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Finance Companies' Rights to Collect
General Electric Capital Corp. v. FPL Service Corp., 2014 WL 360114 (U.S.Dist.Ct. N.D. Iowa Feb. 3, 2013)
General Electric Capital Corp. v. FPL Service Corp., 2013 WL 6238484 (U.S.Dist.Ct. N.D. Iowa Dec. 3, 2013)
This pair of cases exemplifies an unusual literal application (though not acknowledged by the court) of a lease's “hell or high water” provisions. After the unfortunate lessee's business ' including two industrial copiers financed by the lessor ' was destroyed by flooding from Hurricane Sandy, the lessee attempted to justify its failure to continue making payments using two defenses found in the Restatement (Second) of Contracts: supervening impracticability and frustration of purpose. The court makes short shrift of these defenses inasmuch as: 1) the Restatement qualifies both defenses if there is language in the contract to the contrary; and 2) the lease contained provisions amounting to a “hell or high water” clause, which under applicable Iowa law is enforceable whether or not the lease is a true lease.
With regard to arguments by the lessee that the lessor had not properly disposed of the equipment, the lessor attempted to argue that the provisions of Article 9 concerning proper notice and disposition did not apply, since the lease contained language stating that the parties agreed that the transaction was a finance lease under Article 2A. The court makes equally short shrift of this argument by noting that the $1 purchase option in the lease creates a secured transaction subject to Article 9. In the more recent of the two decisions, the court finds that the lessor did in fact dispose of the copiers in a commercially reasonable manner as required by Article 9. [In a somewhat disconcerting footnote to the "hell or high water" provision discussion in the earlier case, the judge states that if it were up to him alone, he would not enforce such a provision against an otherwise valid act-of-God defense unless it was clear that the parties had specifically bargained for the "hell or high water" provision as opposed to its being a non-negotiated, standard provision of the contract.]
In re Brican America LLC Equipment Lease Litigation, 2014 WL 250246 (U.S.Dist.Ct. S.D.Fla. Jan. 22, 2014)
In re Brican America LLC Equipment Lease Litigation, 2013 WL 3967920 (U.S.Dist.Ct. S.D.Fla. Aug. 1, 2013)
These cases illustrate some of the potential difficulties in a triangular relationship involving a vendor, its customers and a financing source. In this multidistrict litigation, a number of dentists and optometrists alleged that they had been victimized after entering into marketing agreements with a vendor (Brican) promising payments by Brican for advertising in the plaintiff's offices to be displayed on flat-screen televisions and related equipment that 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 either: 1) that the leases could be cancelled by the plaintiffs; or 2) that Brican either 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, the relationship of the vendor to the finance company (including whether the finance company was aware of the cancellation provisions), and whether the transactions were structured as leases directly between the finance company and the plaintiffs, or between the vendor and plaintiffs and then subsequently assigned to the finance company. In the most recent of these decisions, the court finds that the vendor's alleged misrepresentations could not be imputed to the finance company and therefore that the “hell or high water” leases directly between the plaintiffs and the finance company should be enforced notwithstanding the cancellation provisions of the marketing agreements. However, the court denies summary judgment in favor of the finance company with respect to the leases assigned to the finance company citing remaining issues of material fact as to whether the finance company could enforce the waivers of defenses in such leases inasmuch as a trier of fact could find that the finance company did not qualify as a good faith assignee.
True Lease Versus Security Interest
In re Wade, 501 B.R. 870 (Bankr.D.Kan. 2013)
This Chapter 13 bankruptcy case involved leases of a television and furniture by an individual. In order to analyze the rights of the lessor, the court decides in one brief paragraph that these leases were true leases, rather than secured transactions. The court reasoned that since the leases could be terminated by the lessee at any time, they did not satisfy the circumstances for creating a security listed in UCC 1-203(b), which require that the lease not be subject to termination by the lessee along with one of a number of other possible circumstances (e.g., the lessee has a nominal purchase option). What the court fails to note ' and did not investigate ' is that even if a transaction does not fall into one of the per se security interest criteria found in 1-203(b), it is still possible that “the facts of the case” mentioned in 1-203(a) could create a security interest for some other reason (e.g., very onerous return conditions might economically compel the lessee to purchase the goods).
Vendor Issues
Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 732 F.3d 755 (7th Cir. 2013) This is an appeal from a 2012 decision of the U.S. District Court in Illinois in which the court held that one party to a contract is not entitled to rely on a representation of law by the other party inasmuch as both parties are presumed to be equally capable of knowing and interpreting the law. In this case, the lessor of office equipment had obtained a representation from the vendor that leases presented to the lessor for review would be valid and fully enforceable. After it turned out that a six-year lease violated an Illinois statute prohibiting leases with municipalities extending beyond five years, the lessor brought suit against the vendor for breach of that representation. This circuit court panel is evidently less certain than was the district court that such representations cannot form the basis for recovery if it turns out that a contract is not enforceable.
After a rather lengthy discussion about whether such a representation might be a representation of fact rather than of law and whether it is actionable in contract or in tort, the court decides to certify questions to the Minnesota Supreme Court, since Minnesota law governed the contract between the lessor and the vendor. One portion of this court's discussion should be considered especially relevant: “While someone must assume the burden of knowing the law and ensuring that the parties' contract and dealings comply with it, we see no particular reason why the contracting parties cannot allocate that task to one or the other of them ' Why not, then, allow contracting parties to allocate the task of legal compliance and the corresponding risk ( i.e., the financial cost) of noncompliance?”
Lease Commencement Issues
Citrus Tower Boulevard Imaging Center, LLC v. David S. Owens MD, PC, 752 S.E.2d 74 (Ga.Ct.App. 2013)
This appellate court affirms the trial court's decision in favor of the lessor. Although this lessor is not a finance company, the statement in its lease that the lease term would commence when the equipment is “functionally operational” is not uncommon in finance company leases for such equipment (MRI imaging equipment). Although the imaging facility had begun scanning patients with the equipment under lease, the lessee never made any lease payments and argued that the term “functionally operational” was intended to encompass a number of specific and unsatisfied criteria not set forth in the lease. This court agrees with the trial court that the lessee's attempt to introduce such extrinsic evidence was not warranted given the fact that the numerous scans made satisfy the plain meaning of the words. The lesson here is that such disputes may be more avoidable to the extent that the term “functionally operational” can be given a clearer, more detailed meaning in the lease.
End-of-Term Issues
Full Gospel Baptist Church Fellowship International v. Capital One, 2013 WL 5570328 (U.S.Dist.Ct. E.D.La. Oct. 9, 2013)
An aircraft lessor and lessee negotiated an amendment to the original lease after the lessee requested additional financing for replacement of the aircraft's engines. The amendment included, among other things, a residual guaranty clause in which the lessee promised to pay the difference between the casualty loss value as of the final date of the lease term and the proceeds received by the lessor from a sale of the aircraft following its return. Although the lessee attempted to argue that the original purchase price stated in the original lease was meant to be used in calculating the casualty value, the court agrees with the lessor that the larger original purchase price set forth in the amendment was required to be used for purposes of the residual guaranty clause.
Forum Selection, Jurisdiction and Choice Of Law
U.S. Bank National Association v. San Bernadino Public Employees' Association, 2013 WL 6243946 (U.S.Dist.Ct. D.Minn. Dec. 3, 2013)
After the lessor brought suit in Minnesota against a California lessee in default, the lessee sought dismissal for lack of personal jurisdiction and, in the alternative, sought transfer of the case to California for reasons of convenience and fairness. The lease contained a “floating” forum selection clause providing for adjudication in either the state of the lessor or of the lessor's assignee. After noting that federal courts have generally upheld the validity of such forum selection clauses, and concluding that it had jurisdiction over the matter based on this clause in the lease, the court grants the lessee's request to transfer the case to California on grounds of convenience for the lessee and also because the supplier of the equipment was located in California.
Finance Companies' Rights to Collect
This pair of cases exemplifies an unusual literal application (though not acknowledged by the court) of a lease's “hell or high water” provisions. After the unfortunate lessee's business ' including two industrial copiers financed by the lessor ' was destroyed by flooding from Hurricane Sandy, the lessee attempted to justify its failure to continue making payments using two defenses found in the Restatement (Second) of Contracts: supervening impracticability and frustration of purpose. The court makes short shrift of these defenses inasmuch as: 1) the Restatement qualifies both defenses if there is language in the contract to the contrary; and 2) the lease contained provisions amounting to a “hell or high water” clause, which under applicable Iowa law is enforceable whether or not the lease is a true lease.
With regard to arguments by the lessee that the lessor had not properly disposed of the equipment, the lessor attempted to argue that the provisions of Article 9 concerning proper notice and disposition did not apply, since the lease contained language stating that the parties agreed that the transaction was a finance lease under Article 2A. The court makes equally short shrift of this argument by noting that the $1 purchase option in the lease creates a secured transaction subject to Article 9. In the more recent of the two decisions, the court finds that the lessor did in fact dispose of the copiers in a commercially reasonable manner as required by Article 9. [In a somewhat disconcerting footnote to the "hell or high water" provision discussion in the earlier case, the judge states that if it were up to him alone, he would not enforce such a provision against an otherwise valid act-of-God defense unless it was clear that the parties had specifically bargained for the "hell or high water" provision as opposed to its being a non-negotiated, standard provision of the contract.]
In re Brican America LLC Equipment Lease Litigation, 2014 WL 250246 (U.S.Dist.Ct. S.D.Fla. Jan. 22, 2014)
In re Brican America LLC Equipment Lease Litigation, 2013 WL 3967920 (U.S.Dist.Ct. S.D.Fla. Aug. 1, 2013)
These cases illustrate some of the potential difficulties in a triangular relationship involving a vendor, its customers and a financing source. In this multidistrict litigation, a number of dentists and optometrists alleged that they had been victimized after entering into marketing agreements with a vendor (Brican) promising payments by Brican for advertising in the plaintiff's offices to be displayed on flat-screen televisions and related equipment that 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 either: 1) that the leases could be cancelled by the plaintiffs; or 2) that Brican either 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, the relationship of the vendor to the finance company (including whether the finance company was aware of the cancellation provisions), and whether the transactions were structured as leases directly between the finance company and the plaintiffs, or between the vendor and plaintiffs and then subsequently assigned to the finance company. In the most recent of these decisions, the court finds that the vendor's alleged misrepresentations could not be imputed to the finance company and therefore that the “hell or high water” leases directly between the plaintiffs and the finance company should be enforced notwithstanding the cancellation provisions of the marketing agreements. However, the court denies summary judgment in favor of the finance company with respect to the leases assigned to the finance company citing remaining issues of material fact as to whether the finance company could enforce the waivers of defenses in such leases inasmuch as a trier of fact could find that the finance company did not qualify as a good faith assignee.
True Lease Versus Security Interest
In re Wade, 501 B.R. 870 (Bankr.D.Kan. 2013)
This Chapter 13 bankruptcy case involved leases of a television and furniture by an individual. In order to analyze the rights of the lessor, the court decides in one brief paragraph that these leases were true leases, rather than secured transactions. The court reasoned that since the leases could be terminated by the lessee at any time, they did not satisfy the circumstances for creating a security listed in UCC 1-203(b), which require that the lease not be subject to termination by the lessee along with one of a number of other possible circumstances (e.g., the lessee has a nominal purchase option). What the court fails to note ' and did not investigate ' is that even if a transaction does not fall into one of the per se security interest criteria found in 1-203(b), it is still possible that “the facts of the case” mentioned in 1-203(a) could create a security interest for some other reason (e.g., very onerous return conditions might economically compel the lessee to purchase the goods).
Vendor Issues
After a rather lengthy discussion about whether such a representation might be a representation of fact rather than of law and whether it is actionable in contract or in tort, the court decides to certify questions to the Minnesota Supreme Court, since Minnesota law governed the contract between the lessor and the vendor. One portion of this court's discussion should be considered especially relevant: “While someone must assume the burden of knowing the law and ensuring that the parties' contract and dealings comply with it, we see no particular reason why the contracting parties cannot allocate that task to one or the other of them ' Why not, then, allow contracting parties to allocate the task of legal compliance and the corresponding risk ( i.e., the financial cost) of noncompliance?”
Lease Commencement Issues
This appellate court affirms the trial court's decision in favor of the lessor. Although this lessor is not a finance company, the statement in its lease that the lease term would commence when the equipment is “functionally operational” is not uncommon in finance company leases for such equipment (MRI imaging equipment). Although the imaging facility had begun scanning patients with the equipment under lease, the lessee never made any lease payments and argued that the term “functionally operational” was intended to encompass a number of specific and unsatisfied criteria not set forth in the lease. This court agrees with the trial court that the lessee's attempt to introduce such extrinsic evidence was not warranted given the fact that the numerous scans made satisfy the plain meaning of the words. The lesson here is that such disputes may be more avoidable to the extent that the term “functionally operational” can be given a clearer, more detailed meaning in the lease.
End-of-Term Issues
Full Gospel Baptist Church Fellowship International v.
An aircraft lessor and lessee negotiated an amendment to the original lease after the lessee requested additional financing for replacement of the aircraft's engines. The amendment included, among other things, a residual guaranty clause in which the lessee promised to pay the difference between the casualty loss value as of the final date of the lease term and the proceeds received by the lessor from a sale of the aircraft following its return. Although the lessee attempted to argue that the original purchase price stated in the original lease was meant to be used in calculating the casualty value, the court agrees with the lessor that the larger original purchase price set forth in the amendment was required to be used for purposes of the residual guaranty clause.
Forum Selection, Jurisdiction and Choice Of Law
After the lessor brought suit in Minnesota against a California lessee in default, the lessee sought dismissal for lack of personal jurisdiction and, in the alternative, sought transfer of the case to California for reasons of convenience and fairness. The lease contained a “floating” forum selection clause providing for adjudication in either the state of the lessor or of the lessor's assignee. After noting that federal courts have generally upheld the validity of such forum selection clauses, and concluding that it had jurisdiction over the matter based on this clause in the lease, the court grants the lessee's request to transfer the case to California on grounds of convenience for the lessee and also because the supplier of the equipment was located in California.
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