What's New in the Law

Ability to Collect Rentals under Article 2A Finance Leases or Leases With 'Hell or High Water' and/or Waiver of Defenses Provisions

De Lage Landen Financial Services, Inc. v. Viewpoint Computer Animation, Inc., 2009 WL 678635 (U.S.Dist.Ct. E.D.Pa. March 11, 2009) and 2009 WL 902365 (U.S.Dist.Ct. E.D.Pa. April 1, 2009). These two cases (the latter of which does not involve the lessor/plaintiff directly) illustrate issues that can arise when a lessor becomes part of a program involving not only the leasing of equipment, but also the provision of services by third parties. Notwithstanding a rental agreement that clearly disclaimed responsibility on the part of the lessor for the performance of services related to the equipment being leased, the court refused to decide many of the legal issues facing the lessor without further factual investigation regarding the lessor's role in the program and the possible connection of other program documents (to which the lessor was not a party) to the rental agreement. The customer had signed the rental agreement as part of a program devised by the service provider (with help from the equipment manufacturer) to enable the customer to achieve promised substantial savings on its telephone and Internet costs. When the service provider became insolvent and stopped providing those services, the customer stopped making payments on the rental agreement, claiming that it had a right to do so under its agreement with the service provider and claiming that the lessor was part of a conspiracy to commit fraud on it and other similarly situated customers. Indicating, among other things, that it could not determine yet what law to apply (the rental agreement was to be governed by Pennsylvania law while the customer's agreement with the service provider was to be governed by Texas law), the court states, “' this [c]ourt cannot conclude at this stage without discovery whether the [a]greements should be construed together and therefore which law should apply.”

Measures of Lessors' Damages

C & J Leasing Corp. v. Beasley Investments, Inc., 2009 WL 777870 (Iowa App. March 26, 2009) (unpublished disposition, final publication decision pending). After its lessee defaulted, the lessor took possession of the leased equipment and disposed of it before suing the lessee and personal guarantors. Apparently without deciding whether the lease was a true lease or one that creates a security interest, this court applies both Article 9 and Article 2 in reviewing a lower court's decision with respect to the lessor's claims for damages against the various defendants. The one defendant (a personal guarantor) that appeared at the lower court's trial prevailed at that trial by arguing that he had not been notified of the disposition, that such disposition was not commercially reasonable, and therefore that the lessor was not entitled to a deficiency judgment against him. This appellate court applies Article 9's rules in affirmation of the lower court's decision. This court then analyzes the damage claims against the remaining defendants by employing the damages provisions in Article 2. Notwithstanding this inconsistency, this portion of the decision correctly (assuming that the lease is a true lease to which Article 2, not Article 9, applies) distinguishes among the possibly applicable Article 2 provisions based on the facts of the case and provisions in the lease before remanding to the trial court for recalculation of the damages. The court also rejects the lessor's attempt to argue that the lessee would have exercised a purchase option, but for the default, and therefore that the calculation should include the full amount of that option price (as opposed to the lessor having to prove that it actually sustained a loss to its residual interest).

Liability ' Vicarious and Otherwise ' of Lessors (Mostly Motor Vehicle Lessors) for Equipment-Related Injuries and Damages

Reph v. Hubbard, 2009 WL 649910 (U.S.Dist.Ct. E.D.La. March 10, 2009). After finding that a lessor of a motor vehicle involved in an accident was not independently negligent in a manner leading to the injury resulting from the accident, the court holds that the federal Graves amendment prevents the lessor from being found liable on an alternative theory of vicarious liability. In this case, the lessor had satisfied its obligations under Louisiana law by verifying that the lessee had a valid driver's license and did not appear to be impaired at the time of the lease.

Forum Selection, Jurisdiction and Choice of Law

National City Commercial Capital Corporation v. All About Limousines Corporation; v. Cotton; v. Page, 2009 WL 683786; 683777; 683773 (Ohio App. March 16, 2009). In these three cases, decided by the same appellate court on the same date, the court reviews a lower court's decisions not to enforce forum selection clauses in NorVergence leases in favor of the Ohio-based plaintiff as assignee of such leases. The appellate court agrees with the lower court in denying the plaintiff's arguments in favor of personal jurisdiction based upon certain lessees having sent payments to Ohio and/or having filed counterclaims in the lower court. With respect to whether the “floating” forum selection clause in the leases should be enforced in favor of the assignee, this court remands the cases to the trial court in light of the reasoning set forth in the Ohio Supreme Court's Preferred Capital v. Power Engineering decision not to enforce such a clause when the lessor possessed information not disclosed to the lessee of its intent almost immediately to assign the lease to an assignee in a foreign jurisdiction (absent a clear showing that the lessee had knowingly consented to litigate in any forum). The lower court was directed to look further into the details of the program agreement between NorVergence and the assignee and other facts of these cases.

Waivers of Trial By Jury

TFG-North Carolina, LP v. Performance Fibers, Inc., 2009 WL 1415968 (U.S.Dist.Ct. D.Utah May 15, 2009). The lessee and guarantor (evidently the parent company of the lessee) argued that a master lease agreement and guaranty were both unenforceable and void for lack of consideration and therefore that the waivers of jury trial found in both documents also could not be enforced. This court grants the lessor's motion to strike a jury demand by the defendants noting that there was no gross disparity in bargaining power, that the jury waivers were conspicuous (capitalized and in bold print), and that allegations of fraud in the inducement regarding a contract as a whole are not sufficient to invalidate a waiver of jury trial (as to which alleged fraud must apply specifically).

Assignments of Leases

Bremer Bank, National Association v. John Hancock Life Insurance Company, 2009 WL 702009 (U.S.Dist.Ct. D.Minn. March 13, 2009). This case illustrates a number of the issues that can arise when a lessor finances a lease transaction by assigning its interests in the lease and granting a security interest in the equipment to another financing source ' commonly referred to as a “leveraged lease.” This particular case is one involving very expensive equipment (an aircraft leased to Northwest Airlines) and a set of relatively complex documents (a participation agreement, an indenture, a trust agreement, an assignment agreement, etc, in addition to the lease); but the same issue can arise in much simpler instances of lease financing as well ' i.e., following a default by the lessee, are there are restrictions on what an assignee of the lease and holder of a security interest in the equipment may do in enforcing its interests in the equipment that serve to protect the lessor's residual interest in the equipment? In this case, the court rejected the equipment owner's arguments based upon what the owner claimed was: 1) an “equity squeeze protection” clause in the documents; and 2) the lender's alleged violation of standards imposed by the U.C.C. (Article 9's commercial reasonableness requirements with respect to foreclosures and, in general, the implied covenant of good faith and fair dealing). While legal requirements often cannot be varied, the negotiated provisions of the agreements comprising the transaction should be carefully assessed with respect to the rights under various circumstances of those parties with an interest in the equipment.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating and providing advice related to direct transactions, syndications and vendor financing arrangements. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Erin Staton and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.

Ability to Collect Rentals under Article 2A Finance Leases or Leases With 'Hell or High Water' and/or Waiver of Defenses Provisions

De Lage Landen Financial Services, Inc. v. Viewpoint Computer Animation, Inc., 2009 WL 678635 (U.S.Dist.Ct. E.D.Pa. March 11, 2009) and 2009 WL 902365 (U.S.Dist.Ct. E.D.Pa. April 1, 2009). These two cases (the latter of which does not involve the lessor/plaintiff directly) illustrate issues that can arise when a lessor becomes part of a program involving not only the leasing of equipment, but also the provision of services by third parties. Notwithstanding a rental agreement that clearly disclaimed responsibility on the part of the lessor for the performance of services related to the equipment being leased, the court refused to decide many of the legal issues facing the lessor without further factual investigation regarding the lessor's role in the program and the possible connection of other program documents (to which the lessor was not a party) to the rental agreement. The customer had signed the rental agreement as part of a program devised by the service provider (with help from the equipment manufacturer) to enable the customer to achieve promised substantial savings on its telephone and Internet costs. When the service provider became insolvent and stopped providing those services, the customer stopped making payments on the rental agreement, claiming that it had a right to do so under its agreement with the service provider and claiming that the lessor was part of a conspiracy to commit fraud on it and other similarly situated customers. Indicating, among other things, that it could not determine yet what law to apply (the rental agreement was to be governed by Pennsylvania law while the customer's agreement with the service provider was to be governed by Texas law), the court states, “' this [c]ourt cannot conclude at this stage without discovery whether the [a]greements should be construed together and therefore which law should apply.”

Measures of Lessors' Damages

C & J Leasing Corp. v. Beasley Investments, Inc., 2009 WL 777870 (Iowa App. March 26, 2009) (unpublished disposition, final publication decision pending). After its lessee defaulted, the lessor took possession of the leased equipment and disposed of it before suing the lessee and personal guarantors. Apparently without deciding whether the lease was a true lease or one that creates a security interest, this court applies both Article 9 and Article 2 in reviewing a lower court's decision with respect to the lessor's claims for damages against the various defendants. The one defendant (a personal guarantor) that appeared at the lower court's trial prevailed at that trial by arguing that he had not been notified of the disposition, that such disposition was not commercially reasonable, and therefore that the lessor was not entitled to a deficiency judgment against him. This appellate court applies Article 9's rules in affirmation of the lower court's decision. This court then analyzes the damage claims against the remaining defendants by employing the damages provisions in Article 2. Notwithstanding this inconsistency, this portion of the decision correctly (assuming that the lease is a true lease to which Article 2, not Article 9, applies) distinguishes among the possibly applicable Article 2 provisions based on the facts of the case and provisions in the lease before remanding to the trial court for recalculation of the damages. The court also rejects the lessor's attempt to argue that the lessee would have exercised a purchase option, but for the default, and therefore that the calculation should include the full amount of that option price (as opposed to the lessor having to prove that it actually sustained a loss to its residual interest).

Liability ' Vicarious and Otherwise ' of Lessors (Mostly Motor Vehicle Lessors) for Equipment-Related Injuries and Damages

Reph v. Hubbard, 2009 WL 649910 (U.S.Dist.Ct. E.D.La. March 10, 2009). After finding that a lessor of a motor vehicle involved in an accident was not independently negligent in a manner leading to the injury resulting from the accident, the court holds that the federal Graves amendment prevents the lessor from being found liable on an alternative theory of vicarious liability. In this case, the lessor had satisfied its obligations under Louisiana law by verifying that the lessee had a valid driver's license and did not appear to be impaired at the time of the lease.

Forum Selection, Jurisdiction and Choice of Law

National City Commercial Capital Corporation v. All About Limousines Corporation; v. Cotton; v. Page, 2009 WL 683786; 683777; 683773 (Ohio App. March 16, 2009). In these three cases, decided by the same appellate court on the same date, the court reviews a lower court's decisions not to enforce forum selection clauses in NorVergence leases in favor of the Ohio-based plaintiff as assignee of such leases. The appellate court agrees with the lower court in denying the plaintiff's arguments in favor of personal jurisdiction based upon certain lessees having sent payments to Ohio and/or having filed counterclaims in the lower court. With respect to whether the “floating” forum selection clause in the leases should be enforced in favor of the assignee, this court remands the cases to the trial court in light of the reasoning set forth in the Ohio Supreme Court's Preferred Capital v. Power Engineering decision not to enforce such a clause when the lessor possessed information not disclosed to the lessee of its intent almost immediately to assign the lease to an assignee in a foreign jurisdiction (absent a clear showing that the lessee had knowingly consented to litigate in any forum). The lower court was directed to look further into the details of the program agreement between NorVergence and the assignee and other facts of these cases.

Waivers of Trial By Jury

TFG-North Carolina, LP v. Performance Fibers, Inc., 2009 WL 1415968 (U.S.Dist.Ct. D.Utah May 15, 2009). The lessee and guarantor (evidently the parent company of the lessee) argued that a master lease agreement and guaranty were both unenforceable and void for lack of consideration and therefore that the waivers of jury trial found in both documents also could not be enforced. This court grants the lessor's motion to strike a jury demand by the defendants noting that there was no gross disparity in bargaining power, that the jury waivers were conspicuous (capitalized and in bold print), and that allegations of fraud in the inducement regarding a contract as a whole are not sufficient to invalidate a waiver of jury trial (as to which alleged fraud must apply specifically).

Assignments of Leases

Bremer Bank, National Association v. John Hancock Life Insurance Company, 2009 WL 702009 (U.S.Dist.Ct. D.Minn. March 13, 2009). This case illustrates a number of the issues that can arise when a lessor finances a lease transaction by assigning its interests in the lease and granting a security interest in the equipment to another financing source ' commonly referred to as a “leveraged lease.” This particular case is one involving very expensive equipment (an aircraft leased to Northwest Airlines) and a set of relatively complex documents (a participation agreement, an indenture, a trust agreement, an assignment agreement, etc, in addition to the lease); but the same issue can arise in much simpler instances of lease financing as well ' i.e., following a default by the lessee, are there are restrictions on what an assignee of the lease and holder of a security interest in the equipment may do in enforcing its interests in the equipment that serve to protect the lessor's residual interest in the equipment? In this case, the court rejected the equipment owner's arguments based upon what the owner claimed was: 1) an “equity squeeze protection” clause in the documents; and 2) the lender's alleged violation of standards imposed by the U.C.C. (Article 9's commercial reasonableness requirements with respect to foreclosures and, in general, the implied covenant of good faith and fair dealing). While legal requirements often cannot be varied, the negotiated provisions of the agreements comprising the transaction should be carefully assessed with respect to the rights under various circumstances of those parties with an interest in the equipment.

Robert W. Ihne, a member of this newsletter's Board of Editors, is an attorney with 25 years of experience in commercial financing, primarily in the areas of secured transactions and equipment leasing. Such experience has included drafting, negotiating and providing advice related to direct transactions, syndications and vendor financing arrangements. He may be reached at [email protected]. The author gratefully acknowledges the assistance of Erin Staton and Ed Gross of Vedder Price Kaufman & Kammholz, P.C. in the preparation of this update.