What 's New in The Law

Finance Companies' Rights to Collect

In re Brican America LLC Equipment Lease Litigation, Case No. 10-md-02183-PAS (U.S. Dist.Ct. S.D.Fla. July 18, 2014)

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)

Update from our discussion in May: 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). The agreements promised payments by Brican for advertising in the plaintiffs' offices, to be displayed on flat screen televisions and related equipment, which 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: 1) directly between the finance company and the plaintiffs; or 2) between the vendor and plaintiffs and then subsequently assigned to the finance company. In the Jan. 22, 2014 decision, the court found 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, in the July 18, 2014 decision, the court found in favor of the plaintiffs and against the finance company with respect to the leases assigned to the finance company. The court held that the finance company could not enforce the waivers of defenses in such leases inasmuch as the finance company's knowledge of possible fraud by the vendor and failure to investigate further while purchasing more transactions disqualified it as a good-faith assignee with holder-in-due course status. In a puzzling footnote in this same decision, the court first stated that these assigned financing agreements are secured transactions rather than true leases, and “therefore” the plaintiffs are “account debtors” with respect to waiver of defenses law. Any implication that lessees on a true lease would not be an account debtor is incorrect inasmuch as “account debtor” is defined to include someone obligated on chattel paper ' which includes true leases as well as security agreements.

Siemens Financial Services, Inc. v. Stonebridge Equipment Leasing, LLC, 2014 WL 2557413 (R.I. Sup. Ct. June 6, 2014)

Although this decision does not make clear whether the Siemens Financial lease to a “spectacularly unsuccessful” medical imaging operation contained a “hell or high water” provision, the court does find that providing the lessee with a demographic profile regarding the potential demand for health-care services (with appropriate disclaimers) does not constitute a fraudulent representation excusing the lessee from making its lease payments. Thus the Rhode Island Supreme Court affirms the summary judgment granted in favor of the lessor by a Rhode Island Superior Court.

Leasing Services LLC v. Machinist AFL-Ciolodge 6S, 2014 WL 1688070 (Wis.App. April 30, 2014)

After a trial court agreed with the lessee that a lease's “hell or high water” clause was unconscionable and should not be enforced, this appellate court reversed. Citing a Wisconsin decision stating that for a contract to be found unconscionable, it must exhibit both procedural and substantive unconscionability, this court held that because the lessee was free to comparison shop and not bound to deal with the lessor on the lease, there was no procedural unconscionability, and thus the lease should be enforced.

Nissan World, LLC v. Market Scan Information Systems, Inc., 2014 WL 1716451 (U.S.Dist.Ct. D.N.J. April 30, 2014)

The lessees in this case entered into lease agreements with Wells Fargo Financial Leasing that contained large balloon payments due at the end of the lease term. The lease agreements provided for “hell or high water” obligations, contained an integration clause, and stated that the lessor was not an agent of the equipment supplier. The lessees refused to make such balloon payments and provided evidence that the supplier had promised to make such payments on behalf of the lessees if the latter entered into leases of equal or greater value after the initial leases expired. Wells Fargo sought both to have the court: 1) order the lessees to make their balloon payments under the leases; and 2) order the supplier to pay Wells Fargo damages for failing to deal with the lessees, and make balloon payments on their behalf (the failure of which Wells Fargo argued was a breach of a warranty under its dealer agreement with the supplier). While the court agreed that the supplier did breach a warranty made to Wells Fargo by failing to negotiate with the lessees regarding new leases and make the balloon payments, it also held that it could not grant Wells Fargo summary judgment against the lessees insofar as a trier of fact still needed to determine whether Wells Fargo had knowledge of (or possibly even helped develop) the agreements between the lessees and the supplier. That, according to the court, could lead to a conclusion that the “hell or high water” provisions had been modified.

Key Equipment Finance, Inc. v. Performance Imaging, LLC, 2014 WL 2257175 (Conn.Super. April 22, 2014) (unpublished opinion, check court rules before citing)

After a lessee ceased making payments on two lease agreements, claiming that the equipment did not function, this court decided in favor of the lessor, holding that the leases are finance leases under Article 2A and therefore implied warranties of merchantability and fitness for a particular purpose do not apply. The court went on to say that even if the agreements were not classified as finance leases, those warranties were properly disclaimed.

True Lease Versus Security Interest

In re Stanford, 2014 WL 4163186 (Bankr.D.S.D. August 20, 2014)

In a case in which the court concluded that it did not matter whether certain agreements were true leases or security agreements for purposes of resolving the primary issue regarding termination of the automatic stay, the court made an odd statement about South Dakota law ' that whether the per se security-interest-creating conditions listed in Article 1-203(b) are the only conditions for creating a security interest, or merely a bright-line test allowing for other circumstances that might also create a security interest is unresolved under South Dakota law. The fact that there are no South Dakota cases explicitly deciding this issue should not be a barrier to any court's concluding what many other cases and commentators have indicated ' that there can be “facts of the case” other than those enumerated in 1-203(b), which lead to a conclusion that a lease creates a security interest (e.g., a purchase option that is not nominal in any sense but which is such a bargain that the lessee would be foolish not to exercise it).

Robert W. Ihne is an attorney with more than 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. He may be reached at [email protected]. The author gratefully acknowledges the assistance Ed Gross , Christine Luong , Rebecca Rigney and Deb Abram of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.

Finance Companies' Rights to Collect

In re Brican America LLC Equipment Lease Litigation, Case No. 10-md-02183-PAS (U.S. Dist.Ct. S.D.Fla. July 18, 2014)

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)

Update from our discussion in May: 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). The agreements promised payments by Brican for advertising in the plaintiffs' offices, to be displayed on flat screen televisions and related equipment, which 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: 1) directly between the finance company and the plaintiffs; or 2) between the vendor and plaintiffs and then subsequently assigned to the finance company. In the Jan. 22, 2014 decision, the court found 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, in the July 18, 2014 decision, the court found in favor of the plaintiffs and against the finance company with respect to the leases assigned to the finance company. The court held that the finance company could not enforce the waivers of defenses in such leases inasmuch as the finance company's knowledge of possible fraud by the vendor and failure to investigate further while purchasing more transactions disqualified it as a good-faith assignee with holder-in-due course status. In a puzzling footnote in this same decision, the court first stated that these assigned financing agreements are secured transactions rather than true leases, and “therefore” the plaintiffs are “account debtors” with respect to waiver of defenses law. Any implication that lessees on a true lease would not be an account debtor is incorrect inasmuch as “account debtor” is defined to include someone obligated on chattel paper ' which includes true leases as well as security agreements.

Siemens Financial Services, Inc. v. Stonebridge Equipment Leasing, LLC, 2014 WL 2557413 (R.I. Sup. Ct. June 6, 2014)

Although this decision does not make clear whether the Siemens Financial lease to a “spectacularly unsuccessful” medical imaging operation contained a “hell or high water” provision, the court does find that providing the lessee with a demographic profile regarding the potential demand for health-care services (with appropriate disclaimers) does not constitute a fraudulent representation excusing the lessee from making its lease payments. Thus the Rhode Island Supreme Court affirms the summary judgment granted in favor of the lessor by a Rhode Island Superior Court.

Leasing Services LLC v. Machinist AFL-Ciolodge 6S, 2014 WL 1688070 (Wis.App. April 30, 2014)

After a trial court agreed with the lessee that a lease's “hell or high water” clause was unconscionable and should not be enforced, this appellate court reversed. Citing a Wisconsin decision stating that for a contract to be found unconscionable, it must exhibit both procedural and substantive unconscionability, this court held that because the lessee was free to comparison shop and not bound to deal with the lessor on the lease, there was no procedural unconscionability, and thus the lease should be enforced.

Nissan World, LLC v. Market Scan Information Systems, Inc., 2014 WL 1716451 (U.S.Dist.Ct. D.N.J. April 30, 2014)

The lessees in this case entered into lease agreements with Wells Fargo Financial Leasing that contained large balloon payments due at the end of the lease term. The lease agreements provided for “hell or high water” obligations, contained an integration clause, and stated that the lessor was not an agent of the equipment supplier. The lessees refused to make such balloon payments and provided evidence that the supplier had promised to make such payments on behalf of the lessees if the latter entered into leases of equal or greater value after the initial leases expired. Wells Fargo sought both to have the court: 1) order the lessees to make their balloon payments under the leases; and 2) order the supplier to pay Wells Fargo damages for failing to deal with the lessees, and make balloon payments on their behalf (the failure of which Wells Fargo argued was a breach of a warranty under its dealer agreement with the supplier). While the court agreed that the supplier did breach a warranty made to Wells Fargo by failing to negotiate with the lessees regarding new leases and make the balloon payments, it also held that it could not grant Wells Fargo summary judgment against the lessees insofar as a trier of fact still needed to determine whether Wells Fargo had knowledge of (or possibly even helped develop) the agreements between the lessees and the supplier. That, according to the court, could lead to a conclusion that the “hell or high water” provisions had been modified.

Key Equipment Finance, Inc. v. Performance Imaging, LLC, 2014 WL 2257175 (Conn.Super. April 22, 2014) (unpublished opinion, check court rules before citing)

After a lessee ceased making payments on two lease agreements, claiming that the equipment did not function, this court decided in favor of the lessor, holding that the leases are finance leases under Article 2A and therefore implied warranties of merchantability and fitness for a particular purpose do not apply. The court went on to say that even if the agreements were not classified as finance leases, those warranties were properly disclaimed.

True Lease Versus Security Interest

In re Stanford, 2014 WL 4163186 (Bankr.D.S.D. August 20, 2014)

In a case in which the court concluded that it did not matter whether certain agreements were true leases or security agreements for purposes of resolving the primary issue regarding termination of the automatic stay, the court made an odd statement about South Dakota law ' that whether the per se security-interest-creating conditions listed in Article 1-203(b) are the only conditions for creating a security interest, or merely a bright-line test allowing for other circumstances that might also create a security interest is unresolved under South Dakota law. The fact that there are no South Dakota cases explicitly deciding this issue should not be a barrier to any court's concluding what many other cases and commentators have indicated ' that there can be “facts of the case” other than those enumerated in 1-203(b), which lead to a conclusion that a lease creates a security interest (e.g., a purchase option that is not nominal in any sense but which is such a bargain that the lessee would be foolish not to exercise it).

Robert W. Ihne is an attorney with more than 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. He may be reached at [email protected]. The author gratefully acknowledges the assistance Ed Gross , Christine Luong , Rebecca Rigney and Deb Abram of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.