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'Secured Lender's Corner:' Protecting the Secured Lender Before a Mortgagor or Lessee Files Bankruptcy
Earlier this year, the United States Court of Appeals for the Fifth Circuit explored the application of the equitable lien doctrine after a secured equipment lender sought to recover directly from its borrower's insurance company once the borrower filed a Voluntary Petition under Chapter 11. The court affirmed the district court's denial of relief to the lender. This reinforces the importance that a secured lender protect itself when entering a transaction with a borrower or lessee to avoid a total loss if the borrower or lessee files a bankruptcy petition or if the leased equipment is damaged, missing or both.
A little diligence at the beginning of a transaction may avoid the unfortunate circumstance that befell the equipment lessor in the recent decision of the Fifth Circuit Court of Appeals in Sierra Equipment Inc. v. Lexington Insurance Co., 890 F.3d 555 (5th Cir. 2018). This case reveals what can occur when an equipment lessor did not require that a lessee make it a loss-payee or additional insured on the lessee's insurance policy.
The Sierra decision dealt with the application of a state (Texas) common law “equitable lien doctrine,” in a situation where a lessor of equipment (Sierra Equipment) sought to recover directly from an insurance company (Lexington Insurance Company), which covered the loss and destruction of leased equipment for the lessee. The case was originally filed in state court and removed by the defendant to the United States District Court, which dismissed the case for lack of standing because Sierra was not a party to the insurance contract. The Fifth Circuit affirmed in a decision that has application to both insolvency and insurance law.
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