relationship between the vendor and the lessor. However, with respect to the marketing agreements with differently worded cancellation provisions, the court finds that the possibility that Brican would buy the leases from the plaintiffs did not abrogate the plaintiffs' obligations to make all payments pursuant to the “hell or high water” provisions in the leases. [Editor's note: see full discussion of this case in the November, 2013 issue.]

Xerox Corporation v. Graphic Management Services Inc., 2013 WL 3777148 (U.S.Dist.Ct. W.D.N.Y. July 17, 2013)

This case could prove useful to anyone (either the original lessor or an assignee of that lessor) attempting to collect under a lease in which the lessor is also the vendor of the equipment. Among a number of issues raised by the parties, the central one was whether the lessor/vendor was entitled to summary judgment against a lessee of equipment sold by the vendor when the lessee claimed that the equipment did not function properly, and that the lessor/vendor had fraudulently induced the lessee to enter into the leases. This court granted the lessor's summary judgment motion and enforced both the lease's “hell or high water” clause and the parties' agreement in the lease to treat the transaction as an Article 2A finance lease, even if the transaction did not qualify under the Article 2A definition of such (this lease would not have qualified inasmuch as this lessor was also the supplier of the equipment).

Pacific Financial Leasing, LLC v. Fernandes, 2013 WL 3184620 (Mass.App. Ct. June 25, 2013) (slip copy, not to appear in a printed volume)

After being approached by a vendor of wide-screen televisions, the lessee (which operated a bar and restaurant) entered into a lease for televisions with a lessor referred by the vendor. After the lessee defaulted on the lease, the lessor brought suit and obtained a summary judgment against the lessee. On this appeal, the lessee alleged that there were issues of material fact regarding misrepresentations made by the vendor concerning income to be obtained by the lessee from advertising sales that should have precluded summary judgment. This court affirmed the lower court's holding, noting that the lease provides that it is a non-cancelable Article 2A finance lease and that there was no evidence presented by the lessee to suggest that the vendor and lessor were related in a way that might provide a basis for concluding that the lessor should be held responsible for the vendor's alleged misrepresentations.

True Lease Versus Security Interest: In General

Canal Air, LLC v. McCardell, 2013 WL 4482965 (U.S.Dist.Ct. E.D.Mich. Aug. 21, 2013)

This decision illustrates how a lack of analysis of the criteria for determining whether a purported lease creates a security interest can have a substantial impact on determining the rights of the parties. After the parties had entered into a sale/leaseback transaction for an aircraft and the lessee defaulted, the lessor sought summary judgment as to the lessee's liability and amount of damages. The lessee alleged that Article 9 applied to the transaction and that the lessor had violated its obligations to provide notice of sale and a commercially reasonable disposition of the aircraft. Without any analysis employing the criteria found in Article 1, Section 203, of the UCC concerning the distinction between true leases and secured transactions, this court concluded that New York's Article 2-A (the court oddly referred to this Article as both Article 2 and Article 2-A) applied and that the lessee had waived its rights to notice and a commercially reasonable disposition (rights that cannot be waived under Article 9). The court's determination rested primarily on the parties' intent as evidenced by language in the lease stating that the parties intended the lease to constitute both a true lease and a finance lease under Article 2A. Thus the court awarded summary judgment to the lessor without considering either the statutory criteria or other concepts employed for years by courts and commentators to adjudicate true lease/security interest questions.

Lessors' Damages: Measures and Entitlement

Choice Asset Management, Inc. v. CIT Technology Financing Services, Inc., 2013 WL 5039340 (Tex.App. Sept. 11, 2013)

This case offers another illustration of the difference between operating under Article 2A versus Article 9 when it comes to enforcing one's interests. This appellate court affirmed the summary judgment of a lower court in favor of the lessor. The lessee argued that the lessor had failed to prove that it repossessed and sold a piece of equipment to mitigate damages, and that the lessor did not dispose of certain equipment in a commercially reasonable manner under certain provisions of both Article 2A and Article 9. Since there was apparently no dispute that the transaction was a true lease, this court noted that Article 2A: 1) permits a lessee to waive rights it might otherwise have (such as requiring the lessor to act on its remedy of repossessing and disposing of all the equipment ' the lessor chose not to do so); and 2) does not require commercial reasonability in the context of selling equipment repossessed after a default ' but only in the context of disposition in the form of leasing the equipment to a new lessee. The court also noted that the lessee's attempts to cite obligations of a secured party under Article 9 are unavailing in the context of a transaction governed by Article 2A.

Mitsui Rail Capital, LLC v. American Coal Company, 2013 WL 3227291 (Ill.App. June 21, 2013) (unpublished opinion, check court rules before citing)

This is an appeal from a lower court's finding that the lessee under a railcar lease was responsible for paying the costs of repair to railcars that suffered substantial corrosion damage during the course of the lease. Although the lessee attempted to argue that the lessor had failed to inspect and repair damage to the cars, this court affirmed the lower court's reasoning that: 1) the lessor's inspection obligations pertained only to the wheels and moving parts (not the tubs that were the subject of the corrosion); and 2) the corrosion did not constitute “normal wear and tear” as permitted by the lease. The court also agreed with the lower court that it was not necessary to determine the precise cause of the damage inasmuch as the cars, which had a normal life expectancy of 40 or 50 years, had only 10% of useful life remaining after being in possession of the lessee for four to five years.

Liability of Lessors for Equipment-Related Injuries and Damages

Shew v. Hill, 2013 WL 5290005 (U.S.Dist.Ct. N.D.Ala. Sept. 18, 2013)

This case illustrates the fact that the Graves Amendment, while clearly preempting state vicarious liability laws with respect to motor vehicle lessors, also contains a savings clause that permits state law-based negligence actions against such lessors ' e.g., for negligent entrustment of motor vehicles to parties that subsequently cause damage or injury while using the vehicles.

Kindard-Jennings v. The Yellow Cab Company, Inc., 2013 WL 4046584 (Conn.Super. July 19, 2013) (unpublished opinion, check court rules before citing)

A taxicab company attempted to use the Graves Amendment as a defense to a suit for damages caused by an automobile accident that alleged vicarious liability under Connecticut law. Citing the reasoning of a New York appellate court, this court agreed that there is no authority for the defendant's argument inasmuch as the protection of the Graves Amendment extends only to those engaged in the trade or business of renting or leasing motor vehicles. The New York appellate decision had also rejected an argument that the Graves Amendment violated equal protection by favoring leasing companies over other vehicle owners such as taxi owners, owners of repair shops providing loaner vehicles and car dealers permitting test drives.

Forum Selection, Jurisdiction and Choice of Law

Winthrop Resources Corp. v. Hospital Authority of Ben Hill County, 2013 WL 4199672 (U.S.Dist.Ct. D.Minn. Aug. 15, 2013)

A Minnesota lessor and a Florida lessee negotiated choice of law and choice of forum provisions of their lease, which stated that the lease was to be governed by Minnesota law and that both parties consented to the jurisdiction of any federal court in Georgia. However, the provision went on to specify that the lessor could select an alternative forum in its sole discretion. When the lessor commenced a suit in Minnesota (initially a state court, subsequently removed by the lessee to this federal court), the lessee moved to dismiss for lack of personal jurisdiction, or alternatively, to transfer to a federal court in Georgia. Due to the selection by both parties of Minnesota law and various other factors establishing contacts with Minnesota, this court concluded that the lessor has demonstrated enough minimum contacts to establish jurisdiction in Minnesota and also denies the lessee's motion to transfer the case to Georgia.

Sovereign Immunity from Suit

Dallas County Hospital District v. Hospira Worldwide, Inc., 2013 WL 1803572 (Tex.App. April 30, 2013)

When a lessor of hospital equipment brought suit for breach of contract and quantum meruit to collect unpaid lease payments from a county hospital district, the lessee defended by claiming sovereign immunity. The trial court rejected the hospital district's argument that it was not a local governmental entity for purposes of a Texas statute waiving sovereign immunity for breach of contract claims against local governmental entities that had been given the statutory authority to enter into contracts. This appellate court agreed ' but only with regard to the lessor's breach of contract claim. The court reversed the trial court in part by also holding that the statutory waiver of immunity does not extend to claims in quantum meruit ' dismissing that part of the lessor's claim with prejudice.

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Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with more than 25 years' experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. The author gratefully acknowledges the assistance of Cristina Richards and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.

Finance Companies' Rights to Collect

The following cases are about finance companies' rights to collect, including the ability to collect rentals under article 2A finance leases or leases with “Hell or High Water” and/or Waiver of Defenses provisions. They illustrate some of the potential difficulties in a triangular relationship involving a vendor, its customers and a financing source.

In re Brican America LLC Equipment Lease Litigation, 2013 WL 3967920 (U.S.Dist.Ct. S.D.Fla. Aug.1, 2013)

In In re Brican America, a multidistrict litigation, a number of dentists and optometrists alleged that they had been victimized after entering into marketing agreements with a vendor (Brican) that promised payments for advertising in the plaintiffs' offices on flat-screen televisions and related equipment. The latter were to be financed by leases between the plaintiffs and either: 1) a lessor/finance company (NCMIC); or 2) Brican itself (which leases were subsequently assigned to NCMIC). The marketing agreements between Brican and the plaintiffs had different versions of a cancellation provision, applicable in the event that Brican failed to honor its commitments, which provision stated that
either: 1) the leases could be cancelled by the plaintiffs; or 2) Brican would, or could be requested by the plaintiffs to, buy the leases from the plaintiffs.

According to the court, the central questions involved the wording of the cancellation provisions, the relation of such provisions to the leases, and the relationship of the vendor to the lessor (including whether the lessor was aware of the cancellation provisions). With regard to the marketing agreements with cancellation provisions stating simply that the leases would be cancelled, the court refuses to grant summary judgment in favor of the lessor since undisputed facts did not establish: 1) that the lessor did not know of these provisions; and 2) that there was not some apparent agency relationship between the vendor and the lessor. However, with respect to the marketing agreements with differently worded cancellation provisions, the court finds that the possibility that Brican would buy the leases from the plaintiffs did not abrogate the plaintiffs' obligations to make all payments pursuant to the “hell or high water” provisions in the leases. [Editor's note: see full discussion of this case in the November, 2013 issue.]

Xerox Corporation v. Graphic Management Services Inc., 2013 WL 3777148 (U.S.Dist.Ct. W.D.N.Y. July 17, 2013)

This case could prove useful to anyone (either the original lessor or an assignee of that lessor) attempting to collect under a lease in which the lessor is also the vendor of the equipment. Among a number of issues raised by the parties, the central one was whether the lessor/vendor was entitled to summary judgment against a lessee of equipment sold by the vendor when the lessee claimed that the equipment did not function properly, and that the lessor/vendor had fraudulently induced the lessee to enter into the leases. This court granted the lessor's summary judgment motion and enforced both the lease's “hell or high water” clause and the parties' agreement in the lease to treat the transaction as an Article 2A finance lease, even if the transaction did not qualify under the Article 2A definition of such (this lease would not have qualified inasmuch as this lessor was also the supplier of the equipment).

Pacific Financial Leasing, LLC v. Fernandes, 2013 WL 3184620 (Mass.App. Ct. June 25, 2013) (slip copy, not to appear in a printed volume)

After being approached by a vendor of wide-screen televisions, the lessee (which operated a bar and restaurant) entered into a lease for televisions with a lessor referred by the vendor. After the lessee defaulted on the lease, the lessor brought suit and obtained a summary judgment against the lessee. On this appeal, the lessee alleged that there were issues of material fact regarding misrepresentations made by the vendor concerning income to be obtained by the lessee from advertising sales that should have precluded summary judgment. This court affirmed the lower court's holding, noting that the lease provides that it is a non-cancelable Article 2A finance lease and that there was no evidence presented by the lessee to suggest that the vendor and lessor were related in a way that might provide a basis for concluding that the lessor should be held responsible for the vendor's alleged misrepresentations.

True Lease Versus Security Interest: In General

Canal Air, LLC v. McCardell, 2013 WL 4482965 (U.S.Dist.Ct. E.D.Mich. Aug. 21, 2013)

This decision illustrates how a lack of analysis of the criteria for determining whether a purported lease creates a security interest can have a substantial impact on determining the rights of the parties. After the parties had entered into a sale/leaseback transaction for an aircraft and the lessee defaulted, the lessor sought summary judgment as to the lessee's liability and amount of damages. The lessee alleged that Article 9 applied to the transaction and that the lessor had violated its obligations to provide notice of sale and a commercially reasonable disposition of the aircraft. Without any analysis employing the criteria found in Article 1, Section 203, of the UCC concerning the distinction between true leases and secured transactions, this court concluded that New York's Article 2-A (the court oddly referred to this Article as both Article 2 and Article 2-A) applied and that the lessee had waived its rights to notice and a commercially reasonable disposition (rights that cannot be waived under Article 9). The court's determination rested primarily on the parties' intent as evidenced by language in the lease stating that the parties intended the lease to constitute both a true lease and a finance lease under Article 2A. Thus the court awarded summary judgment to the lessor without considering either the statutory criteria or other concepts employed for years by courts and commentators to adjudicate true lease/security interest questions.

Lessors' Damages: Measures and Entitlement

Choice Asset Management, Inc. v. CIT Technology Financing Services, Inc., 2013 WL 5039340 (Tex.App. Sept. 11, 2013)

This case offers another illustration of the difference between operating under Article 2A versus Article 9 when it comes to enforcing one's interests. This appellate court affirmed the summary judgment of a lower court in favor of the lessor. The lessee argued that the lessor had failed to prove that it repossessed and sold a piece of equipment to mitigate damages, and that the lessor did not dispose of certain equipment in a commercially reasonable manner under certain provisions of both Article 2A and Article 9. Since there was apparently no dispute that the transaction was a true lease, this court noted that Article 2A: 1) permits a lessee to waive rights it might otherwise have (such as requiring the lessor to act on its remedy of repossessing and disposing of all the equipment ' the lessor chose not to do so); and 2) does not require commercial reasonability in the context of selling equipment repossessed after a default ' but only in the context of disposition in the form of leasing the equipment to a new lessee. The court also noted that the lessee's attempts to cite obligations of a secured party under Article 9 are unavailing in the context of a transaction governed by Article 2A.

Mitsui Rail Capital, LLC v. American Coal Company, 2013 WL 3227291 (Ill.App. June 21, 2013) (unpublished opinion, check court rules before citing)

This is an appeal from a lower court's finding that the lessee under a railcar lease was responsible for paying the costs of repair to railcars that suffered substantial corrosion damage during the course of the lease. Although the lessee attempted to argue that the lessor had failed to inspect and repair damage to the cars, this court affirmed the lower court's reasoning that: 1) the lessor's inspection obligations pertained only to the wheels and moving parts (not the tubs that were the subject of the corrosion); and 2) the corrosion did not constitute “normal wear and tear” as permitted by the lease. The court also agreed with the lower court that it was not necessary to determine the precise cause of the damage inasmuch as the cars, which had a normal life expectancy of 40 or 50 years, had only 10% of useful life remaining after being in possession of the lessee for four to five years.

Liability of Lessors for Equipment-Related Injuries and Damages

Shew v. Hill, 2013 WL 5290005 (U.S.Dist.Ct. N.D.Ala. Sept. 18, 2013)

This case illustrates the fact that the Graves Amendment, while clearly preempting state vicarious liability laws with respect to motor vehicle lessors, also contains a savings clause that permits state law-based negligence actions against such lessors ' e.g., for negligent entrustment of motor vehicles to parties that subsequently cause damage or injury while using the vehicles.

Kindard-Jennings v. The Yellow Cab Company, Inc., 2013 WL 4046584 (Conn.Super. July 19, 2013) (unpublished opinion, check court rules before citing)

A taxicab company attempted to use the Graves Amendment as a defense to a suit for damages caused by an automobile accident that alleged vicarious liability under Connecticut law. Citing the reasoning of a New York appellate court, this court agreed that there is no authority for the defendant's argument inasmuch as the protection of the Graves Amendment extends only to those engaged in the trade or business of renting or leasing motor vehicles. The New York appellate decision had also rejected an argument that the Graves Amendment violated equal protection by favoring leasing companies over other vehicle owners such as taxi owners, owners of repair shops providing loaner vehicles and car dealers permitting test drives.

Forum Selection, Jurisdiction and Choice of Law

Winthrop Resources Corp. v. Hospital Authority of Ben Hill County, 2013 WL 4199672 (U.S.Dist.Ct. D.Minn. Aug. 15, 2013)

A Minnesota lessor and a Florida lessee negotiated choice of law and choice of forum provisions of their lease, which stated that the lease was to be governed by Minnesota law and that both parties consented to the jurisdiction of any federal court in Georgia. However, the provision went on to specify that the lessor could select an alternative forum in its sole discretion. When the lessor commenced a suit in Minnesota (initially a state court, subsequently removed by the lessee to this federal court), the lessee moved to dismiss for lack of personal jurisdiction, or alternatively, to transfer to a federal court in Georgia. Due to the selection by both parties of Minnesota law and various other factors establishing contacts with Minnesota, this court concluded that the lessor has demonstrated enough minimum contacts to establish jurisdiction in Minnesota and also denies the lessee's motion to transfer the case to Georgia.

Sovereign Immunity from Suit

Dallas County Hospital District v. Hospira Worldwide, Inc ., 2013 WL 1803572 (Tex.App. April 30, 2013)

When a lessor of hospital equipment brought suit for breach of contract and quantum meruit to collect unpaid lease payments from a county hospital district, the lessee defended by claiming sovereign immunity. The trial court rejected the hospital district's argument that it was not a local governmental entity for purposes of a Texas statute waiving sovereign immunity for breach of contract claims against local governmental entities that had been given the statutory authority to enter into contracts. This appellate court agreed ' but only with regard to the lessor's breach of contract claim. The court reversed the trial court in part by also holding that the statutory waiver of immunity does not extend to claims in quantum meruit ' dismissing that part of the lessor's claim with prejudice.

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Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with more than 25 years' experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. The author gratefully acknowledges the assistance of Cristina Richards and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.