Substance over Form in the Bankruptcy Courts
June 29, 2005
Under the Bankruptcy Code, whether a lease is a true lease or a disguised security agreement also has serious consequences. If a lease is a true lease, and the debtor in possession has need of the equipment or other leased property, the lessor is entitled to receive all the payments due under the contract. If a lease is not a true lease but is a disguised security agreement, the lender is only entitled to the lesser of what is owed and the property's value, which could be significantly less than the totality of the lease payments. The balance will be treated as a general unsecured claim. Further, the creditor will only be entitled to the value of the collateral if it perfected its lien. If it did not perfect, its entire claim will be treated as a general secured claim (which is why informational filings of UCC-1 forms are recommended in lease transactions). Even if it did perfect, payment could be delayed until a plan is confirmed and even then stretched out over the length of the plan as opposed to the terms required by the original contract. For these reasons, usually the debtor will argue that the lease is a disguised security agreement, and the creditor will argue that the lease is a true lease.
The Latest News on NorVergence
June 29, 2005
There have been three recent developments in two state courts in the closely watched NorVergence matter. First, a Florida circuit court judge dismissed the State Attorney General's suit against a number of leasing companies, holding that the leasing companies had not violated Florida's laws. Among other things, the court stated that the hell and high water and the waiver of defense and warranties clauses are permitted under Florida law and that the NorVergence forum selection clause is valid and enforceable under Florida law.
Arbitration Clauses: Do's and Don'ts for Leasing Lawyers
June 29, 2005
When faced with a transaction in which the arbitration of potential future disputes would offer advantages over court litigation or other forms of dispute resolution, a critical first step is to create a workable, enforceable arbitration agreement. In most instances, this agreement will be the "arbitration clause" included in the lease. A poorly drafted arbitration clause can create time-consuming and costly delays to the arbitration process. Arbitration agreements must be drafted carefully, and expert advice should be sought on all but the most straightforward two-party, single-contract cases. For U.S. parties involved in cross-border transactions, an arbitration agreement may be more appealing than court litigation because of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") under which awards may be enforced abroad with relative ease. The New York Convention currently has 137 signatory countries. No analogous treaty currently exists for court awards rendered in the United States.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Important Implications for the Equipment Leasing Industry
June 07, 2005
On April 20, 2005, President Bush signed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law (the "Act"). Although the Act has received much media attention in recent months for its potential impact upon consumers seeking protection under Chapter 7 of the Bankruptcy Code (the "Code"), it does contain a number of amendments to the Code that will affect, either directly or indirectly, the ways in which equipment lessors will relate to their liquidating or reorganizing lessees. This article provides a brief overview of some of the new amendments to the Code and explains how they will change the dynamics between lessors and lessees.
In The Marketplace
May 26, 2005
Highlights of the latest equipment leasing news from around the country.
Eureka v. Wentworth: Further Erosion of the 'Hell or High Water' Principle
May 26, 2005
A fundamental tenet of equipment leasing has been the concept of "hell or high water" rental payments. Once the lease is signed and the lessee accepts the goods, then the lessee's promises under the lease become irrevocable, especially the promise to pay rent. The draftsmen of UCC Article 2A recognized this critical element and codified it with respect to a finance lease in UCC §2A-407(1)-(2) (all citations herein refer to Uniform Commercial Code Article 2A pre-2003 revisions). A finance lease is a particular type of "true" equipment lease in which the lessee itself selects the item of equipment it wants and instructs the lessor to acquire it for lease to the lessee. UCC §2A-103(g). A finance lessor is neither the manufacturer nor supplier of the item of equipment; it is merely providing the money. Article 2A of the Uniform Commercial Code (the "Code" or the "UCC") extends certain benefits to finance lessors, one of the most important of which is that the lessee's promises are not subject to termination, modification or repudiation; in other words, the lessee must comply with them come "hell or high water." UCC §2A-407(2)(b).
EAEL Elects New Board
May 26, 2005
The Eastern Association of Equipment Lessors elected a new board at its annual business meeting on April 15, 2005.
Substance over Form in the Bankruptcy Courts
May 26, 2005
The old saw is that if it walks like a duck and sounds like a duck, it must be a duck. Although bankruptcy is sometimes viewed by its detractors as defiant of common sense, the common sense duck adage is alive and well in bankruptcy courts. No matter what the parties or their lawyers may call an agreement or transaction, the courts are inclined to change the label and treatment to match what they see as the parties' true intention, risk retention, or economic reality. In bankruptcy parlance, the duck rule is called "recharacterization" and it is most commonly seen when courts are asked to consider shareholder loans, personal property leases, factoring arrangements, and asset backed securitizations. Through recharacterization, loans become capital contributions, leases become security agreements, and claimed true sales (the linchpin of factoring and securitizations) become loans. The impact of relabeling an agreement or transaction is significant. What was intended to be "bankruptcy remote" may find itself at bankruptcy central. The purpose of this article is to canvass just those situations where a lender, lessor and buyer could be very surprised, and how the recharacterization can affect the parties' expectations.
