WHAT’S NEW IN THE LAW OF LEASING

Robert W. Ihne, Esq.

[with thanks to Ed Gross, Christine Luong, Rebecca Rigney and Deb Abram of
Vedder Price for gathering cases]
Updated for the ELFA through January 1, 2020
(* denotes items added or updated since last update as of June 1, 2019)

Finance Companies’ Rights to Collect – Including 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. Damian Giancola, DVM, LLC, 2019 WL
6840633 (Pa.Superior Ct. December 16, 2019)(non-precedential decision) *
A vendor of veterinary diagnostic equipment agreed to credit its customer for its
usage of the equipment against lease payments owing by the customer under a lease of
the equipment with DLL. Although not entirely clear from the facts recited in this
decision, such credits were apparently not made a part of the lease itself, but were instead
contained in a separate agreement with the vendor. After the customer defaulted and
contended that there had been errors in the crediting, the court awards DLL summary
judgment based upon (i) the lease’s provision that it constituted an Article 2A finance
lease and (ii) the “hell or high water” clause also contained in the lease. The court notes
that the customer had failed to include a claim, and had not filed a third-party joinder,
against the vendor.

GreatAmerica Financial Services Corp. v. Monge & Associates, P.C., 2019 WL 3720469
(Iowa Ct. App. August 7, 2019) *
After a vendor of telephonic equipment entered into a lease of such equipment
with the lessee and then assigned such lease to GreatAmerica, the lessee ceased making
payments under the lease. When sued by the assignee, the lessee raised a number of
defenses regarding the lease itself including unconscionability, illegality, and fraudulent
inducement, and also asserted that the assignee could not be considered a holder in due
course due to the close connection between the vendor and the assignee (citing a vendor
agreement between the vendor and the assignee). This appellate court upholds the grant
of summary judgment by the trial court in favor of the assignee (i) based upon the ability
of the assignee – whether or not it was a holder in due course – to enforce the “hell or
high water” clause in the lease, and (ii) in addition finds that the lessee had proven no
infirmity in the underlying transaction on which to deny holder in due course status even
if the Iowa Supreme Court were to adopt (which it has not done so to date) the close-
connection doctrine that permits a court to infer knowledge by a closely connected
assignee of problems in the underlying transaction.

Xerox Corp. v. Bus-Let, Inc., 2019 WL 2514855 (U.S. Dist. Ct. W.D.N.Y. June 18,
2019) *
Lessees/defendants had entered into two equipment lease agreements (as well as
two maintenance agreements) with Xerox regarding printing equipment. Each of the

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lease agreements contained “hell or high water” clauses as well as agreements by the
lessees to treat the contracts as Article 2A finance leases. The leases also stated that in
the event Xerox failed to provide maintenance services, the lessees’ exclusive remedy
would be to replace the equipment. After the lessees defaulted in their payment
obligations, Xerox sought summary judgment for payment default and the lessees filed
counterclaims of various sorts. The court grants Xerox partial summary judgment,
stating that “Defendants’ claim that Xerox failed to maintain the leased equipment is
immaterial: because there is a ‘hell or high water’ clause in the lease agreement, Xerox’s
performance is irrelevant to its entitlement to judgment as a matter of law.” Evidently the
lessees had never requested the “exclusive remedy” of replacement and the court does not
indicate whether the lessees might have any other remedy after making payment under
the leases if Xerox had indeed failed in its maintenance obligations. The court does deny
Xerox summary judgment on one lease where the lessee claimed that it was fraudulently
induced to sign the lease.

Hitachi Data Systems Credit Corp. v. Precision Discovery, Inc., 2018 WL 4284290
(U.S.Dist.Ct. S.D.N.Y. Sept. 7, 2018)
After defaulting on a lease of data storage equipment, the lessee brought a number
of counterclaims against the lessor in response to the lessor’s suit after the lessee’s
default. After disposing of a few preliminary lessee challenges, the court arrives at the
central issue in the case – whether the lessee can successfully claim that it was
fraudulently induced by the lessor to enter into the lease. The court dismisses this claim
on the basis that the lessor disclaimed all representations regarding the equipment in the
lease. The court also rejects the lessee’s argument that such disclaimers needed to be in
each lease schedule since each schedule incorporates the master lease in which such
disclaimers can be found. At one point the court references, without specifically
commenting on it, a lessor argument that the “hell or high water” clause in the lease bars
the lessee from making any fraud-based counterclaim. It can be noted that if a lessee is
able to prove that it was fraudulently induced to enter a lease by a knowing lessor, “hell
or high water” clauses will likely not suffice to convince a court to enforce the lease – at
least in any serious case of fraud.

People of the State of New York v. Northern Leasing Systems, Inc. 75 N.Y.S.3d 785,
2017 WL 9480188 (N.Y.Sup.Ct. Nov. 17, 2017)
The New York Attorney General brought suit against a number of companies that
leased credit card processing equipment to small businesses, alleging fraudulent and
deceptive practices as well as seeking dissolution of the first named defendant/lessor.
Claims made by the AG under a consumer protection statute are dismissed inasmuch as
the lessees were small businesses and small business owners, as opposed to obligors on
transactions for personal, family or household use. The court holds the forum selection
clause contained in the leases to be unenforceable, and permits to go forward (a) the AG
claims regarding (i) the lessors conducting fraudulent or illegal business and (ii)
procedural and substantive unconscionability of the lease forms as well as (b) the AG’s
motion for dissolution of the first named lessor. Although this decision does not provide
much detail regarding the alleged fraudulent practices, it stands as a cautionary tale
regarding lessors’ attempts to take advantage of small businesses.

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Blue Ridge Bank, Inc. v. City of Fairmont, 807 S.E.2d 794, 2017 WL 5559861 (Sup.Ct.
of App. W.Va. November 14, 2017)
After the lessee (a city in West Virginia) entered into a lease purchase agreement
(“lpa”) with a lessor, it discovered that the lessor had converted funds designated to pay
for the lessee’s equipment subject to the lpa, causing the lessee to pay for much of this
equipment itself. The money that the lessor was to have used to pay for the equipment
came from the lessor’s assignment of the lpa to a bank (the “assignee”). After the lessee
paid for much of the equipment out of pocket, it attempted to negotiate with the assignee
to reduce the amount of its monthly payment under the lpa to recoup the amount it was
forced to pay for the equipment itself. When the assignee did not consent, the lessee filed
a declaratory judgment action, which the trial court decided in favor of the lessee. On
appeal by the assignee, this court affirms the trial court’s judgment in favor of the lessee.
Although the court includes some confusing comments labeling the lpa an Article 2A
finance lease yet also stating that the lpa gave the lessor a security interest in the
equipment, the decision rests on the legal position of the assignee as having being subject
to claims and defenses of the lessee, whether accruing before or after notification of the
assignment. Since the lessee had not accepted all of the goods under the lpa, the court
holds that such fact constituted an exception to the “hell or high water” obligation of the
lessee argued by the assignee. The court goes on to hold that since the lessee had not
entered into an enforceable agreement not to assert against the assignee claims that it
might have against the lessor, the lessee can assert against the assignee defenses arising
from the lessor’s misuse of funds.

H.E.D. Inc. v. Konica Minolta Business Solutions U.S.A. Inc., 2017 WL 4340205
(U.S.Dist.Ct. N.D.Ind. September 29, 2017)
After printing equipment leased from the lessor proved to be inadequate for the
needs of the lessee, the lessee brought suit against the lessor for breach of warranty and
breach of contract. The court rules in favor of the lessor with regard to three provisions
set forth in conspicuous print in the lease: (i) the disclaimer of warranties; (ii) the
agreement that the lease is a finance lease under Article 2A; and (iii) the waiver of the
rights to consequential, indirect or incidental damages. The court also notes that the lease
contained a waiver of rights under Article 2A. However, the court puts off ruling on
other lessee complaints inasmuch as the court states that it cannot determine who exactly
are parties to the lease – in particular with respect to the lessor. The lease states that the
lessor is Konica Minolta Premier Finance, a program of Konica Minolta Business
Solutions U,S.A., Inc. – and the court asks whether both KMPF and KMBS are lessors.
Although the defendant indicated that they were the same entity (in all likelihood the only
legal entity is KMBS, with KMPF being merely a division of the former), the court asks
for more resolution of this question.

Xerox Corp. v. JoJo Monster Graphics, LLC, 2017 WL 3895907 (U.S.Dist.Ct. W.D.N.Y.
September 6, 2017)
In a case with somewhat puzzling facts and/or puzzling plaintiff arguments, a
“hell or high water” clause and an agreement that the lease was an Article 2A finance
lease is enforced – notwithstanding that the lessor was a vendor of the equipment which
had made a “Total Satisfaction Guarantee” in the two leases stating that the lessor would

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replace any equipment with which the lessee was not totally satisfied. Despite the
lessee’s allegations that the equipment did not function properly and that the lessor did
not properly service the equipment, the court holds that the lessee had agreed to make all
payments unconditionally, that such provisions in a lease between commercial entities are
typically enforceable and not contracts of adhesion, and that the lessee had not alleged
that it had requested the lessor to replace the equipment per its exclusive remedy under
the “Total Satisfaction Guarantee.”

ShopKo Stores Operating Co., LLC v. Balboa Capital Corp., 2017 WL 3579879
(U.S.Dist.Ct. C.D.Cal. July 13, 2017)
This case concerns the lessor’s motion for summary judgment with respect to a
number of claims made by the lessee arising from the lessor’s having charged interim
rent for a period of one day less than a quarter for equipment lease schedules which had a
base term of a number of quarterly periods. The master lease provided that the rent
payable shall be “shown on” the schedule – which the lessee argued should have meant
the indicated number of quarters shown on the schedule – but also provided that the
lessor could elect to have interim rent equal to 1/90 of the average quarterly rent payable
on any day, in the lessor’s discretion, occurring in the quarter following the
commencement date. The lessor elected the 89th day of the quarter, which resulted in an
initial interim rent payment being very close to the quarterly rent – an amount that the
lessee claimed it mistook for the initial full quarterly rent payment. The court denies the
lessor’s motion for summary judgment on all the lessee’s claims except for one that the
court finds duplicative of the main breach of contract claim. Not helpful to the lessor’s
case was evidence introduced by the lessee of forty-nine other complaints from customers
alleging that they were misled by the lessor’s interim rent charging practices.
Also not helpful was lessor’s internal communication in response to a lessor employee
suggestion that the interim rent charge could be more than the regular quarterly payment:
the lessor decided that charging only 89/90 of the quarterly rent would not “rock the
boat” and stated that “Hogs get fat and pigs get slaughtered.”

Ryder Truck Rental, Inc. v. Maalt LP, 2017 WL 9806932 (U.S.Dist.Ct. N.D.Texas July
12, 2017); Ryder Transportation Services v. Maalt LP, 2016 WL 11372210 (U.S.Dist.Ct.
N.D.Texas July 5, 2016)
These cases illustrate some of the issues that can arise in connection with a lease
that also includes obligations on the part of the lessor to service the equipment. After a
lessee had ceased making payments under a Truck Lease and Service Agreement, the
lessor sued the guarantors on the lease. The guarantors argued that they did not have an
obligation to pay since the lessor had fraudulently induced the lessee to enter the lease
and also raised other defenses. After initially (in the earlier case) holding that the lessee
had standing to intervene and that the guarantors had alleged enough material facts for its
fraudulent inducement claim, the court (in the second decision) grants the lessor
summary judgment as to such claim. The court did not, however, grant the lessor’s
summary judgment motion as to other possible material breaches by the lessor. In
evaluating the lessor’s claim for liquidated damages (and holding that more facts were
necessary to evaluate this claim), the court decided that the agreement was predominantly
a lease of goods rather than a contract for the provision of services -- since the amount to

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be paid for maintenance was less than 18% of the fixed lease charges – and therefore to
be evaluated according to the rules of the UCC.

Lease Finance Group, LLC v. Qazi, 59 N.Y.S.3d 281, 56 Misc.3d 944, 2017 WL
2855090 (NYC Civil Ct. June 28, 2017)
This decision illustrates some of the limits of “hell or high water” lease provisions
and holder in due course status for assignees in the context of a leasing company’s
attempt to enforce a guaranty against the person who also signed the lease (on behalf of
what entity or person is not clear) – a person whose first language was not English and
who alleges that he was told that the lease was merely an agreement to be responsible for
damages to the equipment. The court notes that this leasing company has been sued by
the New York state attorney general for ensnaring unsophisticated business owners into
signing leases with “hell or high water” clauses and other “onerous” terms. Such
business owners are initially approached by a separate company offering credit card
processing services who then have the business owner sign papers for both such services
and also a lease that will be assigned to LFG. The court denies the lessor’s motion for
summary judgment, noting that there are remaining issues as to whether the lessor took
the lease without notice of fraudulent inducement and as to whether the lessee even knew
what it was signing (the court here includes a reference to the NorVergence line of cases).
This is a reminder that fraud by a lessor can be a defense to enforcement of “hell or high
water” clauses and that an assignee’s knowledge of fraud as well as the existence of
possible fraud-in-factum can be defenses to enforcement by the assignee.

Construction Resources Group, LLC v. Element Financial Corp., 2017 WL 2266894,

2017 WL 2305717 (U.S.Dist.Ct. W.D.Ok. May 23, 24 2017)
These two decisions, written on consecutive days, illustrate the way that an
Article 2A finance lease is supposed to operate for the benefit of the lessor and also to
preserve certain remedies for the lessee. In the first case, the lessor moved for summary
judgment after the lessee had ceased making payments on a lease of a wheel loader which
the lessee complained was severely defective. After carefully analyzing the statutory
criteria for a finance lease, the court decides that this lease did not fully satisfy the Article
2A definition. However, since the lease also contained a provision stating that the parties
agreed that the lease was a finance lease as defined in Article 2A, and since the lease was
not, according to the court and notwithstanding arguments by the lessee, an
unconscionable contract (even if a contract of adhesion), the court agrees to treat the
lease as a finance lease. Thus, the court grants the lessor’s motion for summary judgment
based upon the lessee’s unconditional-obligation-to-pay requirement that is characteristic
of finance leases. In the second case, the lessee was attempting to recover damages for
breach of a warranty from the equipment manufacturer applicable to the wheel loader. In
this case the court denies the manufacturer’s motions for summary judgment with respect
to its express warranty, the implied warranty of merchantability, and the lessee’s claims
for incidental and consequential damages – scheduling a trial on these claims. Thus,
while the lessee was held to its unconditional obligation to the lessor insofar as it agreed
that its lease constituted a finance lease, it retained remedies against parties supplying the
equipment as long as it can prove that warranties, either express or implied, had been
violated.

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Kinetic Leasing, Inc. v. Nelson, 2017 WL 2985536 (U.S.Dist.Ct. D.N.D. Apr.14, 2017)
This dispute revolves around a lease of equipment which the lessor purchased
from one company (which apparently was considered by the lessor to be a dealer) to lease
the equipment on a finance lease to another company. The lessee was responsible for
structuring the transaction in this manner; however, it claimed that not all of the
equipment was delivered with titles such that the lessee could register and use it. In
addition, it appeared that some of the equipment to be leased was still subject to a
security interest previously granted by the seller to its lender. When the lessee stopped
making all payments under the lease, this lawsuit ensued. Although the court states that
contentions of fraud, misrepresentation and enforceability of the lease required further
proceedings and could not be resolved on the parties’ summary judgement motions, the
court does rule that the lease was a finance lease as defined in Article 2A (and as
discussed in White, Summers & Hillman). Of interest also is the lessor’s argument that it
is industry practice not to independently investigate whether a dealer can pass clear title
to the equipment it sells. Lastly, the court rejects the lessee’s argument that the lease is
invalid due to Minnesota (the lessee’s state) law requiring motor vehicle lessors to be
licensed. The court rules that this law was not intended to apply to lessors under finance
leases.

Xerox Corp. v. RP Digital Services, Inc., 232 F.Supp.3d 321, 2017 WL 512621 (U.S.Dist
Ct. W.D.N.Y. Feb. 8, 2017)
The lessee had entered into both a purchase agreement and finance lease
agreement with Xerox, the manufacturer and vendor of both pieces of equipment, but
ceased making payments on both after claiming that the equipment under the lease did
not work properly and that Xerox had made false and fraudulent statements about that
equipment. The court grants Xerox summary judgment as to both the purchase
agreement and lease, as to the latter holding that the lease’s “hell or high water” clause
was enforceable and sufficient to defeat the lessee’s claims of fraudulent inducement and
negligent misrepresentation. This vendor was fortunate, perhaps, that the court did not
focus on the origins of “hell or high water” as supporting finance companies, who supply
only money, not equipment, and cannot generally be expected to have any responsibilities
with respect to the equipment being financed.

ShopKo Stores Operating Co., LLC v. Balboa Capital Corp., 2016 WL 9308530
(U.S.Dist.Ct. C.D.Cal. October 19, 2016)
This lessee is suing Balboa for fraud with respect to collecting more rent
payments than was apparent to the lessee. The claim is that the lease docs did not
adequately disclose an extra “pro-rata” or “interim” rent payment charged by Balboa at
the beginning of the lease term which the lessee believed to be the initial ordinary
periodic payment due. The court conducted a hearing concerning this claim and the
lessee’s requests to discover the experience of, and any complaints from, Balboa’s other
customers. Notwithstanding Balboa’s objections to such a “fishing expedition,” the court
orders Balboa to produce documents that evidence customer complaints.

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GreatAmerica Financial Services Corp. v. Meisels, 2016 WL 5480718 (Ct.App. Iowa
September 28, 2016)(final publication decision pending)
This affirmation of a lower court decision may be encouraging for those who
finance equipment vendors. At issue is the enforcement of a lease between an office
equipment vendor and its customer, which lease was subsequently assigned to a finance
company. The lessee had also entered into a service agreement with the vendor, and after
the lessee alleged that the vendor had not performed under that service agreement, it
ceased making lease payments to the assignee and asserted that the vendor should return
any lease payments already made. The lessee argued that the lease and service agreement
constituted a “unified” agreement and also that the equipment had not been accepted
under the lease. The court concludes that acceptance had occurred in view of a signed
certificate of acceptance and the lessee having made fifteen payments before attempting
to cancel the lease. The court also rejects the argument that the lease was part of a
“unified” agreement and holds that the lease contained a “hell or high water” clause
which was enforceable by the assignee. Finally, the court finds that the assignee was a
holder in due course, entitled to enforce the lease’s waiver of defenses clause. In this
regard, the court rejects the lessee’s claim that there was “fraud in factum” such that the
lessee could justify not paying the assignee (as a holder in due course) because the lessee
had no reasonable opportunity to obtain knowledge of the contents of the lease.

CDK Global, LLC v. Tulley Automotive Group, Inc., 2016 WL 1718100 (U.S.Dist.Ct.
N.J. April 29, 2016)(not for publication)
Although this case is in a preliminary stage of its proceedings and does not
directly raise hell or high water or waiver of defenses issues, it provides a cautionary tale
for those who might consider financing leases originated by a vendor who is also
providing services in connection with the leased equipment. After a car dealership had
ceased making payments under a lease of equipment designed to facilitate its day-to-day
operations, the vendor sued to accelerate the lease payments and obtain return of the
equipment. The dealer counterclaimed, alleging that the leased system did not work
properly, resulting in numerous problems, and that the dealer had been fraudulently
induced to enter into the lease and related master services agreement. Although the
vendor argued that an integration clause in the services agreement barred the dealer from
alleging misrepresentations by the vendor, this court holds that the alleged
misrepresentations concerned matters that were extrinsic to the services agreement and
thus were not barred. Among other bad news for the vendor was the court’s refusal to
dismiss the dealer’s counterclaim under the New Jersey Consumer Fraud Act, which
covers goods and services sold to the general public (i.e., not limited to goods and
services for personal, family or household use).

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In re Brican America LLC Equipment Lease Litigation, 2015 WL 235409 (U.S.Dist.Ct.
S.D.Fla. January 16, 2015)
In re Brican America LLC Equipment Lease Litigation, 2014 WL 12772199, 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. January 22, 2014)
In re Brican America LLC Equipment Lease Litigation, 2013 WL 3967920 (U.S.Dist.Ct.
S.D.Fla. August 1, 2013)
[Other proceedings in this case may be found at 2013 WL 12092311 (U.S. Dist.Ct.
S.D.Fla. November 15, 2013 and 2015 WL 11681185 (U.S.Dist Ct. April 23, 2015)]
[The District Court’s findings were generally affirmed in Blank v. NCMIC Finance
Corp., 2016 WL 6871879 (U.S.Ct.App. 11th Cir. November 22, 2016)(not selected for
publication in West’s Federal Reporter)]
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 which were to be financed by leases between the plaintiffs and either (i) a
lessor/finance company (NCMIC) or (ii) 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 (a) that the leases could be
cancelled by the plaintiffs, or (b) 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 (i) directly between the finance company and the
plaintiffs or (ii) between the vendor and plaintiffs and then subsequently assigned to the
finance company. In the January 22, 2014 decision, 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, in the July 18, 2014 decision, the court finds in favor
of the plaintiffs and against the finance company with respect to the leases assigned to the
finance company holding 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 states 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. In the January 16, 2015 decision, the court clarifies

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its previous decision, holding that the reliance element of each plaintiff’s fraudulent
inducement claim against Brican will need to be established through further proceedings.

The CIT Group/Equipment Financing, Inc. v. Brown County, Ohio, 25 N.E.3d 473, 2014
WL 7014658 (Ohio App. Dec. 15, 2014)
After a county hospital defaulted under its lease of hospital equipment, the lessor
sued the county. Although the lease had been signed by the president of the hospital and
authorized by the hospital’s board of trustees, this appellate court affirms a lower court’s
ruling that had granted summary judgment in favor of the county. The court holds that
no agency relationship had been established between the county and the hospital’s board
of trustees inasmuch as the statute creating the hospital does not expressly grant the board
the authority to bind the county and subject its general fund to payment of hospital
contracts, and that even if some implicit agency relationship were demonstrated, the
proper procedures to bind the county had not been satisfied.

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 reverses. After
citing a Wisconsin decision stating that for a contract to be found unconscionable, it must
exhibit both procedural and substantive unconscionability, this court holds 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 containing 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 lessees entered into leases of equal or
greater value after the initial leases expired. Wells Fargo sought both to have the court
order (i) the lessees to make their balloon payments under the leases and (ii) 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

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warranty under its dealer agreement with the supplier). While the court agrees 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 holds that it cannot
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 – which, 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 decides 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 goes on to
say that even if the agreements were not classified as finance leases, those warranties
were properly disclaimed.

General Electric Capital Corp. v. FPL Service Corp., 995 F.Supp.2d 935 (N.D. Iowa
2014)
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 (i) the Restatement qualifies both
defenses if there is language in the contract to the contrary, and (ii) 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.]

10
General Electric Capital Corp. v. MSI Modular Systems Installations, 2014 WL
12696769 (U.S.Dist.Ct. C.D.Cal. January 30, 2014)
In this dispute, the lessor brought suit against the lessee for not making full
payments with respect to two leases of commercial trucks. The lessee claimed that the
lessor was aware of the lessee’s need for trucks with the most recent model of engines
that complied with California emissions rules (and that anything less would be of limited
use to the lessee), but instead had trucks delivered with earlier model, non-compliant
engines. The lessor argued that there was no explicit provision in the leases regarding the
engines and that the lessor had disclaimed all warranties. Finding that there may be an
ambiguity in the contract, the court denies the lessor’s motions to dismiss the lessee’s
counterclaims for breach of contract and intentional and negligent misrepresentation.

Xerox Corporation v. Graphic Management Services Inc., 2013 WL 3777148

(U.S.Dist.Ct. W.D.N.Y. July 17, 2013)
This case could prove useful to anyone (either the original lessor or an assignee of
that lessor) attempting to collect under a lease in which the lessor is also the vendor of the
equipment. Among a number of issues raised by the parties, the central issue was
whether the lessor/vendor was entitled to summary judgment against a lessee of
equipment sold by the vendor when the lessee claimed both that the equipment did not
function properly and that the lessor/vendor had fraudulently induced the lessee to enter
into the leases. This court grants the lessor’s summary judgment motion and enforces
both the lease’s “hell or high water” clause as well as the parties’ agreement in the lease
to treat the transaction as an Article 2A finance lease even if the transaction did not
qualify under the Article 2A definition of “finance lease” (this lease would not have
qualified inasmuch as this lessor was also the supplier of the equipment).

Pacific Financial Leasing, LLC v. Fernandes, 2013 WL 3184620 (Mass.App.

Ct. June 25, 2013)(slip copy, not to appear in a printed volume)
After being approached by a vendor of wide screen televisions, the lessee (which
operated a bar and restaurant) entered into a lease for televisions with a lessor referred to
the lessee by the vendor. After the lessee defaulted on the lease, the lessor brought suit
and obtained a summary judgment against the lessee. On this appeal, the lessee alleged
that there were issues of material fact regarding misrepresentations made by the vendor
concerning income to be obtained by the lessee from advertising sales that should have
precluded summary judgment. This court affirms the lower court’s holding, noting that
the lease provides that it is a non-cancelable Article 2A finance lease and that there was
no evidence presented by the lessee to suggest that the vendor and lessor were related in a
way which might provide a basis for concluding that the lessor should be held responsible
for the vendor’s alleged misrepresentations.

The CIT Group/Equipment Financing, Inc. v. Shapiro, 2013 WL 1285269 (U.S.Dist.Ct.

S.D.N.Y. March 29, 2013)
After a lessee’s interests under a lease had been assigned to another lessee that
subsequently stopped making payments and filed for bankruptcy, the lessor sued the
original lessee and the personal guarantors on the original transaction. The defendants’
arguments that they were not liable to the lessor because the lessor had failed to provide

11
them notice of the bankrupt lessee’s default are rejected by the court on the ground that
the assignment agreement between the original lessee and the bankrupt lessee stated that
the original lease agreement remained in full force and effect. The terms of that original
lease agreement, according to the court, provided that the lessor had no duty to provide
notice before bringing suit. What the court and the defendants may not have considered is
that the original lessee became a surety by remaining liable on the lease after the
assignment – i.e., it became a guarantor of the bankrupt lessee’s obligations. Unless it
waived defenses based upon suretyship, it should have been entitled to raise such
defenses such as failure of the lessor to provide notice of the successor lessee’s default.

Telerent Leasing Corp. v. Progressive Medical Imaging PLC, 2013 WL 228087 (U.S.
Dist.Ct. E.D.Mich. Jan. 22, 2013)
When the lessee under an Article 2A finance lease defaulted, the plaintiff (an
assignee of the first assignee of the original lessor’s rights) brought suit against the lessee
and seven individuals who had signed personal guarantees of the lessee’s obligations –
each guaranty limited to twenty percent “of the amount funded by the Lessor in the
aggregate…” This case centers on the correct interpretation to be given those quoted
words found in the guarantees. Although the court rejects the guarantors’ argument that
the words should be interpreted to mean the current amount due under the lease, it also
rejects the plaintiff’s seemingly reasonable interpretation that “the amount funded by the
Lessor” means the amount actually funded by the original lessor. Instead, the court
reasons that the plaintiff’s recovery should be limited by the law of assignment (“under
which ‘the assignee succeeds to no greater rights than those possessed by the assignor’”)
to the amount assigned to the plaintiff by the initial assignee after about three years’
worth of lease payments had been made. No doubt the plaintiff believed it had a higher
number to rely upon from the guarantors – the same number that would have defined the
guarantors’ liability had there been no assignment at all by the original lessor – when it
decided to purchase the lease from the initial assignee.

TBF Financial, LLC v. Petrenko, 2012 WL 5292826 (Wash.App.Div.1 Oct. 29, 2012)
The same court that decided the Financial Pacific Leasing v. Sharp case below
reverses a trial court summary judgment in favor of an assignee of the original lessor on
grounds that might cause some concern. After a lessee entered into a lease of a copy
machine with the manufacturer of the copier (or an affiliate of the manufacturer) that
contained a provision prohibiting modifications unless in writing, the lessee allegedly
received non-conforming equipment and then spoke over the phone with a
manufacturer’s representative and agreed to an oral modification of the lease terms in
consideration for not rejecting the equipment. In reversing the trial court’s summary
judgment in favor of the assignee and remanding for trial, this appellate court refers to the
no-modification-except-in-writing clause and states that “Despite this clause, it is well
settled in Washington that parties to a contract may modify or abrogate contract terms in
any manner they choose, regardless of provisions that prohibit modifications or
abrogation except in a particular manner. Indeed, Washington courts have consistently
held no-oral-modification clauses unenforceable.” Whether or not the assignee might
have some recourse against its assignor (the equipment manufacturer or its affiliate), such
statements by this appellate court may give financing companies pause.

12
Financial Pacific Leasing, LLC v. Law Offices of David A. Sharp, P.A., 2012 WL
4857214 (Wash.App.Div.1 Oct. 15, 2012)(unpublished opinion)
This case raises interesting questions about the meaning of “acceptance” – both
under Article 2A and in the context of the terms of a lease agreement. In this case the
lease provided that the assignee of the lease could verify by phone that the equipment had
been examined by the lessee, was in good operating order and was accepted for all
purposes under the lease. Although the equipment vendor never actually delivered the
equipment which was to be subject to the lease, when the lessee was called by the
assignee, the lessee saw a truck delivering a large box and told the assignee that the
equipment was “just being delivered.” The lease also stated that a phone confirmation of
acceptance by the lessee would authorize the assignee to pay the vendor – which the
assignee did following the phone call. After finding that the parties to the lease agreed
that the lease was intended to qualify as an Article 2A statutory finance lease (as stated in
the lease) and also commenting that Article 2A’s definition of “finance lease” provides
that the lessee’s obligations become irrevocable upon the lessee’s acceptance of the
equipment, the court concludes – perhaps questionably – that the lessee was not entitled
to rely on its argument that the lease did not qualify as a finance lease because it never
actually accepted the equipment. The court reasons that the lease contained waivers of
lessee rights under 2A – 508 through 522, which includes 2A-515, Acceptance of Goods
(providing, among other things, that acceptance occurs after a reasonable opportunity to
inspect the goods). This court, however, goes on to reverse a trial court’s summary
judgment against the lessee and remands for trial on the issue of whether the lessee’s
stating that the equipment was just being delivered constituted acceptance under the
terms of the lease. This decision makes clear that the manner in which a lease indicates
when a lessee will be deemed to have accepted the equipment is critical to commencing
the lessee’s unconditional obligations to pay. This can be crucial whether or not the court
properly decided that a lessee’s waivers of certain provisions of Article 2A means that the
lessee cannot defend itself from finance lease claims by stating that it had not actually
accepted the equipment.

In re Equipment Acquisition Resources, Inc. (Brandt v. The CIT Group/Equipment

Financing, Inc.), 2012 WL 4754957 (Bankr.N.D. Ill. Sept. 28, 2012)
This case is one of eleven cases decided on the same date coming out of the
bankruptcy of Equipment Acquisition Resources. In each of these cases, William A.
Brandt, Jr., the Plan Administrator for EAR, brought suit against a different finance
company to recover lease payments made by EAR to the finance company as fraudulent
transfers. It was alleged that an individual had caused EAR to enter into leases of
equipment acquired by the finance companies at grossly inflated prices from another
company that had just purchased the equipment from EAR. The Administrator claimed
that all of these circular transfers amounted to a Ponzi scheme in which funds from
financing companies entering into leases later in time were used to pay EAR’s earlier
inflated lease obligations – to the eventual detriment of EAR and its other creditors. The
court concludes that the Administrator’s claims will be dismissed in one month unless the
Administrator is able to provide more specific evidence of actual fraudulent intent on the
part of the finance company.

13
Simington v. Lease Finance Group, LLC, 2012 WL 651130 (U.S.Dist.Ct. S.D.N.Y. Feb.
28, 2012)
A pair of small businesses brought a class action suit against a group of
defendants in the business of processing electronic payments (for credit and debit cards)
which involved the leasing of electronic point-of-sale equipment by plaintiffs. At this
early stage in the suit, the court grants some of the defendants’ motions to dismiss certain
of the plaintiffs’ claims but denies other defendant motions with regard to other plaintiff
claims. While not at the stage where the court might have discussed lessor/defendant
arguments based on “hell or high water” leases, the case illustrates examples of purported
outrageous conduct by the defendants such as, for example, hiding most of the provisions
on relatively expensive leases for inexpensive equipment which plaintiffs were talked
into signing in return for unfulfilled promises of huge savings on the costs of the payment
processing services.

GE Capital Information Technology Solutions, Inc. v, Campbell Ads LLC, 2011 WL

5835909 (U.S.Dist.Ct. N.D.Ind. Nov. 21, 2011)
After the lessee ceased making payments owing on a lease for a copier machine,
the lessor brought suit and the lessee (i) counterclaimed that the lessor had breached the
lease agreement by failing to provide a proper working copy machine and also (ii)
affirmatively defended by arguing that the lessor had breached warranties regarding the
equipment. In this brief decision, the court rules in favor of the lessor by pointing out
that in the lease, the lessor had disclaimed warranties and the lessee had waived rights
and remedies under Article 2A. The court did grant a lessee motion to file a third party
complaint against the manufacturer of the copier.

De Lage Landen Financial Services, Inc. v. Rasa Floors, LP, 792 F.Supp.2d 812 (E.D.Pa.
2011)
A lessor entered into lease agreements with two lessees in connection with a
program operated by certain vendors (Capital 4 and 3Com) who offered customers
telephone and internet services requiring networking and telephone equipment, the
financing of which took the form of the subject lease agreements. After the service
provider failed, the lessees ceased making lease payments and the lessor filed suit. This
court grants summary judgment in favor of the lessor – both on it claims against the
lessees and on the counterclaims asserted by the lessees. The lease agreements made clear
that although the rental payments might include the cost of services being provided
(which the lessor would forward to the service provider) in addition to the amount for
equipment rental, the lessor was not responsible for providing the services or maintaining
the equipment. The court notes that after the failure of the service provider, the lessor
decreased the amount of the rental payments to eliminate the portion for the services.
The decision strongly supports the enforceability of lease provisions placing a “hell or
high water” obligation on lessees to make all payments (both under Article 2A and under
contract law), and finds no evidence that the lessor was in any agency relationship with
the vendors such that alleged fraudulent conduct on their part could be attributed to the
lessor.

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Tri-States Utility, Inc. v. Infinity Metering Company, Inc., 2011 WL 2634291
(U.S.Dist.Ct. W.D.Mo. July 5, 2011)
After the lessee entered into a lease agreement for water metering equipment, the
original lessor assigned the lease to a bank/assignee which then acquired the equipment
selected by the lessee. After the lessee discovered that the meters were defective, it
stopped making payments under the lease and brought suit against the bank contending
that the bank had breached its duty under the lease when it acquired defective equipment.
Citing language in the lease disclaiming warranties by the lessor and indicating that the
lessor’s role was only to provide financing for the lessee’s use of the equipment and also
citing Article 2A’s finance lease provisions, the court granted the bank’s summary
judgment counterclaim motion that the lessee was liable under the lease notwithstanding
the condition of the equipment.

GreatAmerica Leasing Corp. v. Wahoo Productions of Florida, Inc., 2011 WL 1559935

(U.S.Dist.Ct. N.D.Iowa April 21, 2011)
Notwithstanding the fact that not all of the equipment subject to a lease had been
delivered and accepted, this court finds that the lessor was entitled to collect all of the
scheduled lease payments. The court initially states that it need not resolve the issue as to
whether a relatively brief lease provision regarding non-cancelability constituted a hell or
high water obligation because the parties agreed that the lease is an Article 2A finance
lease. This conclusion seems a bit strange since, as the court itself recites, acceptance of
the goods is a prerequisite for satisfying the statutory meaning of “finance lease.” In any
event, the court’s conclusion of full liability rests primarily on a lease addendum, signed
by the lessee to induce the lessor’s payment to the supplier of the goods, in which the
lessee promises to make all payments under the lease even if some or all of the goods are
not delivered and/or installed.

De Lage Landen Financial Services, Inc. v. Perkins Rowe Associates, Inc., 2011 WL
1466157 (U.S.Dist.Ct. M.D.La. April 18, 2011)
After the lessee defaulted on its lease and was sued by the assignee of the lease,
the lessee brought various claims against the original lessor, including with regard to
improper installation of the equipment and failure to notify the lessee that it had assigned
the lease to the assignee. The court grants the original lessor’s motion for summary
judgment, holding that the lease’s provisions setting forth the lessee’s absolute and
unconditional obligations to pay rent precluded most of the lessee’s claims and also
finding that the lessor had no obligation to notify the lessee of an assignment.

K.E.L. Title Insurance Agency, Inc. v. CIT Technology Financing Services, Inc., 2011
WL 1326230 (Fla.App. April 8, 2011)
This appellate court affirms summary judgment in favor of the lessor on a lease
which stated that (i) the lessee was responsible for any service or maintenance with
respect to the equipment and (ii) the equipment supplier/servicer was not an agent of the
lessor. The lessee had attempted to argue that the lessor had breached an obligation to
service the equipment.

15
Allen & Company, LLC v. Sanford USD Medical Center, 2011 WL 941195 (U.S.Dist.Ct.
N.D.Ill. March 15, 2011)
Notwithstanding the lessee’s claim that it never received and accepted the
equipment which was the subject of a lease, the court grants the summary judgment
motion of the original lessor’s assignee. The court rejects the lessee’s arguments that the
assignee was not entitled to enforce the lease’s hell or high water clause because the
assignee allegedly was aware of a license agreement between the lessee and the
equipment vendor and therefore was not a holder in due course. For one thing, holder in
due course status is relevant to enforcement of waivers of defenses – not hell or high
water provisions. Secondly, the lease was a lease of equipment, not of services, and there
was no evidence that the assignee had knowledge of any lessee defenses with respect to
that lease. In addition, the lessee had made monthly payments under the lease for over
three years and thus was estopped from asserting defenses against an assignee that had
relied on the lessee having signed the lease and an acceptance certificate.

C & J Vantage Leasing Co. v. Wolfe, 2011 WL 7434633 (Iowa Sup.Ct. March 4, 2011)
In another of a line of cases involving financing of golf course beverage carts, the
Iowa Supreme Court reverses lower court grants of summary judgment in favor the
assignee of the lease used for the financing. When Royal Links, the company that was
paying the lessee for advertising on the cart (in the same amounts owed by the lessee
under the lease), stopped making those payments, the lessee ceased making payments
under its lease. After determining that the $1 option lease was a security agreement
under the law, the court holds that the hell or high water provision in the agreement is
nevertheless enforceable – rejecting any notion that such provisions are only enforceable
in the context of a true lease. The court then notes that the lease did not have a waiver of
defenses provision, but then considers whether an assignee must be a holder in due
course to enforce a hell or high water payment obligation. Though perhaps not as clearly
stated as it could have been, the court’s position is that such is not necessary (these two
types of provisions, recognized as distinct by the court, are quite different with respect to
the requirements on the parties seeking to enforce them – if there is no waiver of defenses
provision, the question of holder in due course status simply does not arise). Since the
assignee in this case could only stand in the shoes of the original lessor, when the court
concludes (i) that there are material issues of fact regarding whether Royal Links was
acting as an agent for the original lessor when Royal Links allegedly misled the lessee
and (ii) that an integration clause in the lease does not preclude the introduction of
evidence of such misrepresentations by Royal Links, the court finds that it must deny the
assignee summary judgment. It should be noted that the outcome would likely have
been different had the lease contained a waiver of defenses.

Artists & Framers, Inc. v. Lease Finance Group, LLC, 2011 WL 345883 (U.S.Dist.
Ct. D.Md. Feb.2, 2011)(slip copy)
This decision denies a lessor’s motion to dismiss a lessee’s suit claiming that the
lessee had no obligation to make payments under what was stated to be a non-cancellable
lease. The court is clearly sympathetic to the lessee’s claims that an alleged agent for the
lessor grossly misled the lessee regarding the nature – in particular, the possibility of
cancellation – of a possibly illegible lease of equipment for processing credit cards. The

16
lessee’s allegations, if ultimately proven to be true, provide an example of how lessors
ought not to induce customers to sign leases.

GreatAmerica Leasing Corp. v. Davis-Lynch, Inc., 2011 WL 167248 (U.S.Dist.Ct.

N.D.Iowa Jan. 19, 2011)(slip copy)
Pursuant to a Private Label Vendor Agreement, the plaintiff purchased leases on a
non-notification basis from a vendor of office equipment. After the defendant/lessee
stopped making lease payments to the plaintiff (who billed the lessee in the name of the
vendor), claiming that the equipment vendor had engaged in fraudulent activity, the
plaintiff filed a motion for summary judgment. In granting the motion, the court has
occasion to discuss the nature of both the hell or high water and waiver of defenses
provisions in the lease. Although it distinguishes between the two types of provisions
and correctly indicates that a waiver of defenses can only be enforced by an assignee
qualifying as a holder in due course, the court makes some other statements that are
potentially confusing. For example, the court states that the effect of a hell or high water
clause is generally to make the assignee of a lease a “quasi holder in due course” and also
notes that a defense of fraud in the factum is a defense against a contract that includes a
hell or high water provision. What those statements fail to recognize is that although
even a lesser kind of fraud – fraud in the inducement – may be a defense to enforcement
of a hell or high water clause by the original lessor, such a defense should not be
available against enforcement of a waiver of defenses by an assignee qualifying as a
holder in due course. In other words, a hell or high water clause in the absence of a
waiver of defenses will not itself place an assignee in the position of a holder in due
course who can be defeated only by the most egregious type of fraud. Although not
discussed in this decision, it can be noted that the fact that the lessee did not have any
notice of the assignment until it defaulted had no effect on the assignee’s ability to
enforce the waiver of defenses.

Gaia Leasing LLC v. Wendelta, Inc., 2010 WL 5421324 (U.S. Dist Ct. D.Minn. Dec. 23,
2010)
This case should motivate the assignees of equipment lessors to be sure they
obtain and understand all of the documents related to the lease transaction being assigned.
Although the lease in this case was not an Article 2A finance lease (the lessor had
supplied the goods), it did contain a waiver of defenses (which the court confusingly
refers to as a “hell-or-high water” clause). Nevertheless, the transaction also included a
document called the Condition Precedent – the satisfaction of which was to be the trigger
for the lessee’s obligations to the lessor. Since the lessor was not able to satisfy the terms
of the Condition Precedent, the lessee was never obligated to begin making payments
under the lease to the assignee, against whom the court grants summary judgment.

Direct Capital Corp. v. Babatunde Osunbayo, 104546/98, NYLJ 1202472562632, at *1

(Civ., RI, September 21, 2010)
The court grants a lessor’s motion for summary judgment against a lessee in
default, finding that the lease satisfied the requirements for an Article 2A finance lease
and that the lessee had accepted the equipment. Notwithstanding the lessee’s defense that
the equipment vendor had failed to disclose certain information about the equipment, the

17
court holds that the lessor had only arranged for the financing and was not responsible in
any way for the equipment.

C & J Vantage Leasing Co. v. Outlook Farm Golf Club, LLC, 784 N.W.2d 753 (Iowa
2010)
This is an appeal to Iowa’s highest court of a decision involving facts common to
a number of other cases – leases of beverage carts to golf courses with respect to which
an advertising company had represented that advertising on the carts would pay for the
costs of leasing. When the advertising company stopped paying, the lessee stopped
paying the lessor or assignee of the lessor, and suit was brought against the lessee. The
Iowa Supreme Court reverses the lower court’s summary judgment against the lessee --
finding that there were genuine issues of material fact regarding whether the advertising
company, which may have fraudulently induced the lessee to enter into the lease, had
acted as agent for the lessor. The problem with this decision is its apparent confusion of
a defense of fraudulent misrepresentation concerning facts regarding the lease transaction
(sometimes referred to simply as fraud in the inducement) – which could be a valid
defense to paying the lessor under the hell or high water clause contained in the lease –
with the type of fraud that afforded the lessee neither the knowledge nor reasonable
opportunity to learn of the essential character of the transaction (sometimes referred to as
fraud in factum) – which is one of the few defenses to enforcement by a lessor’s assignee
of a waiver of defenses contained in the lease. The court does not appear to understand
the significant distinction between the legal rights of the lessor, on the one hand, and its
assignee, on the other: “…defenses to contract formation, such as fraud in the
inducement, may be asserted even where a party has agreed to a hell-or-high water clause
or a waiver-of-defenses provision.” Other elements of the decision concerning some
common practices in vendor-related business (e.g., placing the vendor’s logo on the lease,
having the vendor arrange for the signing of the lease) and concerning the distinction
between leases and secured transactions could also stand further and better thought.

Edison Generator Exchange, Inc. v. Quality Business Communications, Inc., 2010 WL

2696637 (N.J.Super.App.Div. July 1, 2010)(unpublished opinion – check rules before
citing)
This decision affirms a summary judgment granted by the trial court against a
lessee alleging, among other things, that the equipment was not “correct” and did not
perform properly. Since the lease was correctly found to be a finance lease as defined in
Article 2A and because the lessee had signed a delivery and acceptance certificate, the
court holds that the lessee could not successfully raise these defenses to making all its
payments.

Jet Acceptance Corp. v. Quest Mexicana, S.A. DE C.V., 2010 WL 2651641 (N.Y.Sup.
June 23, 2010)(Unreported disposition - will not appear in a printed volume)
This case involves four identical leases for commercial aircraft. Although only
one of the aircraft was accepted by the lessee as evidenced by its signing an acceptance
certificate, the court grants the lessor’s motion summary judgment as to the lessee’s
liability for all four leases – based primarily on the hell or high water clauses contained in
the leases. While the details for finding liability on the other three leases are not made

18
totally clear, a factor probably influencing this decision was the fact that the lessor had
invested nearly eight million dollars readying the four aircraft for delivery to the lessee –
a fact probably contemplated in the lease agreements.

Leaf Financial Corp. v. ACS Services, Inc., 2010 WL 1740884 (Del.Super. April 30,
2010)(unpublished opinion, check court rules before citing)
The court grants a lessor’s motion for summary judgment against a lessee for
breach of a lease. The court finds that the statutory requirements for creating a finance
lease exist in this case; but also goes on to cite an Article 2A Official Comment stating
that even if all aspects of the statutory definition are not met, the parties may create such
a lease by agreement. The court rejects the lessee’s argument that the lessor had
established a partnership with the vendor. The court also noted that the lessee could not
rely on certain defenses under Article 2A because the lease form had the lessee waive any
rights and remedies it might have under 2A-508 through 2A-522. One potentially
interesting point not mentioned in this decision (possibly not really an issue under the
less-than-perfectly-clear facts of this case or, even if an issue, not raised by the lessee or
the court) was whether the transaction qualified as a lease under Article 2A at all. While
the decision sometimes refers to goods, the “System” that was the subject of the contract
appears to be comprised primarily of software. If this system were to have been all
software (or perhaps even primarily software), the contract would not qualify as a lease
of goods governed by Article 2A.

Faust Printing, Inc. v. Man Capital Corp., 2009 WL 5210847 (U.S.Dist.Ct. N.D.Ill.
December 23, 2009)
After the lessee executed a lease with a financing company affiliate of a
manufacturer of printing presses (there apparently was some confusion on the part of the
lessee as to which company was to sign the lease as lessor) and received a printing press
that allegedly did not function as expected, the lessee brought a fraud action against both
the manufacturer and its finance company claiming that it had been fraudulently induced
to sign the lease with representations that the lessee would have recourse against the
manufacturer in the event of problems with the press. This court denies a summary
judgment motion by the defendants, which motion argued that the hell or high water
clause in the lease precluded a fraudulent inducement claim. Without any explanation,
the court mentions a previous summary judgment opinion holding that the hell or high
water clause was preceded by “ambiguous” language. In the “Net Lease” language
quoted in the opinion, the only such language seems to be “Except as otherwise
specifically provided herein or in any Schedule hereto,” but the court fails to point to any
provision elsewhere which might modify the lessee’s absolute and unconditional
obligations.

Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 2009 WL 2170999
(U.S.Dist.Ct. D.Minn. July 17, 2009)
Although an equipment vendor’s representative (alleged by the lessee to have
made various misrepresentations regarding the equipment) assisted the lessee in obtaining
financing, the lessee did not demonstrate an agency relationship between the rep and the
lessor. The court finds here that summary judgment against the lessee on the issue of

19
liability with regard to the finance lease at issue is appropriate. (See discussion below
under Measures of Lessors’ Damages with regard to the lessor’s request for damages.)

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 later 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
refuses 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 Court cannot conclude at this
stage without discovery whether the [a]greements should be construed together and
therefore which law should apply.”

The People ex rel. The Board of Trustees of Chicago State University v. Siemens
Building Technologies, Inc., 900 N.E.2d 414 (Ill.App. 2008)
While this case focuses more on the interpretation of a particular state statute –
the Illinois Public University Energy Conservation Act – than on leasing law generally, it
may be of interest to those contemplating financing for public entities. In connection
with its attempt to obtain energy savings using equipment installed by Siemens Building
Technologies, the state university entered into a master lease agreement with Siemens
Financial Services (though the agreement is called a “lease,” the parties and court
consider the substance of the transaction to be a security agreement). One of the issues
decided here is whether the aforementioned Act prevents the use of “hell or high water”
financing provisions under which the university must pay a lessor/financer for energy
conservation measures even if the measures do not produce a savings to the university.
In affirming a lower court decision that the Act does not prevent such a financing
provision, this court states, “If we presume for purposes of this question that third-party
financing was contemplated by the legislature, then the commercial reality of this type of
lease makes it clear that the risk as between the lessee and lessor for defective equipment
is to be placed on the lessee who has recourse against the supplier.”

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OFC Capital v. AT Publishing, Inc., 2008 WL 4962942 (U.S.Ct.App. 9th Cir. Nov. 20,
2008) (not for publication in Federal Reporter; not precedent except as provided by Ninth
Circuit rules)
After a District Court in Alaska had ruled in favor of the lessor, holding among
other things that a finance lessor has no obligation to provide conforming equipment and
that the lessee had no right to revoke acceptance, the Ninth Circuit affirms. In particular,
the decision indicates that since the lessee realized the equipment was nonconforming
before acceptance, it could not rely on 2A-517, which requires that the lessee did not
discover the nonconformity as a condition of valid revocation in the case of a finance
lease (in addition to the condition – not referenced by the court – that the lessee’s
acceptance had been reasonably induced by the lessor).

In re Rafter Seven Ranches L.P. (Rafter Ranches L.P. v. C.H. Brown Company), 2008
WL 4787106 (U.S.Ct.App. 10th Cir. Nov. 4, 2008)
A divided Tenth Circuit panel affirms the decisions of a bankruptcy court and
bankruptcy appellate panel that a lessee of irrigation sprinkler systems was liable for
unpaid rentals on its leases despite the facts that the systems supplied by a company
chosen by the lessee did not conform to specifications of the equipment in the leases and,
in the case of some of the equipment, was never used after the lessee inspected it and
determined it to be “junk.” The primary basis for finding liability with respect to the
unused equipment was that the lessee failed to notify the lessor of its rejection of the
equipment in a reasonable period of time as required by Article 2A – letting the
equipment sit in the fields for six weeks before notifying the lessor. The dissent argues,
to the contrary, that a reasonable opportunity to inspect should include an opportunity to
test, which in the case of the “junk” would have been futile. The majority had also noted
that the lessee authorized the lessor to pay the supplier before the equipment was
delivered and agreed that it would look only to the supplier in the event the equipment
was defective. Whether such promises would obligate the lessee to make all lease
payments owing under the leases – under contract law if not under Article 2A finance
lease provisions requiring a reasonable opportunity to inspect – even if prompt notice of
nonconformity was given, is not made clear.

Frontier Leasing Corp. v. Bowlers Country Club, Inc., 2008 WL 4725183 (Iowa App.
October 29, 2008)(final publication decision pending)
In a case with a factual background similar to, and decided by the same court as,
the C and J Leasing Corp. v. Hendren Golf Management case decided in January of
2007, this appellate court affirms a lower court’s grant of summary judgment for the
lessor based upon the “hell and high water” provision in the lease notwithstanding a
vendor’s financial inability to pay for advertising on golf carts in amounts sufficient for
the lessee to make the payments owing on the lease. The court notes that since “hell and
high water” provisions are enforceable in Iowa and since the lessee had every opportunity
to read the lease, there was no genuine issue of material fact to support a claim that the
lease was unconscionable.

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Fieldtech Avionics & Instruments, Inc. v. Component Control.Com, Inc., 262 S.W.3d
813 (Tex.App. 2008)
On the surface, the part of this case deciding the dispute between the lessor and
lessee (lessee claims against a vendor were also being decided) seems to be a
straightforward application of Article 2A statutory finance lease rules; however, it does
not appear that the transaction qualifies for such treatment. The lessor is said to have
acquired software from a vendor and then to have leased it to the lessee. Apart from
questions regarding ownership of and possessory rights to the software (i.e., did the lessor
itself have any right to transfer possession and use of the software to the lessee – as
opposed to merely advancing to the vendor the proceeds of a loan to the lessee as
payment for the lessee’s right to use the software), Article 2A defines “lease” as a
transfer of the right to possession and use of goods and “goods” is defined to include
movable things and fixtures, but not information. Although, therefore, Article 2A would
not appear to apply to this transaction, both the lessor and lessee agreed that the lease
between them was a statutory finance lease – which probably explains the court’s
application of Article 2A law. Since the lease otherwise met the statutory requirements
for being a statutory finance lease, the lessee’s unhappiness with the performance of the
software would generally not affect its unconditional obligation to make all rental
payments. The lessee argued, however, that it had revoked acceptance of the software
and that, according to an Official Comment to 2A-407, a lessee’s irrevocable obligation
to pay under a finance lease remains subject to the lessee’s revocation of acceptance if
the lessee has accepted without discovery of the nonconformity and the lessee’s
acceptance was reasonably induced by the lessor’s assurances [see 2A-517(1)(b),
numbered slightly differently in Texas]. Since the lease, however, also contained a
general waiver of the lessee’s rights under a number of sections of Article 2A, including
2A-517, the court affirms a lower court’s finding of summary judgment in favor of the
lessor. An interesting question that did not need to be decided, given the lessee’s
waivers, is the likelihood of a lessor under a finance lease giving its lessee assurances
regarding the goods being leased if that lessor genuinely played no role in the selection,
manufacture or supply of the goods.

IFC Credit Corp. v. Burton Industries, Inc., 536 F.3d 610 (7th Cir. 2008)
A NorVergence lessee had signed both NorVergence’s standard Equipment
Rental Agreement as well as another NorVergence-generated document entitled
“Hardware Application.” Notwithstanding the lease’s provisions for “hell or high water”
payment obligations, a waiver of defenses in favor of assignees, and – of special
relevance to this decision – a merger clause stating that the lease terms were the complete
and exclusive statement of the agreement and that terms not contained in the lease would
not be legally enforced, the Seventh Circuit found that the Hardware Application’s
provision that the lease was not binding until the equipment was installed was applicable
(as a contemporaneous written document whose admission into evidence did not violate
Illinois’s parol evidence rule) to the facts of this case. Although the equipment was
delivered and the lessee signed a delivery and acceptance receipt, since the equipment
was never installed, the lease was held never to have existed, leaving the assignee with no
legal right to collect. Whether or not the facts of this case are common to other
NorVergence lease situations, this ruling should give pause to any assignee of any well-

22
drafted lease which has not somehow assured itself that the lessee had not signed some
other document simultaneously that could call into question the existence of the lease.

National City Commerce Capital Corp. v. Blackledge Country Club, Inc., 2008 WL
2797010 (Conn.Super. June 25, 2008)(unpublished opinion)
This brief denial of a lessor’s motion for summary judgment illustrates the
potential difficulty of enforcing even a “hell or high water” lease when there exists a
service agreement to be fulfilled by other parties that is necessary for the proper
functioning of the equipment. Although the facts are not entirely clear, the lessor may
have taken this lease of GPS equipment to be used at the defendant’s golf course by
assignment from a company who had relations with other companies responsible for
installing and servicing the equipment. The court denied the lessor’s summary judgment
motion before a factual examination of the defendant’s claims concerning the purported
agency relationship between the plaintiff and parties that were alleged to have improperly
serviced the equipment and/or alleged to have improperly induced the defendant to sign
the lease.

CN Funding, LLC v. The Ensig Group, Ltd., 2008 WL 2340660 (N.Y.App.Div. June 10,
2008)
This brief decision partially overturns a questionable trial court decision holding
that a lease was not enforceable due to lack of consideration since the equipment had not
been delivered by a vendor that had filed for bankruptcy. The appellate court notes that
although the lease did not qualify as an Article 2A finance lease, the parties had agreed to
treat it as such and the lessee agreed to pay the lessor notwithstanding any failure by the
vendor to deliver the equipment. This decision, however, declines to award summary
judgment to the lessor since the record presented an issue of fact as to whether the lessor
was aware of the vendor’s bankruptcy before signing the lease, in which case the lessee
may have a defense to payment.

Xerox Corporation v. Digital Express Graphic, LLC, 2008 WL 2278492 (Tenn.Ct.App.

May 22, 2008)(slip copy)
Although the lease in this case does not qualify as an Article 2A finance lease and
although the lessor had entered into a maintenance agreement with the lessee in
connection with the lease, the decision illustrates the importance of employing lease
provisions whose enforceability is supported by Article 2A. This decision upholds the
lessor’s right to restrict the lessee to an exclusive remedy – replacement of the equipment
by the lessor in the event the lessor was unable to maintain the equipment – and to
enforce its remedy of acceleration of the remaining balance in the event the lessee
defaulted in its scheduled payments. The decision also finds that the terms of the lease
adequately disclaimed implied warranties of merchantability (in this instance the
equipment was not sold by the lessor in the ordinary course of its business and had been
selected by the lessee) and fitness for a particular purpose.

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Popular Leasing USA, Inc. v. Mortgage Sense, Inc., 2008 WL 1952380 (Cal.App. May 6,
2008) (not reported in Cal.Reptr.3d)
Although this decision may not be able to be cited as precedent (California rules
of court must be consulted), it strongly affirms a NorVergence assignee’s ability to rely
on a waiver of defenses clause – even in the face of lessees’ claims (accepted by the trial
court, whose decision is reversed here) that the equipment was never installed and thus
the lease allegedly never commenced. The court cites in particular its own 2006 decision
in Wells Fargo Bank Minnesota N.A. v. B.C.B.U. that explained the commercial
importance of enforcing such waiver of defense clauses. The decision also highlights the
difference between (i) the type of fraud that may have induced the lessees to sign leases
and certificates of acceptance even before the equipment had been installed and (ii) the
only type of fraud available as a defense against a holder in due course (in which the
signer had neither knowledge nor opportunity to learn of the character and essential terms
of the instrument it was signing).

Pludeman v. Northern Leasing Systems, Inc., 2008 WL 1944567 (N.Y.Ct.App. May 6,

2008) (subject to revision before publication in the New York Reports)
In this split decision by New York’s highest court, the majority finds that a
number of small business owners have sufficiently pleaded, under New York law, a cause
of action for fraud against individuals comprising the lessor’s top management. While
this decision does not directly address the liability of the lessees to make payments under
their allegedly fraudulently procured leases, it interestingly highlights practices of the
salespeople employed by the lessor’s equipment vendor that could conceivably come
back to haunt the lessor and even its individual managers: concealing subsequent pages
of the lease containing important provisions while having the lessee sign the front page;
rushing the lessees into signing; and not providing the lessees with a copy of the lease
(unless they called a 1-800 phone number). The dissenting judge points out that the first
page of the lease indicates that it is “Page 1 of 4;” that most people entering into
relatively small transactions (e.g., a car rental) do not bother to read the entire agreement;
that the majority’s real reasons for objecting to the inside pages of the lease were
apparently not that they were concealed, but that the provisions there were arguably
unduly harsh; and that the salespeople who presented the leases to the lessees for
signature were not employees of the lessor.

In re NorVergence, Inc. (Diversified Aerospace Services, LLC v. IFC Credit Corp.), 2008
WL1901114 (Bankr.D.N.J. April 25, 2008)
A number of lessees under NorVergence leases brought an action in the
NorVergence bankruptcy proceedings against IFC Credit, which had been assigned the
leases by NorVergence, to have the leases found void and unenforceable. In this
decision, the bankruptcy court finds that it does not have jurisdiction to hear the lessees’
claims due to the fact that NorVergence’s bankruptcy estate is administratively insolvent.
If the lessees were successful in this proceeding, IFC would have an indemnification
claim against NorVergence based upon its agreement with NorVergence. Since,
however, the bankruptcy estate is administratively insolvent, the outcome of the lessees’
claims could have no effect on the administration of the estate and thus jurisdiction in the
bankruptcy proceedings does not exist.

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IFC Credit Corporation v. Specialty Optical Systems, Inc., 252 S.W.3d 761 (Tex.App.
2008)
Although vacating a trial court’s order of sanctions (including ordering that letters
regarding the assignee’s agreements with NorVergence be sent to all other NorVergence
lessees against which the assignee had made claims) against this NorVergence assignee,
this appellate court affirms the trial court’s holdings that (i) the lessee had been
fraudulently induced by NorVergence into signing its lease (when NorVergence falsely
promised to see that a contract with a competing telecommunications provider would be
cancelled before countersigning the lease) – making the lease unenforceable (presumably
by NorVergence in particular, though the decision does not make this clear) – and (ii)
IFC was not entitled to holder in due course status with regard to enforcing the lease’s
waiver of defenses provision because it was aware that, among other things,
NorVergence was promising lessees savings in connection with its leases with no intent
to deliver.

Federal Trade Commission v. IFC Credit Corp., 2008 WL_1001154 (U.S.Dist.Ct.

N.D.Ill. April 9, 2008)
In this opinion by a Magistrate Judge, the court grants a NorVergence assignee’s
motion to dismiss one count of the FTC’s complaint – seeking to deny enforceability of
the floating forum selection clause found in the leases acquired by such assignee (such
holding being consistent with the Seventh Circuit’s decision in Aliano Bros. as noted in
the Forum Selection section below) – but denies IFC’s motions on two other counts. At
this very early stage in the lawsuit, the court appears to be quite deferential to the FTC’s
arguments against IFC. Although IFC argued that the lessees – small businesses and
religious and other not-for-profit organizations – were not “consumers” under the Federal
Trade Commission Act, the court (indicating that this issue was one of first impression
under the FTCA) was inclined to defer to the agency’s interpretation of the statute, which
interpretation included such lessees as “consumers.” The court also lists a good number
of instances of alleged complicity by IFC in NorVergence’s fraudulent scheme sufficient
to warrant a trial. Although difficult to tell for certain, some of the statements made by
the court may betray a lack of understanding of financing industry practice. For example,
the court refers to IFC’s purchase of leases “at a discount” – perhaps implying that IFC
knew it was purchasing questionable paper – when what IFC paid may have merely
equaled the present value of an aggregate payment steam, computed using an ordinary
and reasonable discount rate of interest. In addition, the facts that (i) the lessees appear to
have been obligated by the waiver of defense clauses in the leases to continue paying IFC
even if the lessees had defenses to paying NorVergence and (ii) IFC could argue that the
leases were stand-alone equipment leases rather than a part of an integrated package of
services, were both characterized as parts of a “scheme.” In any event, to the extent that
an assignee can be proven to have been aware of or part of a deceptive and fraudulent
scheme, the UCC would not permit such an assignee to take advantage of a waiver of
defenses clause – whether or not the lessees are justifiably characterized as consumers.

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Dolphin Capital Corp. v. Schroeder, 2008 WL 630602 (Mo.App. March 11, 2008)
In what may be the latest tactic employed by NorVergence lessees to avoid
having to pay assignees of NorVergence leases (see also OFC Capital v. Schmidtlein in
the Forum Selection section below), the seven lessees in this consolidated appeal had
obtained dismissals of the cases by the assignee in the lower court – which dismissal is
affirmed by this court of appeals – after convincing the court that NorVergence was an
indispensable party to the action. Since NorVergence had been prevented by its
bankruptcy from joining in pending litigation by its customers, this Missouri court
needed to decide whether proceeding in the “necessary” party’s absence would unduly
prejudice the lessees. The court finds that the lessees’ burden of proving fraud in the
factum and fraud in the inducement without NorVergence is too great to permit the suit to
proceed. One influence on the court appears to be “the disturbing inferences arising from
the actions of Dolphin and NorVergence” – including the fact that Dolphin continued to
purchase leases from NorVergence after learning of numerous immediate complaints by
other NorVergence lessees against whom Dolphin had already instituted collection
actions. Aside from mentioning such suspicions concerning Dolphin, the court does not
discuss the distinction between fraud in the factum and fraud in the inducement, and the
potential effect of such a distinction on the assignee’s right to collect.

Wells Fargo Financial Leasing, Inc. v. Mountain Rentals of Gatlinburg, Inc., 2008 WL
199855 (Tenn.Ct.App. Jan. 24, 2008)(not reported in S.W.3d; see Tennessee court of
appeals rules regarding citation)
In affirming a lower court summary judgment in favor of a lessor’s assignee, the
Court of Appeals cites a number of cases (including a number on this What’s New in the
Law list) that either enforce the “hell or high water” nature of a lessee’s obligations under
an Article 2A finance lease or enforce a lease’s waiver of defenses provisions –
notwithstanding the lessee’s unhappiness with the equipment and with the original
lessor’s maintenance of such equipment. In holding that this type of finance lease is not
unconscionable or inequitable, the court instructively cites a couple UCC treatises while
stating, “Normally, a lender who enables a buyer to acquire the goods is not subject to a
refusal by the buyer to repay the loan if the goods are not what the buyer expected.
Similarly, a finance lessee cannot refuse to pay a lessor an agreed payment….The parties
entered into a financial transaction in which the lessor is lending money and dealing
largely in paper, not goods….The statutory scheme of finance leases benefits both
parties. The lessor gains certainty and security for its extension of credit. The lessee
forgoes it warranty claims against the lessor but becomes a statutory third party
beneficiary of the supply contract between the manufacturer or other supplier and the
lessor.”

Republic Bank v. AMTEC Precision Products, 2007 WL 2220521 (U.S.Dist Ct. D.Utah
July 27, 2007)
Although not a decision predicated upon principles of leasing law or waiver of
defenses, this case illustrates the absolute obligation of a debtor/lessee under a progress
payment agreement intended to lead to a leasing arrangement. The debtor/lessee had
signed both a master progress payment agreement and a master lease agreement pursuant
to terms under which the former obligations would be transformed into the latter only

26
upon the execution and delivery of a “final” acceptance and delivery certificate. After a
number of progress payments had been made to vendors, with respect to which the
debtor/lessee executed “partial” acceptance and delivery certificates, the original
lessor/lender (apparently servicing the transaction on behalf of its assignee) demanded
repayment in full due to an alleged default under the documents related to the
debtor/lessee’s deteriorating financial condition. The debtor/lessee attempted to argue
that the last executed partial acceptance and delivery certificate should have been treated
as a final certificate and therefore that its future obligations should consist only of
ordinary periodic payment obligations under the lease. This court holds, however, that
the documentation does not support such a conclusion and that progress payment
obligations and related charges could be accelerated.

Key Equipment Finance, Inc. v. South Shore Imaging, Inc., 835 N.Y.S.2d 268 (App.Div.
2007)
This court overturns a lower court’s holding that a lease of imaging equipment
was unenforceable because its print was less than eight points in depth – in violation of a
New York statute. The appellate court notes that the statute applies by its terms only to
printed contracts involving either (i) consumer transactions for personal, family or
household purposes or (ii) residential leases, whereas this equipment was medical
equipment being used by a corporate lessee for business purposes.

C and J Leasing Corp. v. Hendren Golf Management, Inc., 2007 WL 257955 (Iowa App.
January 31, 2007)
This appellate court reverses a lower court determination (about one year earlier)
that a lease of two golf course beverage carts was unconscionable. Finding that the lessee
was not unsophisticated and that the type of “hell or high water” clause found in the lease
is valid and enforceable in Iowa, this court finds no evidence of either procedural or
substantive unconscionability. After agreeing with the lower court (and disagreeing with
the plaintiff) that there was no evidence of an agency relationship between the lessor and
the vendor (which became financially unable to continue paying the lessee money for
advertising that had been sufficient for the lessee to make its payments under the lease),
this court also holds (contrary to the lower court, but consistent with commentary in
Article 2A) that whether or not the lease actually qualified (as stated in the lease) as a
“finance lease,” the parties could achieve the same result by agreement.

State of Florida, Office of the Attorney General, Department of Legal Affairs v.

Commerce Commercial Leasing, LLC, 946 So.2d 1253 (Fla.App. 2007)
A Florida appellate court reverses the lower court's dismissal of a claim by the
state attorney general under the Florida Deceptive and Unfair Trade Practices Act against
seven assignees of NorVergence leases. While not reaching an issue raised by the
attorney general -- that such common lease provisions as "hell or high water" payment
obligations, waivers of defenses, disclaimers of warranties and floating forum selection
clauses are themselves violations of that Act -- this court finds enough other potential
issues to reinstate the claim. The decision holds that the trial court focused too narrowly
on the legality of the aforementioned lease provisions while ignoring other allegations
concerning the overvaluing of the equipment, disparities in rental costs for the same

27
equipment, and burying the rental agreements within a stack of documents referred to as
an “application.” The decision also faults the trial court for using the UCC definition of
“consumer lease” (i.e., a lease of goods to be used primarily for personal, family or
household purposes) rather than the broader definition of “consumer” in the FDUTPA.

Key Equipment Finance, Inc. v. Pioneer Transportation, Ltd., 2007 WL 118007

(U.S.Dist.Ct. W.D.Wisc. January 17, 2007)
In a decision generally favorable to the plaintiff/lessor, the legal analysis
contained in this decision indicates a potential for future problems arising from a
common form of documenting and structuring financing transactions. After the lessee
had entered into a series of leases for messaging equipment to communicate with its truck
drivers, the equipment began to fail to deliver or receive messages – due primarily to a
failure of service to be provided by the equipment vendor – and the lessee stopped
making lease payments. The lessor contended that the lease was an Article 2A finance
lease or, alternatively, that the lease contained language which would have the same
effect – i.e., to make the lessee’s payment obligations irrevocable. Since the leases
contained a purchase obligation (payment of $1 at the end of term), the court correctly
rejected the Article 2A finance lease characterization. However, the court accepted the
lessee’s alternative characterization as a sale of goods with a security interest based upon
the fact that the lessor had acquired the equipment from the vendor in conjunction with
entering into the lease with the lessee. Evidently, the court viewed this arrangement as
one sale followed by another, thus making the purported lease transaction subject to
Article 2, Sales, of the UCC and the possible defenses afforded to buyers thereunder
(e.g., revocation of acceptance or cancellation of the agreement). Fortunately for the
lessor, the court held that the equipment itself was not non-conforming (as opposed to the
service which was to have been provided by the vendor) and thus that the lessee could not
avail itself of these Article 2 remedies. The decision also suggests that even if the
equipment were non-conforming, the provisions of the lease disclaiming warranties and
referring the lessee to the vendor (instead of the lessor) for all complaints regarding non-
conforming equipment provided remedies to the lessee other than those available under
Article 2. Had the court been content simply to characterize the purported lease as a
secured loan – rather than a secured installment sale – there would have been no need to
consider all of these potential buyer’s remedies emanating from Article 2. However, the
use of a typical lease document – containing little or no indication that the lessor is in
actuality only making a secured loan – in conjunction with the lessor’s purchase of
equipment from the vendor can give rise to the characterization employed by this court.

Custom Data Solutions, Inc. v. Preferred Capital, Inc., 2006 WL 3734660 (Mich.App.
December 19, 2006)(unpublished)
After a lower court held that the lessee under NorVergence leases was not
obligated to pay Preferred Capital as an assignee of NorVergence due to uncontested
fraud on the part of NorVergence, the assignee appealed based on an argument that the
leases contained a merger clause and were thus separate from NorVergence’s fraudulent
service agreements. In holding that the assignee had not refuted the lessee’s evidence
that the leases were part and parcel of the agreement for a total communications package,
the court states that “As Norvergence’s assignee, defendant [Preferred Capital] stood in

28
the shoes of Norvergence vis a vis the [leases]” and quotes a case stating that an
“assignee stands in the position of the assignor, possessing the same rights and being
subject to the same defenses.” Based on that the court concludes that the leases are
“voidable at plantiff’s option by virtue of Norvergence’s fraudulent inducement,
regardless of whether plaintiff shows a breach of the [leases] by Preferred.” There was
no discussion, however, of whether the lease contained a waiver of defenses, which is
intended under Article 9 to have exactly the opposite effect of the general rule of law
regarding an assignee’s position invoked by this court, and whether such waiver of
defenses is enforceable notwithstanding fraudulent inducement by the original lessor.

IFC Credit Corp. v. United Business & Industrial Federal Credit Union, 2006 WL
3692403 (U.S.Dist.Ct. N.D.Ill. Dec. 11, 2006)
Following a jury verdict in favor of the lessee, the plaintiff, an assignee of a
NorVergence lease, moved for judgment as a matter of law on its lease contract claim, for
a new trial and to supplement the record with regard to certain jury instructions. In
denying all such motions except to supplement the record, this court has occasion to
discuss the manner in which the jury had been instructed concerning the plaintiff’s
arguments based on the leases’ provisions for “hell or high water” obligations to pay,
Article 2A finance lease status and waiver of defenses. In particular, there is discussion
of how an assignee’s right to collect based upon such provisions is affected by the
lessee’s defenses based on fraud – both fraud in the inducement and fraud in factum.
Although not entirely clear, the court may be using “fraud in factum” to mean one of the
very few defenses available to an obligor to prevent enforcement by a good-faith, for-
value assignee of a lease with a waiver of defenses provision – i.e., fraud that induced the
lessee to sign the lease with neither knowledge nor reasonable opportunity to learn of its
character or its essential terms. Whether or not the jury in this case was properly
instructed in that regard is not clear, but the fact that the case got to a jury is significant
and was due to the court’s finding that the jury waiver in the lease was not enforceable, in
part, because it was relatively inconspicuous. Such finding was, however, reversed by
the U.S. Court of Appeals for the Seventh Circuit (2008 WL 126552 – see the summary
in the Waivers of Trial by Jury section below), which appellate decision remanded the
case to the District Court and included some pointed remarks about the difference
between fraud in the factum and fraud in the inducement.

Snap-on Credit, LLC v. M&B Auto, 2006 WL 3873336 (N.Y.CityCt. December 4,

2006)(unpublished)
This court denies a summary judgment motion seeking damages for breach of a
lease by the assignee of the lease, originally between an independent franchise dealer of
the equipment manufacturer as lessor and the lessee. Although the lease contained a
“hell or high water” provision unconditionally obligating the lessee to make all lease
payments regardless of any defect in the equipment, it also included a reference to the
manufacturer’s warranty. The court holds that these two provisions are potentially in
conflict, that the warranty’s provisions were apparently not waived, and thus that more
details need to be learned concerning the particular provisions of the warranty and
conduct of the parties. The decision does not indicate whether the lease contained a

29
waiver of defenses clause that might have enabled the assignee to collect payments
notwithstanding issues relating to enforceability by the original lessor.

De Lage Landen Financial Services, Inc. v. Cricket’s Termite Control, Inc., 942 So.2d
1001 (Fla.App. 2006)
After the lessee entered into a lease of equipment designed to randomly select and
dial telephone numbers and then play a pre-recorded marketing message, it was notified
by the State of Florida that such use of the equipment violated a Florida non-solicitation
law. Following this notice, the lessee ceased using the equipment and also ceased
making payments to the assignee of the lease. When sued by the assignee, the trial court
ruled in favor of the lessee on the basis that the lease was void and unenforceable because
the use of the system was a violation of Florida law. In reversing the trial court, this
appellate court noted that (i) there were other possible legal uses of the equipment and (ii)
the lease was an Article 2A finance lease containing a “hell or high water” clause and a
variety of disclaimers concerning the adequacy and fitness of the equipment.

IFC Credit Corporation v. Magnetic Technologies, Ltd., 859 N.E.2d 76 (Ill.App. 2006)
This appellate court overturns a lower court’s ruling against an assignee of a lease
entered into by the lessee with NorVergence, Inc. The lower court had dismissed an
action brought by the assignee to collect payments under the lease based upon the
purported res judicata effect of default judgments against NorVergence in separate
lawsuits brought by the Federal Trade Commission and the Illinois Attorney General,
both of which judgments declared NorVergence lease agreements to be void and
unenforceable. Finding that the assignee in this case was not a party to either of those
lawsuits, that its interest in the lease was acquired before the commencement of the two
lawsuits, and that its relationship with NorVergence as assignee did not require a
conclusion that it was in privity with NorVergence, this court finds the doctrine of res
judicata not to be applicable to the assignee’s claims against the lessee. The court also
declines to consider the lessee’s collateral estoppel defense based on two other courts
having recently found NorVergence leases assigned to this assignee to be unenforceable,
because the lessee raised this argument for the first time on appeal.

United States Achievement Academy, LLC v. Pitney Bowes, Inc., 2006

WL 2990140 (U.S.Dist.Ct. E.D.Ky. Oct. 18, 2006)
Although the facts regarding the lease documentation are somewhat unclear – the
court refers to lease agreements having not only the lessor and lessee, but also the
equipment supplier, as parties – this court holds that various defenses asserted by a lessee
unhappy with the performance of equipment being leased are not available against a
lessor under an Article 2A finance lease, even where lessor is affiliated with the
equipment supplier.

Direct Capital Corporation v. New ABI Inc., 822 N.Y.S.2d 684 (N.Y.Sup.Ct 2006)
Notwithstanding its finding that a lease’s disclaimer of the implied warranties of
merchantability and fitness for a particular purpose was not conspicuous and therefore
not enforceable under Article 2A, this decision goes on to hold that the lessee’s defense
to making payments owing under the lease is unsuccessful inasmuch as the lease qualifies

30
as a “finance lease” which, according to Article 2A, (i) does not include such implied
warranties and (ii) requires the lessee to make all payments irrespective of any defects in
performance. While such reasoning is sound to the extent that Article 2A is applicable,
the stated facts indicate that the lease may have given the lessee a one dollar purchase
option. In such a case, Article 2A would not be applicable and the decision would more
likely need to consider the effect of basic contract law.

Wells Fargo Bank Minnesota, National Association v. B.C.B.U., 49 Cal.Rptr.3d 324

(Cal.App. 2006)
In a decision demonstrating the power of a waiver of defenses clause, this court
affirms a judgment in favor of an assignee against a lessee that had signed a lease and
related acceptance certificate, but that never received the equipment and that had agreed
with the lessor to rescind the lease after the date the lease was assigned (the lessee did not
become aware of the assignment until about two years after the rescission, when it was
sued by the assignee). Notwithstanding its agreement with the lessee that the lease had
never become a finance lease under Article 2A (which requires that the lessee accept the
goods before its promise to pay becomes irrevocable) for purposes of collection by the
lessor, the court holds that Article 9’s provisions regarding waivers of defenses gives the
assignee the right to collect as long as the lessee is not able to assert successfully any of
the limited number of specific defenses that are available against a holder in due course
of a negotiable instrument. Although the court expresses sympathy for the lessee, which
signed the documents believing that the lessor would hold them in escrow until the
equipment was delivered and accepted, the court cites “sound policy” and references
securitization as a modern form of financing in concluding that “Enforcing a waiver of
defenses, save for those that would be good against a holder in due course of a negotiable
instrument, promotes the transfer of accounts by allowing a purchaser to rely on the face
of the documents. Thus, the lessee, like the maker of a negotiable instrument, bears the
risk of putting into the stream of commerce documents that appear regular on their face
but have underlying flaws.”

Liberty Bank, F.S.B. v. Diamond Paint and Supply, Inc., 2006 WL 2691719 (Iowa App.
Sept. 21. 2006)
This appellate court affirms summary judgment in favor of an assignee of two
NorVergence leases against a lessee who argued, among other things, that the leases were
fraudulent and unconscionable and also unenforceable by the assignee due to the close
connection between NorVergence and the assignee. In this rather brief decision, the
court indicates that Iowa has yet to adopt the close connection doctrine and that the “hell
or high water” provisions effectively cut off the defenses of fraud and unconscionability.

Lyon Financial Services, Inc. v. Clear Sky MRI and Diagnostic Centers, Inc., 2006 WL
2338407 (U.S.Dist.Ct. E.D.Pa. August 10, 2006)
This court grants summary judgment against a group of lessees with respect to
their liability to pay all rentals owing under their leases. Notwithstanding having made
payments under the leases for a time, the lessees argued that summary judgment was not
appropriate since the plaintiff had not pled and proven the execution of certificates of
acceptance which, according to the lease schedules, were to indicate the date on which

31
the payment obligations commenced and therefore, according to the lessees, were a
condition precedent for their obligations. The court relies on the “hell or high water”
provisions in the leases setting forth the lessees’ “absolute and unconditional” obligation
to make all payments in rejecting this possible obstacle to summary judgment.

Citicorp Leasing, Inc. v. Kusher Family Limited Partnership, 2006 WL 1982757

(U.S.Dist.Ct. S.D.N.Y. July 14, 2006)
Decision strongly upholds a lessor’s right to collect all rentals under Article 2A
finance leases with “hell or high water” language in the face of the lessee’s evidence that
the CT scanning equipment being leased was unsafe. The court goes on to say that even
if the leases did not qualify as finance leases under the UCC, the lessor’s warranty
disclaimers would suffice as a matter of contract law both to absolve the lessor of any
liability for the equipment and to require continued payment by the lessee. The court
further finds that the lessee’s allegations that the vendor and lessor had formed a joint
venture (there was evidence that the vendor had granted the lessor an exclusive right to
provide financing) were not substantiated to the point where the lessor might have
liability for the vendor’s negligence.

IFC Credit Corporaton v. Aliano Brothers General Contractors, Inc., 2006 WL 1843387
(U.S.Dist.Ct. N.D.Ill. June 28, 2006)
After this court had been overruled by the Seventh Circuit in granting the lessee’s
motion to dismiss for lack of personal jurisdiction based upon the alleged
unenforceability of the NorVergence lease’s “floating forum selection” clause, the court
denies the lessee’s motion to dismiss based upon the alleged preclusive effect of a default
judgment entered in 2005 by a U.S. District Court in New Jersey in a suit brought against
NorVergence by the Federal Trade Commission. This court holds that because IFC was
not a party to the FTC suit, because it cannot yet be determined whether IFC and
NorVergence were in privity, and because IFC may qualify as a holder in due course, it is
possible that IFC may be entitled to enforce the lease even if it is found to be void (a
contention of the FTC in the New Jersey case).

William Palumbo Insurance Agency, Inc. v. Irwin Business Finance Corporation and IFC
Credit Corporation, 2006 WL 1718280 (Mass.Super. May 15, 2006)
This decision consolidates seven cases in which lessees of NorVergence sought
summary judgment that their leases held by various assignees of NorVergence should be
rescinded due primarily to fraudulent conduct on the part of NorVergence. The lessees
argued that a 2004 decision by a Massachusetts court in response to a suit against
NorVergence brought by the state Attorney General, holding that the leases were
rescinded and unenforceable, renders the leases void and binds the finance
company/assignees. Noting that the assignees had no opportunity to participate in the
Attorney General’s suit, this court declines to grant summary judgment in favor of the
lessees, and comments that fraud in the inducement does not render the leases void and
that the leases by their terms are enforceable by good faith, for-value assignees.
Although some of the assignees had requested summary judgment in their favor, the court
declines, noting that while the assignees’ arguments have considerable strength, the

32
lessees have not had an opportunity to contest the assignees’ status as good faith
purchasers for value.

Anderson v. Leasecomm Corporation, 2006 WL 1314128 (Tex.App. May 15, 2006)

In affirming a lower court’s summary judgment in favor of the lessor, this court
affirms a finance lessor’s ability to collect rentals notwithstanding lessee complaints
about the equipment and the equipment vendor’s failure to service the equipment (as well
as dismissing unsupported arguments of fraud in the inducement).

IFC Credit Corporation v. Century Realty Funds, Inc., 2006 WL 435695 (U.S.Dist.Ct.
M.D.Fla. February 21, 2006)
In a case brought by an assignee of a NorVergence lease, which case had been
transferred from a District Court in Illinois (where it had been initially brought by the
assignee) to Florida (the defendant’s principal place of business), this court denies the
plaintiff’s motions to dismiss defendant’s counterclaims and to strike defendant’s
affirmative defenses by stating that all the defendant needed to do was plead a claim for
fraud and/or fraudulent misrepresentation under the applicable law. It is not clear
whether the court’s conclusions rely on the defendant’s claims of assignee participation
in the fraud or whether allegations of ab initio illegality of the contract as fraudulently
induced only by the original lessor would have been sufficient.

Advancmed, LLC v. Pitney Bowes Credit Corporation, 2006 WL 36901 (U.S.Dist.Ct.

E.D.Ky January 4, 2006)
The court holds that an Article 2A finance lease entered into by the financing
subsidiary of a vendor as lessor was enforceable against the lessee notwithstanding the
lessee’s unhappiness with the equipment and services to be provided by the vendor. The
decision emphasizes the legal difference between the vendor and the lessor and indicates
how the lease clearly distinguishes the rights and obligations of the lessor from those of
the party that supplied the equipment.

De Lage Landen Financial Services, Inc. v. M.B. Management Co., Inc., 2005 WL
3376813 (Pa.Super. Dec. 13, 2005)
When a lessee attempted to escape its payment obligations under a lease of a
copier that did not function properly, this court overturns a lower court’s decision in
favor of the lessee, noting that the lessee could not avoid the provisions of the lease
(which the lessee admittedly had not read thoroughly) which indicated that the lease was
a finance lease under Article 2A. This court cites an Official Comment to the definition
of “finance lease” which states that the parties may achieve the same result by agreement
even if not all aspects of the definition are satisfied.

Wells Fargo Bank Minnesota, National Association v. CD Video, Inc., 802 N.Y.S.2d 423
(App.Div. 2005)
This decision affirms a lower court’s grant of summary judgment in favor of an
assignee of an equipment lease containing a waiver of defenses, stating that a good-faith,
for-value assignee was not required to prove the original lessor’s performance as a
condition of enforcing the lessee’s obligations.

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Wells Fargo Bank, N.A. v. BrooksAmerica Mortgage Corporation, 419 F.3d 107 (2nd
Cir. 2005)
In a case in which the lessee entered into a sale-leaseback of computer equipment
but was never paid by the lessor, the U.S. District Court for the Southern District of New
York granted a motion for summary judgment by the lessor’s assignee for past due
payments and a declaration that the lessee remains obligated for remaining payments due
under the lease (2004 WL 2072358). The district court decision strongly supported the
enforcement of waiver of defense and “hell or high water” provisions – whether or not
the lease qualifies as a true lease governed by Article 2A. The Second Circuit affirms;
however, its reasoning highlights the sophistication of the lessee without indicating the
significance of that characterization.

Lyon Financial Services, Inc. v. Woodlake Imaging, LLC, 2005 WL 331695

(U.S.Dist.Ct. E.D.Pa. Feb. 9, 2005)
In deciding a motion by an assignee of a lessor to dismiss certain counterclaims
and defenses of the lessee, while the court finds that it cannot determine the outcome
without an evidentiary record, it does have occasion to comment upon Article 2A’s
finance lease “hell or high water” provisions and Article 9’s waiver of defense
provisions. The court strongly endorses a number of examples of enforcement of “hell or
high water” provisions including one that notes how important such provisions are for the
leasing industry. However, the court also seems more hesitant to enforce such provisions
than the District Court in the BrooksAmerica case discussed above if the purported lease
turns out instead to create a security interest. The court also makes note of the criteria
given in Article 9 for an assignee to enforce a waiver of defense provision. It is
important to remember that while often having the same effect, these two different types
of provisions emanate from different parts of the UCC and may need to be distinguished.

Sony Financial Services, LLC v. Multi Video Group, Ltd., 2005 WL 91310 (U.S.Dist.Ct.
S.D.N.Y. Jan. 18, 2005), report and recommendation adopted by 2005 WL 309753
(U.S.Dist.Ct. S.D.N.Y. Feb. 9, 2005)
A lessor’s summary judgment motion is granted notwithstanding the lessee’s
claims that equipment and services to be provided by an affiliate of the lessor were not as
promised. The court cited language in the lease clearly distinguishing between the lessor
and the equipment vendor, and cited cases enforcing Article 2A finance leases in which
the lessor was an affiliate of the equipment vendor.

Eureka Broadband Corporation v. Wentworth Leasing Corporation, 400 F.3d 62 (1st Cir.
2005)
After entering into an Article 2A finance lease, the lessee discovered that the
lessor had never paid either of the two equipment vendors when the vendors began
demanding money from the lessee. After returning the equipment to the vendors (along
with the payment of some money), the lessee sued the lessor for rental payments made to
the lessor. The lessor counterclaimed that the “hell or high water” provision in the lease
and the finance lease provisions of Article 2A entitled it to continued payments under the
lease. This decision affirms the lower court’s awarding of damages to the lessee and

34
holds that fraud on the part of a lessor constitutes an exception to 2A-407, entitling a
lessee to cancel the lease.

Fillmore v. Leasecomm Corporation, 2004 WL 3091642 (Mass.Super. Nov. 15, 2004)

In determining that a purported lease was not unconscionable, the court
characterizes the agreement as a standard Article 2A finance lease arrangement
(notwithstanding that the subject matter of the agreement was a license for accessing an
internet payment gateway enabling merchants to process credit card transactions rather
than a transfer of a right to possess goods). The court notes that the lessor was acting as a
financing source only and was not responsible for failures on the part of the service
provider.

Copelco Capital, Inc. v. Johnson, 2004 WL 1559652 (Cal.App. 2 Dist. July 13, 2004)
(not officially published)
Summary judgment in favor of an assignee of a lease of a copier is upheld based
upon the “hell or high water” and waiver of defenses provisions found in the lease,
notwithstanding the failure of the original lessor to service the copier as required by the
lease. The court commented that the assignee had not sought to collect payment of
amounts due on the maintenance agreement, though it was not made clear whether or
how the lease distinguished between payments for maintenance and those strictly for the
use of the equipment.

Rhythm & Hues, Inc. v. The Terminal Marketing Company, Inc., 2004 WL 941908 (U.S.
Dist.Ct. S.D.N.Y. May 4, 2004); report and recommendation of U.S. Magistrate Judge
adopted, 2006 WL 800959 (U.S.Dist.Ct. S.D.N.Y. March 28, 2006)
Without any evidence of bad faith on the part of the assignee, Wells Fargo Bank
Minnesota, a summary judgment motion by such assignee on the enforceability of a
waiver of defenses clause in a lease is granted. At the same time, the court denies a
summary judgment motion by the lessee with respect to a different lease based in part on
an argument that the lessee’s obligations had not commenced because the lease indicated
no commencement date (the lessee having not challenged the commencement of other
leases also indicating no commencement date).

Jaz, Inc. v. Foley, 85 P.3d 1099 (Hawai’I Intrmed.Ct. App. 2004)

Notwithstanding its having signed an acceptance certificate in connection with a
“hell or high water” master lease, a lessee that never received the equipment is found not
to have become obligated to make all rental payments and not to bear the risk of loss
either under the terms of the lease or under Article 2A finance lease provisions.
Analyzing this transaction under leasing law (despite referring to the lessee as having
purchased or acquired the equipment under its lease with the lessor), the court
emphasizes that a lessee must have a reasonable time to inspect the equipment before
being said to have accepted it. The court points out that the lessor could have had the
lessee agree to be responsible for reimbursing the lessor in the event that the lessor was
required to pay the vendor before shipment and the equipment was not delivered. The
decision raises issues for lessors who rely on acceptance certificates without somehow
verifying delivery and the passage of a reasonable time to inspect.

35
Harte-Hanks Direct Marketing/Baltimore, Inc. v. Varilease Technology Finance Group,
Inc., 299 F.Supp.2d 505 (D. Md. 2004)
In the course of discussing a lessee’s obligation under a lease of printing
equipment that also provided for servicing of the equipment by the lessor, the court holds
that the enforceability of a “hell or high water” obligation to make lease payments is not
affected by the lessor’s failure to provide the services. The decision does, however,
permit the lessee to attempt to prove fraud in the inducement to enter into the lease, in
which case the lease would be voidable at the option of the lessee.

Wells Fargo Bank Minnesota, N.A. v. Nassau Broadcasting Partners, L.P., 2003 WL
22339299, 52 UCC Rep.Serv.2d 249 (S.D.N.Y. Oct. 10, 2003)
Lessee held to have unconditional obligation to make lease payments under “hell
or high water” provision in lease notwithstanding lessor’s failure to make all payments
owing to lessee under sale/leaseback arrangement – based upon finding that lessee had
agreed that its rent payment obligations commenced after disbursement of “any” (as
opposed to “all”) funds by lessor. In the context of discussing the validity of assignments
of the lease by the original lessor, dicta in the decision erroneously refer to a “hell and
high water” provision as “simply one variant of a waiver of defense and is subject to
U.C.C. Sec. 9-403.”

Unistar Leasing v. Lipkin, 2004 WL 2650825 (N.Y.App.Div. Nov. 19, 2004)

Unistar Leasing v. Betco, Inc., 2004 WL 2650771 (N.Y.App.Div. Nov. 19, 2004
Preferred Capital, Inc. v. Sturgil, 2004 WL 1882865 (OhioApp. 9 Dist. Aug. 25, 2004)
Information Leasing Corporation v. King, 800 N.E.2d 73, 155 Ohio App.3d 201 (Ohio
App. 2003)
Information Leasing Corporation v. Borda, 2003 WL 22103377 (OhioApp. 1 Dist. Sept.
12, 2003)
Information Leasing Corporation v. Chambers, 789 N.E.2d 1155, 152 Ohio App.3d 715
(OhioApp. 2003)
Information Leasing Corporation v. GDR Investments, Inc., 787 N.E.2d 652, 152 Ohio
App.3d 260 (OhioApp. 2003)
Series of cases upholding the “hell or high water” obligations of lessees (and their
guarantors) signing Article 2A finance leases. The lessees had ATM machines installed
on their business premises by Credit Card Center, a vendor of ATM services who offered
lease financing to lessees approved by the lessor. After the vendor filed bankruptcy, it
ceased servicing the ATM machines and the lessees ceased making payments under the
leases. These decisions held that the lessees remained liable under apparently well-
drafted leases – good unconditional payment language, thorough Article 2A finance lease
provisions, disclaimers of warranties regarding the equipment, statements that the lessor
was not responsible for the vendor’s acts -- notwithstanding lessee claims that the
vendor’s false promises were to be attributed to the lessor. However, certain of these
decisions also held that both common law and Article 2A require a lessor to minimize
damages – something the lessor had failed to do in some instances when it did not pick
up the machines after being notified that they were available.

36
True Lease versus Security Interest: In General

In re: Green Parts International, Inc. (Conserv Equipment Leasing, LLC v. Green Parts
International, Inc.), 2019 WL 3713691 (Bankr.N.D.Ga. August 6, 2019) *
After the lessee filed for bankruptcy, the lessor moved for relief from the
automatic stay so that it could repossess and sell its equipment. The lessee attempted to
argue that the agreement was not a true lease, but in fact a security agreement, and thus
the lessor should not be entitled to its requested relief. The lessee’s argument was
premised on a letter from the lessor, dated prior to entry into the lease, stating that the
lessee would be able to purchase the equipment at the end of the lease for a specific
amount that should be considered nominal – thus transforming the purported lease into a
secured transaction. The court, however, finds that the letter was not admissible
inasmuch as (i) the lease contained a provision that its stated terms – including a fair
market value purchase option – could not be altered except by a writing signed by both
parties and (ii) the parol evidence rule prohibits the use of pre-contract negotiations
within the scope of the contract. Without the ability to use the amount stated in such
letter, the lessee was unable to prove that the purchase option was nominal or that the
useful life of the equipment would not extend much beyond the lease term. The court
thus grants the lessor’s motion for relief from the automatic stay.

In re McQuaig (The Cardinal Group, LLC v. McQuaig), 2019 WL 1470891 (Bankr.

S.D.Ga. March 28, 2019)
The lessor argued that the lease of a rent-to-own portable barn was a true lease
and that the lessee in bankruptcy therefore must assume or reject the lease under 11
U.S.C. § 365. The main dispute was whether the word “term” in the lease meant a full 48
months or renewable one-month terms. The court holds in favor of the latter
interpretation, and since the lessee could terminate the lease and return the equipment
after any month without penalty, the court holds that the lease is a true lease under UCC §
1-203.

In re Johnson (Rental Access, LLC v. Johnson), 2018 WL 3005811 (Bankr.M.D.Ga. June

13, 2018)
A rental company made a motion for relief from the automatic stay almost a year
after confirmation of a Chapter 13 plan on the basis that its agreement with the debtor
was a true lease (of a portable storage shed). After holding that because the rental
company had received no notice of plan confirmation and therefore could make its
motion, the court holds that the agreement was a rental-purchase agreement under
Tennessee law, which prohibits the agreement from being characterized as a security
interest (also holding that the agreement would be considered a true lease under UCC 1-
203 because the lessee could discontinue the lease at any time). Because the
lessee/debtor had failed to timely assume the lease, the lease is deemed rejected and the
rental company is entitled to relief from the stay.

In re Clinton Nurseries, Inc., 2018 WL 2293554 (Bankr.D.Conn. May 17, 2018)

The lessor had entered into schedules under a master lease regarding various
equipment to be used by the debtor in bankruptcy – a nursery. Each schedule provided

37
that the lessee had a purchase option of $1 at the end of the lease term. Evidently
desiring that true leases be found, the lessor argued that the lease versus security interest
question should be evaluated as of the time a court is called upon to interpret the
agreement, rather than as of the time of its execution. As recognized by the court, this is
simply wrong – the evaluation is to be done as of the time of entry into the agreement.
The fact that the schedules contained $1 purchase options made easy the determination
that the agreements created security interests.

In re Lasting Impressions Landscape Contractors, Inc., 579 B.R. 43, Case No. 15-24433-
TJC chapter 11 (Bankr. D.Md. September 14, 2017)
The debtor in bankruptcy leased seven trucks from Ford Motor Credit to be used
in its business. After the debtor filed for bankruptcy, Ford brought motions for relief
from the automatic stay, which motions were opposed by the debtor which claimed that
the leases were actually secured transactions. After examining the lease provisions
regarding the parties’ obligations at the end of the lease, some of which the court finds
rather unclear, the court concludes that at lease expiration either (i) the lessee may retain
the vehicles by paying an “assumed residual” equal to ten percent of the original cost, or
(ii) the vehicles will be sold and either (a) any excess received over the assumed residual
(to be paid to the lessor) will be passed on to the lessee or (b) any deficiency will be paid
by the lessee to the lessor. Thus, in any case, the lessor will receive the assumed residual
and has neither an up-side potential nor down-side risk. Analyzing these facts, the
opinion runs through the statutory criteria and various concepts found in cases and
commentary. Two older Maryland cases are mentioned, but found not helpful in light of
the 1987 amendments to Article 1-203. The court finds the Brankle Brokerage &
Leasing case decided in 2008 (394 B.R. 906) – a case concerning a TRAC lease – most
persuasive in concluding that, with no up-side potential or down-side risk, the lessor has
created a security interest, rather than a true lease. Apparently, the court never considered
the relevant state TRAC statute.

VFS Leasing Co. v. Hudson, 2017 WL 5071338 (U.S.Dist.Ct. W.D.Texas. August 7,

2017)
In the course of defending against a summary judgment motion by the lessor of
equipment, the lessee argued that the lease was actually a secured transaction and that the
lessor had not disposed of the equipment in a commercially reasonable manner, as
required by Article 9. Employing UCC 1-203’s criteria for distinguishing a true lease
from a secured transaction, the court finds that the lessee provided no evidence regarding
the economic life of the equipment and that the lease did not require the lessee to renew
the lease or provide an option to renew for no or nominal additional consideration.
Pointing out that the lease contained a purchase option for close to $90,000, the court also
finds that such an amount does not satisfy the criteria regarding a purchase option of no
or nominal additional consideration. The lessee apparently did not raise the possibility
that even such a large amount of money could constitute a bargain purchase option that
might “economically compel” the lessee to exercise that option. Lastly, the court cites a
Fifth Circuit case indicating that a statement in the lease that the parties intended to treat
the lease as an Article 2A finance lease should be considered in determining true lease
status – at least in the absence of (i) evidence regarding the equipment’s economic life

38
and (ii) a nominal purchase option. The UCC and related Official Comments indicate,
however, that the stated intent of the parties should not be regarded as significant in
determining whether a lease is to be characterized as true or not.

In re: Jack, 579 B.R. 627, 2017 WL 3225977 (Bnkr.Ct. M.D.Fla. July 31, 2017)
The debtors in bankruptcy had entered into a lease for furniture and a tool bench
that qualified as a rental-purchase agreement under Florida law. Since Florida’s statutes
also state that a rental-purchase agreement is not to be construed as a security agreement,
this court holds that the agreement is a true lease that must be assumed or rejected under
Section 365 of the Bankruptcy Act – as argued by the lessor. Florida law defines a
rental-purchase agreement as an agreement for the use of personal property by a natural
person for personal or household use for a period of four months or less, that is
automatically renewed, and that permits the lessee to acquire ownership of the property.
Evidently the automatic renewal is not mandatory and the lessee always has the option of
ending the lease and returning the property after any given short term. Otherwise, the
agreement would become a longer-term agreement that might, under the usual law
distinguishing true leases from security agreements (i.e., apart from a state law, as in this
case, specifically stating that certain agreements are to be construed as true leases and not
security agreements), be classified as a security agreement.

Stanley v. Pawnee Leasing Corp., 2017 WL 2686294 (Ct.App.Indiana June 22,

2017)(unpublished disposition not to be regarded as precedent)
After defaulting under a lease, and receiving no notice of the sale of the leased
equipment by the lessor, the lessees appealed a judgment against them in the trial court,
contending that the lease instead created a security interest governed by Article 9, which
contains notice requirements that had not been followed by the lessor. After noting that
the lessees had cited outdated caselaw which indicated that the mutual intent of the
parties was controlling on this issue, the court rules against the lessees’ contention,
stating that the lessees had made no attempt to apply the current statutory provisions to
establish that the lease created a security interest.

Xerox Corporation v. Piranha Business Cards, LLC, 2017 WL 11367725, 2016 WL

5415849 (U.S.Dist.Ct. S.D.Mississippi January 17, 2017 *, September 28, 2016)
Analyzing whether the contracts in dispute were true leases or security
agreements, in the earlier decision the court applies New York law to determine, first,
whether the contracts satisfy the statutory “bright line” tests that would create a security
interest – in particular, whether the fair market value purchase option was “nominal.”
The court asks counsel to brief whether a fair market value option indicates that the
option was not nominal or whether such an option could still be considered nominal if
that amount would be less than the lessee’s predictable cost of performing at the end of
the lease. Since both conclusions can be derived from the statutory wording, this court
has indeed pointed out an ambiguity in the statute regarding what is nominal. The court
goes on to ask the parties to address whether, even if none of the bright line tests
(including the purchase option being nominal) are applicable, the law requires a further
contextual analysis to determine whether the lease creates a security interest (citing the
recently decided In re Ajax Integrated case summarized below). Finally, the court notes

39
that if the conclusion is that the transaction is a security agreement, the lessor’s argument
that the lessee waived certain rights in the lease would be untenable inasmuch as Article
9 states that certain rights (e.g., to notice of disposition and to a commercially reasonable
disposition of the equipment) may not be waived by the debtor. In the second decision,
after additional briefing from the parties, the court grants the lessor’s motion for
summary judgment and concludes that the lessee has not demonstrated that the leases
were in fact security agreements. The court questionably states that the seeming
contradiction within the statute regarding fair market value options being possibly both
nominal and not nominal should be resolved in favor of the latter interpretation, meaning
that a lease with a fair market value option does not satisfy the bright line test for creating
a security interest. The court does, however, decide that a contextual analysis is still
appropriate even if none of the bright line tests are not satisfied. Without much
explanation, the court agrees with the lessor that the lessor retained a meaningful
reversionary interest in the equipment and as a result the plaintiffs Article 9 defenses do
not apply. The court also decides that any non-Article 9 defenses were waived in the
agreements.

In re: Ajax Integrated, LLC (Fangio v. Vehifax Corporation), 554 B.R. 568, 2016 WL
4186598 (Bankr. N.D.N.Y. August 4, 2016)
This decision contains both a good analysis of what, under the facts of this case,
turns a purported lease of equipment by the lessee in bankruptcy into a security
agreement, and a puzzling suggestion regarding the ability of a buyer in the ordinary
course of business to escape the security interest of the assignee of its seller. The
equipment lease at issue, which was financed by the lessor via an apparently full recourse
loan from an assignee, contained a ten percent purchase option. Moving through the
requirements in the relevant New York statute, the court focuses on whether the purchase
option constituted “nominal additional consideration” so as to transform the lease into a
security agreement. While there was some evidence that the expected value of the
equipment at the end of the lease was a good deal more than the purchase option, the
court holds that there remained a genuine issue of material fact as to that possible
conclusion. However, the court finds sufficient evidence that the lessee’s reasonable
predictable cost of performing at lease end (for refurbishing and returning the equipment)
was high as compared with the purchase option so as to render the option “nominal”
under the statutory language. The court further states that if a reviewing court were to
find that analysis questionable, a “contextual analysis” of the “economic realities” of the
transaction would indicate the same result – inasmuch as the lessor had obligated itself to
pay the assignee the same amount as the ten percent purchase option (expecting,
evidently, that the lessee would exercise that option).
What is puzzling is that the court also grants the trustee in bankruptcy leave to argue that
the lessee/debtor in bankruptcy was a “buyer in the ordinary course of business” so as to
have purchased the equipment (inasmuch as the “lease” was actually a secured
installment sale) free of the security interest held by the assignee. While Article 1-
201(a)(9)’s definition of “buyer in ordinary course of business” does include the
possibility that the purchase may be for cash or on secured credit (such as this
lease/secured installment sale agreement) and while Article 9-320(a) states that a buyer in
ordinary course of business takes free of a security interest created by the buyer’s seller,

40
even if the buyer knows of the security interest, the lessee/buyer here actually created the
security interest itself that is being held by the seller’s assignee by virtue of taking
assignment of the transaction. While the debtor/lessee/buyer may be entitled to take the
equipment free of security interests granted by the lessor/seller to the lessor/seller’s
secured creditors generally, there should be no argument that it can set aside the security
interest in the equipment held by the assignee of the transaction (which the assignee had
perfected by a filing against the debtor/lessee/buyer). Even if the lessor/seller had
granted the assignee a security interest in the lease and equipment in order to secure its
(full recourse) payment obligations to the assignee, such a security interest in the
equipment would be meaningless inasmuch as the equipment was no longer owned by the
lessor at the time of the assignment. However, the assignee has a perfected security
interest in the equipment created by the debtor by virtue of being the holder of the
transaction – which should not be avoidable under any theory involving a buyer in
ordinary course.

BCL-Equipment Leasing LLC v. Tom Spensley Trucking, Inc., 2016 WL 3461603

(U.S.Dist.Ct. W.D.Wisc. June 21, 2016)
While not to the point of deciding whether a purported lease is a true lease or a
secured transaction, this opinion illustrates some important differences in enforcement
rights and obligations that depend upon the ultimate characterization. This case is a
replevin action arising out of an alleged breach of a purported lease. The defendant-
obligors’ counterclaims against the enforcement actions taken by the purported lessor
assert (correctly) that if the transaction is a secured transaction, they had rights such as a
right to redeem the collateral and the right not to have the peace breached when the
plaintiff attempted self-help to obtain the collateral.

In re: LaRita Jean Harris, 2016 WL 7732998 (Bankr.W.D.Mo. April 18, 2016)
A creditor in this bankruptcy proceeding attempted to argue that a rent-to-own
furniture agreement was a secured transaction, rather than a lease. Noting that a Missouri
statute dictated that a rental-purchase agreement was not generally to be construed as a
security interest, the court bases its decision on Article 1-203’s provision that if the
customer has the right to terminate the agreement (without penalty) before the scheduled
end of term, it cannot be considered as having created a security interest. The court so
rules despite the creditor’s argument that the financial realities of the transaction make
the agreement non-terminable because the debtor would not be able to recover the equity
in her investment in the furniture if she did terminate.

In re Hunt, 540 B.R.438 (Bankr.D.Idaho 2015)

Debtors in bankruptcy obtained financing from a friend to purchase a small
plumbing business, including various property related thereto. When the debtors
attempted to argue that the property was not property of the bankruptcy estate, but instead
was being leased under a (true) finance lease under Idaho law, the court concluded that
the agreement between the debtors and their friend was instead a disguised security
interest – since the agreement indicated that the debtors would own the property at the
end of the transaction (when they had completed all payments to their friend) for no
additional consideration.

41
In the matter of Wells (Wells v. American Financial, Inc.), 2015 WL 3862969
(Bankr.N.D.Ala. June 22, 2015)
The debtor in this bankruptcy claimed that its 91 month automobile lease with the
defendant finance company was not a true lease. The court agrees with the finance
company, finding that the purchase option in the lease of $3,445.05, representing about
20% of the original purchase price of $16,300, was not nominal, citing a Sixth Circuit
decision holding that a 10% purchase option was not nominal. In the course of so
concluding, the court states, “The Plaintiff, while arguing the payment option is nominal,
asserts that the buyout amount represents 38.8% of the value of the vehicle at buyout.
Whether the payment represents 20% or 38.8% of the vehicle’s original value, the Court
finds that the payment is not nominal using either calculation.” It is difficult to be sure,
but the court may be misunderstanding the plaintiff’s point. If the plaintiff was claiming
that the amount represented 38.8% of the vehicle’s value at the end of the lease – as
opposed to 38.8% of the vehicle’s original value – there may have been a good reason to
conclude that the lease was not a true lease inasmuch as that might have represented a
bargain purchase option (if such a bargain was determinable as of the inception of the
lease).

GEO Finance, LLC v. University Square 2751, LLC, 2015 WL 1637310 (U.S.Dist.Ct.
E.D.Mich April 13, 2015)
Amid a rather complex set of facts was the central question of whether the
agreement to finance a geothermal water supply system was a true lease or a security
interest. The court correctly notes that the fact that the equipment was fixtures does not
itself answer the question since the UCC permits fixtures to be the subject of a true lease
as well as of a security interest. While analyzing the status of the transaction under UCC
1-203, the court focuses especially on whether the agreement’s purchase option was
“nominal” (which would thereby convert the lease to a security interest) according to that
Section’s statement that “Additional consideration is nominal if it is less than the lessee’s
reasonably predictable cost of performing under the lease agreement if the option is not
exercised.” The court reasons that the large purchase option amounts were likely
substantially higher than lessee’s cost of performing during the original term of the lease,
and therefore had not been proven to be “nominal.” The court misses the point of this
Code provision, however, since the Code’s (perhaps not very clearly stated) point is to
compare the purchase option amount with the lessee’s cost of performing its end-of-lease
obligations. If such end-of-lease obligations are more expensive, then the lessee has a
clear incentive to exercise the purchase option and become the owner of the equipment
rather than expend a good deal of money to, for example, return the equipment (even if
that option is for a substantial amount of money – not the usual understanding of the
word “nominal”). The court concludes that the agreement was a true lease with the lessor
retaining a meaningful residual interest in the equipment. The court fails to inquire,
perhaps because the parties did not raise the issues, either (i) whether the lessee may have
been “economically compelled” to exercise the purchase option (for example, because the
leased equipment was difficult or impossible to identify, disassemble and return) or (ii)
whether the lessor may have been responsible for removing and returning the equipment

42
for a prohibitively expensive amount. In either of such cases, there would be a strong
argument that the lease was in fact a security interest.

In re Xchange Technology Group LLC, 2014 WL 7451973 (Bankr.D.Del. Dec. 30, 2014)
In the course of determining a lessor’s rights under a lease of computer equipment
to a lessee that had filed bankruptcy, this court engages in some very outmoded analysis
to determine whether the lease, governed by Minnesota law, was a true lease or a secured
financing. Holding that the lease was not a true lease, the court cites a 1990 Minnesota
decision which quotes at length from a 1988 edition of the White and Summers UCC
treatise. In addition to noting that the lease at issue contains a “relatively nominal” ten
percent purchase option, the court also points to factors such as (i) lease provisions
requiring the lessee to pay for taxes, insurance and maintenance on the equipment; (ii)
the fact that the lessor is a financier; and (iii) the fact that the lessee had selected the
equipment from a third-party vendor rather than from the lessor, as evidence that the
arrangement was a (secured) financing rather than a lease. It appears as if this court
ignores a good deal of the statutory provisions in effect since 1987 that make facts such
as the aforementioned lessee’s lease responsibilities irrelevant in determining whether a
transaction constitutes a true lease. Although the court may have arrived at the same
conclusion by employing the factors set forth in UCC 1-203 and more recent case law, it
is difficult to tell.

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

In a case in which the court concludes 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 makes 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).

In re Gutierrez (Gutierrez v. Popular Auto, Inc.), 2014 WL 3888277 (Bankr.D.Puerto

Rico Aug. 8, 2014)
The debtor/plaintiff in this bankruptcy proceeding had entered into a motor
vehicle lease for seventy-two months with an option to purchase the vehicle for $0.00
plus a charge of $150.00. After the plaintiff argued that this lease was in fact a security
interest, the vehicle lessor pointed to a provision in the lease stating that the lessee agreed
that the lease was a financial lease contract under Puerto Rico’s Act to Regulate Personal
Property Lease Contracts. Although the lessee attempted to argue that the later enacted
Puerto Rico Commercial Transactions Act (which adopted our UCC’s previous definition
of “security interest” in 1-201(37) that converted a lease with a nominal purchase option
into a security interest) repealed conflicting provisions of the Act to Regulate Personal

43
Property Lease Contracts, the court agreed with the lessor that the lease provision
amounted to a waiver of the lessee’s rights under the Commercial Transactions Act – and
therefore concluded that the lease must be treated as a true lease. Whether or not this is
an accurate statement of Puerto Rican law today, it is clearly a different outcome than
would be the case under the UCC in effect in all fifty of the United States, under which
the economics of an agreement calling itself a lease determines its legal status as opposed
to what the parties may state in such agreement.

In re Purdy (Sushine Heifers, LLC v. Citizens First Bank), 763 F.3d 513 (6th Cir. 2014)
This case involves a dispute between a lessor of dairy cows (to a dairy farmer)
and a bank holding a perfected purchase money security interest in the farmer’s livestock.
This decision reverses a District Court decision in favor of the bank. The court first finds
that the relevant “good” to be evaluated with respect to its remaining economic life is the
herd of cattle, not the individual cows. This leads to the conclusion that because the
economic life of the herd is far greater than the lease term, the bright line test that was
used by the lower court to conclude that the agreement created a security interest was not
in fact satisfied. Because this court also concludes that the bank did not carry its burden
of proving that the lease created a security interest for some other reason, the court
concludes that the leases should be regarded as true leases.

Delphi Automotive Systems, LLC v. Capital Community Economic/Industrial

Development Corporation, Inc., 2014 WL 2893398 (Ky. Sup. Ct. June 19, 2014)(not a
final opinion and not to be cited as authority in Kentucky courts)
In a dispute between a secured creditor and a purported lessor of equipment that
had taken no steps to perfect its interest as a precautionary measure, the Kentucky
Supreme Court affirms the holding of two lower courts that the lease in fact created a
security interest. This portion of the decision (there was also an analysis of whether the
transaction was subject to Article 9 at all) was simple inasmuch as the lease agreement
did not allow the lessee to terminate for the full term of the lease and the lessee was
bound to become the owner of the equipment for no additional consideration at the end of
the lease.

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 that these
leases were true leases, rather than secured transactions, in one brief paragraph. 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).

44
Canal Air, LLC v. McCardell, 2013 WL 4482965 (U.S.Dist.Ct. E.D.Mich. August 21,
2013)
This decision illustrates how a lack of analysis of the criteria for determining
whether a purported lease creates a security interest can have a substantial impact on
determining the rights of the parties. After the parties had entered into a sale/leaseback
transaction for an aircraft and the lessee defaulted, the lessor sought summary judgment
as to the lessee’s liability and amount of damages. The lessee alleged that Article 9
applied to the transaction and that the lessor had violated its obligations to provide notice
of sale and a commercially reasonable disposition of the aircraft. Without any analysis
employing the criteria found in Article 1, Section 203, of the UCC concerning the
distinction between true leases and secured transactions, this court concludes that New
York’s Article 2-A (the court oddly refers to this Article as both Article 2 and Article 2-
A) applied and that the lessee had waived its rights to notice and a commercially
reasonable disposition (rights that cannot be waived under Article 9). The court’s
determination rests primarily on the parties’ intent as evidenced by language in the lease
stating that the parties intended the lease to constitute both a true lease and a finance lease
under Article 2A. Thus the court awards summary judgment to the lessor without
considering either the statutory criteria or other concepts employed for years by courts
and commentators to adjudicate true lease/security interest questions.

In re Rodriguez, 2013 WL 1385665 (Bankr.S.D.Tex. April 3, 2013)

In this case, the lessor of two trucks to a lessee which subsequently filed
bankruptcy attempted to argue that its lease was a true lease. Holding that the lessee’s
end of lease purchase option of $6,600 was nominal insofar as that amount was less than
fifty percent of the estimated fair market value, the court finds that the lease instead
created a security interest as claimed by the bankrupt lessee. The court also notes that the
lessee had made a significant down payment to the truck vendor before the lessor and
lessee entered into the lease to finance the remaining portion. For some reason, the court
also attaches significance to the use of the word “funding” by the lessor with respect to
the transaction as if that word were indicative of a loan rather than a lease.

In re Waltman, 2012 WL 5828717 (Bankr.S.D.Ala. Nov. 16, 2012)

This case illustrates how certain types of state laws can be decisive in determining
whether a lease creates a security interest. The lessee/debtor in bankruptcy had entered
into rental purchase agreements with a lessor of portable storage buildings. The
agreements provided that the property was owned by the lessor and for a lease term of
one month, which the lessee could extend on a month to month basis by making monthly
payments in advance of the next monthly period. They also provided that the lessee
would acquire ownership of the goods after making thirty six monthly payments and
otherwise complying with the leases. Agreeing with the lessor that these agreements
should not be construed as security agreements (as contended by the lessee), the court
looks to a Tennessee statute governing rental purchase agreements which states that
rental purchase agreements are not to be construed as security interests as defined in
Tennessee’s UCC. The court points to decisions in other states with similar statutes
coming to similar conclusions, and concludes that the agreements should be treated as
executory contracts or unexpired leases under the Bankruptcy Code.

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In the Matter of Cherry, 2012 WL 3252231 (Bankr.N.D.Ala. August 7, 2012)
The lessor under an automobile lease attempted to receive true lease treatment in
the lessee’s bankruptcy by arguing that the lease gave the lessee the right to terminate
early. This court holds that because the lease provisions concerning early termination,
although ambiguous, included language that the lessee would be required to pay a
“substantial charge” which “may be up to several thousand dollars,” the lessee could not
effectively terminate her obligations under the lease. That finding, plus an end of term
purchase option of $650 which the court termed “nominal,” leads the court to conclude
that the lease created a security interest.

In re Miller Brothers Lumber Company, Inc., 2012 WL 1601316 (Bankr.M.D.N.C. May

8, 2012)
The threshold issue in this case of lease versus security interest was easily
resolved inasmuch as the lease contained a $1 purchase option. Illustrating that this
determination has important consequences, the court goes on to consider the fact that the
“lessor” – as a secured creditor rather than the owner of the equipment – had permitted a
financing statement to lapse after the “lessee” had filed for bankruptcy. Under revised
Article 9, a bankruptcy filing no longer tolls the amount of time before lapse as it had
under former Article 9. Because the “lessor” did not continue the filing during the
bankruptcy, it became unperfected with the consequence that its security interest could be
avoided under the Bankruptcy Code.

Brenner Financial, Inc. v. Cinemacar Leasing, 2012 WL 1448048 (N.J.Super.A.D. April

27, 2012)(unpublished opinion, check court rules before citing)
This is another case illustrating the different legal rights of various parties when a
purported lease in fact creates a security interest. This case involved the lease of a motor
vehicle containing a nominal purchase option of $106.05 – readily determined to be a
lease creating a security interest. After the consummation of a sale/leaseback transaction,
the lessor/secured party obtained a certificate of title in New Jersey with itself named as
owner and its financing source listed as lienholder. Shortly thereafter the lessee
fraudulently obtained a certificate of title in Michigan listing itself as owner with two
other parties listed as first and second lienholders. After determining that although the
lessor/secured party was not named as a lienholder on the NJ title, it had nevertheless
perfected its security interest (under the majority rule throughout the United States
holding that listing oneself as owner substantially complies with perfection
requirements), this appellate court reverses the holding of the trial court and finds that
this lessor/secured party’s interest had priority over the lienholders listed on the other
title. However, since the rights of the various parties are governed by Article 9 (not
Article 2A), the court remands to the trial court to apply the rules of Article 9 relating to
enforcement of a security interest to determine whether the repossession activity by the
lessor/secured party was done according to these rules designed to preserve the rights of
all parties involved.

46
VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio
August 5, 2011)
Following a default by the lessee, the lessor repossessed and sold the four trucks
being leased. In evaluating the lessee’s claim that the lessor was not entitled to a
deficiency judgment because the lessor had not complied with Article 9’s requirement of
commercial reasonability with regard to the sale, the court had to decide whether Article
9 applied at all – i.e., whether the lease created a security interest. Finding that the
purchase option of 8.84% of the equipment’s original cost was close to the parties’ stated
stipulated loss value at the end of the lease, the court concludes that the purchase option
did not constitute nominal additional consideration and that the lease was a true lease.

In re KY USA Energy, Inc., 449 B.R. 745 (Bankr.W.D.Ky. May 31, 2011)
Whether a lease of trucks created a security interest was a relatively simple issue
for this court inasmuch as the lease contained a $1 purchase option. Although the lessor
apparently admitted that the lease constituted a security interest, it also attempted to argue
that the lease was an executory contract for bankruptcy purposes. The basis for this
argument was that there were no certificates of title bearing the lessee’s name. The court
denies the lessor’s claim by pointing out that under Kentucky law a conditional lessee of
a motor vehicle is considered the owner and permitted to register the vehicle even if its
name is not on the title.

In re Warne, 2011 WL 1303425 (Bankr.D.Kan. April 4, 2011)

This court holds that a lease of a truck was a true lease, in large part because the
fixed price purchase option had been stipulated by the parties to represent the estimated
fair market value of the truck at the end of the lease term and thus did not constitute
nominal additional consideration. The lessee attempted to argue that its payment of a
security deposit at the outset of the lease equaling exactly the amount of the purchase
option turned this transaction into a security agreement, since the lessee could purchase
the truck for no additional consideration at the end of the lease if the lessor simply
retained the deposit. As the court observes, that argument ignores the function of a
security deposit and also does not lead to the conclusion that the lessee will buy the truck
at the end of the lease. The lessee could instead decide that its most sensible option
would be to return the truck and receive the return of its security deposit (assuming, of
course, that there was no lessee default).

In the matter of Del-Maur Farms, Inc., 2011 WL 2847709 (Bankr.D.Neb. July 14,
2011)(slip copy)
In evaluating whether a lessee’s end of lease options cause a lease to create a
security interest, this court mentions a variety of previous cases comparing the purchase
option price to the original price and to the total rental payments. Although the court
concludes its discussion by stating that a purchase option price equal to ten percent of the
original purchase price or nine percent of the total rental payments is “nominal additional
consideration” under the statute, the court appears in fact to rely primarily on an analysis
of whether the exercise of the option would be the only sensible alternative for the lessee.
Since a failure to exercise the option under the terms of this lease would require the
lessee to renew for an additional one year period and make payments aggregating more

47
than the option price along with the choice of either returning the equipment or paying
fair market value to purchase the equipment, the court holds that the lease creates a
security interest.

In re Turner, 2011 WL 2490600 (Bankr.W.D.Mo. June 22, 2011)

This very brief and simple case serves to demonstrate that if a lessee (in this case
of an automobile) has the right to terminate the lease and return the goods at any time
without penalty or further payment (the only requirement being to return the automobile
in its original condition, reasonable wear and tear excepted), the lease cannot be said to
create a security interest. A necessary condition listed in the statute for creating a
security interest is that the lessee’s obligation be for the full term of the lease and not be
subject to termination by the lessee.

Gibralter Financial Corp. v. Prestige Equipment Corp., 2011 WL 2493771 (Ind. June 21,
2011)
This decision by the Supreme Court of Indiana contains an excellent general
discussion of the law distinguishing true leases from security interests. The court
reverses decisions by lower courts that had granted summary judgment in favor of a
lessor against a secured creditor claiming that a purported lease in fact created a security
interest. Since the lessor had not filed a financing statement, if the lease was deemed to
be a secured transaction, repossession and sale of the equipment by the lessor following
the lessee’s default would have been subject to the secured creditor’s security interest.
Although the Supreme Court agrees with the lower courts that the secured creditor had
not been able to show that the provisions of an early buy out option constituted nominal
additional consideration (therefore not satisfying one of the “bright line” tests for creating
a security interest), this decision also notes that the burden of winning its summary
judgment motion and proving that the lease was a true lease was the lessor’s burden.
Even if no bright line test had been satisfied, since the lessor had not provided any
evidence that other “economic realities” did not serve to create a security interest, this
court refuses to affirm the lower courts’ grant of summary judgment in favor of the
lessor.

In re Kentuckiana Medical Center LLC (Kentuckiana Medical Center LLC v. The

Leasing Group Pool II, LLC), 2011 WL 1750769 (Bankr.S.D.Ind. May 6, 2011)
In granting a motion for summary judgment in favor of a debtor in bankruptcy
finding that three purported leases in fact created security interests, this court evaluates
lease end options giving the lessee either (i) a fair market value purchase option of not
less than ten percent of the lessor’s original cost for the equipment, (ii) a one month
renewal for a given amount after which title would be transferred to the lessee, or (iii) an
option to return the equipment along with a guaranty that the equipment could be sold by
the lessor for not less than ten percent of original cost (and paying all costs of return,
storage and sale by the lessor). Although the stated facts are less than totally clear,
apparently the one month renewal option would amount to the same payment to the lessor
as the purchase option with title being transferred to the lessee in both cases. Turning its
focus to the last option – for return – the court concludes that the costs to return under
such option would likely exceed the cost of purchase – thus making purchase the only

48
sensible choice for the lessee. The court cites In re Grubbs and concludes that the
economic realities of the situation call for a conclusion that the leases create security
interests.

In re Southeastern Materials, Inc., 2010 WL 2836360 (Bankr.M.D.N.C. July 15, 2010)

This case illustrates neatly some of the stark legal differences between true leases
and leases creating a security interest. The lessee had entered into two schedules with the
lessor under the same master lease – one with a $1 purchase option and one with a fair
market value purchase option. After finding that the former created a security interest,
the court holds that since the lessor had not perfected its security interest within the
twenty day period after delivery of the equipment, its priority was junior to a bank’s prior
filed lien. With regard to the latter, since no party contested that it constituted a true
lease, the court granted the lessor relief from the automatic stay and ordered that the lease
be rejected. The differences in rights and obligations of “lessor” financiers under both
the UCC and Bankruptcy Code cannot be overemphasized.

Gibralter Financial Corp. v. Prestige Equipment Corp., 925 N.E.2d 751 (Ind.App.2010)
(transfer granted, opinion vacated, IN RAP 58(A)(Ind. Oct. 29, 2010))
Eight months after an equipment user bought a punch press, it entered into a
sale/leaseback transaction with a lessor containing an early buyout option. After the user
defaulted on the lease, the lessor sold the equipment and later was sued by a secured
lender of the user for conversion. This appellate court upholds a lower court’s summary
judgment against the secured creditor. While finding that the EBO price was nearly 80%
of the equipment’s estimated value at the time that the EBO was to be exercised, the
court states that this can hardly be said to be nominal additional consideration and cites
the In re Gateway Ethanol court’s mention of the opinion of White & Summers that any
option price above 50% should not be considered nominal. The court also finds that the
cost of exercising the EBO was more than the cost to the user of finishing the lease and
returning the equipment – not satisfying one of the criteria for nominality found in the
statute. In addition, the court determines that the fact that the payments to be made
during the lease term provided the lessor with a full return on its investment is not
dispositive in favor of the secured party – citing the full payout lease as one of the factors
listed in the statute as not necessarily creating a secured interest. Finally, the court also
notes that the lack of a bill of sale or purchase agreement in connection with the
sale/leaseback was not an indication that the ownership of the equipment had not been
transferred to the lessor.

Cobra Capital, LLC v. Pomp's Services, Inc., 2010 WL 680947 (U.S.Dist.Ct. N.D.Ill.
Feb. 23, 2010)
This decision denies a defendant/lessee's motion for partial summary judgment
predicated in part on the claim that its lease with the plaintiff/lessor was a "disguised
sale" (i.e., a secured transaction). After briefly summarizing Illinois law by stating that a
purported lease will be recharacterized as a secured transaction if it satisfies one of two
tests (the "per se" test or the "economic realities" test), the court finds that there were
disputed issues of fact as to whether a $1 purchase option was intended (which would
satisfy one of the "per se" tests) and whether the lessor did not retain a meaningful

49
reversionary interest in the equipment at the end of the lease (which would satisfy the
economic realities test).

In re Uni Imaging Holdings, LLC, 2010 WL 148422 (Bankr.N.D.N.Y. Jan. 12, 2010)
In deciding whether the lessee in bankruptcy has met its burden of demonstrating
that a purported lease was actually a secured transaction, the court initially describes the
negotiation of rental amounts and a fixed-price purchase option in the context of the
parties’ intentions and expectations, and then examines the facts in light of the statutory
requirements and caselaw (including numerous citations to the In re Gateway Ethanol
case discussed below). Without always distinguishing clearly between two meanings
taken on by the term “nominal additional consideration” (one provided in the statutory
language itself – i.e., that the cost of the purchase option may be less than the cost of
completing the other requirements of the lease such as removing and returning the
equipment – and another discussed in various cases and commentary – i.e., a comparison
of the purchase option price with the expected value of the equipment at the end of the
lease to determine whether a bargain purchase price provides an economic compulsion on
the part of the lessee to exercise the option), the court discusses both meanings and
concludes that the lessee has not met its burden.

Park Western Financial Corporation v. Phoenix Equipment Company, Inc. (In re Phoenix
Equipment Company, Inc.), 2009 WL 3188684 (Bankr.D.Ariz. Sept. 30, 2009) (not for
publication – electronic docketing only)
In this memorandum decision, the court considers whether a number of leases of
trailers (originated through sales of the equipment by the lessee to the finance company
followed by leasebacks to the lessee) should be recharacterized as secured transactions.
The court seems to be at least somewhat influenced by the fact that these sale-leasebacks
were motivated by the lessee’s general financing needs and that the transactions were tied
together with cross-collateralization agreements. In its legal analysis, the court initially
finds that the lessee’s requested recharacterizaton cannot be based simply upon the fact
that all of the leases were subject to a “nominal” ten percent purchase option – since the
lessee had not presented enough valuation evidence to establish that such a purchase
option should be considered nominal – thereby automatically creating a secured
transaction. However, in continuing to review all the “facts of the case,” the court finds
that since the ten percent purchase option was applied to all leases – regardless of their
varying lengths and the differences in the values of the equipment at the outset of the
leases (i.e., bearing no relation to the anticipated fair market value of the equipment at the
end of the leases) – the leases should be considered secured transactions inasmuch as
both the lessor and lessee expected that the lessee would have no choice but to purchase
the equipment in order to stay in business.

Gangloff Industries, Inc. v. Generic Financing and Leasing Corporation, 2009 WL

1674976 (Ct.App.Ind. June 16, 2009)
This appellate court decision against a lessor of a truck reverses a lower court
decision. This decision first finds that the lease created a security interest based on a
version of the economic realities test – indicating that the only sensible course of action
would have been for the lessee to exercise its purchase option at the end of the lease. The

50
court cites a New York bankruptcy court decision collecting cases in which purchase
option prices ranging from 10% to 25% of the aggregate rental price were found to be
nominal. After finding that the lease created a security interest, the court concludes that
the appellant’s possessory lien for repairs and other services had priority over the lessor’s
lien – citing Section 9-333 of the UCC.

In re Gateway Ethanol, L.L.C., 415 B.R. 486 (Bankr.D.Kan. 2009)

The purchaser of certain equipment from a debtor in bankruptcy sought to have a
lease recharacterized as a security agreement inasmuch as such recharacterization would
mean that the purchaser was not required to make future payments owing under the lease.
In order to determine whether such purchaser met its burden of proof, the court focuses
much of its discussion on the amount of the fixed-price purchase option under the lease
and whether it amounts to “nominal additional consideration” under the Article 1
statutory language distinguishing between true leases and secured transactions. This
provision states that a purchase option will be considered nominal if the lessee’s
predictable cost of completing performance under the lease (without exercising the
option) would be greater than the cost of exercising the option. Since the purchaser was
unable to demonstrate that the cost to remove and return the equipment approached the
amount of the purchase option, it failed to prove the creation of a security interest under
this per se portion of the statutory criteria. The court goes on to consider other
arguments advanced by the purchaser that the lessor did not retain a meaningful residual
interest – a concept referenced in various cases and commentaries – and also rejects
them. For instance, the court compares the purchase option price to the anticipated value
of the equipment at the end of the lease and opines that it cannot conclude that such
purchase option was nominal. (In this connection, a footnote references the opinion of
White & Summers in their treatise that any option price above fifty percent of the
predicted fair market value at lease termination cannot be nominal.) After considering
other economic factors (as intended by the drafters of the statutory criteria for making the
true lease-security interest distinction), the court mentions that even if the parties’ intent
may have some relevance, all evidence was that the parties originally intended the
transaction to be a true lease.

In re Ecco Drilling Company, Ltd., 390 B.R. 221 (Bankr.E.D.Tex 2008)

This case provides an illustration of a potentially confusing mixture of one of the
elements of the statutory criteria for distinguishing true leases from security interests
found in Article 1 that itself leads to the conclusion that a security interest has been
created (the existence of a nominal purchase option in the lease) and a concept used to fill
in the statutory gaps (assessing the “economic realities” of the transaction). The lease
contained a purchase option of an amount equal to fifteen percent (15%) of the greater of
(i) the value of the equipment or (ii) sixty percent (60%) of the going concern value of
the lessee determined by a third party appraiser. The court cites other cases stating that
the term “nominal” can be used in a relative, rather than an absolute sense, to conclude
that sizable purchase options of even a million dollars can be nominal. The court’s
determination that the lease creates a security interest, however, focuses primarily on the
economic circumstances of the lessee and of the transaction when it concludes that the
lessee was highly unlikely simply to walk away from the drilling rigs that were the

51
subject of the lease without paying the option price to purchase them. According to the
court, those economic realities indicated that neither the lessor nor the lessee expected –
nor would anyone else expect – anything other than the lessee’s exercise of its purchase
option. Whether or not a purchase option amount qualifies as nominal, to the extent that
the lessee can be reasonably predicted to exhaust the economic value of the goods, the
transaction should be considered to create a security interest.

Automotive Leasing Specialists, L.L.C. v. Little, 2008 WL 2369145 (U.S.Dist.Ct.

W.D.La. June 10, 2008)
After the individual lessee under a motor vehicle lease agreement filed for
bankruptcy protection, she argued that the lease was not a true lease, but instead created a
security interest. After finding that the lease did not afford the lessee with the right to
terminate its obligations (with a questionable interpretation of the phrase “all other
amounts then due under this Lease” contained in the early termination provision) and that
the lessee had been given an option to purchase the vehicle at the end of the lease term
for $206, the court looked to Louisiana’s UCC provisions distinguishing leases from
security interests (the same as in the uniform version of the UCC in effect in most states)
and to cases in other jurisdictions (not finding any cases in either Louisiana or the Fifth
Circuit on point) to determine that this lease creates a security interest. While this
holding seems rather unremarkable in view of its interpretations of the lease provisions
and facts, the court notes that while it does not have to decide any other issue – such as
who owns the vehicle – at this time, there is a Louisiana statute that grants the lessor
under a “financed lease” creating a security interest “full legal and equitable title and
ownership” until a lessee has actually exercised a purchase option under such lease. The
ramifications of such a statute – contrary to what would be concluded under the laws of
other states – will evidently need to wait for another time.

Coonrod & Associates Construction Co. v. Davis, 2006 WL 3773235 (Kan.App.

December 22, 2006)(unpublished)
About one year after entering into a lease of a garbage truck (with a TRAC
provision not particularly relevant for the determination of issues in this case), the lessor
sent a letter to the lessee stating that the lessor would convey the truck to the lessee for no
additional compensation at the end of the lease if the lessee made all payments pursuant
to the terms of the lease. After the lessee had temporarily fallen behind in its payments,
though catching up shortly after the scheduled end of the lease term, the lessor sued for
return of the truck. The trial court held in favor of the lessor, finding that the letter was
unenforceable for failure of consideration and also that the lessee had defaulted under the
lease. This appellate court reverses, based on its findings that (i) the lease was originally
a lease governed by Article 2A, (ii) 2A-208(1) states that no consideration is required for
a modification of a lease to be binding, and (iii) the effect of the modifying letter was to
convert the lease into a security agreement. This conclusion apparently means that once
the conversion to a security agreement occurs, a subsequent default – even under the
specific terms of the modification – does not re-convert the transaction to a lease,
entitling the lessor to return of the equipment per the terms of the original lease.

52
In re Parker, 2006 WL 4114240 (Bankr.D.S.C. Sept. 14, 2006)
This court examines the application of UCC Section 1-201(37)’s definitional
distinction between a lease and a secured transaction to consumer rental purchase
agreements for furniture in order to determine the treatment of such agreements under a
Chapter 13 bankruptcy plan – i.e., to determine whether the agreements must be assumed
or rejected or treated as a secured claim. After concluding that the agreements do not
satisfy the “bright-line” criteria indicating a secured transaction – thus requiring a further
examination of the “facts of each case” – the court focuses on five factors, four of which
are already mentioned in the statutory language of 1-201(37), in concluding that the
agreements are true leases. The court rejects the debtors’ argument that because their
rental payments were disproportionately large compared to the value of the property, they
effectively did not have a meaningful right of termination. Instead of evaluating this
argument as a possible example of economic compulsion, the court employs the statute’s
indication of the neutrality of the full pay-out factor as a reason to reject the debtor’s
argument.

Perez v. Rent-A-Center, Inc., 186 N.J. 188, 892 A.2d 1255 (N.J. 2006)
Although this New Jersey Supreme Court decision does not discuss the distinction
between leases and security interests directly, it provides its own interesting perspective
on the treatment of “rent-to-own” contracts. It overturns rulings by both the trial and
appellate courts which had concluded that neither the New Jersey Retail Installment Sales
Act nor the state’s criminal usury statute is applicable to the contracts at issue – not
applicable (according to the lower courts) because the customers were not bound to make
all the payments which would entitle them to become the owners of the goods. In what
the lone dissenting opinion refers to as “a cobbled-together judicial cure for a perceived
but unsubstantiated ill,” the court highlights the intended protections for consumers who
often finance their purchase of household goods through rent-to-own contracts. There is
also some discussion of the history of the “time price doctrine” and the interrelationship
of interest rate provisions in New Jersey’s RISA and its criminal usury statute. (An
Appendix to the reversed appellate court decision lists statutes in other states, most of
which – unlike New Jersey and only two other states – have statutes explicitly regulating
rent-to-own contracts as a distinct transactional form.)

Freeway Auto Credit v. Bonner (In the matter of Bonner), 2006 WL 2092386
(Bankr.M.D.Ga. July 19, 2006)
In deciding that a lease of a used motor vehicle was a true lease, rather than a
security agreement, this bankruptcy court bases its conclusion in part upon testimony that
the vehicle had not been maintained well and was “on its last legs” – indicating that its
value at the end of the lease would be less than the purchase option price and concluding
that the purchase option was not nominal. Such an analysis is incorrect insofar as it relies
on an estimated value of the goods at lease end, which estimate is done during the course
of the lease instead of at lease inception. The testimony regarding the condition of the
vehicle also indicated that the vehicle had only one or two more years of remaining life.
Since the remaining lease term extended for a longer period, the same faulty analysis
should have resulted in a conclusion that the lease was actually a security agreement.

53
Both estimated remaining economic life and estimated value at lease end should be
determined as of the beginning of the lease.

Jackson v. State of Alabama, 2006 WL 825239 (Ala.Crim.App. March 24, 2006)

In deciding whether a defendant was guilty of theft of property, this criminal court
examines a rental agreement in light of Alabama’s UCC to determine whether (a) the
defendant sold property that was owned by the rental company, or (b) the property was
owned by the defendant with the rental company only retaining a security interest under
the rental agreement. After examining the UCC definition of “security interest” and
some Alabama cases, the court concludes that because the defendant was not obligated to
pay rentals for any particular period of time and could return the property without further
liability, the rental agreement was a true lease and the defendant was guilty of theft.

In re Allied Printing, Inc., 2005 WL 3947958 (Bankr.S.D.Fla. March 20, 2006)

In concluding that a lease of equipment is a true lease, this court carefully works
its way through the UCC’s definition of “security interest,” quotes the Official
Comment’s disavowal of the parties’ intent and of certain factors previously considered
indicative of ownership in the lessee (but also found in typical net (true) leases), and finds
that the lessor retained a meaningful reversionary interest in the equipment. In support of
its analysis, the court cites the UCC treatise written by White and Summers on the subject
of the general irrelevancy of the above-referenced factors. Although the court cites the
testimony of an expert witness for the lessor who indicated that costs of de-installing,
shipping and refurbishing of the equipment would be substantial, such fact was not
mentioned again during the court’s analysis of the true lease/security interest issue as a
potential economic compulsion for the lessee to buy the equipment.

WorldCom, Inc. v. General Electric Global Asset Management Services (In re

WorldCom, Inc.), 339 B.R. 56 (Bankr.S.D.N.Y. 2006)
In denying both parties’ opposing motions for summary judgment on the issue of
whether a lease of commercial telecommunications transmission equipment constituted a
true lease (argued by GE, the lessor) or a secured transaction (argued by WorldCom, the
lessee), the court does an exhaustive analysis of the statute, cases and commentary and
concludes that neither party was entitled to summary judgment. The decision highlights
the necessity of evaluating the various factors relevant to making a true lease/security
interest determination as of the inception of the lease, rather than at the end of the lease
term.

Ford Motor Credit Company, Inc. v. Racwell Construction, Inc., 808 N.Y.S.2d 294
(App.Div. 2005)
In this brief decision with sketchy facts and sketchy legal reasoning, the court
holds that a lease was actually a secured transaction based upon the nature of its remedies
after a default, citing a 1980 New York case. That earlier case, however, cites factors for
finding a secured transaction that would no longer be considered relevant under present-
day UCC criteria.

54
Coleman v. DaimlerChrysler Services of North America, Inc., 623 S.E.2d 189
(Ga.Ct.App. Nov. 14, 2005)
In vacating a trial court’s finding that Article 9 did not apply to a lease agreement,
the court focuses on the criteria for distinguishing leases from security interests discussed
in In re QDS Components, 292 B.R. 313 (which contains a lengthy discussion of cases
and commentary interpreting earlier and more recent versions of Article 1-201(37). The
court remands the dispute to the trial court inasmuch as neither the parties nor the trial
court addressed these criteria.

Cook Sales, Inc. v. Shores (In re Shores), 332 B.R. 31 (U.S.Dist.Ct. M.D.Fl. 2005)
Notwithstanding the fact that the lessee had the right to terminate the lease at any
time, the Bankruptcy Court in this district held that a lease was not a true lease because
the lessee had the option of purchasing the goods (a portable building) for no additional
consideration after paying rent for thirty-six months, at which time the goods were
expected to have a remaining useful economic life extending well into the future. The
District Court reverses on the ground that a lessee’s right to terminate at any time (i.e.,
where the lessee has no obligation to make rental payments for any period of time past
the latest rental period) strongly indicates that the lease is a true lease, along with the
equipment’s lengthy useful life and various requirements in the lease regarding protection
of the lessor’s interest in the equipment.

United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609 (7th Cir. 2005), rehearing
and rehearing en banc denied (Aug. 23, 2005), cert. denied, 126 S.Ct. 1465 (March 6,
2006)
The Seventh Circuit holds that a particular airport facilities lease entered into by
the airline debtor is a secured loan, and not a true lease, for purposes of federal
bankruptcy law. Although the subject matter of the lease was not personal property, the
court’s discussion of the extent to which state law concerning the distinction between true
leases and security interests controls federal bankruptcy law relating to that same subject
is instructive – and potentially threatening to the treatment of TRAC leases in
bankruptcy. According to the court, “A state law that identified a ‘lease’ in a formal
rather than a functional manner would conflict with the Code, because it would disrupt
the federal system of separating financial from economic distress…”

In re Bailey, 326 B.R. 156 (Bankr.W.D.Ark. 2005)

In determining whether a purported lease of two trucks was a true lease, the court
holds that the lessee had no other reasonable alternative than to exercise his purchase
option, which the court characterizes as “nominal.” Rather than finding nominality
simply as a result of the option price being substantially below the expected residual
value, the court appears to consider lost opportunity cost when considering whether the
facts fit the statute’s statement that “additional consideration is nominal if it is less than
the lessee’s reasonably predictable cost of performing under the lease agreement if the
option is not exercised.” The court also cites the Buehne case discussed below for the
proposition that certain factors – even those that are listed in the statute as not in
themselves implicating a security interest – are “signposts indicative of a sale.”

55
In the matter of Sanford, 2005 WL 629022 (Bankr.M.D.La. Jan. 31, 2005)
The lessee had entered into an equipment rental agreement providing for no
specific term, month-to-month rental payments, and a purchase option that would apply a
portion of the rental payments made toward the purchase price. Because the lease was
terminable at any time by the lessee, the court holds that the lease did not create a
security interest, denies the lessee’s claim that it had purchased the equipment and holds
that the lessor had terminated the lease before the lessee filed for bankruptcy and thus had
the right to recover the equipment.

In re Buehne Farms, Inc., 321 B.R. 239 (Bankr.S.D.Ill. 2005)

In deciding that a lease of cows was actually a disguised security agreement, the
court focuses on the “economic realities” of the transaction (in this case, the fact that no
reasonable lessee would fail to exercise the purchase option), but also includes some
confusing analysis such as identifying nominality of a purchase option price with the
economic realities test and, in dicta, citing other factors as pointing to the creation of a
security interest such as the lessee bearing the risk of loss and costs of insurance, upkeep
and taxes, which factors are listed in the statute as not in themselves implicating a
security interest. Although this lease contained a residual guaranty by the lessee similar
to TRAC provisions in motor vehicle leases, the decision does not discuss the economic
effect of such a provision.

In re Grubbs Construction Company, 319 B.R. 698 (Bankr.M.D.Florida 2005)

In the course of finding a number of purported leases (which, if true leases, would
have constituted executory contracts subject to termination prior to bankruptcy) to be
secured transactions, this court manages to invoke many different concepts employed in
other cases and in commentary for distinguishing between true leases and secured
transactions. With respect to four of the five leases, the court appears to rely heavily on
its determination that, given the particular terms of those lease schedules, the lessee had
little economic choice other than to purchase the equipment under an early buyout option.
With respect to the fifth lease, referred to as a TRAC lease, the court finds that the
economic substance was no different than a typical installment loan with a balloon
payment at the end. Evidently this TRAC lease did not involve motor vehicles (the type
of equipment was not identified), which likely would have necessitated consideration of a
state TRAC statute, inasmuch as the court’s discussion of perfection of the lessor’s
security interests involved only the filing of UCC financing statements, and not notation
of liens on certificates of title.

CIT Technology Financing Services, Inc. v. Tricycle Enterprises, Inc., 787 N.Y.S.2d 133
(App.Div. 2004)
A lease with a five-year term and a purchase option of “10% of Total Cash Price”
is held to be a true lease. The court first determined that “total cash price” should be read
to mean the total of all payments to be made over the five-year term of the lease (rather
than the price of the equipment at the beginning of the lease). Ten percent of that
aggregate amount equaled thirty percent of the anticipated remaining market value of the
equipment at the end of the lease term. Because the lease stated that it was governed by
Massachusetts law, the court determined that the lease was a true lease based upon a “rule

56
of thumb” employed by Massachusetts courts that a purchase option price greater than
twenty-five percent of market value at the end of the lease term should not be considered
“nominal” and thus not creating a security interest under Section 1-201(37).

Fifth Third Bank v. Roberts, 2004 WL 2785955 (Ohio App. 3 Dist. December 6, 2004)
In finding a purported lease to be a true lease, this court focuses both upon the
intent of the parties as evidenced by the wording and provisions of the lease document
(notwithstanding the Official Comment to the UCC definition of “security interest” in
which the focus of the definition was stated to have shifted from intent to economics) as
well as the economic fact that the purchase option amount was not nominal.

Lebron d/b/a Lebron Electronics v. Citicorp Vendor Finance, Inc. f/k/a Copelco Capital,
Inc., 2004 WL 1615837 (Tex.Ct.App. July 20, 2004)
Judgment in favor of a lessor is affirmed in which the lessee had unsuccessfully
argued that equipment leases were transactions creating security interests and were
usurious. The court applies what is sometimes referred to as a “bright line” version of
UCC Section 1-201(37) by stating that in order for a lease to create a security interest, the
transaction must not be subject to termination by the lessee and at least one of four
additional factors must be satisfied. After finding none of such four factors to apply in
this case, the court holds that the transactions are leases. This analysis contrasts with
decisions of other courts that have looked at other facts (sometimes referred to as
“economic realities”) in holding that a security interest has been created even when the
“bright line” test for true lease status has been passed.

In re Fleming Companies, Inc., 308 B.R. 693 (Bankr.D.Del. 2004)

Responding to a motion by a lessor for assumption or rejection of a lease, the
court holds that the purported lease creates a security interest under 1-201(37), primarily
because the equipment will have little or no value at the end of the lease term and also
because the economic realities were such that the lessor would have no incentive to take
the equipment back at the end of the lease term.

Legends Gym v. ABCO Leasing, 383 F.Supp.2d 911 (W.D.Texas 2004)

The lessee attempted to argue that it was not liable for failing to make payments
under a lease because the lease was actually a usurious loan – void and unenforceable.
The court holds that the transaction was a lease, rather than a secured loan, because the
lessee was not obligated to buy the equipment, the rental payments were not applied to
the purchase price, and the purchase option price was fair market value, which the court
says, “by definition, is not nominal.” The decision does not touch on other issues (which
may not have been raised by the parties), such as the economic life of the equipment, that
might bear on true lease status.

Sankey v. ABCO Leasing, Inc. (In re Sankey), 307 B.R. 674 (D. Alaska 2004)
An interesting discussion of the factors to be employed in determining whether a
purported lease is true or not. After quoting from White & Summers regarding the need
in some cases to look beyond the “per se” or “bright line” tests for creation of a security
interest in order to determine whether a transaction provides the lessor with a meaningful

57
reversionary interest – and is therefore a true lease – the court expresses what it believes
should be the basic test: “If the lease terms provide that at the end of the lease the lessor
will receive either return of the leased goods or the reasonably predicted fair market value
the goods will have at the time the option is to be performed, the lessor has retained a
meaningful reversionary interest.”

Duke Energy Royal, LLC v. Pillowtex Corporation (In re Pillowtex, Inc.), 349 F.3d 711
(3rd Cir. 2003)
Application of 1-201(37) to a services agreement providing for the use of
equipment by Pillowtex with rather unusual end-of-term provisions giving the lessor a
number of options with regard to that equipment. In deciding that the agreement was not
a true lease, but instead created a security interest, the court emphasizes a factor
enunciated in an prior bankruptcy case as evidence of non-true lease status – the present
value of the scheduled lease payments being greater than the cost of the leased property
(i.e., a full-pay-out lease). Since the cited case, this factor has been explicitly enumerated
in the latest version of 1-201(37) as a factor that does not in and of itself create a security
interest – a point that goes unnoticed in this decision. The same result could have been
justified instead by relying on the economic reality that the lessor would never have
undertaken the expense of removing the equipment.

In re QDS Components, Inc., 292 B.R. 313 (Bankr.S.D.Ohio 2002)

While holding against a party claiming that leases were disguised security
agreements, this decision includes a lengthy discussion of past and present versions of 1-
201(37) and of cases and commentary interpreting them. Consistent with certain cases
and commentary, the court comments that present 1-201(37) falls short in defining when
a lessor retains a “meaningful reversionary interest.”

Chance Industries, Inc. v. TCF Leasing, Inc. (In re Chance Industries, Inc.), 2002 WL
32653678 (Bankr.D.Kan. March 29, 2002)
Four lease agreements are held to secured transactions under Section 1-201(37).
After finding an early termination right (at month twelve in a thirty-six month term) to be
economically harsh – rendering the agreement effectively not subject to termination by
the lessee for thirty six months and thus satisfying one aspect of the circumstances
deemed to create a security interest – the court examined the purchase options at the
thirty-sixth month and found that they could be exercised for “nominal additional
consideration,” which completed the description of one of the security-interest-creating
circumstances in the UCC’s definition of “security interest.” The decision relies on a
variety of factors in determining what is “nominal,” including a comparison of the
purchase option prices with both the original purchase price of the equipment and the
total lease payments during the initial term. In addition – and perhaps most important of
all – the court recites that portion of 1-201(37) stating, “Additional consideration is
nominal if it is less than the lessee’s reasonably predicable cost of performing under the
lease agreement if the option is not exercised.” Each of the four leases at issue required
the lessee to renew the lease for twelve more months for an aggregate rental of more than
the option price if the lessee did not exercise the option.

58
Dieck v. Unified School District of Antigo, Langlade, Marathon and Shawano Counties,
Wisconsin, 458 N.W.2d 565 (Wis.App. 1990)
While not decided under the UCC, this case involving a real property lease raises
the same issues that could be raised under a municipal lease of equipment – does the fact
that a municipality has the right to terminate a lease under the lease’s non-appropriation
clause mean that the lease must be characterized as a true lease as opposed to the creation
of indebtedness along with the grant of a security interest. In this case, a school district
entered into a twenty year lease of a school building with a $10 purchase option at the
end of that twenty year term. This decision holds that the district’s non-appropriation
right means that the lease could be terminated at any time and thus should be considered
a true lease as opposed to indebtedness requiring taxpayer approval. Apart from the non-
appropriation right, it seems fairly clear that the transaction would otherwise be fairly
characterized as the creation of indebtedness. If the same transaction involved the lease
of equipment with a $10 purchase option, apart from the non-appropriation right, the
lease would definitely be characterized under the UCC as a lease creating a security
interest.

True Lease versus Security Interest: TRAC Leases and TRAC Statutes

Kenworth Sales Company v. Skinner Trucking, Inc., 2019 WL 6721194 (Idaho Supreme
Court December 11, 2019) *
Although this case involving a TRAC lease does not raise the true lease/security
interest issue, it merits mention as an interesting, if somewhat odd, set of circumstances
regarding TRAC leases. After a commercial truck dealer sold three trucks to a finance
company for lease to one of its customers – on a typical TRAC lease setting forth a
residual value for each truck and a provision that if the trucks are returned to the lessor at
lease end they will be sold, with any deficit from the residual owing by the lessee and any
surplus payable to the lessee – the customer returned the trucks to the dealer at lease end
(as was the customer’s practice, notwithstanding the lease provision stating that the return
location was to be stipulated by the finance company). For some reason not made very
clear other than the lessee being a “good customer” of the dealer, the dealer estimated the
worth of the trucks as less than the residual stated in the lease, paid the finance company
the total residual value as well as a past due amount on one truck, and then brought suit
against the lessee on an unjust enrichment claim for the deficit amount (i.e., the residual
value minus the estimated worth of the trucks) and past due rent. Because the lessee had
not asked the dealer to pay the lessor, the court denies the dealer’s request based on its
conclusion that the dealer had acted as an “officious intermeddler.”

In re Royal T Energy, LLC (Royal T Energy v. ENGS Commercial Finance Co.), 2019
WL 267783 (Bankr. E.D. Texas January 18, 2019)
After entering into a lease for a truck, the lessee filed for bankruptcy and sought a
determination that the lease was actually a financing transaction rather than a true lease.
The lease contained a standard TRAC provision providing that if the lessee did not
purchase the equipment at the end of the lease for a stated estimated fair market value,
the equipment would be sold and the lessee would receive the excess, if any, over that

59
estimate and would pay the lessor the deficit, if any, under that estimate. For some
reason the court does not mention the relevant state TRAC statute, but instead analyzes
the issue under UCC 1-203. Finding no per se creation of a security interest, the court
rejects the lessee’s attempt to argue “economic realities” and holds that the TRAC rider’s
function is to motivate the lessee to maintain the equipment as required and that the lease
is a true lease. This reasoning runs counter to the majority of cases decided before the
enactment of state TRAC statutes that reasoned that such a TRAC structure amounted to
a secured loan with a balloon payment owing to the lessor at the end of the lease.

In re Lasting Impressions Landscape Contractors, Inc., 579 B.R. 43, Case No. 15-24433-
TJC chapter 11 (Bankr. D.Md. September 14, 2017)
[See summary in True Lease versus Security Interest: In General section above]

In re Lightning Bolt Leasing, LLC, Case No. m3:15-bk-05173-JAF (Bankr.M.D.Fla.

May 25, 2016)
At issue in this bankruptcy proceeding is whether a lease of two trucks should be
treated as a true lease or a security agreement. The lease was apparently a standard
TRAC lease setting forth “TRAC values” for each truck. At the end of the lease term, if
a truck was sold for more than its TRAC value, the surplus was to be paid to the lessee,
and if the sale was for less than its TRAC value, the deficit was to be paid to the lessor by
the lessee. Under the UCC’s test for creation of a security interest, the court finds that
none of the per se security-interest-creating conditions had been satisfied. Nevertheless,
the court holds that the lease was actually a security agreement when considering the
economics of the transaction – the TRAC provision placed all of the upside potential and
downside risk on the lessee resulting in the lessor being divested of any real residual
interest. When the lessor pointed out that an applicable Illinois statute provided that “a
transaction does not create a sale or security agreement merely because it provides that
the rental price is permitted or required to be adjusted under the agreement either upward
or downward by reference to the amount realized upon the sale or other disposition of the
motor vehicle or trailer” (fairly standard language in so-called TRAC statutes in most
states), the court brushes that off by stating that “shifting the entire risk of ownership, as
opposed to a certain adjustment [e.g., for wear and tear on the vehicle], as is the case
here, is not within the protection of the statute.” This reasoning, while perhaps valid with
regard to the economics of the transaction alone, disregards the point of the TRAC statute
– i.e., that the effect of the TRAC clause should be ignored when applying the UCC’s
statutory tests for creating a security interest. If the court felt that federal bankruptcy law
somehow pre-empts the state TRAC statute, it did not explicitly say so.

In the Matter of HB Logistics, LLC, 2011 WL 4625198 (Bankr.N.D.Ala. Sept. 29, 2011)
In this bankruptcy case, four different lessors sought to have their TRAC leases
(three of which seem to have contained standard TRAC provisions, with the fourth
possibly containing a “split” TRAC provision under which the lessor assumes some of
the risk) declared to be true leases entitled to the appropriate protection under the
Bankruptcy Code. These leases were governed by the laws of four different states, and
the court references TRAC statutes enacted in three of these states – Alabama, Texas and
Minnesota. With respect to the fourth state, the court indicates that the lessor did not

60
argue that Mississippi law had passed a TRAC statute similar to the other states, and the
court does not itself cite such a statute (Mississippi did in fact enact such a statute in 1994
– apparently still in effect). Nevertheless, the court holds that the TRAC lease governed
by Mississippi law is a true lease under the Mississippi UCC. The court appears to feel
generally that TRAC leases do not give the lessees “any equity” in the equipment and
should be considered true leases based on the “economic realities.”

In re Lash, 2010 WL 5141760 (Bankr.M.D.N.C. Dec. 9, 2010)(slip copy)

In connection with various motions in bankruptcy proceedings of a lessee of a
truck, the court decides that a lease with a standard TRAC provision created a security
interest. The lease provided that it was governed by Utah law. Indicating that Utah
courts have interpreted UCC 1-203 consistently with the majority of courts in other
jurisdictions, this court finds it appropriate to look to cases from other jurisdictions to
help decide the issue at hand. Although the lessee argued that the TRAC amount was
nominal additional consideration (thus satisfying the “bright-line” test for creating a
security interest), the court finds that since there was no evidence presented regarding
either the present or projected value of the truck, the court would not be able to come to a
conclusion regarding nominality and must instead consider the economic realities of the
transaction. In doing so the court finds the reasoning of a Florida bankruptcy court
decision, In re Grubbs Construction Company (also mentioned in the Hitchin Post case
below), convincing – i.e., that the TRAC lease closely resembles a loan with a balloon
payment at the end and that the lessor, which could realize neither upside nor downside
from the sale of the truck at the end of the lease, had no meaningful reversionary interest
in the truck. Overlooked by this decision is the existence in Utah of a TRAC statute in
the state’s motor vehicle code stating the motor vehicle lease agreements with terminal
rental adjustment clauses do not create a security interest.

Hitchin Post Steak Co. v. General Electric Capital Corporation (In re HP Distribution,
LLP.), 2010 WL 3699240 (Bankr.D.Kan. September 3, 2010)
The court grants the lessor’s motion for summary judgment (and denies lessee’s
motion) requiring the lessee to assume or reject leases after deciding that the leases --
TRAC leases of truck tractors and trailers -- were true leases. After a discussion of
Article 1’s distinction between true leases and secured transactions and references to
cases and commentary which have supplied concepts to aid in making the distinction, the
court acknowledges disagreements regarding the status of TRAC leases. While
mentioning the existence of a so-called TRAC-neutral statute in the state law governing
the transaction, the court states that such a statute should not alone drive the analysis and
apparently agrees with those who found TRAC leases to be true leases even in the
absences of such TRAC statutes. The court spends some time attempting (arguably
unsuccessfully) to distinguish a TRAC-like lease discussed in In re Grubbs Construction
Company, 319 B.R. 698 (Bankr.M.D.Fla. 2005) in which that court characterized the
TRAC provision as economically equivalent to a balloon payment at the end of a loan
transaction. Apart from the existence of a TRAC statute requiring that the TRAC
provision not be determinative of the creation of a security interest, one must wonder
how a transaction in which the lessor has neither upside potential nor downside risk with
respect to potential changes in value caused only by market conditions can be

61
characterized as one in which the lessor maintains a meaningful residual interest or
entrepreneurial stake in the equipment being leased.

In re Double G Trucking of The Arklatex, Inc., 432 B.R. 789 (Bankr.W.D.Ark. 2010)
In considering a lessor’s motion requiring the lessee in bankruptcy to assume or
reject leases of three motor vehicles containing a typical TRAC provision, the court finds
that the lessee was unable to carry its burden of proving that the lease was in fact a
secured transaction. After acknowledging a split of authority concerning the status of
TRAC leases, the court relies most heavily on the addition to Arkansas’s UCC of a
TRAC statute provision stating that a security interest is not created merely because the
lease contains a TRAC clause. Since the lessee had been unable otherwise to prove that
the lessor did not retain a reversionary interest or that the lessee had acquired equity in
the goods, the court grants the lessor’s motion.

In re Brankle Brokerage & Leasing, Inc. (Brankle Brokerage & Leasing, Inc. v. Volvo
Financial Services), 394 B.R. 906, 2008 WL 4470061 (Bankr.N.D.Ind. Sept. 18, 2008)
Applying the choice of law provision in the lease – calling for North Carolina law
– this bankruptcy court finds a way around a statute that apparently was intended to
safeguard the true lease status of TRAC leases. In North Carolina’s Article 2A, “lease” is
defined to include a motor vehicle operating agreement that is considered a lease under
Section 7701(h) of the Internal Revenue Code (regarding TRAC leases). However, the
court states that this does not resolve the issue in itself and goes on to consider the
provisions of Article 1 distinguishing a true lease from a security interest. It then applies
the same kind of analysis found in many early (i.e., prior to the adoption of TRAC lease
statutes in nearly all states) TRAC lease cases to find that since the lessee has all of the
down-side risk and up-side potential (and thus the lessor has no meaningful residual
interest), the transaction is actually a security agreement. The court does indicate that if
North Carolina had enacted the same kind of TRAC statute found in a few other states –
i.e., by amending Article 1’s true lease/security interest distinction instead of amending
the definition of “lease” in Article 2A – this decision would have gone the other way.
The court does not indicate how it would rule in the face of the most common form of
TRAC statute – found in a State’s motor vehicle code and stating that its provisions
regarding TRAC leases not creating security interests are “notwithstanding any other law
to the contrary.”

Zions Credit Corporation v. Rebel Rents, Inc. and Perry Valley Rentals, Inc. (In re Rebel
Rents, Inc.), 291 B.R. 520 (Bankr.C.D.California 2003)
Lease transaction containing a TRAC provision and also a repurchase agreement
from the truck dealer, each providing for an anticipated residual value to be paid to the
lessor, held to constitute a true lease under 1-201(37).

Morris v. Dealers Leasing, Inc. (In re Beckham), 275 B.R. 598 (D.Kansas 2002); aff’d In
re Beckham, 52 Fed. Appx. 119, 2002 WL 31732497 (10th Cir. Dec. 6, 2002)
TRAC lease held not to constitute a security agreement inasmuch as (i) the lessee
was not obligated or compelled to purchase the vehicles (e.g., under a “no lessee in its
right mind test” where the lessee has no rational economic alternative but to purchase the

62
goods); (ii) a TRAC clause provides an incentive to maintain vehicles in good condition;
and (iii) a Kansas TRAC amendment to Article 2A (K.S.A. Sec. 84-2a-110) providing
that TRAC clauses do not themselves create security interests itself was meant to clarify
existing law.

Morris v. U.S. Bancorp Leasing and Financial (In re Charles), 278 B.R. 216 (Bankr.D.
Kansas 2002)
Fairly thorough parsing of factors expressed in 1-201(37) in holding that a TRAC
lease does not create a security interest [disagreeing with In re Zerkle, 132 B.R. 316
(Bankr.S.D.W.Va. 1991), which held that TRAC leases create an option to purchase for
no additional consideration], then further holding that Kansas’ TRAC statute hobbles any
argument that TRAC leases are secured transactions.

In re Damron, 275 B.R. 266 (Bankr.E.D.Tenn. 2002)

TRAC lease held not to constitute a security interest under 1-201(37). The TRAC
rider stated that the estimated residual value was a reasonable current estimate of fair
market value and the court found that value to be a reasonable figure designed to
encourage maintenance of the vehicles. No mention was made of Tennessee’s 47-2A-
110, a TRAC amendment similar to that in Kansas mentioned in the two cases discussed
immediately above.

Lessors’ Damages – Measures and Entitlement

De Lage Landen Financial Services, Inc. v. Universal Wilde, Inc., 2019 WL 4195441
(U.S.Dist.Ct. S.D.N.Y. August 15, 2019) *
After the lessee had entered into various lease agreements with the original lessor,
which were subsequently assigned to DLL, the lessee ceased making payments under all
such leases. DLL then obtained a default judgment, and in this decision the magistrate
judge recommends that the District Court award damages – in a principal amount
designed to put the plaintiff in the same economic position it would have been if the
lessee had fulfilled its contractual obligations – plus prejudgment interest at the requested
rate of 18% per annum, which amount has typically been awarded in connection with
default judgments in this circuit (being less than the 25% limit in the New York criminal
usury statute and insofar as the New York civil usury limit of 16% is not applicable to
corporations).

The Huntington National Bank v. Bristow U.S. LLC, 2019 WL 1004218 (U.S.Dist.Ct.
S.D.N.Y. March 1, 2019)
After the expiration of a lease of a helicopter, the lessor and lessee filed summary
judgment claims against each other – the lessor claiming that the lessee had not complied
with the terms of the lease concerning enrolling the helicopter’s engines in an engine
maintenance program and the lessee claiming that the lessor had acted in bad faith
regarding instructions for return of the helicopter. The courts denies both sets of motions
for summary judgment (except deciding against the lessee’s claim of unjust enrichment
on the part of the lessor), finding that the terms of the lease were not entirely clear

63
concerning exactly how the lessee was to fulfill its obligation and suggesting that there
were issues of fact to be resolved regarding, among other things, the lessor’s dragging its
feet regarding return since its market for selling the helicopter had become saturated.

In re: Republic Airways Holdings Inc., 2019 WL 630336 (Bankr. S.D.N.Y. Feb. 14,
2019)
After the lessee of several aircraft filed for bankruptcy, a summary judgment
motion was made by the lessee asking this court to evaluate whether the liquidated
damages provisions in the leases are enforceable, and if not, whether the guarantor was
nevertheless liable to pay based on such liquidated damages provisions under its absolute
and unconditional guaranty (the lessee had rejected the leases and returned the planes to
the lessor). The leases provided the lessor with a choice of three methods to calculate the
liquidated damages (this decision initially, and apparently mistakenly, refers to this
choice as the lessee’s choice) that involved a stipulated loss value table. The court cites
testimony that the SLV numbers represented a month-by-month calculation of the
amount necessary to provide the lessor with a return of four percent on its initial
investment in the aircraft (assuming previously scheduled monthly payments had been
made). The court holds that these liquidated damages clauses are not enforceable under
Article 2A insofar as they serve to transfer market risk to the lessee, rather than reflecting
the actual damages to the lessor at the time of default – one example being that if the
default occurred one month before the end of the term and the market value of the aircraft
had dropped significantly, the lessee would bear the risk of such a decline in market
value, which would have been suffered by the lessor had no default occurred at all. The
court summarizes the lessor’s arguments for relying on stipulated loss values as
liquidated damages, which arguments cite Official Comments to 2A-504 (Liquidation of
Damages), the status of the leases as finance leases under Article 2A, and previous
judicial decisions, as well as the lessor’s argument that the lessee was sophisticated
enough to understand and accept the risk it was undertaking. But the court emphasizes
instead the statutory language that the formula must be “reasonable in light of the then
anticipated harm caused by the default,” and states that transfer of market risk to the
lessee is not reasonable. With respect to the other issue, the court disagrees with case law
cited by the lessor and holds that liquidated damages which are not enforceable under the
leases also cannot be recovered under an unconditional guaranty because to allow such
recovery would likewise violate public policy. (This matter was settled and the issues
were thus not appealed to a higher court.)

Central Transport, LLC v. Balram Trucking, LTD, 2018 WL 3995658 (U.S.Ct.App. 6th
Cir. August 20, 2018)
Negligence on the part of the defendant was the indisputable cause of destruction
of a truck and trailer being leased by the plaintiff under a lease from a lessor. This court
affirms the holding of a District Court applying Indiana law that the lessee, which was
responsible for all damage under its lease, could recover from the defendant pursuant to
the equitable doctrine of subrogation.

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Bank of the West v. Prince, 2018 WL 3868796, 2745911 (U.S.Dist.Ct. W.D.La. August
14, 2018, June 7, 2018)
These two cases involve the appropriate remedies to be enforced by the court
under a lease that both parties conceded to be governed by the Louisiana Lease of
Movables Act. The lessor argued that such act allows for the recovery of the leased
property as well as liquidated damages (the remaining lease payments discounted to
present value at 2% per annum, as set forth in the lease). The court, however, holds that
the remedies set forth in the act are not cumulative; and that liquidated damages are only
to be rewarded if they are reasonable. Inasmuch as material facts regarding the amount
and reasonableness of the liquidated damages still, according to the court in its first
decision, needed to be resolved, the court held that an additional hearing would be
required – which was the subject of the second decision. Although Article 2A was
apparently not applicable in this case, certain of its most basic principles appear similar to
the court’s analysis of Louisiana law.

AGCO Finance, LLC v. Littrell, 2017 WL 7369877 (U.S.Dist.Ct. D.Minn. December 15,
2017)
The assignee of a lease of a tractor (as well as of a contract for the sale of other
farm equipment) sought a default judgment on both liability and damages after the lessee
had failed to make payments. Following a detailed discussion of what is required for
obtaining such a judgment under federal law, the court grants the assignee’s motion. The
court notes that the assignee would not be entitled to its earlier request for both the
present value of the remaining lease payments and repossession of the tractor, which
would result in a windfall for the assignee. After the assignee withdrew its request
regarding future lease payments and instead asked for only payments for the time period
prior to repossession, the court grants the default judgment.

Quality Equipment Leasing, LLC v. Alabama Logistics, LLC, 2017 WL 4304626

(U.S.Dist.Ct. N.D.Alabama September 28, 2017)
After the lessee defaulted on four lease agreements for trucks and trailers and a
landlord of the lessee had moved some of this equipment, the lessor sued - requesting
both actual and liquidated damages. The court’s discussion of liquidated damages is a
bit confusing. It rejects the lessor’s claim for liquidated damages as duplicative of its
claim for actual damages, but also awards the lessor as actual damages the acceleration of
rentals due after the leases were terminated by the lessor without any present valuing of
such damages. The court also seems to interpret the liquidated damages claim as calling
for the acceleration of all payments for the entire life of the lease – a very large amount
that the court understandably rejects as a penalty. As to one trailer that was not returned,
the court awards the lessor the amount of its fair market value at the time of termination
(plus interest at 6% per annum).

In re: Tidewater, Inc., Case 17-11132-BLS Doc 497 (Bankr.D.Del. August 30, 2017)
This is the transcript of a hearing in bankruptcy court which includes arguments
by counsel for the debtors-in-bankruptcy/lessees and a creditor/lessor regarding the
enforceability of a stipulated loss value provision in lease documents. The lessees were a
group of affiliated companies which had entered into sale-leaseback transactions for

65
leases of vessels, which obligations were all guarantied by Tidewater, Inc.
Notwithstanding arguments by the creditor that previous caselaw had been altered by
Article 2A-504 (supporting SLV remedies) and that the SLV remedy in the leases at issue
actually resulted in damages that were lower than the actual damages, the court holds that
prior case law was still good law and that the SLV was an unenforceable penalty. The
court postponed a decision on an interesting issue related to the guaranty – whether an
absolute and unconditional guaranty can be enforced despite the unenforceability of the
underlying obligation (i.e., such a guaranty waiving defenses such as an SLV provision
amounting to a penalty or even the underlying obligation being fraudulently induced).
Settlement of the case by the lessor precluded a decision on this point by the court.

BA Jacobs Flight Services, LLC v. Rutair Limited, 2017 WL 277913 (U.S.Dist.Ct.

N.D.Ill. January 20, 2017)
This decision is published over a year after the court had declared (in opinions
summarized previously) that the acceleration clause in the lease at issue constituted an
unenforceable penalty. To determine the actual damages to which the lessor should be
entitled, the court held an evidentiary hearing. According to the court, based on this
hearing as well as pre-trial and post-trial briefs, the parties agreed on very little – the
court characterizing their analysis as self-serving, speculative and biased, not supported
by any expert analysis or opinion. So the court here undertakes a rather extensive
analysis itself based on the facts presented to it, and arrives at its own determination of
damages to be paid to the lessor, reserving until a later hearing what the precise amount
of prejudgment interest and attorneys’ fees should be. [The decision as to these two
amounts can be found in the case of the same name at 2017 WL 2056193 (U.S.Dist.Ct.
N.D.Ill. May 12, 2017).]

Xerox Corporation v. AC Square, Inc., 2016 WL 5898652 (U.S.Dist.Ct. N.D.Cal.

September 1, 2016)
This seems to be a fairly straightforward case of a default judgment in which the
court approves, first, the plaintiff/lessor’s claim that the lessee had defaulted under a
number of leases, and second, after being ordered to submit additional evidence as to
damages, the calculation of damages based in large part on the provision in the leases
calling for present valuing remaining rentals using a 4% discount rate. The court also
grants the lessor’s demand to recover the property leased under all agreements. The court
does not make clear, however, whether the combination of these two remedies might
result in a windfall to the lessor if the sum of the money damages and value of the
property were to be more than the lessor’s remaining investment.

PNC Equipment Finance, LLC v. MDM Golf, LLC, 2016 WL 3453057 (U.S.Dist.Ct.
S.D.Ohio June 20, 2016)
In this brief decision, the court enters a default judgment in favor of the lessor
based mainly upon the terms of the lease – the stipulated loss value set forth in the lease
minus the net proceeds from the lessor’s sale of the repossessed equipment plus interest
at the statutory rate.

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BLB Aviation South Carolina, LLC v. Jet Linx Aviation, LLC, 808 F.3d 389 (2015)
In this case, the U.S. Court of Appeals for the Eighth Circuit renders a harsh
verdict against an aircraft lessor’s claim for damages following a lessee breach. The case
concerned whether the appropriate measure of damages for failing to maintain an aircraft
properly was the cost of repair or the diminution in value. Since the cost of repair
measure would entail completely re-doing the underlying maintenance, the court rejected
that as economic waste that would put the lessor in a better position than it would have
been without the breach. And since the lessor had not provided sufficient proof of
diminution in value, the court affirms the District Court’s dismissal of the lessor’s claim
for damages.

BA Jacobs Flight Services, LLC v. Rutair Limited, 2016 WL 8328631 (U.S.Dist.Ct.

N.D.Ill. December 8, 2015)
After the court had previously granted the lessor partial summary judgment as to
the defaulted aircraft lessee’s liability, the lessor moved for summary judgment as to
damages based upon the lease’s liquidated damages provision entitling the lessor to
acceleration of the rentals remaining after default. The court denies the motion stating
that this acceleration clause was an unenforceable penalty (not a reasonable estimate at
the time of contracting of the likely damages from breach) since it did not take account of
the fact that the lessor had repossessed and sold the aircraft. As for the calculation of the
lessor’s actual damages, the court finds that there are enough issues in dispute so as to
require a future evidentiary hearing.

SunSouth Capital, Inc. v. Harding Enterprises, LLC, 2015 WL 12895752 (U.S.Dist.Ct.

M.D.Ala. November 5, 2015)
After its lessee had defaulted, had refused to turn over the equipment or reveal its
location, and had continued to use the equipment, the lessor requested a temporary
restraining order. The court grants the order without notice to the lessee ordering
cessation of use of the equipment and turning it over to the lessor, finding that all of the
conditions for the issuance of such an order had been met, including the prevention of
immediate and irreparable injury to the lessor if the order is not granted. The court also
set the date for an evidentiary hearing to determine whether to convert the TRO into a
preliminary injunction.

BA Jacobs Flight Services, LLC v. Rutair Limited, 2015 WL 360758 (U.S.Dist.Ct.

N.D.Ill. January 27, 2015)
The lessee in this case began making payments on its aircraft lease in a timely
fashion, but most of these payments were substantially less than the amounts owing under
the lease. After the lessor repossessed the aircraft and brought suit for partial summary
judgment as to the lessee’s liability, the lessee argued that the lessor did not have the
right to repossess under the lease because the lease provision giving the lessor that right
began with the words “If Lessee fails to may any payment of rent or other charges within
30 days after such amounts are due and payable…” This court concludes that the
language was not ambiguous enough to permit the lessee to make payments in any
amount – no matter how small – and avoid the possibility of repossession without
demand or notice as set forth in the lease.

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VFS Leasing Co. v. USASIA Casino Tours/Entertainment, Inc., 2015 WL 82716
(U.S.Dist.Ct. N.D.Cal. January 6, 2015)
FLCM ACQ VIII, LLC v. Taos Ventures, LLC, 2014 WL 7009872 (U.S.Dist.Ct.
M.D.Fla. December 11, 2014)
PNC Equipment Finance, LLC v. MDM Golf, LLC, 2014 WL 5219582 (U.S.Dist.Ct.
S.D.Ohio October 14, 2014)
Balboa Capital Corp. v. WCS Lending LLC, 2014 WL 4956459 (U.S.Dist.Ct. N.D.Tex.
September 29, 2014)
These cases all involve lessors’ motions for entry of a default judgment against
their lessees. They help illustrate the standards applied by courts before granting such
motions. In the California case, the court first declines to find for the lessor under a rule
regarding claims for a “sum certain” inasmuch as not every element of the lessor’s
damage calculation was clearly demonstrated. The court does, however, make a
determination of damages in favor of the lessor under a different rule based upon the
lease’s provisions and the clear evidence presented by the lessor (including holding that
the stipulated loss values set forth in the lease did not constitute a penalty). In the Florida
case, while the court is willing to find the lessee liable, it also holds that the lessor has not
laid out precisely how it calculated the damages and directs the lessor to demonstrate its
calculations more clearly. The court in the Ohio case held that the lessor’s evidence
enabled the court to determine the amount of damages by subtracting the net proceeds of
the lessor’s sale of the equipment from the stipulated loss value, all as set forth in the
lease. Lastly, the court in the Texas case cited Texas law indicating that a lessor may not
both recover all unpaid rent and repossess the equipment from the lessee unless the lessee
has clearly waived its right to retain possession. The court was also concerned not to
render a default judgment that would put the lessor in a better position than if the lease
had been fully performed, and it calls instead for the record to be supplemented regarding
the potential effect of granting these multiple remedies.

Choice Asset Management, Inc. v. CIT Technology Financing Services, Inc., 2013 WL
5039340 (Tex.App. September 11, 2013)
This case offers another illustration of the difference between operating under
Article 2A versus Article 9 when it comes to enforcing one’s interests. This appellate
court affirms the summary judgment of a lower court in favor of the lessor. The lessee
argued that the lessor had failed to prove that it repossessed and sold a piece of
equipment to mitigate damages and that the lessor did not dispose of certain equipment in
a commercially reasonable manner under certain provisions of both Article 2A and
Article 9. Since there was apparently no dispute that the transaction was a true lease, this
court notes that Article 2A (i) permits a lessee to waive rights it might otherwise have
(such as requiring the lessor to act on its remedy of repossessing and disposing of all the
equipment – the lessor chose not to do so); and (ii) does not require commercial
reasonability in the context of selling equipment repossessed after a default – but only in
the context of disposition in the form of leasing the equipment to a new lessee. The court
also notes that the lessee’s attempts to cite obligations of a secured party under Article 9
are unavailing in the context of a transaction governed by Article 2A.

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Mitsui Rail Capital, LLC v. American Coal Company, 2013 WL 3227291 (Ill.App. June
21, 2013)(unpublished opinion, check court rules before citing)
This is an appeal from a lower court’s finding that the lessee under a railcar lease
was responsible for paying the costs of repair to railcars that suffered substantial
corrosion damage during the course of the lease. Although the lessee attempted to argue
that the lessor had failed to inspect and repair damage to the cars, this court affirms the
lower court’s reasoning that (i) the lessor’s inspection obligations pertained only to the
wheels and moving parts (not the tubs which were the subject of the corrosion) and (ii)
the corrosion did not constitute “normal wear and tear” as permitted by the lease. The
court also agrees with the lower court that it was not necessary to determine the precise
cause of the damage inasmuch as the cars, which had a normal life expectancy of forty or
fifty years, had only ten percent of useful life remaining after being in possession of the
lessee for four to five years.

The CIT Group/Equipment Financing, Inc. v. Shapiro, 2013 WL 1285269 (U.S.Dist.Ct.

S.D.N.Y. March 29, 2013)
After finding that the original lessee was liable to the lessor for a default by a
successor lessee to whom the original lessee assigned its interests under the lease, the
court considers what damages are owed the lessor under that lease. After reviewing the
fairly typical remedies provision of the lease – entitling the lessor to choose one or more
of a number of different remedies including demanding the immediate payment all rentals
due under the lease and demanding a stipulated loss value (to be offset by the proceeds of
a possible cash sale of the equipment) – the court finds such provisions to be
substantively unconscionable because they purportedly permit the lessor to recover both
future rent and the value of the equipment. Whether or not the court correctly interprets
the phrase “all Rent Payments due under the Lease” to include future as well as past due
payments, the court does find for the lessor by employing the lease’s severability
provision and applies that provision to enforce only those portions of the remedies which
the court finds reasonable – the liquidated damages amount minus the proceeds of a
commercially reasonable sale.

AEL Financial, LLC v. Hunt Club Pediatric Associates, P.A., 2012 WL 6642472
(U.S.Dist.Ct. N.D.Ill. Dec. 20, 2012)
This court denies a lessor’s motion for summary judgment as to damages with
respect to a lessee in default. The lessor had attempted to rely entirely upon an affidavit
of its collections manager representing a payoff statement generated by the lessor’s
electronic accounting/payment management system setting forth amounts owed under a
number of different categories presumably relating to the lease. The court
understandably finds that because this statement provided no explanation of the lease
provisions that purportedly justified these categories and the calculation of the amounts
owing, more evidence would be needed to establish the amount of the lessee’s liability.

Andersons, Inc. v. Lafarge North America, Inc., 2012 WL 5259149 (U.S.Ct.App. 6thCir.
October 25, 2012)(not for publication)
After a lessee returned two hundred railcars to a lessor at the end of a ten year
lease, the lessor deemed the cars to require substantial repairs in order to bring them into

69
the condition required by the lease and, after being unable to agree with the lessee as to
the repair costs, sued the lessee for damages consisting of the cost of repair, holdover
rent, prejudgment interest and attorneys’ fees. The Court of Appeals affirms the District
Court’s awards of the cost of repair and holdover rent and its denial of prejudgment
interest and attorneys’ fees. Of greatest interest is the description of the District Court’s
reasoning regarding the cost of repairs (disregarding the highest and lowest estimates of
repair costs and averaging the two intermediate estimates) and the discussion of the
award of holdover rent. With respect to the latter, the lease gave the lessor the right to
demand holdover rent at the rate of one and one half times the lease rate if the cars were
not delivered in the specified condition within thirty days of lease expiration.
The court finds that because the lessor did not have the use of the cars during the six
month period following lease expiration while it attempted a settlement with the lessee,
the lessor was entitled to holdover rent for that period of time – and that such amount was
not unreasonable in light of the difficulty of quantifying the damage and did not
constitute an unenforceable penalty as argued by the lessee. The court also agrees with
the trial court’s finding that the lessor was not entitled to holdover rent for the period
beyond the six months in that the lessor should have realized that settlement with the
lessee would not be achieved and should have taken steps to mitigate its damages.

TBF Financial, LLC v. DRF Services, Inc., 2012 WL 1570141 (Minn.App. May 7, 2012)
(unpublished opinion, see Minnesota rules before citing)
After entering into a lease forbidding the lessee from transferring the equipment
or assigning its rights under the lease without lessor consent, the lessee did both of those
things and the transferee began making lease payments instead of the lessee. When the
lessor sued the lessee seeking damages for the breach, the lessee attempted to argue that it
had a statutory right to assign its lease obligations under UCC 2A-303 concerning
alienability of a party’s interest under a lease. This appellate decision affirms a trial
court’s summary judgment in favor of the lessor in which the same statute is cited giving
the lessor the rights and remedies (including damages) under UCC 2A-501(2) (which
provides for rights and remedies under 2A as well as under the lease [unless limited by
2A]).

Philips Medical Capital, LLC v. P & L Contracting, Inc., 2012 WL 860324 (U.S.Dist.Ct.
N.D.Miss. March 13, 2012)
This decision illustrates a relatively straightforward calculation of damages
provided in a lease following a lessee default – including acceleration of remaining
payments due plus a booked residual value, but without any discounting of such amounts
to present value. There is also provision for pre-judgment interest under state law in this
federal diversity action and for post-judgment interest allowable under federal law.

Lyon Financial Services, Inc. v. Jude’s Medical Center, Ltd., 2011 WL 6029195
(U.S.Dist.Ct. N.D.Ill. Dec. 5, 2011)
Following the lessee’s default, the lessor repossessed and sold the equipment
being leased and then brought suit against the lessee for the deficiency. After rejecting a
claim by the lessee that the lease created a security interest, the court nevertheless holds
that even though Minnesota’s Article 2A does not expressly require that a sale of leased

70
goods following a default be commercially reasonable, Minnesota courts have found that
concept helpful in determining mitigation of damages issues. Stating that there was
insufficient information regarding the circumstances of the sale of equipment in this case
to determine whether the sale was commercially reasonable, the court denies the lessor’s
motion for summary judgment.

Wells Fargo Bank Northwest, N.A. v. US Airways, Inc., 2011 WL 6141034 (N.Y.Sup.Ct.
Dec. 1, 2011)(unreported disposition)
This decision upholds a provision in an aircraft lease providing for the payment of
twice the ordinary monthly rental for the period following a default until the lessee
returned the aircraft in the condition required by the lease. The court comments that
liquidated damges for rental holdovers in multiples of the monthly rent have been upheld
as not unreasonable in other New York cases and also notes that the lease in this case,
like the leases in the other New York cases, was negotiated by sophisticated persons in
the airline industry with experienced counsel.

VFS Leasing Co. v. J & L Trucking, Inc., 2011 WL 3439525 (U.S.Dist.Ct. N.D.Ohio
August 5, 2011)
After a lessee default, the lessor repossessed and sold the four trucks that were
subject to the lease. The lessee argued that since the lease created a security interest, it
was an Article 9 transaction under which the lessor had a duty, among other things, to
dispose of the equipment in a commercially reasonable manner. However, the court held
that the lease was a true lease governed by Article 2A and that no commercial
reasonableness requirement applied to the truck sale under North Carolina law.

Canal Air, LLC v. McCardell, 2011 WL 5075724 (U.S.Dist.Ct. E.D. Mich. Oct. 26,
2011)
After the lessor and lessee entered into a lease of an aircraft as a part of a
sale/leaseback transaction, the lessee defaulted and relinquished the aircraft to the lessor,
which thereupon sold it and brought suit against the lessee for the deficiency. Objecting
to the lessor’s motion for summary judgment, the lessee argued that the lessor (i) had not
demonstrated that its sale of the aircraft had been commercially reasonable and (ii) had
not provided the lessee with reasonable notice of the sale. The court agrees with the
lessee and cites various sections of Article 9 to explain the obligations of the lessor in
conducting such a sale. What is curious about this decision is that there is no discussion
concerning whether Article 9 should apply at all – i.e., whether the lease of the aircraft
was a true lease (in which case the default provisions of Article 2A would apply) or
whether the lease instead created a security interest (in which case the provisions of
Article 9 cited by the court would apply).

TFG-North Carolina, L.P. v. Performance Fibers, Inc., 2011 WL 3040275 (U.S.Dist.Ct.

D.Utah July 22, 2011)
In this brief decision, the court carefully examines the terms of a lease to
determine various portions of a plaintiff’s damages claim. After finding that the lessee
was liable for three unpaid base term payments (not to be reduced by the amount of
interim rent payments made by the lessee, but reduced by the amount of the last month’s

71
rent paid as a security deposit) and for a twelve month extension triggered by the lessee
not having given the required notice, the court finds against the lessor’s claim for an
additional six month period following the twelve month extension inasmuch as the lessor
was on notice that the lessee would not would not be extending due to its default. The
court also finds against the lessor with respect to an ambiguous lease provision for
interest at eighteen percent per annum – since it was worded to apply only to payment
and expenses incurred by the lessor, rather than the entire amount due.

GATX Corporation v. Appalachian Fuels, LLC, 2011 WL 3104070 (U.S.Dist.Ct. E.D.Ky

July 8, 2011)
This case illustrates a number of possible sources of law necessary to conclude
whether a grant of attorneys’ fees is appropriate after a lessee default and what methods
should be used to calculate the amount of such fees. According to the court, whether fees
may be awarded at all is a matter of state law, but whether state or federal law determines
the amount to be awarded is a closer call. The facts of this case – two equipment leases,
one governed by California law and one by Kentucky law – affords an opportunity to
observe how state laws may differ on this subject. Issues discussed include how to
determine a reasonable hourly rate and how to calculate the number of hours reasonably
expended.

Andersons, Inc. v. LaFarge North America, Inc., 2011 WL 2357895 (U.S.Dist.Ct.

N.D.Ohio June 9, 2011)
This decision holds that the lessor was entitled to damages with respect to leased
railroad cars that were not returned at the end of the lease in the condition required by the
lease. According to the court, the trial centered on a battle of the experts as to the
expenses that would be required to return the cars to serviceable condition. Rather than
simply deciding in favor of one of the four experts, the court’s conclusion reflects an
average of the estimates of two of the four – the two (one hired by the lessor and one by
the lessee) found most credible by the court.

GATX Corp. v. Appalachian Fuels, LLC, 2011 WL 2260695 (U.S.Dist.Ct. E.D.Ky. June
7, 2011) This case contains a very interesting, thorough discussion of damage
claims made by the holder of two leases with the same lessee – one acquired from
another lessor and one entered into directly with the lessee. The leases were stated to be
governed by California and Kentucky law, respectively. Much of the discussion centers
on the provisions for liquidated damages – a stipulated loss value in the former lease
calculated by present valuing future rentals at a discount rate of three percent and
stipulated loss values in the latter calculated using percentages of the original equipment
cost. In assessing the reasonableness of these liquidated damages provisions, the court
refers to Article 2A as in effect in both states. However, California’s version of Article
2A also refers to a different provision of its civil code regarding liquidated damages –
regarding reasonability under the circumstances existing at the time the contract was
made. The court also takes into account provisions of both federal law and the applicable
state law regarding pre and post-judgment interest. The decision is instructive regarding
possible differences in state law regarding the calculation of damages.

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Farnam Street Financial, Inc. v. Balaton Group, Inc., 2011 WL 1258512 (U.S.Dist.Ct.
D.Minn. March 30, 2011)
In granting a lessor’s motion for summary judgment against a defaulting lessee,
this court gives the lessor all the damages listed in the lease without tempering them in a
manner that other courts have employed – whether based on Article 2A or common law
principles – to ease the lessee’s burden. For instance, the lessor is awarded accelerated
future rentals without provision for present valuing them and the lessee is ordered to
return the equipment without provision as to whether any sales proceeds should be
applied to mitigate the other amounts awarded the lessor.

G.E. Capital Information Technology Solutions, Inc. v. The Myler Company, Inc., 2011
WL 649684 (U.S.Dist.Ct. S.D.Ind. Feb. 11, 2011)(slip copy)
After defaulting under its lease, the defendant/lessee unsuccessfully asserted a
creative argument to avoid summary judgment in favor of the lessor. The lessee
contended that the liquidated damages provision in the lease was unenforceable as a
penalty because it did not require the lessor to mitigate its damages. Rejecting this
argument, the court indicates both (i) that the lease would have required the lessor to
mitigate if the equipment had been returned by the lessee (instead the lessee had retained
the equipment after default) and (ii) that the general rule is that while the nonbreaching
party must mitigate, the burden is on the breaching party to demonstrate failure to do so
(which this lessee was apparently unable to do).

Textron Financial Corp. v. Seven Falls Golf and River Club, LLC, 2011 WL 251115
(U.S.Dist.Ct. W.D.N.C. Jan. 25, 2011)(slip copy)
In this case, the court grants a lessor’s motion for summary judgment as to a
defaulting lessee’s liability and damages owed under the lease. Inasmuch as the lease
clearly set forth how to calculate the amounts that would be owing after a lessee default
(past dues, estimated property tax to be owed by the lessor, future rentals discounted to
present value, recovery and storage fees, and a credit to the lessee for proceeds of sale of
the equipment), a considerable portion of this decision is spent on the calculation of
reasonable attorneys’ fees to be awarded the lessor based upon a number of factors
enumerated in the Rhode Island (the law governing this lease) Supreme Court Rules of
Professional Conduct.

PNCEF, LLC v.Hendricks Building Supply LLC, 2010 WL 4677772 (U.S.Dist.Ct.

S.D.Ala. Nov.8, 2010); 2010 WL 3672257 (U.S.Dist Ct. S.D.Ala. Sept. 10, 2010)
After denying entry of a default judgment against a lessee in the earlier case and
ordering the plaintiff (a successor to the original lessor) to submit further evidence to
establish its claim for money damages, the court finds that the plaintiff is entitled to
recover “stipulated loss value” – defined in the lease to include total delinquent rent
(including late fees), all future rent and the estimated fair market value of the equipment
at the end of the lease term. With respect to estimated fair market value, the court
accepts the estimate provided by the plaintiff’s representative based on her experience,
her examination of web sites to determine the “going price” for such equipment and her
consultations with other employees of the plaintiff. However, the court declines to award
the plaintiff “reasonable” attorney’s fees in excess of those actually incurred based on

73
plaintiff’s argument that “reasonable” should include potential future fees to be incurred
due to difficulty of enforcement or possible contingency payments.

Columbus Bank and Trust Company v. Granger, 2010 WL 99055 (U.S.Dist.Ct.

M.D.Georgia January 6, 2010)
A lessor’s motion for summary judgment is denied regarding the amount owed to
it by the lessee after the equipment had been sold by the lessor following a lessee default.
The court finds that there is a genuine issue of material fact as the whether the sale price
was fair and therefore whether the sale was commercially reasonable. While the court is
clearly applying Article 9 requirements and language (e.g., “collateral,” “debt,” “secured
party”) to the lease transaction, it does not explain how it concluded that the lease created
a security interest (evidently the lessor did not contest this issue). The case serves as an
illustration that a lessor’s rights after default can be considerably different depending
upon whether its lease is a true lease or not.

Tango Transport, L.L.C. v. Transport International Pool, L.L.C., 2009 WL 3753559

(U.S.Dist.Ct. W.D.La. November 9, 2009)
This court denies the lessor’s motion for partial summary judgment on its claim
that the lessee should be required to pay at the lease rate for trailers that it did not return
to the lessor at the termination of the lease. Notwithstanding clear language to that effect
in the lease, the court notes that the lease also called for the trailers to be returned to a
particular “Return Location” set forth on the schedules and that such location was a
distribution center that had been closed by the lessor. Thus the court was unwilling to
award the lessor with damages on summary judgment without further investigation of the
facts regarding possible discussion and agreement as to alternative return locations.

Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 2009 WL 2170999
(U.S.Dist.Ct. D.Minn. July 17, 2009)
While finding for the lessor on its summary judgment motion regarding the
lessee’s liability for breach of a finance lease (see discussion above in the Ability to
Collect Rentals section), the court concludes that it cannot grant summary judgment on
the issue of damages. It does so after finding that there was a genuine issue of material
fact as to whether the lessor reasonably mitigated its damages. The court admits that the
UCC’s concept of “commercial reasonableness” in a secured transaction is not directly
applicable in this leasing case, but goes on to state that Minnesota courts find it helpful in
determining mitigation of damages issues when leased property is repossessed and sold.

National City Healthcare Finance v. Refine 360, LLC, 607 F.Supp.2d 881 (N.D.Ill. April
9, 2009)
In this case, the lessor had moved for a default judgment against both a lessee in
default and an individual guarantor. This court denies the motion without prejudice to
reassertion of a revised motion – but in a manner consistent with this court’s views on the
unenforceable penalty nature of the remedies set forth in the lease that were being
requested by the lessor. Without citing Article 2A, the court asserts that American law
(apparently, at least, case law) is universal in its condemnation of remedy provisions that
provide for receipt of more than the sum of past due rents and the present value of both

74
future rents and anticipated end-of-term fair market value of the leased property and then
subtracting the current value of such property. In this case the lease contained what the
court refers to as “a prototypical penalty provision of the type that to this Court’s
knowledge no court will enforce” – the lease’s definition of “Stipulated Loss Value” (an
amount that the lease permitted the lessor to demand) provided for no discounting to
present value of either future rents or the estimated fair market value of the property. The
court is apparently so outraged by the lessor’s request here that it suggests that it may not
be inclined to enforce another lease provision – requiring the lessee to pay the lessor’s
attorneys’ fees.

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).

Giant Eagle, Inc. v. Phar-Mor, Inc., 528 F.3d 455 (6th Cir. 2008)
Reversing in part prior Bankruptcy and District Court decisions, the Sixth Circuit
holds that under Pennsylvania law, a lessor’s claim in bankruptcy for damages following
the lessee’s rejection of a lease does not disappear as soon as the lessor mitigates its
damages by successfully re-leasing the equipment to another party. In this case, the other
party (i.e., the new lessee) itself filed for bankruptcy shortly after entering into the new
lease and subsequently rejected that lease. This decision indicates that since the lessor’s
attempt at mitigation proved to be less than completely successful, the lessor retained an
unsecured claim in the initial bankruptcy for its losses. The court does affirm the holding
of the lower courts that the lessor was entitled to administrative expenses in the form of
post-petition rent payments from the date the lessee filed its petition in bankruptcy until
the date it rejected the lease.

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Western Peterbilt, Inc. v. Lozano, 2008 WL 1778324 (Wash.App.Div. April 21, 2008)
(unpublished opinion)
After a lessee had made several late payments under its lease and then failed to
abide by a lessor offer to bring itself current, the lessor terminated the lease, repossessed
one of two trucks being leased and filed suit to repossess the other. Although the lessee
argued that the lessor had waived its rights to terminate the lease and repossess the trucks
by initially accepting late payments (along with late payment fees), this appellate court
affirms summary judgment in favor of the lessor by the trial court, citing language in the
lease providing (i) for multiple remedies for default, (ii) that no choice of any one remedy
served to exclude exercise of others, and (iii) that no waiver of a default is a waiver of
any other default or subsequent breach.

Holmes v. General Electric Capital Corp., 387 B.R. 896 (M.D.Ga. 2008)
This decision affirms the holding of a Bankruptcy Court that GECC was entitled
to apply security deposits that it held and to claim further damages based upon a series of
agreements (including a lease, an amendment to the lease requiring payment of a re-
marketing fee, a security deposit agreement, and a cross collateral/cross default
agreement) relating to the use of aircraft financed by GECC. The Bankruptcy Court’s
findings that GECC acted according to the terms of these agreements and in good faith
were all affirmed.

Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., 2008 WL 564699 (U.S.Ct.App. 8th Cir.
March 4, 2008)
After this Circuit Court had previously determined that a “Term Sheet Proposal”
evidenced a binding preliminary agreement between the parties (in 2005: 408 F.3d 460),
the lessor brought an action seeking expectancy (benefit-of-the-bargain) damages (e.g.,
for lost profits) for breach of the term sheet agreement. The Circuit Court here affirms
the District Court’s holding that the type of preliminary agreement evidenced by this term
sheet (what federal courts in New York had called a “Type II” agreement in which the
parties bind themselves to negotiate the final terms of a contract while complying with
the terms of the preliminary agreement, as opposed to a “Type I” agreement that
evidences essentially complete agreement on all material issues) does not warrant the
award of expectancy damages.

Frank’s International, Inc. v. Smith International, Inc., 249 S.W.3d 557 (Tex.App. 2008)
After determining that the first of two contracts at issue, although providing for a
mixture of goods and services, was predominately for the lease of goods and thus
governed by Article 2A, the court analyzes the effect of a mutual agreement by the
parties to cancel this contract when entering into a second contract. Citing 2A-505’s
provision stating that following cancellation of a lease any rights based on prior defaults
survive such cancellation (along with the retention of certain remedies) unless the parties
have agreed otherwise, the court overturns a lower court’s ruling that the rights of the
lessor had been extinguished by the cancellation

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Barr International, Inc. v. Paradise Produce Company, Inc., 2008 WL 162849 (Del.Super.
Jan. 7, 2008)(unpublished opinion – not reported in A.2d)
In granting a lessor’s motion for summary judgment, the court brushes aside the
lessee’s assertion that the lessor is limited to the measure of damages set forth in Article
2A’s Section 528, by noting that the introductory language of such Section provides an
exception permitting the lease agreement itself to determine the damages for breach. In
this case the lease provided, among other things, that the lessor could require the lessee to
purchase the goods for a designated amount. Such amount plus other accrued unpaid
charges minus the amount realized by the lessor from a sale of the goods was awarded to
the lessor as its damages.

Leasecomm Corporation v. Akpaffiong, 2007 WL 3309455 (Mass.App.Div. October 31,

2007)(not reported in N.E.2d)
This appellate court reverses a trial court decision in favor of a lessee who had
continued to use equipment past the end of the lease term without making renewal
payments. Finding that the transaction was clearly a commercial one and that the lease
documents clearly spelled out the lessee’s end-of-term responsibilities, the appellate court
rejects the trial court’s finding that the lease was unconscionable and holds that
Leasecomm’s entry into a consent decree regarding the non-cancellability of its leases
and where it would institute collection suits has no effect on this lessee’s obligations.

Star Leasing Co. v. Michael’s Cooperage Co., Inc., 2006 WL 1995722 (U.S.Dist.Ct.
S.D.Ohio July 13, 2006)
This case illustrates the relation between a somewhat unusual remedies provision
in a lease (permitting the recovery of future rentals only in the event of a payment default
– not for other defaults) and provisions of Article 2A pertaining to repudiation of a lease
by one party if that party does not provide adequate assurance of performance following a
request by the other party if that other party had reasonable grounds for feeling insecure
(2A-401 in the uniform version, different numbering in Ohio). Here the lessee had
continued to make rental payments and argued that the lessor was not entitled to future
rentals as damages. The court, however, found that the lessor’s justifiable termination of
the lease and bringing suit in court following the lessee’s repudiation of the lease under
the law (by not providing the lessor with adequate assurance of performance after the
lessor had learned of the lessee’s plans to sell its assets) entitled the lessor to disregard
the peculiar default provision and sue for total breach. The court also employs a clause in
the lease calling for its amendment if any provision in the lease is prohibited by law to
save the lease’s accelerated damages provision by requiring state-law mandated
minimization of damages at the same time.

Lanier Worldwide, Inc. v. Bridgecenters at Park Meadows, LLC, 2006 WL 1653323

(Ga.App. June 16, 2006)
In this appellate court reversal of a trial court’s modification of an arbitration
award, the court mentions that damages consisting of the present value of future lease
payments may be awarded under Article 2A-529 “if the lessor is unable after reasonable
effort to dispose of [the goods] at a reasonable price or the circumstances reasonably
indicate that the effort will be unavailing.” Otherwise 2A-528 would apply, which

77
requires a credit for the present value of the market rent for such goods. The appellate
court overturned what it characterized as the trial court’s substitution of its own judgment
for that of the arbitrator concerning whether the lessor could have reasonably disposed of
the equipment.

Addison Express, L.L.C. v. Medway Air Ambulance, Inc., 2006 WL 1489385

(U.S.Dist.Ct. N.D.Tex. May 19, 2006)
The main holding of this case is that provisions in a lease of an aircraft placed the
responsibility for insuring against seizure of the aircraft and the risk of loss in case of
such a seizure on the lessee – notwithstanding the unfortunate fact that the seizure by the
U.S. Drug Enforcement Administration may not have been justified. After holding that
the lessee was obligated to make all lease payments despite the seizure, the court looks to
the lease provisions regarding remedies after default by the lessee and holds that the
remedy of acceleration of future rentals in the lease does not require employing a
discount rate: as of the date of acceleration, “the accelerated payments were not ‘future
damages,’ but were present damages, governed by the terms of the Lease.”

Hewlett-Packard Financial Services Company v. One2One, LLC, 2006 WL 1281335

(U.S.Dist.Ct. D.N.J. May 8, 2006)(not for publication)
After concluding that the lease at issue was an Article 2A finance lease, the
decision examines some of the history of New Jersey law concerning various types of
remedies for damages that are permitted under law, as opposed to constituting a penalty.
Among other things, the court notes that while acceleration of rentals is a common
remedy in leases, future payments must generally be discounted to present value.

TAL Financial Corporation v. CSC Consulting, Inc., 844 N.E.2d 1085 (Mass. 2006)
The Massachusetts Supreme Court discusses the interrelationship of a lease’s
provisions regarding liquidated damages and automatic renewal, given the particular facts
of this case. After the lessee (which had succeeded to the obligations of the original
lessee following a merger and had thereafter misplaced the lease documents and
discarded most of the leased equipment) failed to notify the lessor of an intention to
terminate the lease following the initial thirty-six month term, the lessor declared a
default and sought liquidated damages based upon the present value of rentals alleged to
be owing for two successive automatic annual renewal terms plus a stated percentage of
the original equipment cost. The court affirms a lower court’s holdings that (i) the
lessor’s default letter demanding return of the equipment prevented it from claiming that
the lease term had been automatically extended for the second successive twelve-month
renewal term and (ii) the liquidated damages provision represented an amount that would
be grossly disproportionate to a reasonable estimate (at the time the lease was entered
into) of the actual damages to be incurred beyond the end of the initial thirty-six month
term of the lease. The court also takes the occasion to agree with a majority of courts in
other states and holds that, as a matter of commercial contract law in general, the party
challenging the enforceability of a liquidated damages provision bears the burden of
proof. In a footnote it indicates that although this holding does not explicitly apply to
contracts governed by the UCC, it is not aware of any reason why the allocation of the
burden of proof would be different in that context.

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Frontier Leasing Corporation v. Acevedo Grocery, Inc., 2006 WL 229501 (Iowa App.
Feb. 1, 2006)
In affirming a district court’s decision, this court rejects a lessor’s argument that it
was entitled to damages including the residual value of the equipment being leased due to
the fact that the lessee’s default prevented the lessee from exercising its purchase option
under the lease. While conceding that the law permits a lessor to recover for loss to its
residual interest actually caused by the lessee’s default, the court criticizes the lessor for
attempting to treat the purchase option as an obligation which the lessor would be entitled
to accelerate upon the lessee’s default.

Alaska Construction Equipment, Inc. v. Star Trucking, Inc., 128 P.3d 164 (Alaska 2006)
In a decision with no references to Article 2A, the court holds that under contract
law a lessor may obtain damages for loss of use (as a form of special or consequential
damages) where the lessee caused the equipment to be totally destroyed – in addition to
previously acknowledged rights of a lessor to recover damages for loss of use in cases
where the equipment merely needed to be repaired – and that the measure of such
damages includes the period of time reasonably necessary to secure a suitable
replacement (whether or not such a replacement is actually sought). Thus, a lessor’s
recovery in these circumstances is not limited to the market value of the damaged
property.

U.S. Bancorp Oliver-Allen Technology Leasing v. Hall, Dickler, Kent, Goldstein &
Wood, LLP. 2005 WL 1875459 (U.S.Dist.Ct. S.D.N.Y. August 8, 2005)
A discussion of the appropriateness of summary judgment relating to various
claims for damages. While the amount of liquidated damages under the lease was not in
dispute, the lessee argued that trial was necessary with regard to attorneys’ fees, the
proceeds of sale of returned equipment and the value of missing equipment. Under the
facts of this case, the court holds that only the dispute concerning the value of missing
equipment created a genuine issue of material fact for trial.

New York Career Guidance Services, Inc. v. Wells Fargo Financial Leasing, Inc., 2005
WL 1252315 (N.J.Super. May 2, 2005) (unpublished opinion)
Notwithstanding that the plaintiff was, according to the court’s description, “a
serially delinquent lessee of office equipment,” the court grants the plaintiff’s motion to
certify a class and denies the defendant’s motion to dismiss in this case relating to leases
that permit the lessor to charge a late fee of ten percent of the late payment or up to $50,
at the lessor’s discretion. In this case, the lessor had attempted to collect a $50 late fee
with respect to a monthly lease payment of not much more than that amount, with respect
to which the court commented, “I have grave doubts that a late charge in a commercial
environment of more than 90% of the late payment is reasonable.” Although employing
the word “commercial,” the court comments that the plaintiff’s New Jersey Consumer
Fraud Act claim remains viable (in addition to common law and unjust enrichment
theories of liability).

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Oaks v. Bank One Corporation, 2005 WL 293677, 2005 Fed.App. 0096N (U.S.Ct.App.6th
Cir. Feb. 8, 2005) (not recommended for full text publication)
The court holds that Tennessee law does not require a lessor to notify the lessee
before disposing of the leased goods after a lessee default, even in the context of a lease
that required such a sale to be done in a commercially reasonable manner. The court
rejected lessee arguments invoking cases and statutes involving notice provisions found
in Articles 2 and 9, as opposed to Article 2A.

Raymond Leasing Corporation v. Callico Distributors, Inc., 2005 WL 39772 (Mass.App.

January 11, 2005)
The remedies provision of the lease in this case provided that the proceeds of any
sale of the equipment after a lessee default would be deemed the rental value of the
equipment for the remaining term of the lease, with the effect that all such proceeds
would be credited against the lessee’s obligations for such remaining term. This
appellate court denies the lessor’s appeal of the trial court decision, which applied the
language of such remedies provision literally so as to include any residual interest the
lessor may have had in the credit to the lessee.

AAR International, Inc. v. Vacances Heliades S.A., 349 F.Supp.2d 1114 (N.D.Ill. 2004)
In declaring a liquidated damages clause in an aircraft lease to be unenforceable
(in the context of deciding certain motions before a trial to determine the lessor’s
damages), the court indicates that a lessor will not be permitted simultaneously to recover
both actual and liquidated damages. Since in this case the lessor had repossessed the
aircraft after the lessee defaulted early during the lease term, the court also notes that the
liquidated damage provision did not credit the lessee with the difference between the
estimated residual value expected at the end of the initial term of the lease and the greater
value of the aircraft when it was repossessed in the early portion of that term.

Goodin v. TBF Financial, LLC, 2004 WL 813352 (Ky.App. April 16, 2004)
(unpublished)
Section 2A-528, providing a formula for calculating damages after a lessee
default in certain situations – including a provision for present-valuing the difference
between the future rentals required by the lease and the market rent for the remainder of
the term – is held not to be applicable inasmuch as the lease itself provided an alternative
formula: an acceleration clause requiring the lessee to pay the sum of the remaining
rentals. The court calculates the lessor’s damages using this accelerated amount,
crediting the lessee with the amount that the lessor received for the sale of the equipment.

Information Leasing Corporation v. Pall, Inc., 806 N.E.2d 178, 156 Ohio App.3d 378 (Ct.
App. 2004)
In a case that appears mistakenly to apply leasing law to a transaction creating a
security interest (the documentation included an obligation on the part of the lessee to
buy the equipment at the end of the lease), the court discusses Article 2A’s measure of
damages following a lessee default in a case where the lessor retakes and sells the goods
– employing the difference between the present value of the future rent due under the
lease and the present value of the market rent over the same term.

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Winthrop Resources Corporation v. Eaton Hydraulics, Inc., 361 F.3d 465 (8th Cir. 2004)
Upholds the propriety of a liquidated damages clause based upon pre-determined
casualty values, even where this may result in a payment of four or five times the fair
market value of the equipment, inasmuch as the end-of-term value of the computer
equipment was speculative at the time the lease was entered into by sophisticated
companies who had negotiated the lease – i.e., the casualty loss value was a reasonable
forecast of just compensation for a harm that was very difficult of accurate estimation.

The CIT Group/Equipment Financing, Inc. v. Super DVD, Inc., 8 Cal.Rptr.3d 927
(Cal.App. 2004)
Lease provisions for calculating damages found to be sufficiently clear and
definite to justify issuance of a writ of attachment under a California law requiring that
the amount of the claim be a “fixed or readily ascertainable amount.” The court also
dismissed a contention that the declaration submitted in support of the right to attach
order did not provide information regarding whether the equipment was sold in a
commercially reasonable manner as required by Article 9, by stating that “Assuming
division 9 is even applicable, the record reflects that appellants’ contention is without
merit.”

In re Snelson, 305 B.R. 255 (Bankr.N.D.Texas 2003)

In a case involving a breach of a lease after it had been assumed by the debtor in
bankruptcy, the court discusses the debtor’s claim that the liquidated damages clause in
the lease constituted a penalty in violation of New Jersey’s Article 2A-504. The clause,
which provided for discounting to present value the remaining rentals and the anticipated
residual value of the equipment at the end of the lease term with a credit for disposition
proceeds, was found to be reasonable and distinguishable from the clause determined to
be a penalty in In re Montgomery Ward Holding Corp., 326 F.3d 383 (3rd Cir. 2003).

Wells Fargo Bank Northwest, N.A. v. Taca International Airlines, S.A. and JHM Cargo
Express, S.A., 50 UCC Rep. Serv. 2d 811, 2003 WL 21180415 (S.D.N.Y. 2003)
Summary judgment granted to aircraft lessor seeking to enforce a liquidated
damages formula including the present value of the amounts by which the stated rentals
for the remainder of the lease term exceed the fair market rental value determined, as
provided in the lease, by an appraiser chosen by the lessor.

ePlus Group, Inc. v. Panoramic Communications LLC, 2003 WL 1572000 (U.S.Dist.Ct.

S.D.N.Y. March 27, 2003)
A lessor’s motion for summary judgment based on a liquidated damages
provision is denied on the basis that factual issues were in dispute which would indicate
whether or not the provision would place the lessor in a better position than if the lease
had been fully performed – a factor cited by the court as important for determining
whether a liquidated damages provision is reasonable.

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Linc Equipment Services, Inc. v. Signal Medical Services, Inc., 319 F.3d 288 (7th Cir.
2003)
Analysis by Judge Easterbrook of a lessor’s claim for damages due to the
equipment having been damaged during return and having to be taken out of service for
ten months, in which the court cites Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145
(1854), and notes that while Article 2A does not explicitly provide for recovery of a
lessor’s consequential damages (specifying only incidental damages), neither does it
preclude recovery of such damages. (The recently approved amendments to Article 2A
add provisions for a lessor’s recovery of consequential damages in 2A-530.)

Renewals, Automatic Renewals, Return of Equipment

Pacific Space Design Corp. v. PNC Equipment Finance, LLC, 2014 WL 6603288
(U.S.Dist.Ct. S.D.Ohio Nov. 19, 2014)
After the end of a sixty-month lease, the lessee continued to make monthly lease
payments for an additional thirty-four months before realizing that the initial term had
ended nearly three years ago. When contacted by the lessee, the lessor transferred title,
but did not return any of the extra payments. After the lessee sued for the return of
payments on the basis of both breach of contract and unjust enrichment, this court simply
cites the language in the lease regarding automatic renewal (stating that the lease would
automatically renew for a single twelve month term and thereafter for successive one
month terms unless the lessee provided sixty days written notice of its intent to return or
purchase the equipment) and holds that the lessor was entitled to retain the extra
payments. Interestingly, the court also finds that it does not matter, as the lessee
attempted to argue, whether the lease was a true lease or a conditional sale. It seems
possible that other courts might be inclined to require the lessor to return the extra
payments collected if the lessee were deemed to have become the owner of the equipment
at the end of the initial term (or even more severe, punish the lessor for having violated
usury or other statutes protecting buyers or borrowers by collecting more than that to
which it was entitled under a secured installment sale or a secured loan).

Parimist Funding Corp. v. Suffolk Vascular Associates, PLLC. 2008 WL 399156, 18

Misc.3d 1131(A) (N.Y.Sup. January 30, 2008) (Slip Copy)
This New York trial court decision refuses to enforce an automatic renewal
provision in three leases of medical and office equipment, citing the lessor’s failure to
provide advance written notification as required by New York’s General Obligation Law
Section 5-901. The court first brushed aside the lessee’s contention that because the
leases were security interests rather than true leases, the lessee should be considered to
own the equipment and have no further obligations after the end of the original sixty
month terms (employing some questionable precedent, however, to reach the conclusion
that they were true leases). What seems odd about this decision is that although the court
states that “the leases obviously become month-to-month leases as they are terminable
upon 30 days notice by either party,” it ignores the exception contained in Section 5-901
for the advance notice requirement with respect to automatic renewal terms of thirty days

82
or less. The court does, however, note that claims by the lessor sounding in conversion,
replevin and for the value of the equipment are not precluded by Section 5-901.

Farnam Street Financial, Inc. v. Trinity Valley Electric Cooperative, Inc., 2006 WL
1195904 (U.S.Dist.Ct. D.Minn. May 4, 2006)
In this brief decision granting a lessor’s motion for summary judgment against the
guarantor of a bankrupt lessee, the court holds that because a notice of intent to terminate
the lease was not sent prior to the date set forth in the lease, the lease automatically
renewed under its terms for a one-year period.

Dayton Development Company v. Gilman Financial Services, Inc., 419 F.3d 852 (8th
Cir. 2005)
After the lessor on a lease with the equipment user sold its interests in the
equipment to another party and leased the equipment back from such other party, that
other party brought suit against the sublessor after the sublessor (i) permitted the user to
renew the user lease without providing written notice and (ii) thereafter negotiated a
purchase price with the user under a fair market value purchase option. The court affirms
the district court’s decision that the plaintiff had no right to compel the sublessor to
participate in an alternative valuation method for determining fair market value (to be
employed if the parties to the user lease could not agree) and that the sublessor had not
violated its agreement with the plaintiff not to modify the user lease without the
plaintiff’s consent by permitting the user to renew without having given written notice.
With respect to the latter claim, the court holds that the sublessor had waived a
requirement in the user lease, as opposed to modifying the lease. It seems apparent that
the plaintiff’s agreement with the sublessor was not as precise as it could have been in
specifying exactly what the sublessor could and could not do in dealing with the user
under the user lease.

Commonwealth Capital Corp. v.Getronics, Inc., 2005 WL 1817170 (U.S.Ct.App. 3d Cir.

August 3, 2005)(not precedential)
Affirmation of a district court decision holding that a lease did not obligate the
lessee to notify the lessor of repairs made to the equipment (unlike required notification
for improvements) and that the lessor had failed to present enough evidence that the
equipment was not returned in the condition required by the lease (as opposed to being
returned with damages constituting only ordinary wear and tear or with missing parts that
were insubstantial). The case illustrates the importance of precise wording in a lease
regarding return conditions and the importance of presenting clear evidence of violation
of those return conditions.

Information Leasing Corporation v. McGladrey & Pullen, L.L.P., 2005 WL 1706113

(U.S.Dist.Ct. D.Minn. July 21, 2005)
Another case illustrating the importance of very careful drafting of lease
provisions regarding return and renewal. The court denies a lessor’s summary judgment
motion due to ambiguity of a lease provision clearly requiring prior notice of intent to
exercise an option to purchase the equipment or renew the lease schedule, but not clearly
requiring prior notice of intent to return the equipment. With respect to the lessor’s claim

83
that equipment returned by the lessee had not be returned in a timely manner, the court
also finds that the lease did not explicitly require return by the expiration date of the
schedule, and looks instead to usage of trade (based on 2A-202) to consider extrinsic
evidence presented by the lessee that return within thirty days after expiration was all that
was required.

Bradstreet Personnel Group, Inc. v. Wells Fargo Financial Leasing, Inc., 2005 WL
1252333 (N.J.Super. May 2, 2005) (unpublished opinion)
The same judge who decided the New York Career Guidance Services case
discussed in the “Measures of Lessors’ Damages” section above finds that the New
Jersey Consumer Fraud Act applies as well to corporate and commercial entities, but
rules against the plaintiffs with respect to its claim that an automatic renewal provision in
a lease form violated such Act. While admitting that they had not read the lease
agreement to begin with, the plaintiffs argued that the renewal provision was so
ambiguous that reading it would not have made a difference. Finding that the plaintiffs
would have had the opportunity to inquire about the renewal requirements if they had
read the provision, the court granted summary judgment in favor of the lessor with regard
to the plaintiffs’ claims of deceptive and unfair practices.

Dynamics Comm. Funding Corp. v. Robert W. Baird & Co., Inc., 2004 WL 1310155
(Va.Cir.Ct. May 5, 2004)
A strong affirmation of a lessor’s right to enforce an automatic renewal provision
requiring the lessee to give notice of termination ninety days before the end of the initial
or any extended term. The facts of this case, however, indicate that only software was
being financed and that the document gave the lessee a $1 purchase option at the end of
the initial term (setting forth an understanding by both parties that such a purchase option
operated only to release the lessor’s interest in the software license). In addition to
marking the end of a lessor’s rights to the subject matter of a lease (whether equipment or
software), the time for exercising a $1 purchase option might be thought also to signal the
end of the lessor’s right to collect rents.

Protection Industries Corp. v. DDB Needham Worldwide, Inc., 763 N.Y.S.2d 546
(App.Div. 2003)
Despite the lessee having made payments after the scheduled termination of an
eight year lease, an eight-year automatic renewal clause in the lease is held to be not
effective due to non-compliance with New York’s General Obligations Law Sec. 5-901.
This law – making unenforceable automatic renewal provisions for greater than a thirty
day renewal period in personal property leases unless the lessor provides its lessee with
fifteen to thirty days advance written notice of the date required in the lease for the lessee
to give the lessor notice of the lessee’s intention to terminate the lease – has previously
been held to apply to New York lessees even when the lease is stated to be governed by
the law of another state: Andin International, Inc. v. Matrix Funding Corporation, 756
N.Y.S.2d 724 (Sup.Ct. 2003). A more recent case, Ludl Electronics Products, Ltd. v.
Wells Fargo Financial Leasing, Inc., 2004 WL 737049 (N.Y.App.Div. March 8, 2004),
holds that this law cannot be used by lessees to recover lease payments made after the
end of the initial term if the lessees have continued their beneficial use of the equipment.

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Winthrop Resources Corporation v. Advanced Telecomm of Pittsburgh, 2002 WL
31777799 (D.Minn. Dec. 10, 2002)
Another in a series of victories for this lessor with respect to an evergreen renewal
clause, following the earlier decisions mentioned below – in this case one-year renewals,
unless one hundred twenty days prior notice of termination is given.

Winthrop Resources Corporation v. Spearhead System Consultants (US), Ltd., 2002 WL

1127713 (D.Minn. May 29, 2002)
Lessor’s summary judgment motion granted with respect to a lease provision
mandating automatic one year renewals unless written notice of termination was provided
one hundred twenty days before the scheduled end of the lease term – despite the court’s
stated reservations about such evergreen provisions (opining that it would be a better
practice to ensure that both parties are notified in advance of such dates for notice of
termination). It seems somewhat ironic, given the court’s inclinations, that the possible
application of the New York statute referenced in Andin above was not raised inasmuch
as the lessee was a New York corporation with its primary place of business also in New
York.

Winthrop Resources Corporation v. North American Lighting, Inc., 2002 WL 334410 (D.
Minn. Feb. 12, 2002)
Lessor’s summary judgment motion granted with respect to lease provision
requiring automatic renewal for one hundred twenty day periods unless either party gave
the other party written notice one hundred twenty days prior to scheduled termination.

[Wisconsin, Rhode Island, Louisiana and New York have statutes regulating automatic
renewal clauses in commercial leases.]

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

Keiper v. Victor Valley Transit Authority, 2019 WL 6703395 (U.S.Dist.Ct. C.D.Ca. July
30, 2019) *
Following a collision between a bus and a tractor-trailer, injured bus riders
brought suit against, among others, the owners of the tractor and the trailer which had
leased such vehicles to the company using such vehicles – premised upon California’s
laws concerning vicarious liability. In view of the Graves Amendment applicable to
these lessor/owners which preempts such vicarious liability law, the plaintiffs attempted
to argue that the lessor/owners had been independently negligent insofar as they were
motor carriers subject to Federal Motor Carrier Safety Regulations and had failed to
arrange reflective tape on such vehicles as required by these Regulations. This court
finds against the plaintiffs insofar as the plaintiffs (i) had failed to provide any evidence
that the defendant lessor/owners qualified as motor carriers and (ii) had provided no other
evidence of independent negligence.

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Favorite v. Sakovski, 2019 WL 3857877 (U.S.Dist.Ct. N.D.Ill. August 16, 2019) *
This action was brought by the wife of a truck driver who was killed in an
accident in which another truck driver crossed the median and crashed into the truck
driven by her husband. The plaintiff alleged that the rental company which leased the
truck to the negligent driver was guilty of negligently entrusting the truck to that driver.
The court first rejects the lessor’s argument that the Graves Amendment bars the
plaintiff’s claim since that Amendment expressly does not apply if there if there is
negligence on the part of the lessor. The court goes on to conclude that because enough
facts remain in contention regarding possible negligent entrustment by the lessor, it must
deny the lessor’s motion to dismiss the plaintiff’’s negligent entrustment claim.

Collins v. Auto Partners V. LLC, 276 So.3d 817 (July 31, 2019) *
An automobile dealership had leased a vehicle to one of its employees, who was
having his car serviced by the dealership. After being severely injured by this vehicle in
an accident, the plaintiff brought suit against the dealership/lessor based on a claim of
vicarious liability under Florida’s dangerous instrumentality doctrine. In this decision, a
Florida District Court of Appeal affirms the trial court’s summary judgment in favor of
the dealership/lessor. In doing so, it finds that (i) the Graves Amendment, which
preempts the dangerous instrumentality doctrine, does not require a written rental
agreement, (ii) the plaintiff did not allege any negligence or criminal wrongdoing on the
part of the dealership/lessor, and (iii) the employee had been treated like any other
customer of the dealership who received use of a loaner/rental car while the customer’s
vehicle was in the shop for repair.

O’Donnell v. Diaz, 2019 WL 1115715 (U.S.Dist.Ct. N.D.Texas March 11, 2019)

After the plaintiff, an automobile passenger injured in an accident, brought suit
against the driver and the rental car company that had leased the automobile to the driver,
alleging negligent entrustment of the vehicle by the lessor, this court considers whether
the Graves Amendment preempted any claim of negligent entrustment by plaintiffs.
Finding no guidance in the Fifth Circuit, the court mentions a 2010 Eighth Circuit case
(Carton v. General Motors Acceptance – see below) stating that negligent entrustment
could constitute one of the types of exceptions for negligence permitted by the Graves
Amendment for claims against lessors. However, as in that Eighth Circuit case, the court
here finds a lack of evidence supporting the plaintiff’s negligent entrustment claim and
grants summary judgment in favor of the lessor.

Newton v. Caterpillar Financial Services Corp., 253 So.3d 1054 (2018)

An independent contractor brought suit against the lessor of a multi-terrain loader,
which had leased the loader to the plaintiff’s employer, for damages related to injuries
sustained by the plaintiff. The basis of liability was Florida’a dangerous instrumentality
doctrine which places vicarious liability on owners of equipment considered to be
dangerous instrumentalities, whether or not the owners are at fault. The Florida Supreme
Court here reverses lower court decisions against the plaintiff, finding loaders to be motor
vehicles for purposes of the dangerous instrumentality doctrine. In this case the loader
had treads at the time of the accident, but could be converted from treads to tires. The
court also finds that the plaintiff’s status as an independent contractor did not exclude

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him from protection under the dangerous instrumentality doctrine. The Graves
Amendment apparently was not raised as a defense by the lessor, because –
notwithstanding the court’s finding the loader to be a motor vehicle for purposes of the
dangerous instrumentality doctrine – the definition of “motor vehicle” for purposes of the
Graves Amendment is “a vehicle driven or drawn by mechanical power and
manufactured primarily for use on public streets, roads, and highways,…”[emphasis
added].

Holder v. Anderson, 2018 WL 4956744 (U.S.Dist.Ct. M.D.Fla. May 14, 2018)

After a collision, the injured plaintiff brought suit against, among others, the
owner of a trailer which was attached to a tractor leased by the same entity (Smith
Transportation, Inc.). One of this decision’s holdings is that Smith’s “identifiable
property interest” – a leasehold interest – in the tractor was sufficient to attach potential
liability under Florida’s dangerous instrumentality doctrine. However, the court also
finds that the Graves Amendment applied to Smith and that since there was no evidence
that there was negligence on the part of Smith in its hiring and supervision of the driver,
any liability on the part of Smith would have to be found on bases unrelated to its
ownership or leasehold interest in the tractor-trailer.

Scott v. A Betterway Rent-A-Car, Inc., 2018 WL 1558268 (U.S.Dist.Ct. M.D.Fla. March

27, 2018)
This court finds that injured parties had failed to state a cause of action against the
car rental company that rented a car to a driver of the automobile responsible for the
plaintiffs’ injuries. The court finds that the Graves Amendment preempts Florida’s
vicarious liability statute and also holds that the plaintiffs had not sufficiently alleged
negligence or criminal wrongdoing that would be exceptions to the Graves Amendment’s
protections for motor vehicle lessors – stating, in particular, that the rental company did
not have a duty to investigate the driver’s ability to drive before renting the car.

Parker v. Miller, 2018 WL 898981 (U.S.Dist.Ct. S.D.Ohio February 15, 2018)

The plaintiff was seriously injured by a tractor trailer driven by one of the
defendants. The driver was employed by another defendant (Dakotaland) which had
leased the truck from a third defendant (Fowlds). The plaintiff’s claims included
vicarious liability against Dakotaland and Fowlds for the driver’s negligence as well as
various other negligence claims relating to the driver. Although both parties felt it
necessary to argue whether the two companies were “affiliates” as defined in the Graves
Amendment, this court holds that the Graves Amendment is simply inapplicable in this
case since its application is limited to claims that a vehicle owner is liable under state law
“by reason of its being the owner of the vehicle.” Not only does Ohio law not impose
strict vicarious liability on vehicle lessors of the kind that the Graves Amendment was
designed to preempt, but the plaintiff’s claims all concern whether the lessor here was the
driver’s employer under Ohio law.

Peters v. Hertz, 2017 WL 3136388 (Mount Vernon NY City Ct. July 13, 2017)
In this small-claims action, the plaintiff sought to recover damages sustained by
her vehicle due to alleged negligence of the driver of a truck rented from Hertz. Without

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explaining why, this court denies Hertz’s summary judgment motion based upon the
Graves Amendment, stating that the plaintiff had raised a triable issue of fact concerning
whether Hertz had negligently entrusted the truck to the driver.

Chase v. Cote, 2017 WL 3000739 (Conn.Super.Ct. June 12, 2017)(unpublished decision,

check court rules before citing)
The plaintiff instituted a personal injury action after sustaining injuries as a result
of a motor vehicle accident caused by the alleged negligent actions of the driver of a
motor vehicle who had leased the vehicle from Cheap Auto, a motor vehicle lessor. The
lessor here was unable to win a summary judgment motion based on the Graves
Amendment due to conflicting evidence concerning whether the rental agreement was
still in effect at the time of the accident (the stated initial due date for returning the
vehicle was March 25, 2014, and the accident occurred on June 6, 2014). The court notes
that the protection of the Graves Amendment is limited to harm to persons or property
that arises out of operation of the vehicle “during the period of the rental or lease.”

Negri v. Murphy, 2017 WL 1453894 (Conn.Sup.Ct. April 3, 2017)(unpublished decision,

check court rules before citing)
After the plaintiff was injured in an auto accident, she sued both the driver and the
leasing company that had rented the car to the driver. The claims against the lessor were
based upon vicarious liability for the recklessness and negligence of the driver as well as
for negligently entrusting the car to the driver. The court quickly disposes of the
vicarious liability claims, citing the Graves amendment, and also finds that there were not
facts to support negligent entrustment – e.g., the lessor had no reason to believe that the
driver was incompetent to operate a motor vehicle.

Escobar v. Nevada Helicopter Leasing LLC, 2016 WL 3962805 (U.S.dist.Ct. D.Hawai’i

July 21, 2016)
In this lawsuit by a widow of a helicopter pilot who died in a crash of the
helicopter, the plaintiff asserted state law tort claims against the lessor of the helicopter
(among other defendants). The lessor had purchased the helicopter from another
defendant and then leased it to a lessee owned by the same individuals that owned the
lessor. According to the court, the lessor was formed to take advantage of federal and
state tax incentives for entities established to purchase and lease helicopters. The court
holds that the state law tort claims are preempted by a provision in the Federal Aviation
Act entitled “Limitation of Liability” (49 U.S.C. Sect. 44112) stating generally that an
owner, lessor or secured party of a civil aircraft is liable for personal injury, death, or
property loss only when the aircraft is in the actual possession or control of such party.
The court analyzes the history of the law and the law of preemption to come to this
conclusion. In particular, the court states that “the legislative history of the statute
established that the federal law’s purpose and objective is to protect financiers, owners,
and long-term lessors [persons leasing an aircraft for at least thirty days] of aircraft from
liability when they were not in actual possession or control of the aircraft.”

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Stratton v. Wallace, 2016 WL 3552147 (U.S.Dist.Ct. W.D.N.Y. April 5, 2016)
This action is a motion by one of the defendants in the 2014 case decided by the
same court (previously summarized) for an interlocutory appeal to the U.S. Court of
Appeals for the Second Circuit. Not happy with the ruling in the previous decision that
the Graves amendment does not preempt all state law regarding vicarious liability for
motor vehicle lessors – since the Federal statute explicitly contains exceptions for
negligence on the part of either the lessor or its affiliates – this defendant evidently hoped
for a ruling from the Second Circuit that the preemption was broader. After a fairly
detailed discussion of preemption law, this court denies the defendant’s motion.

Johnke v. Espinal-Quiroz, 2016 WL 454333 (U.S.Dist.Ct. N.D.Ill. February 5, 2016)

This case grows out of an accident with multiple fatalities in which a driver had
leased a truck from a lessor that previously employed him as a driver and knew that the
driver had a visual impairment. Although the lessor was also in the business of
delivering products, the court holds that it can still receive the benefits of the Graves
amendment – i.e., someone in the business of leasing motor vehicles can still be protected
from state vicarious liability laws even though it is not solely in the business of leasing.
However, the court also indicates that the motor vehicle lessor/defendant in this case may
be subject to liability under legal principles other than those based purely on vicarious
liability due to its lessee’s actions – such as employer-based claims seeking to hold the
defendant liable for the negligence of its alleged statutory employee.

Eisenberg v. Cope Bestway Express, Inc., 2015 WL 5708479 (N.Y.App.Div. Sept. 30,
2015)
Gachlin v. Coastal International Trucks, LLC, 2015 WL 1500547 (Conn. Super. March
10, 2015)(unpublished opinion, check court rules before citing)
The two cases find that a grant of summary judgment with regard to personal
injury damage claims is appropriate in favor of truck lessors where the Graves
Amendment applies – i.e., the action was commenced on or after August 10, 2005; the
truck or chassis qualifies as a motor vehicle under the Graves Amendment; the
lessor/owner was engaged in the business of renting or leasing motor vehicles; and there
are no allegations of negligence or criminal wrongdoing on the part of the lessor.

Houston v. McNeilus Truck and Manufacturing, Inc., 124 A.D.3d 1210, 999 N.Y.S.2d
284, 2015 WL 25075 (N.Y.A.D. January 2, 2015)
This case is an action for damages related to a death caused by a motor vehicle
which invokes a legal principle of New York law not related to the Graves Amendment:
“As a general matter, a finance lessor…that never possesses a product due to its direct
shipment to the lessee and thus has no ability to inspect the product for defects may not
be held liable in negligence for failure to inspect or warn of a dangerous condition.” The
majority of this appellate panel affirms a lower court’s denial of a summary judgment
motion by the owner of the vehicle (presumably a finance lessor) due to the existence of
factual issues regarding whether the decedent’s employer (a “corporate sibling” of the
lessor) had been appointed by the lessor as an agent to inspect the vehicle. A dissenting
opinion of two judges would grant the summary judgment motion, asserting that the
plaintiff had failed to raise this agency argument in the motion court.

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Fisher v. National Progressive, Inc., 2015 WL 105971 (U.S.Dist.Ct. W.D.Okla. January
7, 2015
Davis v. Elrac, LLC, 2014 WL 5394924 (Conn.Super. Sept. 26, 2014)(unpublished
opinion, check court rules before citing)
DelPrete v. Senibaldi, 2014 WL 5286741 (Conn.Super. Sept. 16, 2014)(unpublished
opinion, check court rules before citing)
These three cases are all attempts to hold lessors of motor vehicles liable for
accidents caused by their lessees employing an exception for negligence or criminal
wrongdoing under the Graves Amendment. The plaintiffs claimed that the lessor had
negligently entrusted the vehicles to lessees who caused the accidents. In the Oklahoma
case, the U.S. District Court states that although the Tenth Circuit had not yet addressed
the issue of whether the Graves Amendment permits negligent entrustment claims, that
District Court would act on its own precedent and consider whether the elements of
negligent entrustment under Oklahoma law were satisfied in that case. In the two
Connecticut decisions, the courts proceed on the assumption that negligent entrustment
claims are permitted and go on to examine whether the claims are legally sufficient to
keep the lessor from successfully barring the claim. In the context of discussing whether
the lessors actually or constructively knew that the lessees should not be entrusted with
the vehicle, the decisions indicate that automobile rental companies do not have an
obligation to investigate the driving record of lessees other than checking the driver’s
license. In the Davis case, the plaintiff was found to have sufficiently alleged the lessor’s
failure to check the license to ensure it was facially valid, and thus the court denies the
lessor’s motion to strike. In the DelPrete case, the plaintiff’s pleadings were found
insufficient and the opposite conclusion was reached.

Stratton v. Wallace, 2014 WL 3809479 (U.S.Dist.Ct. W.D.N.Y. August 1, 2014)

After the owner of a tractor-trailer leased it to an affiliated (through common
ownership) company, the lessee’s driver struck a disabled car and killed the car’s driver.
The decedent’s husband brought suit against the owner (among others), claiming that the
owner should be held vicariously liable. This court decides that the Graves Amendment
does not prevent such an action insofar as the statutory exception to shielding lessors
from such liability states that “there is no negligence or criminal wrongdoing on the part
of the owner (or an affiliate of the owner).” The court states that the natural reading of
this portion of the statute is that if either the owner or its affiliate has been negligent, then
the owner can be found liable simply by reason of being the owner. The court
distinguishes this case from the typical kind of case to which the Graves Amendment was
directed – where commercial leasing and rental companies have little control over their
lessees.

Itha v. Stafford, 2014 WL 2696756 (Conn.Super. May 8, 2014)(unpublished opinion,

check court rules before citing)
After a rented car driven recklessly by a minor injured the plaintiffs, they brought
suit to recover damages against the vehicle owner and the leasing company. Although
the court acknowledges that the Graves Amendment protects the owner and leasing
company against any vicarious liability claims, it holds that the plaintiffs’ allegations of

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negligent entrustment (based on the driver’s age and very poor driving record) should not
be dismissed.

37 South Fifth Ave Corp. v. Dimensional Stone & Tile, 2014 WL 1632212 (Mount
Vernon, NY City Ct. April 24, 2014)
The defendant truck leasing and rental company (Penske) had entered into a truck
rental agreement with a lessee whose employee negligently drove the truck and caused
damage to the plaintiff’s vehicle. While the court and the defendant lessee recognized
that Penske could not be held vicariously liable under the Graves Amendment, a
provision of New York’s Vehicle and Traffic Law was invoked to hold Penske liable for
not providing its lessee with a statutorily minimum amount of liability insurance
coverage ($10,000) for property damage, and that like any rental car company, Penske
could not contract away this responsibility by giving the lessee the option of declining the
insurance coverage and providing its own.

Shew v. Hill, 2013 WL 5290005 (U.S.Dist.Ct. N.D.Ala. Sept. 18, 2013)

This case illustrates the fact that the Graves Amendment, while clearly
preempting state vicarious liability laws with respect to motor vehicle lessors, also
contains a savings clause that permits state law-based negligence actions against such
lessors – e.g., for negligent entrustment of motor vehicles to parties that subsequently
cause damage or injury while using the vehicles.

Kindard-Jennings v. The Yellow Cab Company, Inc., 2013 WL 4046584 (Conn.Super.

July 19, 2013)(unpublished opinion, check court rules before citing)
A taxicab company attempted to use the Graves Amendment as a defense to a suit
for damages caused by an automobile accident that alleged vicarious liability under
Connecticut law. Citing the reasoning of a New York appellate court, this court agrees
that there is no authority for the defendant’s argument inasmuch as the protection of the
Graves Amendment extends only to those engaged in the trade or business of renting or
leasing motor vehicles. The New York appellate decision had also rejected an argument
that the Graves Amendment violated equal protection by favoring leasing companies over
other vehicle owners such as taxi owners, owners of repair shops providing loaner
vehicles and car dealers permitting test drives.

Khan v. MMCA Lease Ltd., 2012 WL 5870341 (N.Y.App.Div. Nov. 21, 2012)
This appellate decision reverses a trial court’s denial of a motion by a motor
vehicle lessor to dismiss the complaint of someone whose vehicle was struck by the
vehicle owned by the lessor and operated by its lessee. The plaintiff alleged that the
lessor had negligently maintained its vehicle and thus could be held liable under the
negligence exception in the Graves Amendment (which generally bars recovery against
lessors in the business of leasing motor vehicles on grounds of vicarious liability). The
court finds that the lessor does not engage in the repair and maintenance of vehicles that
it leases, but instead such maintenance was the sole responsibility of the lessee.

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Whitmore v. American Dream Logistics, Inc., 2012 WL 3872022 (U.S.Dist.Ct. E.D.Mo.
Sept. 6, 2012)
Relatives of an individual killed by a tractor trailer sued the company leasing the
truck as lessee and its driver and also sued the lessor on the ground that it had negligently
failed to collect driver trip records from the driver, which allegedly would have revealed
violations of regulations regarding the number of hours permitted for driving, which
violation purportedly resulted in the individual’s death. This court grants the lessor’s
summary judgment motion on the ground that the negligence savings clause contained in
the Graves Amendment (which clause states that an owner can be held directly liable for
harm caused by a lessee if the owner is itself guilty of negligence or criminal
wrongdoing) would not apply in this case since nothing in the lease or law required the
owner to monitor driver trip records for compliance with such driving hours rules.

Lewandowski v. Adelberg, 2011 WL 4424391 (Conn.Super. Sept. 6, 2011)(unpublished

opinion; check court rules before citing)
This very brief decision illustrates that as long as a claim against a motor vehicle
lessor alleges negligence (in this case, alleged failure to properly maintain the vehicle), a
motion to strike based on the Graves Amendment’s preemption of vicarious liability
claims will not succeed.

Vreeland v. Ferrer, 2011 WL 2652187 (Fla.Sup.Ct. July 8, 2011)

Less than three months after holding that federal law clearly preempts Florida
statutory law imposing vicarious liability on motor vehicle lessors (see the Vargas case
below), the Florida Supreme Court holds that federal law concerning vicarious liability of
aircraft lessors does not preempt the Florida common law doctrine of dangerous
instrumentality imposing vicarious liability on such aircraft lessors with respect to certain
classes of injured parties. Overturning lower Florida court decisions in favor of an
aircraft lessor being sued by the estate of a passenger on the aircraft, this court holds that
the federal law limiting liability (49 U.S.C. Sec. 44112 (1994)) neither explicitly nor
implicitly preempts Florida law – in particular because the federal statute is worded to
apply only to personal injury, death or property loss of people or property located “on
land or water” – i.e., only underneath and not on the aircraft. Nothwithstanding a
dissenting opinion stating that such a narrow interpretation of the federal statute “defies
reality,” the court cites federal legislative history and certain cases from other
jurisdictions in support of its view (acknowledging that there are cases holding
otherwise).

Lester v. Patinkin, 2011 WL 2479593 (Conn.Super. May 25, 2011)(unpublished opinion,

check court rule before citing)
A plaintiff injured in a motor vehicle accident brought suit against the motor
vehicle lessor as well as the driver/lessee. This decision holds that the Graves
Amendment does not preempt claims of negligent conduct by the lessor such as failure to
check whether the brakes were in good working order, and therefore denies the lessor’s
motion for summary judgment on such negligence claims.

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Donnelly v. Rental Car Finance Corp., 2011 WL 2417317 (Conn.Super. May 17,
2011)(unpublished opinion, check court rules before citing)
The issue in this case is whether the Graves Amendment entirely precludes a
negligent entrustment suit. After commenting that the issue has not yet been addressed
by Connecticut appellate courts nor by the U. S. District Court for Connecticut or by the
Federal Second Circuit Court of Appeals, the court concludes that an action for negligent
entrustment may be pursued against a rental car company in some circumstances – i.e.,
that the rental company has an obligation to do at least some basic (not stringent)
screening such as checking whether facts readily available would indicate the potential
customer’s unfitness to drive.

Vargas v. Enterprise Leasing Company, 2011 WL 1496474 (Fla.Sup.Ct April 21, 2011)
The Florida Supreme Court (with one dissent) here emphatically decides that
provisions of Florida’s statutes imposing vicarious liability on motor vehicle lessors are
preempted by the Graves Amendment and do not fall under the financial responsibility
law exception of the Graves Amendment that would preclude preemption. The federal
preemption applies even though Florida had eliminated vicarious liability for certain
categories of lessors and limited it for other categories.

Carton v. General Motors Acceptance Corp., 2010 WL 2732874 (U.S.Ct.App. 8thCir.

July 13, 2010) After affirming a U.S. District Court’s decision that the Graves
Amendment precludes a finding of vicarious liability against a motor vehicle lessor, the
Court of Appeals also affirms the District Court’s dismissal of the claim that the lessor
was negligent in continuing to entrust the vehicle that had caused the plaintiffs’ injuries
to the lessee (i.e., by not repossessing the vehicle) after the lessee had defaulted in its
lease payments and failed to maintain required insurance coverage, and after the lessor
had won a judgment for replevin. This decision finds that the lessee’s fiscal
irresponsibility and failure to obtain insurance did not itself pose an unreasonable risk of
physical harm to others such that the lessor had a duty to repossess the vehicle.

Chapman v. Herren, 2010 WL 2927377 (Conn.Super. June 24, 2010)(unpublished

opinion – check court rules before citing)
In this suit involving a claim against a car rental company for injuries sustained
by the plaintiff allegedly caused by the lessee of the automobile, the court disposes of the
plaintiff’s allegation that the Graves amendment is unconstitutional by citing a recent
Connecticut Supreme Court case, Rodriguez v. Testa, 296 Conn. 1 (2010), holding that
the amendment’s preemption of the state’s vicarious liability statute was constitutional.
The decision goes on to hold that the rental company was not independently negligent in
the manner contemplated by the savings clause in the Graves amendment permitting
claims against motor vehicle lessors on grounds other than vicarious liability. The court
holds that there is no legal authority for concluding that Connecticut imposes a duty on
rental companies to investigate a lessee’s driving record – e.g., to determine whether
there may have been past convictions for alcohol related offenses or reckless driving.

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Wilson v. Camrac, Inc., 2010 WL 532450 (Conn.Super. Jan. 11, 2010) (unpublished
opinion – check rules before citing)
This court grants a motion to strike a complaint against a car rental company,
finding the federal Graves Amendment to be applicable to prevent a vicarious liability
claim and rejecting the plaintiff’s argument that the federal statute was an
unconstitutional violation of the commerce clause of the U.S. Constitution.

Babiuk v. Lake, 2009 WL 4728010 (U.S.Dist.Ct. M.D.Fla. December 3, 2009)

In a vicarious liability action against a motor vehicle lessor, the lessor argued for
dismissal based upon lack of federal diversity jurisdiction insofar as federal law limits
liability to an amount below the dollar threshold for such diversity jurisdiction. This
court dismisses the claim against the lessor – not for lack of jurisdiction based upon a
dollar limit on liability, but because the federal statute (the Graves amendment) entirely
preempts Florida vicarious liability law.

Petrushonis v. Andrews, 2009 WL 3839304 (Conn.Super. Oct. 20, 2009)(unpublished

opinion – check court rules before citing)
Summary judgment in favor of truck lessor against a plaintiff injured in a motor
vehicle accident. The plaintiff had made no allegation that the lessor was liable because
of its own direct negligence or criminal actions. Although the court notes that the
complaint does not specifically so allege, the court infers that the vicarious liability action
against the lessor is premised upon a Connecticut statute providing for such – a statute
that had been termed a “statutory suretyship.” However, the court finds that such statute
has been preempted by the federal statute (the Graves amendment) referenced in many
recent cases on the subject (including Connecticut cases).

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.

Garcia v. Vanguard Car Rental USA, Inc., 540 F.3d 1242 (11th Cir. 2008)
This Eleventh Circuit decision holds that the federal Graves amendment preempts
Florida law – a common law “dangerous instrumentality” doctrine coupled with statutory
recognition of that doctrine which places caps on motor vehicle lessor liability – under
which motor vehicle lessors can be held vicariously liable for the negligence of their
lessees. The decision rejects the plaintiffs’ arguments that their lawsuits fall instead
within the Graves amendment’s savings clause, which concerns non-preemption of state
financial responsibility and insurance standards. According to the court, to accept this
interpretation of the savings clause would result in the exception swallowing the whole.
The court also undertakes an extensive analysis of the Graves amendment’s
constitutionality under the Commerce Clause and finds it to be constitutional.

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Brookins v. Ford Credit Titling Trust, 2008 WL 2744335 (Fla.App. July 16, 2008)
Acknowledging that its views are different than other Florida appellate court
decisions on the subject (certifying conflict with such other decisions), this appellate
court affirms the summary judgment granted by a trial court in favor of a motor vehicle
lessor against a plaintiff injured by the lessee-operator, but only on the ground that the
lessor was in compliance with Florida law requiring the maintenance of certain amounts
of insurance in order to avoid the imposition of liability for injuries caused by its lessees.
Contrary to the other appellate court decisions, this court holds that the federal Graves
Amendment does not completely preempt either the Florida common law dangerous
instrumentality doctrine or Florida statutes imposing vicarious liability if the lessor has
failed to meet certain conditions. The court emphasizes the language of the Graves
Amendment disclaiming any intention to supersede state laws imposing financial
responsibility or insurance requirements on motor vehicle lessors.

Avelino v. Williams, 2008 WL 2252529 (Conn.Super. May 8, 2008)(unpublished

opinion, not reported in A.2d)
Brief decision dismissing plaintiff’s argument that the Graves Amendment is an
unconstitutional exercise of power under the commerce clause, which argument was
supported only by the original Graham v. Dunkley New York trial count decision, which
was subsequently reversed, and by a U.S. District Court decision from the Southern
District of Florida which has been criticized by other District Courts in the same Circuit.

Graham v. Dunkley, 2008 WL 269527 (N.Y.A.D. Feb. 1, 2008)

An Appellate Division reversal of a notorious lower court decision which held the
Graves Amendment (the federal statute preempting state laws holding motor vehicle
lessors to be vicariously liable for injuries caused by their lessees) to be contrary to the
U.S. Constitution as a violation of the commerce clause. Consistent with a number of
other listed decisions and contrary to the holding below, this court finds that the New
York vicarious liability statute has a substantial effect on interstate commerce and that
the federal statute preempting it is a legitimate exercise of federal power to govern
interstate commerce. “There can be no real dispute that the rental and lease of vehicles,
and the conditions under which such transactions occur, are economic activities which
impact the national market….As detailed in amicus briefs, vicarious liability laws caused
lessors to either cease leasing cars in states having them, opting for more expensive
balloon note structures, or spread the cost of higher insurance premiums to lease
customers nationwide.”

Kumarsingh v. PV Holding Corp., 2008 WL 238955 (Fla.App. Jan. 30, 2008)

A brief decision affirming the holding of a lower court that the Graves
Amendment supersedes and abolishes the Florida statute governing vicarious liability of
auto lessors as of the federal statute’s effective date (August 10, 2005). In this case, the
appellate court agreed with the trial court’s determination that the defendant lessors were
liable only up to the limits of the statutory self-insurance financial responsibility
minimums set forth in the Florida statute ($10,000), the auto’s lessee who caused the
injuries having been uninsured.

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Ross v. Richardson, 2007 WL 3261558 (Conn.Super. October 19, 2007)(not reported in
A.2d)
Kumarsingh v. PV Holding Corp., 2007 WL 2847956 (Fla.App. October 3, 2007)
These two decisions find against plaintiffs attempting to hold automobile leasing
companies liable for injuries based upon state vicarious liability laws – due to the
preemptive effect of the federal statute referenced below. The Connecticut court also
holds against the plaintiff’s argument that the leasing company did not comply with the
federal statute’s section indicating that the federal statute does not supersede state law
imposing financial responsibility or liability insurance requirements, inasmuch as the
plaintiff had not raised the issue in her complaint.

Poirier v. Papadopoulos, 2007 WL 2245893 (Conn.Super. July 19, 2007)(unpublished)

The plaintiff sued both the driver of a motor vehicle and the leasing company
(Volvo Finance North America) from whom the driver leased the vehicle for injuries
caused to the plaintiff. This court grants Volvo’s motion for summary judgment based
upon both the federal preemptive statute referenced in various cases below (the plaintiff
attempted to argue that such statute was an unconstitutional violation of the commerce
clause – an argument rejected by this court) as well as a Connecticut statute excepting
lessors of private passenger motor vehicles where the lease term is one year or more and
the leased vehicle is insured for bodily injury liability in amounts meeting that statute’s
minimum requirements.

McCloskey v. Klair, 2006 WL 3825270 (U.S.Dist.Ct. E.D.Mich. December 27, 2006)

Following an accident in which the plaintiff was injured by a truck owned by one
of the defendants (an individual named Bhupinder Singh), Mr. Singh attempted to rely on
a Michigan statute that both (i) makes vehicle owners liable for injuries caused by either
their or an agent’s negligence, and (ii) shields lessors in the business of leasing motor
vehicles (pursuant to leases for periods of greater than thirty days). Since Mr. Singh had
leased only this one vehicle to another of the defendants (Buffalo Group, Inc. – additional
facts indicated that Mr.Singh continued to operate the leased truck himself and was a
passenger in the truck at the time of the accident), the court denies his motion for
summary judgment, finding that he was not sufficiently “engaged in the business of
leasing motor vehicles” to be shielded by the statute.

Coach USA, Inc. v. Van Hool N.V., 2006 WL 3523102 (U.S.Dist.Ct. W.D.Wisc.
December 5, 2006)
After a bus caught fire while being driven, causing considerable damage to the
bus and to passengers’ personal property, the lessee sued the lessor in tort for damages
(the lessee had also sued the manufacturer, which was not a party to the lessor’s motion
to dismiss decided by this case). Noting that the lease contained “plain, unequivocal,
unambiguous language” in which the lessor disclaimed all warranties and stated that it
would not be liable for any damage arising from the lessee’s use the bus, the court
granted the lessor’s motion to dismiss, stating that “a party unhappy with the performance
of a product may not seek in tort remedies that are unavailable to it under the terms of its
contract.”

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Moncrease v. Chase Manhattan Auto Finance Corp., 911 A.2d 315 (Conn.App. 2006)
Under the Connecticut vicarious liability statute in effect at the time of the
accident, a lessor of a motor vehicle was stated to be liable for damage to person or
property to the same extent as the operator of the vehicle. This appellate court upholds a
grant of summary judgment in favor of the motor vehicle lessor – finding that the lessor
was not liable under Connecticut’s statute inasmuch as the driver of the car under lease
(the lessee’s unlicensed daughter) was not an authorized driver under the terms of the
lease agreement, which prohibited use of the vehicle by unlicensed drivers. (The court
also makes mention in a footnote of the preemptive federal statute discussed below,
which statute did not apply to this case since this action was commenced before the
statute’s effective date.)

Johnson v. Agnant, 2006 WL 4172893 (U.S.Dist.Ct.D.C. April 25, 2006)

Notwithstanding plaintiff’s creative arguments to the contrary, this U.S. District
Court for the District of Columbia holds that the federal statute referred to in the case
below was clearly intended to preempt any statute in any of the states or the District of
Columbia that imposes vicarious liability for the negligence of a lessee on the lessor of a
motor vehicle as long as such lessor is engaged in the business of leasing motor vehicles
and there is no negligence or criminal wrongdoing on the part of such lessor. The
plaintiff had attempted to argue that the federal statute needed to explicitly name the
statutes to be preempted in order to be adequate to repeal the contrary provisions of state
law.

Davis v. Ilama, 2006 WL 1148702 (Conn.Super. March 14, 2006)

One of the first motor vehicle vicarious liability cases to be decided after the
enactment of a federal statute intended to preempt existing state laws on the subject (49
U.S.C. Sect. 30106). Making mention of the only two earlier decisions in the U.S. (in
New York and Maine) addressing the applicability of this new federal statute, the court
holds against the plaintiff inasmuch as the plaintiff was seeking to impose, under
Connecticut law, precisely the type of liability that the federal statute prohibits – liability
solely by virtue of ownership (in this case, ownership by a vehicle rental company).

King v. Car Rentals, Inc., 2006 WL 788716 (N.Y.App.Div. March 28, 2006)
A case illustrating the complexities of deciding which law to apply to a claim for
personal injuries incurred in a motor vehicle accident that occurred in Canada with an
auto rented from a New Jersey lessor by a driver with substantial New York connections.
This court affirms a lower court decision to apply New Jersey (rather than New York)
law, and thus not hold the lessor vicariously liable for the plaintiff’s non-economic
losses, since the driver was not the employee or agent of the owner – a condition for
liability under New Jersey law, but not required by New York law.

Morales v. Rotino, 2006 WL 552443 (N.Y.App.Div. March 7, 2006)

Ford Motor Credit Company is held to remain vicariously liable under New York
law as the lessor of a motor vehicle which injured plaintiff, notwithstanding the plaintiff’s
execution of a release in return for a monetary settlement with the driver of the vehicle.
Ford’s attempt to argue that the language of the release – encompassing the defendant

97
and its “heirs, executors, administrators, successors and assigns” – included Ford as an
administrator and assignee of the defendant was rejected both by the lower court and this
appellate court.

Chieffo v. Clifford, 2005 WL 2981771 (Conn.Super. Oct. 20, 2005) (unpublished

opinion)
After Connecticut had amended its vicarious liability statute to except leases of
private passenger motor vehicles if the total lease term is one year or more and the leased
vehicle is insured for bodily injury liability in certain minimum amounts, the plaintiff
argued that the statute was unconstitutional on various state and federal grounds in order
to recover from the vehicle’s lessor for injuries. This court finds against each of the
plaintiff’s grounds for unconstitutionality and grants the lessor summary judgment.

Sigovich v. Norma J. Haynes Trucking Co., 2005 WL 1971883 (Conn.Super. July 28,
2005)(unpublished opinion)
Lessor of a trailer moved for summary judgment in an action brought by a
plaintiff injured in an accident allegedly caused by the negligence of the driver of the
tractor (which driver was said by the trailer’s lessor to have no relationship with such
lessor) to which the trailer was attached. The lessor contested theories of liability based
upon both a statutory presumption of agency in a motor vehicle context and statutory
strict liability for motor vehicle lessors. Holding that there exists a split of authority as to
both (1) whether summary judgment is appropriate in the context of the agency issue and
(2) whether a trailer is a motor vehicle for purposes of the vicarious liability statute, the
court denies the lessor’s motion.

Coleman v. Windham Aviation Inc., 2005 WL 1793907 (R.I.Super. July 18,

2005)(unpublished opinion)
In deciding a summary judgment motion by a plaintiff requesting a declaration
that the owner and lessor of an aircraft is vicariously liable under state law (both
Connecticut and Rhode Island are similar in this respect) for injuries caused by the
negligent operation of an authorized operator, the court rejects the lessor’s argument that
federal law preempts such state laws. Notwithstanding apparently clear language in the
federal statute supporting the lessor’s preemption argument, the court examines the
recodification that resulted in the present federal statute and concludes that such
recodification impermissibly extended the scope of the exemption beyond the intent of
the predecessor statute. In a later opinion (also unpublished), a Superior Court in
Connecticut comes to the opposite conclusion concerning federal law: Mangini v.
Cessna Aircraft, 2005 WL 3624483 (Conn.Super. Dec. 7, 2005).

Fredette v. Keybank, USA, 2005 WL 1670808 (Conn.Super. June 14, 2005) (unpublished
opinion)
After characterizing Connecticut’s statute imposing vicarious liability on motor
vehicle lessors for injuries caused by the negligence of its lessees as a “statutory
suretyship,” the court upholds the lessor’s right to seek contractual (under the lease
agreement) and common-law indemnity from the lessee and the lessee’s permitted driver.

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Chilberg v. Chilberg, 788 N.Y.S.2d 533 (App.Div. 2004)
In denying Ford Motor Credit Company’s contention that Section 388 of New
York’s Vehicle and Traffic Law providing for the vicarious liability of owners of motor
vehicles for damages caused by the negligence of the operators of such vehicles is
unconstitutional as applied to long-term vehicle lessors, the court notes that the
legislative purpose was to ensure that injured persons would have recourse to a
financially responsible party and that imposing such liability on long-term lessors is not
an unreasonable means of accomplishing that purpose.

Lanni v. O’Donnell, 2004 WL 2550452 (Mass.Super. Oct. 12, 2004)

Interpreting a Massachusetts law (General Laws c. 231, Sect. 85A) providing that
registration of a motor vehicle in the name of the defendant in an action for damages
arising out of an accident involving such motor vehicle is prima facie evidence that the
driver was acting as an agent of the owner (requiring an affirmative defense by the owner
that it was not responsible for the actions of the driver), the court denies a motion for
summary judgment brought by the lessor/owner (Honda Lease Trust, a/k/a American
Honda Finance Corp.) of the automobile. The court characterized standard lease
provisions requiring greater than mandatory liability insurance, indemnity for claims
arising from use of the automobile, and covenants regarding the vehicle’s use, location
and alteration as “measures of control” that create genuine issues of material fact about
an agency relationship between the lessee and its lessor.

Litvak v. Fabi, 8 A.D.3d 631, 780 N.Y.S.2d 155 (App.Div. 2004)

Reversal of lower court ruling in favor of Keybank, which ruling was premised on
a finding that the bank only held a security interest in a vehicle involved in an accident
and thus could not be liable as an owner under New York’s vicarious liability statute.
Though the basis for the lower court’s finding is not made clear, the appellate court finds
that because the agreement between the bank and the customer was a lease and the bank
held title to the vehicle, the bank was an owner within the meaning of the vicarious
liability statute.

Adreozzi v. Brownell, 2004 WL 1542228 (R.I. Super. July 8, 2004) (unpublished

opinion)
Automobile lessor is held to be subject to one of two Rhode Island statutes
(G.L.1956 Sec. 31-33-6 and 31-34-4) providing for vicarious liability for injuries caused
by the negligence of its lessee. The decision cites Oliveira v. Lombardi, 794 A.2d 453
(R.I. Sup. Ct. April 3, 2002), in which the Rhode Island Supreme Court found that the
purpose of that state’s statute was to find “well-funded pockets” and “additional sureties”
for the satisfaction of negligence claims, and commented that if this would have a
negative impact on the motor-vehicle financing business in the state, the forum for
seeking change was the state legislature. After the lease discussed in this case had been
entered into, Rhode Island’s legislature did indeed amend those two statutes to provide
for either no owner liability or liability limits under various circumstances; however,
those amendments contained a sunset provision making them effective only until July 1,
2004, originally, which sunset date has been twice extended until July 1, 2006. The
decision also cites a recent article surveying the laws of thirteen states providing for

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unlimited or potential vicarious liability of motor vehicle lessors: Kenneth J. Rojc and
Kathleen E. Stendahl, Vicarious Liability of Motor Vehicle Lessors, 59 Bus.Law. 1161
(2004).

Gardner v. Hinman, 2004 WL 616140 (Conn. Super. March 17, 2004)

Commenting that Connecticut’s General Statute Sec. 14-154a imposing liability
on lessors of motor vehicles for damages caused by the operators to whom the motor
vehicles are leased creates a liability even greater than vicarious liability at common law,
this court holds that a discharge of the operator’s liability in bankruptcy does not bar a
claim against the lessor under this statute. The court distinguishes the legal consequences
of such a bankruptcy discharge from those of a release of an operator (and his insurer in
return for a payment to the injured party) which was held also to release the lessor in
Cunha v. Colon, 792 A.2d 832 (Conn. Sup. Ct. April 2, 2002).

Sierra v. A Betterway Rent-A-Car, Inc. d/b/a Budget Rent-A-Car of Atlanta, 863 So.2d
358 (Fl.Ct.App. 2003, rehearing denied Jan. 16, 2004)
Georgia car rental company that knew a car would be driven to Florida and did
nothing to prohibit such is held to be subject to personal jurisdiction in Florida and the
plaintiff’s vicarious liability claim is to be governed by Florida, rather than Georgia, law.
[Morales v. The Coca-Cola Company, 813 So.2d 162 (Fla.Dist.Ct.App. 2002) holds that
under Florida’s common law dangerous instrumentality doctrine as applied to motor
vehicles (unique to Florida, according to the court), the owner of a motor vehicle is liable
to third parties for injuries caused by the negligent use of the motor vehicle by someone
to whom the owner entrusted the vehicle. While “mere naked title” may not entail
vicarious liability, the beneficial ownership ordinarily evidenced by legal title does.]

[Vicarious liability for motor vehicle lessors has been the subject of much
controversy in recent years. Threats of withdrawal from the motor vehicle leasing
business by various finance companies caused Connecticut to amend its version of such a
vicarious liability statute (General Statute Sec. 14-154a) not to apply to certain motor
vehicle leases of one year or longer and caused Rhode Island to amend its statutes as
noted above. Many motor vehicle leasing companies ceased doing business in New
York, which maintained unlimited vicarious liability for lessors. As mentioned in the
more recent cases above, on August 10, 2005, a federal highway, transit and
reauthorization bill (H.R. 3, Public Law 109-59, 49 U.S.C. Sect. 30106) known as the
Graves Amendment was enacted, a portion of which is intended to preempt state law
concerning vicarious liability of motor vehicle lessors.]

Product Liability of Lessors

Jenks v. New Hampshire Motor Speedway, Inc., 2011 WL 3627290 (U.S.Dist.Ct. D.N.H.
August 17, 2011)
Following an accident involving a golf cart being used to carry people doing
charity work at a motor speedway event, the plaintiff’s representative brought suit against
a number of defendants including a strict product liability claim against the manufacturer

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of the cart. During the proceedings, the financing subsidiary of the manufacturer, which
had purchased the cart in order to lease it for use at the speedway, was brought into the
suit on the same theory. In this decision, that subsidiary is granted summary judgment on
this claim. The court finds the reasoning of other cases persuasive in determining that
financing companies are outside the chain of distribution and are not in the business of
selling carts to the public.

Wert v. Jefferds Corp., 2008 WL 204479 (U.S.Dist.Ct.W.D.Va. Jan. 25, 2008)(slip copy)
After being injured in a forklift accident at his workplace, this plaintiff sued the
lessor of the forklift, which lessor also responsible for maintaining the forklift, on a
variety of theories of liability – including product liability. After commenting that lessors
such as this defendant may be subject to product liability claims since they “distribute”
goods (even though not selling them) – citing the Restatement (Third) of Torts: Product
Liability – the court grants the lessor’s motion for summary judgment based on the facts
of this case. Probably due to the responsibilities undertaken by this lessor, there was no
discussion about how product liability might apply to lessors that are strictly financial
lessors.

Massey v. Cassens & Sons, Inc., 2007 WL 773380 (U.S.Dist.Ct.S.D.Ill. March 12, 2007)
Finding that the lessor of a truck trailer was merely a financial lessor, as opposed
to a commercial lessor, this court grants the lessor’s motion for summary judgment
against the plaintiff alleging that the lessor should be held strictly liable for injuries
caused by the defective product. In this decision, the court traces the history of Illinois
common law concerning strict product liability – beginning with sellers of defective
products, extending the rationale for this doctrine to lessors placing the product in the
stream of commerce, and finally distinguishing financial lessors whose role is limited to
providing the money as opposed to the products. Interestingly, as the decision points out,
the distinction between financial and commercial lessors was first made in federal courts
in Illinois and later adopted by state courts.

Wengenroth v. Formula Equipment Leasing, Inc., 784 N.Y.S.2d 123 (App.Div. 2004)
In a product liability action for injuries incurred by an operator of a tractor hitched
to a water wagon, summary judgment motions of the manufacturers of the tractor and
wagon and of the leasing company who leased the two pieces of equipment to the
employer of the operator are denied. The court held that the lessor may be held liable
regardless of the fact that it did not manufacture either part of the vehicle inasmuch as it
selected the tractor without a door and installed a non-oscillating hitch – each being an
issue that raised potential liability (to be decided at trial) for the manufacturers as well.

Svege v. Mercedes-Benz Credit Corp., 329 F.Supp.2d 272 (D.Conn. 2004)

Assignee of a truck lease is held to be a “product seller” under Connecticut’s
Product Liability Act and thus potentially liable for damages resulting from a motor
vehicle accident involving the truck. While the court comments that being an assignee of
a lease or providing financing for the product manufacturer does not necessarily entail
potential liability under this Act, Mercedes-Benz Credit Corp.’s financing program with
Freightliner is held to constitute sufficient involvement in the steam of commerce sending

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Freightliner trucks into the state so as to render MBCC a “product seller” under the Act.
The court also comments in a footnote that MBCC did not argue, and the court did not
therefore address, whether the Connecticut Supreme Court would reject strict product
liability for entities performing the role of “finance lessor,” as has been the case in certain
other states.

Other Conflicting Interests under Article 2A

Textainer Equipment Management Limited v.The United States, 2012 WL 5465983

(U.S.Ct.Fed.Cl. November 6, 2012)
This case from the U.S. Court of Federal Claims is interesting and unusual in that
the United States (specifically, the Army) was able to take advantage of Article 2A to
avoid a takings claim under the Constitution’s Fifth Amendment. The Army had entered
into a master lease agreement as lessee with a company that leased intermodal shipping
containers. Under the terms of that master lease, the Army would take title to any
containers that were lost or deemed lost ninety days after the end of the lease term.
After the end of the master lease term, the government paid the lessor for approximately
1000 containers that the government claimed it could not find. The issues in this case
arose because the containers leased to the Army were obtained by the lessor under lease
agreements with a number of other companies (which can be referred to as the prime
lessors). When these prime lessors were either not paid or only partially paid for the lost
containers by the Army’s lessor (which went out of business), they sued the government
and claimed that their containers had been taken by the Army without paying the prime
lessors just compensation in violation of the Fifth Amendment. After examining the facts
of the case, including the time at which the government was notified by the prime lessors
that the Army’s lessor was in default to them under their leases of the containers, this
court holds that the government qualified as a buyer in the ordinary course under 2A-305:
taking the containers free of the existing prime leases inasmuch as it bought the
containers from someone in the business of selling goods of that kind without knowledge
at such time that the sale violated the rights of the prime lessors. The decision indicates
that if it had not qualified as a buyer in the ordinary course, the government would have
been deemed to have taken the containers without having paid just compensation.

Rent-N-Roll v. Highway 64 Car and Truck Sales, 2010 WL 4629604 (Tenn.Ct.App. Nov.
16, 2010)
In a well-reasoned decision regarding Article 2A’s provisions dealing with
conflicts between lessors of accessions to goods and those having other interests in the
whole of such goods, this appellate court affirms a judgment granting priority to a lessor
of custom wheels and tires. A dealer perfected a security interest in an automobile that it
sold to a woman who subsequently leased custom wheels and tires from a company that
had to cut into the body of the car in order to install the wheels and tires. After the
woman defaulted under both the security agreement with the dealer and the leases with
the lessor of the wheels and tires, the dealer repossessed the car and the lessor sued the
dealer to obtain possession of its wheels and tires. After a thorough examination of 2A-
310, Lessor’s and Lessee’s Rights When Goods Become Accessions, the court concludes

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that the lessor of the wheels and tires was entitled to obtain possession of those leased
goods from the secured party/dealer, but that it must first compensate the dealer for the
damage done to the car when installing the wheels. Although the court does not attempt
to explain the rationale behind the statute, 2A-310 makes a critical distinction regarding
the priority of the lessor of accessions depending upon whether the lease of the
accessions was entered into (i) before, or (ii) at the time or after, the goods became
accessions. The interests of the lessor (as well as of the lessee) have priority only in the
former case with respect to previously existing competing interests in the whole such as
the dealer’s security interest.

Farm Credit Leasing Services Corp. v. Ferguson Packaging Machinery, Inc., 2007 WL
4276841 (U.S.Dist.Ct. E.D.Pa. Dec. 3, 2007)
This suit was brought by a lessor’s assignee (of both the lease and the equipment)
against the buyer of the equipment from the lessee. The lease, as might be expected,
prohibited such a transfer by the lessee, but the buyer apparently was unaware of the
existence of the lease. This court agrees that the assignee may have a valid case for
recovery of monetary damages against the buyer based upon claims of conversion and
unjust enrichment, and thus denies the defendant’s motion to dismiss such claims (left
undecided was a possible ground for dismissal based upon the statute of limitations). It is
not clear whether the plaintiff/assignee had considered enforcing the lease against the
buyer under 2A-305, which indicates that the buyer took the equipment subject to the
lease (inasmuch as it could not qualify as a buyer in the ordinary course from a
merchant/lessee).

The CIT Group/Equipment Financing, Inc. v. M & S Grading, Inc. (In re M & S Grading,
Inc.), 457 F.3d 898 (8th Cir. 2006)
A lessee of certain equipment, which lessee was apparently also a dealer in
equipment of that type, sold the leased equipment to a buyer which subsequently filed for
bankruptcy. When the buyer listed the equipment as property of the bankruptcy estate,
the lessor brought an action to obtain possession. The Eighth Circuit upholds the
decision of the bankruptcy court in the lessor’s favor based upon the provisions of Article
2A-305, which first provides generally that a buyer from a lessee takes subject to the
existing lease, second provides an exception for buyers in the ordinary course from
dealers of goods of that kind, and third provides an exception to such exception in cases
where the goods are subject to a certificate of title statute and such statute provides
otherwise. In this case, the applicable Nebraska certificate of title statute states that a
buyer of a vehicle covered by such statute cannot obtain title to the vehicle until the buyer
has both physical possession of the vehicle and the certificate of title for the vehicle.
Since the lessor still retained the title, it was entitled to have the vehicle turned over to it.
(Apparently, at this stage of the proceedings, no one was contesting the true lease nature
of the lease; otherwise Article 2A would not have been applicable.)

Mercedes-Benz Credit Corporation v. Johnson, 1 Cal.Rptr.3d 396 (Ct.App. 2003)

In a dispute between an individual who had purchased a car from a used car
dealer, which dealer had previously leased the car for his personal use, and the lessor of
the car to the dealer, the court holds that the lessor had the superior right to the car. The

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decision rests on the court’s interpretation of “entrusted” as employed in California’s
version of 2A-305, which states that an ordinary course buyer from a lessee, who is in the
business of dealing in the kind of goods entrusted by the lessor to the lessee, takes free of
the existing lease contract. Article 2A-103(3) refers to Article 2-403(3) for a definition
of “entrusting.” To the concepts of delivery and acquiescence in retention of possession
found in the standard version of Article 2, California added the phrase “for the purpose of
sale, obtaining offers to purchase, locating a buyer, or the like.” The lessor here had no
such purpose. The court goes on to opine that even the ordinary dictionary definition of
“entrust” indicates that a lessor under a lease prohibiting assignment could not be said to
have entrusted the car to someone who would be expected to default on the lease by
selling the car and running off with the proceeds.

Leasing One Corporation v. Caterpillar Financial Services Corp., 776 N.E.2d 408, 48
UCC Rep. Serv.2d 1505 (Ind.Ct.App. 2002)
Decision in which the facts are unfortunately not made clear and the statements of
law appear to be mistaken. A lessee (which may or may not be a dealer in the type of
equipment being leased) under a lease agreement (which may or may not be a true lease)
sold the equipment being leased to a third party (who is alternatively stated to be the user
of the equipment or its source of financing). While this case is not very clear concerning
the facts and the law, different variations on the factual background can be used to
illustrate the rights of third parties who buy from someone who either has granted a
security interest to, or has leased the equipment from, a financing source.

Vendor Issues

General Electric Capital Corp. v. Rhino Business Systems, Inc., 2017 WL 693654
(U.S.Dist.Ct. E.D.Ca. February 17, 2017)
General Electric Capital Corp. v. Rhino Business Systems, Inc., 2016 WL 2743557
(U.S.Dist.Ct. E.D.Ca. May 11, 2016)
GECC had entered into a financing agreement with a vendor of office equipment
and related services to finance the purchase or lease of that equipment by customers of
the vendor. After the vendor allegedly violated a number of representations that it had
made to GECC in the agreement (e.g., that it would not upgrade or refinance the
transactions financed by GECC without GECC’s consent) and also took actions
encouraging the vendor’s customers to breach their contractual obligations to GECC,
GECC sued to force the vendor to repurchase the transactions as required in the financing
agreement. Since the vendor never responded to GECC’s complaint, in the earlier case,
the court grants GECC’s request for a writ of attachment in the amount owed GECC
under the financing agreement against the proceeds of the sale of the vendor’s assets to
another company (Ray Morgan RMC, Inc.). In the more recent case, the court grants
GECC’s motion for default judgment (in the amount of $404,164.18 plus attorneys’ fees
and costs).

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Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 577 Fed.Appx. 606 [2014
WL 4257774] (U.S.Cir.Ct.App. 7th Cir. August 29, 2014)
Based on the answer provided by the Minnesota Supreme Court to the
reformulated questions certified to that court by the Seventh Circuit, the Seventh Circuit
reverses the District Court decision in favor of Illinois Paper, holding that Lyon has
stated an actionable claim for breach of a contractual representation of future legal
compliance, but remands to the District Court for a consideration of the remaining factual
issues regarding a determination of damages. Although this case concerned a
representation of future legal compliance – inasmuch as the enforceability representation
in the vendor agreement concerned contracts to be offered to Lyon by Illinois Paper – the
freedom of contract/allocation of risks rationale arguably also apply to representations
about the present legal compliance of contracts being offered (or assigned if a vendor or
other assignor is assigning a contract to a finance company) at the time the representation
is being made.

Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 2014 WL 2965404
(Minn.Sup.Ct. July 2, 2014)
Addressing questions certified to them by the U.S. Court of Appeals for the
Seventh Circuit, the Minnesota Supreme Court reformulates the questions to decide
whether a claim for breach of a contractual representation of future legal compliance is
actionable under Minnesota law without proof of reliance. This question is answered in
the affirmative, and the court goes on to comment that Minnesota public policy favors the
freedom to contract and “Under freedom of contract principles, parties are generally free
to allocate rights, duties and risks…In this case, the parties agreed to allocate the risk of
legal noncompliance to Illinois Paper.” This answer is consistent with some of the
Seventh Circuit’s comments in its 2013 decision, and led the Seventh Circuit to reverse
the District Court decision in favor of Illinois Paper.

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 [2012
WL 401493 (U.S.Dist.Ct. N.D.Ill. Feb. 6, 2012)] in which the District 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

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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?”

Fortran Group International, Inc. v. Tenet Hospitals Limited, 543 Fed.Appx. 934 (U.S.
Ct.App. 11th Cir. November 1, 2013)(not for publication in the Federal Reporter, see
Federal and Eleventh Circuit rule of procedure before citing)
The Eleventh Circuit Court of Appeals affirms a District Court’s ruling in favor of
a copier manufacturer and against a copier leasing company. Those two parties had
signed a non-circumvention agreement with respect to a particular leasing opportunity for
a lessee. After entry into the lease, the lessee and leasing company agreed to an early
buyout by the lessee and termination of that lease. Subsequently, the lessee entered into a
new lease for additional equipment directly with the manufacturer. The leasing company
brought suit claiming a violation of the non-circumvention agreement, but this court
affirms the decision of the trial court stating that the non-circumvention agreement
applied only to the initial lease.

Key Government Finance, Inc. v. E3 Enterprises Inc., 923 F.Supp.2d 733 (D.Md. 2013)
This case illustrates the importance of careful wording regarding the
responsibilities of parties to a program agreement with respect to events having an effect
on payments from the obligor. The plaintiff/financing source was party to a program
agreement with vendors of copier equipment and services that were used by the United
States Army. After the Army decided not to renew a lease of copier equipment, the
plaintiff demanded that one of the vendors pay it the discounted balance of payments for
the renewal period pursuant the terms of the program agreement. The program
agreement indicated that the plaintiff was entitled to such a payment in the event of a
non-renewal other than for non-appropriation of funds. The defendants argued that such
amount would only be payable to the plaintiff if the non-renewal were caused by some
fault of the defendants; however, after observing that there was no non-appropriation of
funds by Congress, the court finds for the plaintiff, holding that the program agreement
did not require non-renewal to be the result of the defendants fault.

U.S. Express Leasing, Inc. v. Elite Technology (N.Y.), Inc., 928 N.Y.S.2d 696
(N.Y.App.Div. August 25, 2011)
The plaintiff/lessor and defendant/vendor were parties to a Master Purchase
Agreement & Assignment of Leases (MPA) pursuant to which the vendor would lease
equipment to its customers and then sell both the equipment and the lease to the lessor.
However, with respect to one particular customer the lessor entered into a lease directly
with a customer after having been provided by the vendor with what was apparently an
inaccurate and unsigned accountant’s report. After the customer defaulted, the lessor sued
the vendor for breach of representations and warranties made in the MPA and also for
fraud. This appellate court agrees with the trial court’s decision to dismiss the claim for
breach of representations and warranties – which were never triggered since the MPA did
not apply inasmuch as the financing did not take the form contemplated by that

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agreement – but disagrees with the trial court’s dismissal of the fraud claim (finding that
the lessor had alleged enough facts to satisfy the elements of such a claim).

Express Blower, Inc. v. Earthcare, LLC, 2010 WL 5023244 (U.S.Ct.App. 5thCir. Dec. 9,
2010)(not selected for publication in the Federal Reporter; see federal rules of appellate
procedure regarding citation)
Inasmuch as the background of this case involves a vendor’s payment in full to a
lessor of a defaulted lessee’s obligations, it does not illustrate any issues that need to be
resolved between a lessor and its vendor. However, it may be of interest as an example
of the application of legal principles of suretyship in the context of the vendor
subsequently seeking recovery from the lessee.

NCMIC Finance Corporation v. Brican America, Inc., 2010 WL 543339 (U.S.Dist.Ct.

S.D.Fla. Feb. 9, 2010)
In this brief decision the court denies cross motions for summary judgment in a
dispute between a finance company and a vendor for whom the finance company
provided lease financing for the vendor's customers. In the vendor agreement between
the two parties, the vendor represented that it had entered into no agreements with lessees
other than the lease documents of which the finance company was aware. At some time
after the finance company learned that the vendor had entered into undisclosed marketing
agreements with the lessees and a third party, the finance company claimed breach of
warranty and demanded repurchase of the leases according to the terms of the vendor
agreement. The court denies summary judgment to the finance company inasmuch as it
finds that there was a genuine issue of material fact as to whether the finance company
had waived its right to demand repurchase because it continued to fund leases for some
time after learning of the marketing agreements. According to the vendor, the finance
company only made its repurchase demand after the finance company's lender expressed
a desire for the finance company to diversity its portfolio by reducing its concentration of
business with that particular vendor.

Capital Solutions, LLC v. Konica Minolta Business Solutions U.S.A., Inc., 2010 WL
446936 (D.Kan. Feb. 5, 2010)
Although this decision describes few of the facts that underlie the dispute, it can
generally be inferred that the main parties are a lessor that either originates equipment
leases for the customers of a vendor of such equipment or perhaps takes assignment of
such leases originated by the vendor (the vendor also apparently services the leases for
the lessor) and a bank which in turn funds the leases of the lessor by making loans to the
lessor and taking back a security interest in the leases and equipment. After the lessor
apparently defaulted under it financing agreements with the bank, the bank attempted to
enforce its security interest in its collateral (which the court finds to have been properly
perfected), but was opposed by the vendor which claimed a prior right to the equipment
resulting from its having bought back equipment pursuant to a buy-back obligation with
the lessor. Notwithstanding the bank’s knowledge of such obligation, the court holds that
the bank had not authorized the sale of the equipment to the vendor free of the bank’s
security interest, and thus the bank retains the right to enforce such security interest
against the equipment in the hands of the vendor.

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Susquehanna Commercial Finance, Inc. v. Vascular Resources, Inc., 2010 WL 95127
(U.S.Dist.Ct. M.D.Pa. January 6, 2010)
This case is more interesting for its facts and yet-to-be resolved issues than for the
specific decisions rendered. The lessor funded nearly $3 million to the vendor to finance
a lease of medical equipment by a lessee medical practice. The vendor, however, had not
delivered the equipment more than a year later, alleging both that the lessee was not yet
prepared to accept the equipment and that the lessee has continued to make payments
under its lease. After noting the “curious posture of this case,” in which neither the lessor
nor the vendor availed itself of the opportunity to join the lessee as an indispensable
party, the court denies both the lessor’s request for a preliminary injunction requiring the
vendor to freeze and set aside the amount of money funded by the lessor and the vendor’s
request to dismiss the case for failure to state a claim.

BBAS, Inc. v. Marlin Leasing Corporation, 289 S.W.3d 153 (Ark.App. 2008)
This appellate court affirms a lower court grant of summary judgment in favor of
a lessor which, after its lessee defaulted, learned that the vendor had delivered only a
small portion of the equipment to the lessee for which the lessor had paid in full and that
the vendor had “refunded” the value of the undelivered equipment to the lessee instead of
to the lessor. Rejecting the vendor’s argument that awarding the lessor damages would
amount to recourse against the vendor -- recourse to which the vendor had never agreed -
- the court finds that summary judgment in favor of the lessor for the value of the
equipment not delivered to the lessee was appropriate based upon the common law tort of
conversion committed by the vendor.

T-M Vacuum Products, Inc. v. TAISC, Inc., 2008 WL 4093684 (U.S.Dist.Ct. S.D.Tex.
August 28, 2008)
The court finds in favor of a vendor who sued a lessor for the balance of payments
owing to the vendor for furnaces to be leased by the lessor to a lessee. The lessor
claimed that because the vendor had delivered the furnaces after the original delivery
deadline, (i) the lessor was not obligated to pay the balance to the vendor and (ii) the
lessor was entitled to a return of the conditional payments made by the lessor to the
vendor prior to delivery. Noting that the lessee had agreed to extend the delivery
deadline and that the lessee had made all payments owing to the lessor under the lease,
the court granted the vendor’s motion for summary judgment.

Capitol Business Solutions, LLC v. Konica Minolta Business Solutions USA, Inc., 2008
WL 2761307 (U.S.Dist.Ct. D.Kansas July 14, 2008)
While this decision focuses on the particularities of the plaintiff-lessor’s
pleadings, it serves to illustrate potential risks when a lessor relies on its vendor partner to
bill and collect lease payments from the lessees whose use of the vendor’s equipment is
being financed by the lessor. Here the lessor contends that the vendor failed to remit
such payments to the lessor in a timely manner, causing various types of damage to the
lessor including injury to its relationship with its bank.

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M & I Equipment Finance Co. v. Lewis County Dairy Corp., 2007 WL 128879
(U.S.Dist.Ct. N.D.N.Y. Jan. 11, 2007)
After entering into a lease agreement for equipment that had not yet been
manufactured, the lessor made payments – authorized by the lessee – both to the
equipment manufacturer and to the lessee (the latter as reimbursement for a payment
previously made by the lessee to the manufacturer) and was to make further payments to
complete the purchase of the equipment being manufactured. The terms of the lease did
not require the lessor to make its payments pursuant to any particular schedule, but did
give the lessor the right to terminate the lease by a particular date if the manufacturer
failed to deliver. When the manufacturer refused the lessor’s request to provide some
assurances that future lease payments owing would be supported by some sort of
collateral, (i) the lessor ceased making payments to the manufacturer, (ii) the
manufacturer ceased production of the equipment, and (iii) after learning of the
foregoing, the lessee stopped making payments under the lease. Finding that the lessor’s
actions did not constitute a breach of its obligations under the lease and that the lessee’s
non-payment clearly breached its obligations, the court granted the lessor’s motion for
summary judgment.

Wells Fargo Bank v. Levin Professional Services, Incorporated, 2006 WL 1919174

(U.S.Ct.App. 4th Cir. July 12, 2006)
Following delivery of equipment to a lessee, which equipment was to be
purchased from its vendor by the lessor, the vendor was never paid by the lessor and sued
to garnish lease payments from the lessee. Prior to the lessor’s default in paying the
vendor, the lease had been assigned by the lessor to Wells Fargo (as an indenture trustee
for noteholder beneficiaries). In this decision, the Circuit Court affirms the District
Court’s grant of summary judgment in favor of Wells Fargo permitting recovery of
garnished lease payments from the vendor because Wells Fargo was a bona fide
purchaser for value who took possession of the lease prior to the vendor’s garnishment
action.

First Nonprofit Insurance Company v. Miralink Corporation, 2006 WL 1156393

(U.S.Dist.Ct. N.D.Ill. April 27, 2006)
Notwithstanding the supplier’s claims that there was no contract directly between
it and the lessee of equipment sold by that supplier to the lessor, and thus that the lessee
had no legal right to enforce warranties with respect to the equipment, the court notes that
Article 2A automatically extends the benefit of the supplier’s promises made to the buyer
of the equipment (i.e., the lessor) to the lessee under a finance lease. The court thus
refuses to grant the supplier’s motions to dismiss, and permits the lessee to continue in its
attempt to prove the existence of a supply contract. The court also makes short shrift of
the supplier’s suggestion that it is entitled to stand in the shoes of the lessor under the
finance lease and get the benefit of the lease’s disclaimer of warranties and arbitration
provisions.

Wesley v. Schaller Suburu, Inc., 893 A.2d 389 (Conn. 2006)

Plaintiffs had successfully argued in trial court that Subaru Auto Leasing, to
whom an auto dealer had assigned a lease contract, was liable under an earlier version of

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Connecticut’s vicarious liability statute for injuries caused by the car’s driver. The
lessor’s defense that the driver was not listed as an authorized driver on the lease was
rejected by the trial court, which first found that the dealer clearly understood that the car
was intended to be driven by the person involved in the accident and that the leasing
company could be held responsible inasmuch as the dealer was acting as its agent to have
the lease executed. The Supreme Court reverses, finding that the dealership agreement
made the dealer an agent only with respect to titling the leased cars and commenting that
decisions in other jurisdictions nearly all hold that auto dealers are not agents of auto
financing companies.

Human Resources Development Press, Inc. v. Ikon Office Solutions Company, Inc., 2006
WL 149043 (U.S.Dist.Ct. D.Mass. Jan. 12, 2006)
While not especially instructive concerning principles of leasing law, in dealing
with various motions for summary judgment, the court’s discussion of the facts illustrates
potential problems regarding the impact on a lessor’s rights of actions and promises made
to a lessee by a vendor. In this case the vendor had purportedly taken back mal-
functioning equipment that was on lease by its financing source and provided new
equipment under a new lease – while representing to the lessee that the lessee’s
obligations under the first lease would cease, when in fact such obligations continued.

Citicorp Vendor Finance, Inc. v. Premier Support Services, Inc., 2005 WL 3505554
(Conn.Super. Nov. 4, 2005)
A copier equipment vendor had entered into both a lease agreement and a separate
service agreement with respect to the same equipment. After the lease was assigned to a
finance company, the lessee ceased paying under the lease and claimed that the vendor
had failed to provide promised maintenance services. When the finance company sued
on the lease, the lessee sought indemnification from the vendor. This decision holds that
the two agreements were separate and entered into for distinct purposes, and thus there
was no common law right of indemnification by the vendor for the lessee’s failure to pay
under the lease.

Leasecomm Corporation v. Starbuck, 2005 WL 1009740 (Mass.Super. March 14, 2005)

In an action by a leasing company against an equipment vendor for violation of a
vendor agreement between such parties, the court awards damages to the lessor after
finding that an employee of the vendor had either forged or fraudulently obtained
signatures of lessees on leases of equipment paid for by the lessor.

Wiltel Communications, LLC v. Sunrise International Leasing Corporation, 2005 WL

354030 (Minn.App. Feb. 15, 2005) (unpublished opinion)
Summary judgment granted by a lower court against a lessor in favor of a
manufacturer is reversed. The manufacturer shipped equipment to a lessee after (i) the
lessor and lessee had signed lease documents, (ii) the lessor had collected a down
payment from the lessee (consisting of the first and last months’ rent), and (iii) the lessor
had placed two purchase orders with the manufacturer. The lessor argued that the
manufacturer had never accepted the purchase orders by providing proper invoices
indicating delivery of the equipment and that the lease transaction had never closed. The

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lessee filed for bankruptcy in the meantime, and the lessor did not pay the manufacturer
for the equipment. Notwithstanding the lower court’s ruling that the lessor owed the
manufacturer for the equipment, this court holds that there are material issues of fact
regarding the existence of a contract between the manufacturer and the lessor.

Engel Machinery, Inc. v. Wells Fargo Equipment Finance, Inc., 2004 WL 2973824 (U.S.
Dist.Ct. N.D.Ill. Nov. 30, 2004)
In connection with a proposed lease, the prospective lessor/finance company
entered into certain agreements with the equipment vendor including, among other
provisions, that the finance company would not fund the vendor until the lease had
commenced. The equipment was delivered before, but was only fully installed and
accepted after, the finance company’s commitment to fund, as expressed in its
agreements with the vendor, had expired. The finance company never signed the lease
with the lessee (a condition for the commencement of the lease) and shortly thereafter the
lessee filed bankruptcy with the vendor not having been paid. This decision grants the
finance company’s motion for summary judgment based in part on the court’s reading of
the Illinois Credit Agreements Act to mean that the finance company would have had to
sign the lease before it would be considered bound under that Act to pay the vendor.

Fortinet, Incorporated v. OFC Capital, 2004 WL 2496184 (U.S.Dist.Ct. N.D.Cal. Nov. 5,

2004)
Summary judgment is denied an equipment vendor suing a leasing company for
failure to pay for equipment delivered to a lessee, which shortly thereafter entered
bankruptcy. Although the vendor argued that a contract for payment was established by a
series of e-mails between the vendor and the lessor, the court noted some additional
correspondence that conditioned the lessor’s payment on such steps as installation and
inspection of the equipment and the lessee’s execution of a delivery and acceptance form.

Wells Fargo Financial Leasing, Inc. v. LMT Fette, Inc., 382 F.3d 852 (8th Cir. 2004)
Notwithstanding claims by the equipment vendor made to the lessee that he was
acting as an agent for the lessor on a lease of the equipment and promises by such vendor
to take over the lease, the court refused to release the lessee from liability to the lessor in
the absence of any showing of fraud or misconduct by the lessor, citing clear language in
the lease that the vendor was not the agent of the lessor and could make no representation
on behalf of the lessor.

Transfer of a Manufacturer’s Warranty to a Lessee

A. Lopresti & Sons, Inc. v. General Car & Truck Leasing System, Inc., 79 Fed.Appx.
764, 2003 WL 22442932 (U.S.Ct.App. 6th Cir. Oct. 27, 2003)
After finding no evidence that a truck lessor had not fulfilled its obligations to
service the trucks and that the lessor had made no warranty that the trucks delivered
would be free from mechanical defects, the court goes on to consider the lessee’s claim
against the manufacturer of the engines. This claim is denied on the basis that the
manufacturer’s warranty ran to the owner (i.e., the lessor) and that there was no evidence

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that the lessor had transferred the warranty to the lessee. The court evidently did not
have to consider whether the warranty was assignable.

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

Onset Financial, Inc. v. Victor Valley Hospital Acquisition, Inc., 2018 WL 1662611
(U.S.Dist.Ct. D.Utah April 4, 2018)
In this case a lessee’s arguments focuses primarily on the differences between
end-of-term provisions in proposal letters from the lessor and in the final version of such
provisions found in the executed master lease and schedules. The lessee attempted to
argue in favor of equitably rescinding or reforming the lease agreement based on a
doctrine of unilateral mistake. Finding such arguments to be implausible, the court
indicates that (i) the proposals were clearly not binding commitments, (ii) the lessee had
the burden of reading and understanding the lease, and (iii) the lessee had the opportunity
to amend master lease provisions regarding automatic renewals in the schedules just as it
had negotiated changes in other end-of-term provisions in such schedules.

First Technology Capital, Inc. v. BancTec, Inc., 2017 WL 4296339 (U.S.Dist.Ct. E.D.Ky.
September 26, 2017)
The lessor and lessee under a master lease became embroiled in a dispute over the
end-of-term provisions under two equipment schedules. One of the schedules contained
an end-of-term provision stating that after the expiration of the initial term, if no
definitive election to either purchase, renew or return the equipment were made, the lease
would continue on a month-to-month basis until the lessee had made total monthly
payments equal to the equipment’s fair market value. The court rules that no default had
occurred, no holdover rent was due, and sufficient month-to-month rentals had been paid
to entitle the lessee to own the equipment. The issue under the other schedule involved

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the parties’ intent regarding the intended lease term (60 or 61 months). Here the court
rules that all of the documents associated with this schedule may be considered (not
simply the wording of the master lease) and that the issue was ambiguous enough to
require a jury trial.

Winthrop Resources Corp. v. Apollo Education Group, Inc., 2017 WL 3531516

(U.S.Dist.Ct. D.Minn. August 16, 2017
In this case, the lessee had notified the lessor that it chose not to renew its lease of
about 1000 servers, it returned all of the servers it could find, and it told the lessor that
about 3% of the equipment had been lost. With respect to the lost equipment, the lessee
sent a check for its fair market value as calculated by an independent third party. Instead
of simply accepting the equipment and the check (or, if it disagreed with the FMV
calculation, raising that issue), this lessor sued, contending that the lease called for
renewal of the entire lease if not all equipment was returned. Noting that the lessor had
not given any reason for not accepting the FMV check, the court refuses the lessor’s
motion to strike the lessee’s claim of breach of the implied covenant of good faith and
fair dealing. The court even goes so far as to admit allegations made by the lessor’s
attorney, when that attorney was representing lessees in previous cases, that this lessor
had a history of deceptive and bad faith conduct.

Midwest Railcar Corp. v. Everest Railcar Services. Inc., 2017 WL 1383765 (U.S.Dist.Ct.
S.D.N.Y. April 13, 2017)
A lessee of railcars, under a lease that provided for an irrevocable option notice
(to be received by the lessor between 180 and 360 days prior to lease expiration) to either
extend the lease or purchase the railcars, contacted the lessor in a letter during the
relevant time period stating, “This letter will serve as our written notice to either renew
the lease at terms to be negotiated or exercise a purchase option at an amount to be
negotiated.” The renewal and purchase options in the lease stated that the rental and
purchase amounts were to be equal to “the then fair market value of the Units, as
determined by Lessor,…” The lease also stated that the lessee had to provide a minimum
of 180 days irrevocable notice of its intention to return all of the units. The court ruled
that the lessee’s letter constituted an irrevocable notice either to renew or to purchase and
a rejection of the option to return the railcars at the end of the lease. Although the lessee
argued that the letter did not constitute the exercise of an irrevocable option, but instead
only a willingness to negotiate specific terms of either a renewal or purchase, and
notwithstanding the lessee’s claim that the lessor’s offers of specific renewal and
purchase prices were above fair market value, the court holds that since “fair market
value can be determined objectively,” the letter triggered an irrevocable obligation on the
part of the lessee. Since the lessee did not either renew or purchase, the lessor had stated
a claim for breach of contract as a result of the lessee’s revocation of its exercise of the
irrevocable option (with damages to be determined, evidently, after further proceedings).
This ruling constitutes a lesson in fully understanding the meaning of end of term
provisions and in very carefully addressing those provisions when the time comes. The
ruling may seem a bit harsh from the lessee’s point of view, but the court does indicate
that the lessor will be held to a standard of reasonableness when deciding what dollar
amount will constitute fair market value.

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Mid-Missouri Spray Service, Inc. v. South Delta Aviation, Inc., 2015 WL 3828246
(U.S.Dist.Ct. E.D.Ark. June 19, 2015)
A lessee of an aircraft sued its lessor for damages, claiming that the lessor had
refused to consummate the sale of the aircraft to the lessee according to the terms of a
purchase option given the lessee. The court grants the lessor’s motion for summary
judgment, concluding that, even if the lessee had given the lessor timely notice under the
option agreement (a fact disputed by the lessor), the lessee did not have the ability at the
time the lease expired to make the purchase option payment because it did not have the
funds available or approval for a loan for which it had applied. This court bases its
conclusion on common law, citing the Restatement (Second) of Contracts, even though
the Arkansas Supreme Court has not addressed the issue.

Thomas Energy Corp. v. Caterpillar Financial Services Corp., 2014 WL 7366676

(Tenn.Ct.App. Dec. 26, 2014)
After encountering financial difficulties, the plaintiff contacted the lessor to
attempt to change certain terms of various lease agreements including, in particular,
permission to return the equipment early as part of his satisfying his obligations under the
leases. Plaintiff claimed that lessor had previously agreed orally to such a return, but
then subsequently reneged on that promise, forcing him to sell the equipment himself and
then pay off the leases. After plaintiff sued the lessor for failure to fulfill this oral
modification, the trial court granted summary judgment in favor of the lessor. This
appellate court agrees with the trial court’s determination that the plaintiff was a
merchant for purposes of Tennessee’s Article 2A provision [208(2)] stating that a
requirement in a signed lease supplied by a merchant that excludes modification except
by a signed writing must be separately signed by the other party unless that other party is
also a merchant. Thus the plaintiff’s argument that this provision in its leases needed to
be separately signed by the plaintiff was to no avail.

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.

Winthrop Resources Corporation v. GroupEx Financial Corporation, 2012 WL 6097292

(MinnApp. Dec. 10, 2012)(designated as unpublished and not to be cited except as
provided by Minn. statutes)
This appellate court affirms a lower court’s grant of summary judgment to a
lessor regarding a lease’s provisions (i) contemplating the possibility of multiple

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installation dates for various pieces of equipment listed on the same lease schedule
having a single commencement date and therefore a single end-of-term date for all
equipment on that schedule, and (ii) requiring no less than 120 days’ notice before the
end of the lease term of the lessee’s intent to terminate the schedule and return the
equipment. The decision illustrates the consequences of not paying close enough
attention to the meaning and application of such end of lease provisions.

Graphic Pallet and Transport, Inc. v. Balboa Capital Corp., 2012 WL 1952745
(U.S.Dist.Ct. N.D. Ill. May 30, 2012)
After entering into a number of leases with the lessor, the lessee alleged that an
employee of lessor had told the lessee that it could acquire the equipment at the end of
each lease term for one dollar. Since the leases themselves indicated otherwise, the
lessee claimed that various exceptions to the parol evidence rule (e.g., fraud and mistake)
should apply and cause the court to decide in favor of the lessee/plaintiff. This court
instead grants the lessor/defendant’s motion to dismiss.

TFG-Illinois, L.P. v. United Maintenance Company, Inc., 2011 WL 5239728

(U.S.Dist.Ct. D.Utah Nov. 1, 2011)
In a case involving a number of claims by both the lessor and lessee, the primary
issue involved whether the lessor had a right to claim the payments owing under the lease
for an automatic twelve-month renewal term, which renewal term resulted from the
failure by the lessee to provide the requisite prior notice of its election among the stated
end-of-term options. Agreeing with the lessor that the lessee was liable for these renewal
term payments, the court rejects arguments by the lessee (characterized by the court as a
sophisticated party assisted by counsel) that certain e-mails between the parties
constituted substantial compliance with the notice requirement. The decision also deals
with whether an assignment agreement between the plaintiff and the previous lessor
needed to be in writing and, even if the unwritten assignment was invalid (the court held
it was valid), whether the plaintiff had standing as a servicer of the lease. One of the
other claims raised by the lessee was that the lease was actually a security agreement,
although it was not made clear how the lessee would benefit from such a finding. In any
event, the court denied the lessee’s summary judgment motion in this regard, stating that
it could not decide as a matter of law that the lessor did not retain any residual interest in
the equipment subject to the lease.

TFG-North Carolina, L.P. v. Performance Fibers, Inc., 2011 WL 2010002 (U.S.Dist.Ct.

D.Utah May 23, 2011)
Plaintiff/lessor and defendant/lessee entered into a lease having end-of-term
options providing for either the purchase of the equipment for a price to be agreed upon
by both parties or, in the event of no agreement to purchase, then a twelve month
extension at the rate in the lease followed by successive six-month renewals at the same
rate subject to termination by either party by giving prior notice one hundred eighty days
before the end of the renewal period. The lessee argued that its obligations came to an
end at the end of the initial term of the lease, but the court agrees with the lessor that the
parties viewed the transaction as a lease and that the lessee was obligated under the end-
of-term provisions.

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Republic Bank v. Ethos Environmental, Inc., 2011 WL 587772 (U.S.Dist.Ct. D.Utah
February 9, 2011)
After the lessee had defaulted under a lease, the assignee of the original lessor
moved for summary judgment. In granting this motion, the court considered and rejected
a number of lessee arguments for not enforcing the lease. Among the more interesting
was the lessee claim that the end of term provisions in the lease constituted the sort of
perpetual obligation to endlessly renew the lease found to be unenforceable in another
case. The court correctly distinguishes this provision from the one cited by the lessee by
noting that one of the end of lease alternatives – purchase for a price to be agreed upon;
terminate the lease and return the equipment, but then enter into a required new lease of
equipment replacing the returned equipment; or continue for additional twelve then six
month terms at the same rental followed by additional six month terms unless notice of
termination is given by either party – eventually permitted the lessee to terminate.

House of Flavors, Inc. v. TFG-Michigan, L.P., 719 F.Supp.2d 100 (D.Maine 2010)
In this case the court concludes that a lessee was fraudulently induced to enter
into a lease with a particular lessor when, after considerable negotiation regarding the
lessee’s request for a fixed price purchase option, the lessor – claiming it was unable to
clearly provide what the lessee wanted because doing so might jeopardize the lessor’s tax
benefits – gave the lessee a somewhat vaguely worded side letter of intent meant to
assure the lessee. When the lessee attempted to exercise its purchase option at the price it
thought had been agreed to, the lessor refused. After determining that the lessee had been
defrauded, the court went on to determine damages due the lessee from the lessor that
would put the lessee in the position it should have been had the lessor honored what the
lessee thought had been promised by the lessor.

Frost National Bank v. L&F Distributors, Ltd., 165 S.W.3d 310 (Texas May 27, 2005)
After an intermediate appellate court had ruled that language in a lease giving the
lessee the right to buy the equipment for a stated amount “on or before the Expiration” of
the lease meant that the lessee could purchase the equipment for that amount at any time
before the end of the scheduled sixty month term, the Texas Supreme Court holds that the
poorly worded provision could only have been meant to permit the exercise of that option
at the end of the term and that the lessee’s and appellate court’s interpretation was
“unreasonable, inequitable and oppressive.”

First American Commercial Bancorp, Inc. v. Interior Architects, Inc., 2004 WL 2011398
(U.S. Dist.Ct. N.D.Ill. Aug. 31, 2004)
Citing a lease’s integration clause and Article 2A-202, Final Written Expression:
Parol or Extrinsic Evidence, the court holds that an unsigned facsimile side letter placing
a cap on the fair market value purchase option found in an addendum to the master lease
could not be enforced by the lessee. Prior to the initiation of litigation, there had been a
number of instances in which the lessor and lessee had negotiated purchase prices that
exceeded the purported cap. The court also held that the term “fair market value” – not
defined in the lease – was not ambiguous as a matter of law, at least with respect to the
purported cap at issue. The court cites definitions of “fair market value” in Black’s Law

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Dictionary and in some Illinois case law, while acknowledging that there may be a
number of nuances in determining fair market value – none of which were present in this
case.

Central Funding, Inc. v. Compuserve Interactive Services, Inc., 2003 WL 22177226

(Ohio App. 10 Dist. Sept. 23, 2003), appeal not accepted for review, 802 N.E.2d 155
(OhioSup.Ct. 2004)
A case illustrating the benefits of very careful wording – in this case, in
connection with a lessee’s exercise of a fair market value purchase option. Following
lessee’s timely notice of its intent to exercise that purchase option, the lessor attempted to
set the purchase price based upon a formula for early buy-out during the lease term.
After the lessee rejected this suggestion and the lessor rejected a lessee suggestion for fair
market value appraisals, the lessor demanded return of the equipment and the lessee
refused. The definition of fair market value in the lease stated that “Fair Market Value is
mutually determined by Lessor and Lessee as the amount obtainable in a transaction
between an informed and willing user….”, but the lease provided no required mechanism
to determine that value. Holding that the language was ambiguous and that in the
absence of sufficient parol evidence, the language should be construed against the drafter,
the court rejects the lessor’s argument that exercise of the option by the lessee depended
upon mutual agreement as to the purchase price – finding instead that the lessee’s
exercise had created an obligation on the part of the lessor to sell at fair market value and
that such exercise by the lessee also extinguished any obligations under the lease after the
scheduled end of term.

Accepting an Offer from a Lessee in Default to Return the Equipment

IOS Capital, Inc. v. Jacobi, 105 S.W.3d 909 (Mo.Ct.App. 2003)

After picking up its equipment following the defaulted lessee’s request to pick it
up and cancel the lease, the lessor sued to recover the balance owing under the lease.
Although the trial court held that the parties had reached an accord and satisfaction
releasing the lessee from further obligations, the appellate court reverses inasmuch as the
lessor was merely exercising its rights to the equipment under the lease and there was not
any evidence that the lessor was accepting the lessee’s offer to pick it up in return for
canceling the lease. The lower court’s decision is difficult to understand in view of the
lessee’s testimony that no one from the lessor had ever told her that the lease would be
canceled and the fact that the receipt provided by the lessor when it picked up the
equipment specifically stated that the lessee’s obligations were not being released.

Lease Treatment for “Software Leases”

Leaf Financial Corp. v. ACS Services, Inc., 2010 WL 1740884 (Del.Super. April 30,
2010)(unpublished opinion, check court rules before citing)
See discussion in “Ability to Collect Rentals” section above.

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Fieldtech Avionics & Instruments, Inc. v. Component Control.Com, Inc., 262 S.W.3d
813 (Tex.App. 2008)
See discussion in “Ability to Collect Rentals” section above.

In re CNB International, Inc., 307 B.R. 363 (Bankr.W.D.N.Y. 2004)

A lease schedule including only software (related hardware was listed on a
separate schedule) is held not to be a lease for purposes of obtaining the advantages of
Section 365(d)(10) of the Bankruptcy Code. Having made no arrangement with the
licensor of the software to obtain possessory and conditional use rights to the software –
with an understanding that the possessory right would be transferred to the lessee – the
lessor never had a possessory interest in the software that it could transfer to the lessee as
required by Article 2A’s definition of “lease” (2A-103(1)(j) in the uniform version): “No
lessor may lease that which it does not own or in which it does not enjoy at least some
interest or right of possession.” It would be interesting to know how this court would
have ruled if the hardware and related software had been included on the same schedule.
While such a document would be considered “chattel paper” for purposes of Revised
Article 9, courts could conceivably adopt this decision’s view for bankruptcy and other
purposes and attempt to separate the two components.

Indemnity Clauses

United Rentals (North America), Inc. v. Conti Enterprises, Inc., 2018 W.L. 1413260
(U.S.Dist.Ct. S.D.N.Y. March 6, 2018)
An equipment rental company was sued by employees of a contractor who were
injured after the rented equipment malfunctioned. This case involves the rental
company’s attempt to seek indemnification under its rental contract with the contractor.
The indemnity provision required the contractor to indemnify the rental company against
all claims against the rental company, whether or not such claims were for negligence on
the part of the rental company or any claims of strict or product liability, breach of
warranty or any other theory of law. New York General Obligations Law has a provision
stating that indemnity provisions in contracts related to various construction, repair or
maintenance activities (this case involved repair work on a New York City bridge) that
indemnified against the negligence of the indemnitee are unenforceable. Here, the
contractor attempted to move for the court to grant summary judgment on its claim that
the rental company’s demand for indemnification under the rental contract’s indemnity
provision is unenforceable. The court denies this motion inasmuch as there had been no
findings yet with respect to the negligence of the parties involved.

Barnette v. Paxton Van Lines of North Carolina, Inc., 772 S.E.2d 256 (N.C.Ct.App. June
2, 2015)
After the driver of a car was injured when her car was struck by a truck, she sued
the truck driver, its employer and the lessor of the truck to the employer, alleging
negligence in failing to inspect and maintain the braking system on the truck. The lessor,
a truck dealer, had been granted a motion for partial summary judgment against the
lessee/employer in the trial court based upon a provision in the rental agreement in which

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the lessee agreed to indemnify the lessor against all claims related to the use of the truck.
This appellate court affirms the trial court’s ruling by citing a North Carolina Supreme
Court case upholding the right of a party to contractually provide for indemnification
against its own negligence, and further finding that such a right extends to negligent acts
committed by the party to be indemnified prior to entry into the rental agreement
containing the indemnification agreement. [It should be noted that the possibility of
being indemnified for one’s own negligent acts is not the case in all states.]

XTRA Lease LLC v. Pacer International, Inc., 2012 WL 10491 (U.S.Dist.Ct. E.D.Mo.
Jan. 3, 2012)
This case illustrates how important it can be for an indemnity clause in a lease to
be very clear as to whether the lessee is obligated to indemnify and defend a lessor for the
lessor’s own negligence. The court finds that under Missouri law, the language
“indemnify…for any and all losses” did not clearly include losses that might have arisen
due to the lessor’s own negligence. For an indemnity provision to cover the lessor’s own
negligence, such intention must be expressed in clear and unequivocal terms.

Lexington Insurance Company, 900 N.E.2d 536 (Mass.App. 2009) (opinion not
published in printed volume – only appears in a table; may be cited for persuasive value,
but not as binding precedent)
Lessee’s insurer claimed that the lessor’s negligence caused damage to property
of the lessee and lessee’s customer (for which damage the insurer paid). The
Massachusetts Appeals Court here affirms the trial court’s grant of summary judgment in
favor of the lessor based upon the indemnity provision in the lease. Although that
provision did not explicitly include losses caused by the lessor’s negligence, the court
holds that its broad reference to “any and all claims” suffices to include such lessor-
caused losses.

Feldman v. CSX Transportation, Inc., 2006 WL 2065297 (N.Y.App.Div. July 25, 2006)
The plaintiff in this case, an employee of the lessee under a railcar lease with
General Electric Railcar Corporation, was injured while inspecting the railcar, and
subsequently brought suit against everyone connected with the railcar on products
liability and negligence theories. Among other holdings, this decision affirms the lower
court’s grant of summary judgment in favor of GE that the lessee was obligated to
indemnify GE for its reasonable attorneys’ fees and costs according to the plain meaning
of the indemnity clause in the lease.

H&H Painting & Waterproofing Co., 2006 WL 708214 (Fla.App. March 22, 2006)
A lower court finding in favor of a construction equipment lessor seeking
indemnity from a lessee under a lease agreement for losses due to the lessor’s own
negligence is reversed. The appellate court holds that the lease lacked the clear and
unequivocal language necessary to enforce such an indemnity agreement.

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Eagle High Reach Equipment, Inc. v. Precision Drywall, Inc., 2004 WL 938428 (Cal.
App. 2 Dist. May 3, 2004) (unpublished opinion)
Summary judgment in favor of a lessor based upon a lease provision requiring the
lessee to indemnify the lessor against third-party claims for injuries caused by use of
leased equipment is upheld where the indemnity clause was not unconscionable and there
was no evidence of active negligence on the part of the lessor.

Forum Selection, Jurisdiction and Choice of Law

Handoush v. Lease Finance Group. LLC, 254 Cal.Rptr.3d 461, 41 Cal.App.5th 729, 2019
WL 5615674 (Calif.Ct.App. October 31, 2019) *
The lessee had sued the lessor in California (where the lessee was located),
alleging fraud regarding a lease agreement for credit card processing equipment. In
response, the lessor requested dismissal of the suit based upon a mandatory forum
selection clause in the lease requiring all suits to be filed in New York. After the trial
court granted the lessor’s motion, the lessee appealed. This appellate court reverses on
the basis that the lease also contained a (pre-dispute) waiver of jury trial, which is
forbidden in California, and a New York choice of law, which law permits such waivers.
Reasoning that enforcement of the lease provisions would significantly diminish the
lessee’s rights under California law, this court holds that enforcing the forum selection
clause would be contrary to California’s fundamental public policy protecting the right to
a jury trial.

Hewlett-Packard Financial Services Company v. New Testament Baptist Church, 2019

WL 3800234 (U.S.Dist.Ct. D.N.J. August 13, 2019) *
After the lessee failed to pay rent, the lessor initially filed an action in Florida –
the location of the lessee – before filing a voluntary dismissal there without prejudice.
Shortly thereafter, the lessor filed this action in New Jersey. The lessee argued that
transfer to District Court in Florida should be granted inasmuch as the lessor had waived
its right to the permissive forum selection clause in the lease, in which the lessor and
lessee consent to jurisdiction and venue in New Jersey. The court holds that since the
forum selection clause does not include any language regarding waiver of the clause if
there is a previous filing, the lessor did not waive its right to select New Jersey as the
venue. The court goes on to find against the lessee’s other arguments to transfer venue to
Florida.

Brilliant DPI, Inc. v. Konica Minolta Business Solutions, U.S.A., Inc., 2019 WL 1376017
(U.S.Dist.Ct. E.D.Wisc. March 26, ,2019)
The lessee filed suit in Wisconsin against both the original lessor and its assignee
claiming that the leased printers had failed and caused substantial problems with its
customers. Citing the lease’s floating forum selection clause, the assignee moved to
transfer the action against it to New Jersey, its principal place of business. The court
denies the assignee’s motion since the forum selection clause was permissive (“may be
adjudged or determined …” [emphasis added]) and since the assignee had not established
that the transferee forum was clearly more convenient.

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Ortho-Clinical Diagnostics, Inc. v. Mazuma Capital Corp., 2019 WL 1082987
(U.S.Dist.Ct. W.D.N.Y. March 7, 2019)
A lessee, unhappy with end of lease negotiations with its lessor, brought suit
against the lessor in its home state of New York. After negotiations for purchase or return
of the equipment had failed, the lessor claimed that lease provisions triggered an
automatic renewal for an additional twelve months. The lessor also asked for the suit to
be dismissed based upon the lease’s mandatory forum selection clause requiring actions
to be brought in Utah. The lessee attempted to argue that New York’s statute concerning
automatic renewals had been violated and that such statute’s public policy was important
enough to maintain the action in New York. This court holds that the notice provisions
of the statute were not implicated given the facts of this case and that the mandatory
forum selection clause required dismissal of the suit.

Lamotte v. John Christner Trucking, LLC, 2018 WL 6930900 (U.S.Dist.Ct. W.D.Texas

September 18, 2018)
The plaintiff brought this action against an equipment lessor in a Texas county
court, which action was then removed to this Texas federal district court by the
defendants on the basis of diversity jurisdiction inasmuch as all defendants are citizens of
Oklahoma. The equipment lease at issue contained a provision requiring that all claims
in connection with the lease “shall be brought exclusively in the state or federal courts
serving Creek County, Oklahoma.” Based on this mandatory forum selection clause, the
magistrate judge here recommends transfer of this case to the Northern District of
Oklahoma.

Signature Financial LLC v. Neighbors Global Holdings, LLC, Case1:17-cv-06089-JSR

(U.S.Dist.Ct. S.D.N.Y. December 19, 2017)
Everbank Commercial Finance, Inc. v. Neighbors Global Holdings, LLC, 2017 WL
5598216 (U.S.Dist.Ct. D.N.J. November 21, 2017)
Both of these cases involve leases between the same lessor (All Points Solution,
Inc.) and the same defendant/lessee (Neighbors Global Holdings, LLC – owner of
emergency medical centers in Texas and other states). The leases had been assigned by
the lessor to Signature Financial (based in New York), in the more recent case, and to
Everbank Commercial (based in New Jersey), in the earlier case. Both leases contained a
“floating” forum selection clause permitting an assignee of the lease to bring suit against
the lessee in the state of the assignee’s principal place of business. After the lessee
defaulted, each assignee brought suit in the state of its principal place of business and the
lessee attempted to have the suits dismissed for lack of personal jurisdiction, or, in the
alternative, to have the venue transferred to Texas. Both decisions enforce the validity of
the forum selection clause and find that transfer of venue is not warranted. The New
York court’s decision is especially thorough in distinguishing between the various types
of forum selection clauses and reviewing previous cases regarding the validity of
“floating” forum selection clauses in particular. This decision contrasts the abuse of such
clauses in the context of the nationwide NorVergence fraud with the legitimate economic
rationale of same to facilitate the loan assignment market as explained, for example, by
Judge Posner in the 2006 case of IFC Credit v. Aliano Brothers.

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Central Bank of St. Louis v. NEC Amarillo Emergency Center, 2017 WL 4888981
(U.S.Dist.Ct. E.D.Mo. October 30, 2017)
The leases in default contained a “floating” forum selection clause that called for
adjudication in either the lessor’s or its assignee’s principal place of business. The
original lessor had assigned the leases to a finance company who in turn assigned them to
a bank based in St. Louis, Missouri. The lessee had stopped making payments on the
leases - claiming fraud, breach of contract and other reasons not to pay - and brought suit
in state court in Texas, where it was based. After the bank then filed this action in
Missouri claiming breach on all leases, the lessee filed a motion either to dismiss the
bank’s action or transfer venue to Texas. After considering Eighth Circuit cases
involving the “first-filed rule,” this court stays the proceedings in its court until the Texas
court rules on a motion by the bank that the Texas court does not have personal
jurisdiction over the bank. Following that, this court will have a hearing to consider the
lessee’s motion either to dismiss or transfer venue.

XTRA Lease LLC v. 4D Daylight-To-Dark AG Services, LLC, 2017 WL 4778588

(U.S.Dist.Ct. E.D.Mo. October 23, 2017)
The lessor on a lease guaranteed by two individual guarantors brought suit in St.
Louis County, Missouri against the lessee and guarantor alleging breach of both the lease
and guaranty. The guarantors then removed the case to this federal court based on
diversity. The lease contained a provision in which the lessee agreed to jurisdiction in the
state court and also waived any objection to venue there. The guaranty contained a
provision in which the guarantors agreed to jurisdiction in either the state court or this
federal court. Although the lessee consented to removal to the federal court, this court
rules that the lessee’s waiver of its right to object to venue in the state court also
prevented it from consenting to removal to the federal court. This court further rules that
under the “rule of unanimity,” all defendants in a multi-defendant case must consent to
removal, or the case will be remanded. Because the lessee had waived its right to consent
to removal, the court rules that the case be remanded to state court.

In re Varilease Finance, Inc., 2016 WL 4572274 (Tex.Ct.App. September 1, 2016)

After a trial court had refused to enforce a forum selection clause in a lease, the
lessor filed a petition for writ of mandamus in this appellate court to compel the trial
court to enforce such clause. This court conditionally grants the petition for writ to give
the trial court time to vacate its order denying the lessor’s motion to dismiss and signing a
new order granting such motion. Citing language in the lease’s forum selection clause
(“…such controversies [any controversies relating to the lease] shall be tried by a judge
alone before the federal or state courts in Oakland County, Michigan.”), this court holds
that the forum selection clause is mandatory and should be enforced unless the opposing
party clearly shows that enforcement would be unreasonable and unjust. It also notes that
the lessee’s suit against the lessor alleging fraud is directed against the entire agreement
rather than the inclusion of the forum selection clause specifically.

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CP Anchorage Hotel 2, LLC v. Onset Financial, Inc., 2014 WL 5606634 (U.S.Dist.Ct.
E.D.Ky. Oct. 15, 2014)
After a lessee of televisions sued the lessor in this Kentucky federal court,
claiming that the lessor had orally promised to sell it the televisions for ten percent of
their original cost at the end of the lease (the lessor offered a sixty percent purchase price
instead at lease termination), the lessor moved to transfer the case to Utah based upon the
forum selection clause in the lease providing for exclusive jurisdiction in Utah. When the
lessee attempted to argue that the entire lease was the product of the lessor’s fraudulent
purchase option promise, this court holds that transfer to Utah was appropriate since the
lessee had not met its burden of proving that the forum selection clause itself was a
product of fraud.

Marlin Business Bank v. The Halland Companies, LLC, 18 F.Supp.3d 239 (E.D.N.Y.
2014)
After the lessor brought suit in the Philadelphia County Court of Common Pleas
in Pennsylvania alleging breach of the lease by the lessee, the lessee, a New York limited
liability company, had the case removed to a U.S. District Court in Brooklyn, NY. Since
the lease contained a forum selection clause stating that any suit regarding the lease could
be brought only in a state or federal court in Pennsylvania, this court concludes that the
case was not properly removed to New York and grants the lessor’s motion to remand the
case to the court where the lessor originally filed suit.

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.

Winthrop Resources Corp. v. Hospital Authority of Ben Hill County, 2013 WL 4199672
(U.S.Dist.Ct. D.Minn. August 15, 2013)
A Minnesota lessor and a Florida lessee negotiated choice of law and choice of
forum provisions of their lease which stated that the lease was to be governed by
Minnesota law and that both parties consented to the jurisdiction of any federal court in
Georgia. However, the provision went on to specify that the lessor could select an
alternative forum in its sole discretion. When the lessor commenced a suit in Minnesota
(initially a state court, subsequently removed by the lessee to this federal court), the
lessee moved to dismiss for lack of personal jurisdiction, or alternatively, to transfer to a
federal court in Georgia. Due to the selection by both parties of Minnesota law and
various other factors establishing contacts with Minnesota, this court concludes that the

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lessor has demonstrated enough minimum contacts to establish jurisdiction in Minnesota
and also denies the lessee’s motion to transfer the case to Georgia.

Inheanacho v. ABC Bus Leasing, Inc., 2013 WL 636876 (U.S.Dist.Ct. W.D.N.C. Feb. 20,
2013)
After a lessor repossessed three buses from a lessee, the lessee brought suit in a
federal court in the lessee’s state (North Carolina) making various allegations against the
lessor. This court affirms a magistrate judge’s recommendation to grant the lessor’s
motion to transfer the case to a federal court in Minnesota. In reviewing the factors
required by federal law to determine whether to grant such a motion, the court relies
heavily on the fact that the lessee had signed fifteen lease agreements with the lessor,
including the one at issue, consenting to litigation of all issues between the parties
relating to the leases in Minnesota – citing the U.S. Supreme Court’s presumption
towards enforcing such agreements.

Financial Planning Alternatives, Inc. v. De Lage Landen Financial Services, Inc., 2012
WL 2588553 (Mass.App.Div. June 28, 2012)
This decision affirms a dismissal by a trial court of an action by a lessee against a
lessor after the lessor had obtained a default judgment in a Pennsylvania court predicated
upon a clause in the lease consenting to the jurisdiction of Pennsylvania courts. This
appellate court notes both that Massachusetts generally enforces forum selection clauses
and also notes that the lessee is a sophisticated entity in the business of financial
planning. However, in a footnote, this court states that “While recognizing and applying
the established law that compels the decision in this matter, we are not unmindful of the
inequities potentially created by De Lage’s use of a boilerplate forum selection clause.”
In this footnote, the court goes on to mention a decade-old dispute between Leasecomm,
based in Massachusetts and a “standard bearer for the use of forum selection clauses in
finance equipment leases with small businesses,” and the Massachusetts attorney general
which resulted in a settlement in which Leasecomm abandoned its use of such clauses
and agreed to bring its collection suits “where the consumer resided or did business.”

Canon Financial Services, Inc. v. Eufaula School District, 2012 WL 1989225

(N.J.Super.A.D. June 4, 2012)(unpublished opinion, check court rules before citing)
This appellate decision affirms a trial court’s dismissal of a lessee’s motion to
dismiss a complaint by a lessor. The lessee/defendant, a school district in Oklahoma, had
allegedly defaulted on four photocopier lease agreements containing a clause in which the
lessee agreed to the jurisdiction of New Jersey courts. Noting that forum selection
clauses are generally enforced in New Jersey, this decision holds that none of the
exceptions cited by the lessee – including serious inconvenience – applied.

U.S. Bancorp Equipment Finance, Inc. v. Healing Earth Rejuvination Center, LLC, 2012
WL 254494 (Minn.App. Jan. 30, 2012)
This court affirms a trial court’s judgment in favor of a lessor. The lessee did not
appear at trial and on appeal argued that the district court should not have exercised
personal jurisdiction over the lessee since the minimum contacts requirement had not
been satisfied. This brief decision notes simply that (i) the lease contained a forum

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selection clause agreeing to jurisdiction in Minnesota, (ii) such clause was not
unreasonable, and therefore (iii) the minimum contacts requirement was irrelevant.

DeLage Landen Financial Services, Inc. v. Leighton K. Lee Law Office, 2011 WL
6304226 (N.J.Super.App.Div. Dec. 19, 2011)(unpublished opinion, check court rules
before citing)
This appellate decision reverses a trial court’s dismissal of an action filed by the
lessor based upon a lack of personal jurisdiction over the defendants. The lease
contained a consent to jurisdiction in New Jersey that was explicitly non-exclusive. The
court distinguishes a prior case in which a floating selection clause was held to be invalid
for failure to provide any notice of where an action might be instituted. Unlike in that
case, the court states that here defendants were on notice that they were subject to being
sued in New Jersey.

National City Commercial Capital Corp. v. Bullard, 2011 WL 5419747 (Ohio App. Nov.
7, 2011)(check Ohio Supreme Court rules for reporting of opinions and weight of legal
authority)
In upholding a trial court’s decision in favor of a NorVergence lessee that the
assignee could not bring suit in Ohio based on the lease’s floating forum selection clause,
this appellate court finds that the facts of this case were similar enough to apply the
holding from Ohio’s Supreme Court in Preferred Capital v. Power Engineering. The
majority decision disagrees with the arguments of the plaintiff and of a dissenting judge
on this appellate panel that the fact that the leases were not assigned until a month after
they were executed was enough to distinguish this case from Preferred Capital where the
Supreme Court emphasized the “superior knowledge” of the assignor with respect to its
almost immediate assignment to an assignee unknown to the lessee.

De Lage Landen Financial Services, Inc. v. New Life Anointed Ministries International,
Inc., 2011 WL 2601542 (U.S.Dist.Ct. E.D.Pa. June 30, 2011)
After the lessee defaulted, the assignee of the original lessor brought suit in a
federal district court in Pennsylvania, although the lease contained a clause providing for
the parties submission to the non-exclusive jurisdiction of New York state and federal
courts. This court dismisses the suit for lack of jurisdiction, agreeing with the lessee – a
corporation organized in Delaware and located in Virginia – that its promise to make
payments to the lessor in Pennsylvania was not sufficient to support personal jurisdiction.

Canon Financial Services, Inc. v. GR Graphics, Inc., 2011 WL 734860 (U.S.Dist.Ct.

D.N.J. Feb. 18, 2011)
This decision denies a defaulting lessee’s request to transfer the case to its home
state after the lessor brought suit in New Jersey, the venue named in the lease’s forum
selection clause. The court’s denial is based on its finding that the lessee had failed to
demonstrate that litigation in New Jersey would be so gravely difficult that the defendant
would be effectively deprived of its day in court.

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S & L Birchwood, LLC v. LFC Capital, Inc., 2010 WL 4052187 (U.S.Dist.Ct. E.D.N.Y.
Oct. 13, 2010)
In deciding whether to dismiss a lessee plaintiff’s suit against its lessor or to
transfer the suit to a different forum, this court has occasion to discuss the differences
between mandatory and permissive forum selection clauses and to analyze the language
in the lease to decide which was intended. After the lessor had accelerated the remaining
balance of lease payments following an alleged lessee default, the lessee filed suit in New
York seeking a declaratory judgment that it was not in default. The lease contained a
provision stating that “Lessee irrevocably submits to the jurisdiction of any federal or
state court located therein [Illinois]…”. The lessee argued that since this provision does
not explicitly state that suits must be brought in Illinois, it should be construed as
permissive and its suit should be heard in New York. After noting that the lease
provision used neither the word “must” nor the word “may,” the court holds that the
words “irrevocably submits” indicated that the parties intended Illinois to be the venue
for any dispute, and so decides to transfer the suit to Illinois.

Frontier Leasing Corporation v. Hunt, 2010-2813781 (N.C.App. July 20,

2010)(unpublished disposition – see N.C. rules before citing)
This North Carolina appellate decision affirms a trial court’s order granting a
motion by the original lessor’s assignee to enforce a default judgment entered by an Iowa
state court against the lessee, a golf professional in North Carolina. The lessee had
signed a lease containing a consent to personal jurisdiction and venue in Iowa courts.
(The facts underlying the litigation are common to many other cases involving the leasing
of golf beverage carts with respect to which the lessees were told that payments to them
for advertising on the carts would equal the payments owing under the leases. After the
advertising payments stopped, many of the lessees stopped making payments under their
leases.) This court finds that Iowa law would hold the forum selection clause enforceable
notwithstanding the lessee’s claims that the clause was not prominently displayed on the
lease form and that he was not a sophisticated businessman. The court distinguishes the
facts in this case from those in a Pennsylvania case in which that court declined to
enforce the forum selection clause against a lessee who was an immigrant with limited
understanding of the English language.

O'Neill Farms, Inc. v. Reinert, 780 N.W.2d 55 (S.D. 2010)

This South Dakota Supreme Court decision examines whether a very brief forum
selection clause in a two-page lease should be enforced under the circumstances of this
case. In reversing a lower court's finding that the clause was unreasonable based upon a
set of factors mentioned in an earlier Supreme Court decision, this decision holds that a
simple weighing of the factors used by the lower court was not enough, and that a strong
showing of unreasonableness must be made before finding that the clause is
unreasonable. In this case, the fact that the lessor's business involved leasing equipment
throughout the Midwest helped lead to the court's conclusion that the clause's inclusion in
the lessor's contracts was reasonable.

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Merchants and Farmers Bank v. Marquette Equipment Finance, LLC, 2009 WL 2767678
(U.S.Dist.Ct. N.D.Miss. August 27, 2009)
In granting a motion by the original lessor’s successor-in-interest to transfer
venue to Utah of an action regarding a lease option brought by the lessee, this court
decides that it should not rely solely on the lease clause providing for venue in Utah. The
court finds that the clause at issue did not clearly provide for exclusive venue in Utah.
However, after considering convenience factors under the federal statute regarding
motions to transfer, it ultimately decides to grant the finance company’s motion.

Frontier Leasing Corp. v. Singh, 2009 WL 2782681 (Conn. Super. July 31,
2009)(unpublished opinion)
This Connecticut court grants a motion for summary judgment by the leasing
company recognizing a default judgment against the lessee obtained in Polk County,
Iowa. In doing so, the court cites other Connecticut cases that have upheld forum
selection clauses absent a showing of fraud or overreaching.

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.

New Horizons Electric, Inc. v. IFC Credit Corp., 2008 WL 4597419 (Colo.App. October
16, 2008)(unpublished)
This Colorado appellate court affirms the dismissal of actions brought by a
number of NorVergence lessees against a group of NorVergence assignees. The
dismissal was the result of enforcing forum selection clauses in the leases -- some
containing the so-called “floating” forum selection clause -- requiring that actions be
brought in other states. Holding, consistent with another Colorado appellate court, that
forum selection clauses are prima facie valid, this court finds that the plaintiff-lessees did
not demonstrate that they were fraudulently induced to agree to the forum selection
clauses specifically (as opposed to being fraudulently induced to enter into the leases
generally). The court also dismissed plaintiffs’ arguments that their agreement to the
forum selection clauses were induced by fraud in the factum inasmuch as such claim was

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tied to a claim of relief base on the Uniform Consumer Credit Code, which the court
holds is not applicable to commercial transactions such as these.

Polzin v. Appleway Equipment Leasing, Inc., 191 P.3d 476 (Mont. 2008)
The Montana Supreme Court reverses a lower court’s denial of a lessor’s motion
to dismiss for improper venue. The lease contained provisions choosing the State of
Washington – both for the law governing the lease and for the venue of any action (if
elected by the lessor). The decision holds both that Washington law recognizes forum
selection clauses as valid and that, contrary to statements in the lower court’s opinion,
Montana law does not regard such clauses as void as against public policy.

In re Lyon Financial Services, Inc., 2008 WL 2487092 (Tex.Sup.Ct. June 20, 2008)(not
released for publication, subject to revision or withdrawal)
After a trial court had rejected a lessor’s motion to dismiss in an action by the
lessee asserting various claims against the lessor, which motion to dismiss was based
upon forum selection clauses in the lease and subsequent restructuring agreement that
selected courts in Pennsylvania, the lessor sought a writ of mandamus from the Texas
Supreme Court directing the trial court to vacate its order denying the lessor’s motion to
dismiss. The Texas Supreme Court agreed with the lessor that there was no reason not to
enforce the forum selection clause inasmuch as there was no showing that the clause
itself had been procured by fraud or that it was so inconvenient, unfair or subversive of
Texas public policy as to warrant its not being enforced.

In re Boone (Greater Peace Baptist Church, Inc. of Opelika v. Boone), 2008 WL 619169
(Bankr.M.D.Ala. March 3, 2008) (Slip Copy)
A brief decision granting a motion by a Wells Fargo Financial Leasing as lessor to
dismiss the claims against it for improper venue. The lease contained a forum selection
clause requiring legal actions to be instituted in Iowa and because the plaintiff, whose
burden it was to show that the contractual forum is sufficiently inconvenient to justify
retention of the suit in Alabama, filed no brief in opposition to the lessor’s motion, the
lessor’s motion was granted.

OFC Capital v. Schmidtlein Electrical Inc., 656 S.E.2d 272 (Ga.App. 2008)
After OFC Capital, as assignee of a NorVergence lease, brought suit against the
lessee for breach of the lease, the trial court granted the lessee’s motion to dismiss, which
motion had alleged both the unenforceability of the “floating” forum selection clause and
a failure to join NorVergence as an indispensable party. This appellate decision refers to
a recent case in the same court involving the same lessor upholding the enforceability of
this particular forum selection clause. Because the appellate court could not determine
the precise ground for the trial court’s dismissal, it remands the case to the trial court to
make appropriate findings concerning the issue of not joining NorVergence as an
indispensable party.

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National City Commercial Capital Corp. v. Gateway Pacific Contractors, Inc., 2007 WL
3232440 (U.S.Dist.Ct. S.D.Ohio Oct. 31, 2007) (Slip Copy)
This court follows the Sixth Circuit’s Sarasota Kennel Club decision (see below)
in holding the NorVergence “floating” forum selection clause to be unenforceable against
an Ohio lessee under Ohio law – the facts in this case not being distinguishable from
those in the Ohio Supreme Court’s Power Engineering Group decision (see below).

Seymour Lodge, No. 462 v. Frontier Leasing Corp., 872 N.E.2d 703 (Ind.App.
2007)(unpublished memorandum decision)
Affirmation of an Indiana trial court’s entry of summary judgment in favor of an
Iowa lessor based upon a default judgment that had been obtained by the lessor in Iowa
pursuant to a forum selection clause in the lease whereby the Indiana lessee agreed to
venue in Iowa. Notwithstanding the lessee’s objections, the court holds that such clauses
are enforceable and that judgments in other states pursuant to such clauses should be
given full faith and credit unless enforcement of the clause would be unjust or the
lessee’s agreement to the clause had been procured by fraud.

Studebaker-Worthington Leasing, Corp. v. New Concepts Realty, Inc., 16 Misc. 3d

1119(A) (N.Y.Dist.Ct. 2007)(unpublished slip opinion)
This New York court does not accept a Colorado lessee’s argument that the
NorVergence “floating” forum selection clause is invalid and unenforceable.
Acknowledging that serious questions concerning the use of fraud in procuring the lease
had been raised, the court notes that no evidence was presented that specifically
addressed whether the forum selection clause – appearing in bold font – had been itself
procured by fraud. The court also strongly rejects an argument – purportedly supported
by legal scholars and attorneys general around the country – that the agreement
constituted a consumer lease (requiring 10-point type to be enforceable under New York
law). This argument is dismissed based upon the definition of “consumer” and
“consumer lease” found in Article 2A of the UCC as requiring use of the goods being
leased for personal, family or household purposes – not the case in this commercial
context.

OFC Capital v. Colonial Distributors, Inc., 648 S.E.2d 140 (Ga.App. 2007)
This court reverses a trial court’s dismissal of a lessor’s suit brought pursuant to
the NorVergence “floating” forum selection clause. Although the lessee argued that the
lease agreement was procured by fraud, this court notes that the lessee had not produced
any evidence that the forum selection clause was itself so procured. The court also notes
that the forum selection clause was highlighted in bold and that the lessee’s executive
director had initialed the page of the lease containing that clause.

Susquehanna Patriot Commercial Leasing Co., Inc. v. Holper Industries, Inc., 928 A.2d
278 (Pa.Super. 2007)
This decision reverses the decision of a trial court that found the NorVergence
“floating” forum selection clause to be unenforceable. Recognizing a split of authority
around the country regarding this issue, this court holds the clause to be enforceable to
the extent, among other considerations (e.g., it is not so unfair or inconvenient as to

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deprive a party of the opportunity to be heard and it does not violate public policy), that it
was not itself induced by fraud or overreaching.

Frontier Leasing Corporation v. Shah, 931 A.2d 676 (Pa.Super. 2007)

This lessor initially obtained a default judgment in Iowa against an individual
doing business in Pennsylvania pursuant to a lease containing a forum selection clause
that simply provided that any suit pertaining to the lease would be “proper” if filed in
Iowa. After the lessor filed this judgment in a Pennsylvania county court, which denied
the lessee’s petition to strike the judgment, this Pennsylvania Superior Court reverses and
grants the lessee’s motion to strike. The decision purports to apply Iowa law in finding
that because the lessee was an inexperienced individual (a Pakistani immigrant with no
formal training in English) and because the forum selection clause was inconspicuous
(not highlighted as other clauses were), it would be unreasonable and unjust to enforce it.

Polk County Recreational Association v. Susquehanna Patriot Commercial Leasing

Company, Inc., 2007 WL 2068663 (Neb. July 20, 2007)
Lyon Financial Services, Inc. v. bioMerieux, Inc., 2007 WL 2123564 (U.S.Dist.Ct.
D.Minn. July 20, 2007)
In these two cases, coincidentally decided on the same day, the Nebraska
Supreme Court and a federal district court in Minnesota consider the enforceability of
forum selection clauses in leases against lessees complaining of fraud related to the lease
transaction (as well as the inconvenience and/or unreasonableness of requiring the lessees
to litigate in a foreign jurisdiction). The Nebraska Supreme Court upholds the clause
against lessees caught up in the Royal Links golf cart program problems (see C and J
Leasing v. Hendren Golf in the “Ability to Collect Rentals…” section above) on the basis
that alleged fraud relating to the procurement of the leases as a whole does not invalidate
the enforceability of a forum selection clause that was not itself procured by fraud. The
Minnesota District court, on the other hand, finds that under the facts of its case, the
leases were procured by “fraud in the factum” and thus were entirely void – including, of
course, the forum selection clause. Nevertheless, the court dismisses defendants’
arguments asserting lack of personal jurisdiction and also denies motions to transfer
venue.

Preferred Capital, Inc. v. Sarasota Kennel Club, Inc., 489 F.3d 303 (6th Cir. 2007)
The assignee of a NorVergence lease containing its typical “floating” forum
selection clause initially brought suit against the lessee (a Florida corporation) in an Ohio
state court. After the lessee removed the case to an Ohio federal District Court, that court
held that the clause was unenforceable under both Ohio and federal law because of fraud
and overreaching by NorVergence. Although the Sixth Circuit had previously held such
a clause to be enforceable under both federal and Ohio law (see the Associates in Urology
case below), because (i) the Ohio Supreme Court subsequently found the clause to be
invalid under Ohio law (see the Power Engineering Case below) and (ii) this Sixth
Circuit panel now determines that Ohio law should apply to the issue in this case, this
decision dismisses the assignee’s claim due to lack of personal jurisdiction (affirming the
federal District Court’s judgment, but on different grounds).

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Liberty Bank, F.S.B. v. Best Litho, Inc., 2007 WL 1201724 (Iowa App. April 25, 2007)
Iowa appellate court affirmation of a lower court holding that the NorVergence
“floating” forum selection clause is enforceable by an Iowa assignee of NorVergence
equipment rental agreements. After quoting some of the rationale expressed in IFC
Credit v. Aliano Bros. in favor of enforcement, this court indicates that it finds the
reasoning of cases upholding such clauses more persuasive than those invalidating them
(such as in Preferred Capital v. Power Engineering).

Preferred Capital, Inc. v. Power Engineering Group, Inc., 860 N.E.2d 741 (Ohio 2007)
Reversing an Ohio Court of Appeals decision, the Ohio Supreme Court rules that
the “floating” forum selection clause contained in NorVergence leases signed by twelve
out-of-state (i.e., outside of Ohio) commercial entities was not enforceable by the
plaintiff assignee, a finance company with its principal office in Ohio. Although finding
that (i) the lessees were all commercial entities (notwithstanding the lessees’ assertions
that they were unsophisticated “mom and pop” small businesses that should be treated
differently), (ii) there was no evidence that the lessees were defrauded into agreeing to
the forum selection clause in particular, and (iii) there is a valid business reason for
including a floating forum selection clause in contracts, the court nevertheless finds the
clause to be unreasonable and therefore unenforceable. It is not entirely clear whether
this holding rests upon the obvious fact that the signatory would not be able to “answer
the question of where he may be forced to defend or assert his contractual rights” (which
the dissenting opinion notes would invalidate all floating forum selection clauses,
notwithstanding the majority’s finding that such clauses have a valid business purpose)
or, more particularly, that in these cases NorVergence withheld from these lessees the
fact that it intended almost immediately to assign the leases to a company in Ohio. The
dissenting opinion would have adopted the reasoning of the U.S. Court of Appeals for the
Seventh Circuit in IFC v. Aliano Brothers (see below).

Patriot Commercial Leasing Company, Inc. v. Kremer Restaurant Enterprises, LLC, 915
A.2d 647 (Pa.Super. 2006)
This decision affirms the ruling of a (county) Court of Common Pleas finding that
a forum selection clause stipulating venue in the lessor’s county in Pennsylvania was
enforceable against defendants located in Missouri, Wisconsin and Alabama. The court
summarizes the case law as indicating that a forum selection clause in a commercial
contract between business entities is presumptively valid unless (i) the clause itself was
induced by fraud, (ii) the clause is so unfair inconvenient as to deprive a party of its
opportunity to be heard, or (iii) the clause violates public policy. With regard to the first
listed point, the court indicates that a claim that the entire contract was induced by fraud
is not enough without proof that the forum selection clause was itself induced by fraud.

Sterling National Bank as Assignee of NorVergence, Inc. v. Eastern Shipping

Worldwide, Inc., 826 N.Y.S.2d (App.Div. 2006)
A brief decision overruling a lower court’s dismissal of a complaint by a
NorVergence assignee. Noting that there was no allegation that the forum selection
clause (which stipulated that venue was to be in the state where the assignee, if any, is
located) was itself fraudulently induced and that the defendant was a sophisticated

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business entity, this appellate court holds that the clause is enforceable. The court also
notes that the change in venue was only from New Jersey (NorVergence’s location) to
New York.

Preferred Capital, Inc. v. Aetna Maintenance, Inc., 2006 WL 3421829 (U.S.Ct.App. 6th
Cir. Nov. 29, 2006)(not recommended for full-text publication)
Preferred Capital, Inc. v. Associates in Urology, 453 F.3d 718 (6th Cir. 2006)
In these two decisions, the Sixth Circuit reverses lower court decisions in favor of
lessees claiming that the “floating” forum selection clause in NorVergence leases was not
enforceable by this assignee of the leases. The lessees, located in Florida and
Pennsylvania respectively, had argued that the clauses were both unjust in themselves
and also a part of fraudulently induced lease transactions. Holding that the lessees’
general claims of fraud did not demonstrate that agreement to the forum selection clause
was itself fraudulently induced and that such a clause is generally enforceable as between
commercial entities (finding no evidence that enforcement of the clause would be
unreasonable or unjust), this court finds the clauses to be valid and enforceable.
However, in the Aetna Maintenance case, the court comments that the District Court may
revisit the issue upon remand if the Ohio Supreme Court rules to the contrary in a case
before it involving this same assignee (the lessee in which case is Power Engineering
Group, Inc.), which the Ohio Supreme Court did on February 7, 2007 (see above).

Preferred Capital, Inc. v. Ward, Asel and Associates, P.C., 2006 WL 3291044 (Tex.App.
November 14, 2006)
After an assignee of a NorVergence lease obtained a default judgment against the
lessee in a court located in assignee’s state (Ohio), it attempted to domesticate that
judgment in the lessee’s state (Texas). This appellate court affirms the trial court’s order
vacating that judgment, disagreeing with the assignee’s argument that the lessee’s having
sent six lease payments to Ohio was sufficient to permit the Ohio court’s exercise of
personal jurisdiction over the lessee. The court also comments that although the lessee
devoted part of its responsive brief to argue that the lease’s “floating” forum selection
clause (according to which the lessee consents to jurisdiction in the state of the assignee’s
principal office) should not be enforced, this court did not need to address that issue
inasmuch as the assignee had not raised the issue in its original brief.

Johnson v. Key Equipment Finance, 627 S.E.2d 740 (S.C. 2006)

A trial court in South Carolina had dismissed an action by a lessee of telephone
equipment alleged to have been known by the lessor to be illegal, because the lease
contained a forum selection clause agreeing to the jurisdiction of courts in New York.
The South Carolina Supreme Court reverses on the ground that actions involving alleged
misrepresentations made by the lessor prior to entry into the lease, which
misrepresentations may have induced the lessee to enter into the lease – as opposed to
defaults under the lease itself – are not governed by the forum selection clause in the
lease. The court also notes that South Carolina cases generally disfavor forum selection
clauses.

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Citicorp Vendor Finance, Inc. v. Trillium Eye Plastic Surgery, P.C., 2006 WL 355180
(Mich.Ct.App. Feb.16, 2006)(unpublished opinion)
The plaintiff lessor had obtained a default judgment in New Jersey against the
lessee pursuant to a forum selection clause in the lease. After a Michigan circuit court
declined to recognize the New Jersey judgment, this appellate court reverses and finds
that neither New Jersey law (the governing law according to the lease) nor Michigan law
precludes enforcing a forum selection clause merely on the basis of unsupported
allegations by the defendant of inconvenience, abuse of economic power, or violation of
public policy.

Secure Financial Service, Inc. v. Popular Leasing USA, Inc., 892 A.2d 571 (Md.App.
2006)
After a circuit court dismissed a lessee’s action against an assignee of a
NorVergence lease for a declaratory judgment that the lease’s floating forum selection
clause was not enforceable, Maryland’s highest court remands to the circuit court for a
complete statement of the rights and obligations of the parties. This decision mentions
the presumptive enforceability throughout the United States of forum selection clauses
generally, and also lists a number of decisions involving Norvergence in particular (the
majority of which uphold the clause), but evidently requires that the lower court more
clearly address the lessee’s arguments.

IFC Credit Corporation v. Aliano Brothers General Contractors, Inc., 437 F.3d 606 (7th
Cir. 2006)
This Seventh Circuit decision written by Judge Posner provides a powerful
endorsement of the enforceability of floating forum selection clauses of the type
discussed in the cases below. Without deciding whether federal or state law applies, the
decision holds that such a clause is clearly valid under federal law and also valid under
Illinois law given the facts of this case – a commercial lessee that could not be
characterized as a “hapless consumer”. Judge Posner finds the clause to be “clear and
specific” (even if the forum may not be known to the lessee at the time the lease is
signed) and reasons that if such clauses were not enforceable, the assignment of contracts
might be impeded, resulting in higher costs to lessees. In remanding to the Illinois
District Court that had dismissed the lessor’s suit, Judge Posner notes that it will be open
for the lessee to attempt to prove fraud in the procurement of that forum selection clause
and also notes that, notwithstanding an FTC default judgment obtained against
NorVergence (the original lessor) in other proceedings, no such evidence of fraud had
been presented by the lessee in this case.

Partners Equity Capital Company, LLC v. Broward Title Company, 2006 WL 231780
(U.S.Dist.Ct. E.D.Pa. Jan. 30, 2006)
A brief decision upholding a floating choice of law provision in the NorVergence
form of lease (contained in the same paragraph as the floating forum selection clause
discussed in a number of cases in this section) which makes applicable the law of the
state in which the assignee’s principle office is located. The Florida lessee
unsuccessfully argued that the issues in this case brought by an assignee of the lease

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involved a service agreement as well, and thus the choice of law provision in the lease
should not govern.

Lyon Financial Services, Inc. v. Nowobilska Medical Center, Ltd., 2005 WL 3526682
(U.S.Dist.Ct. D.Minn. Dec. 22, 2005)
In this case, the court analyzes factors relevant to the enforcement of a floating
forum selection clause in a lease with Bluedot Funding as original lessor (a different
lessor than most of the other cases discussed in this section) that places venue in the
home state of the lessor’s assignee in the event of an assignment, and concludes that such
a clause is enforceable under both federal and Minnesota law. One factor mentioned by
the court was the lessee’s agreement not to raise any defenses against an assignee that it
might have been able to raise against the original lessor – thus making irrelevant the
convenience of some other forum for the lessee to raise claims against that original
lessor.

SRH, Inc. v. IFC Credit Corporation, 619 S.E.2d 744 (Ga.App. 2005)
After the trial court had dismissed a lessee’s action for rescission of a lease
against the lessor’s assignee, which dismissal was based upon the type of floating forum
selection clause discussed in the cases below (the lessee had brought the action in a court
within its state rather than in the state of the lessor’s assignee, as provided in the lease),
this appellate court reverses the dismissal and holds that a complaint alleging fraud on the
part of both the original lessor and its assignee should not be dismissed unless there are
no possible sets of facts that would entitle the lessee to relief.

Popular Leasing USA, Inc. v. Terra Excavating, Inc., 2005 WL 1523950 (U.S.Dist.Ct.
E.D.Mo. June 28, 2005)
This decision is a strong endorsement of the enforceability of the kind of floating
forum selection clause discussed in the cases below. In its decision the court also (i)
holds that a fraud will only render the clause invalid if the inclusion of that clause in the
contract was itself the product of fraud or coercion, and (ii) places a relatively heavy
burden on the defendant (not overcome in this case) before it would consider granting a
motion to transfer venue.

IFC Credit Corporation v. Burton Industries, Inc., 2005 WL 1243404 (U.S.Dist.Ct.

N.D.Ill. May 12, 2005)
The same court as in the Eastcom case discussed below (a different judge,
however) holds that the type of floating forum selection clause at issue in Eastcom and a
number of the other cases summarized in this section is enforceable. In this case, the
defendant is located in Michigan and is characterized by the court as a sophisticated
business enterprise capable of bargaining for a different clause.

Studebaker-Worthington Leasing Corp. v. Michael Rachlin & Co., LLC, 357 F.Supp.2d
529 (E.D.N.Y. 2004)
After being sued in a New York state court by an assignee of a lease containing a
floating forum selection clause, the lessee (based in New Jersey) removed the case to a
New York federal court and argued that the case should be heard by the bankruptcy court

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(in New Jersey) presiding over the bankruptcy of the original lessor, because the lessee
intended to assert a counterclaim against the assignee related to a claim of fraud against
the lessor. The federal court in New York holds that such does not constitute sufficient
grounds to confer subject-matter jurisdiction and remands the case to the New York state
court. [It is not clear why this case is said to be decided on February 22, 2004, while
referencing dates related to the original lessor’s bankruptcy in June and July of 2004.]

IFC Credit Corporation v. Eastcom, Inc., 2005 WL 43159 (U.S.Dist.Ct. N.D.Ill. Jan. 7,
2005)
The court grants the lessee-defendant’s motion to transfer the case from the
jurisdiction in which the principal offices of the assignee (the plaintiff) of the lessor
(NorVergence) are located to the jurisdiction in which the lessee and the leased
equipment are located, notwithstanding a forum selection clause in the lease agreeing to
venue in whatever jurisdiction the lessor’s assignee happens to be located. The court
questions whether Illinois law would enforce such a provision that fails to specify a
particular jurisdiction, but bases its decision on an evaluation of the convenience and
fairness of transfer given the facts of this case (including the fact that the defendant is
located in California). Some of the reasoning by this District Court is called into question
by a more recently decided Seventh Circuit case noted above (IFC Credit v. Aliano
Brothers General Contractors).

Commerce Commercial Leasing, LLC v. Jay’s Fabric Center, 2004 WL 2457737

(U.S.Dist.Ct. E.D.Pa. Nov. 2, 2004)
In denying a lessee’s motion to dismiss a breach of contract action brought by the
lessor’s assignee for lack of personal jurisdiction, the court cites well-established
authority for generally enforcing forum selection clauses – even those that refer only to
whatever forum that the lessor or its assignee (unknown at the time the lease is signed)
chooses (sometimes referred to as a “floating forum selection clause”).

Ex parte Leasecomm Corporation (In re Sisk v. Kelleher), 879 So.2d 1156 (Ala.Sup.Ct.
2003)
Although a lessee sued his lessor with regard to malfunctioning equipment and
alleged fraud in the inducement as a general matter, the Alabama Supreme Court
enforced the forum selection clause contained in the lease (choosing Massachusetts as the
exclusive forum) in favor of the lessor, since the lessee had not established that he was
fraudulently induced to permit that particular clause to be included in the lease (and the
clause was not otherwise unfair or unreasonable).

Statute of Limitations under Article 2A

ESP Financial Services, LLP v. Vielot, 794 N.Y.S.2d 337 (App.Div. 2005)
The court holds that a lease provision waiving, to the extent permitted by law,
“any and all rights and remedies conferred upon a lessee by Article 2A” did not include
Massachusetts’ Article 2A’s four-year statute of limitations. Since the plaintiff brought
this suit more than four years after it had declared the lessee to be in default – but within

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the six-year period for actions on a contract that would otherwise apply – and the waiver
was held not to apply, the lessee’s motion to dismiss was granted.

Waivers of Trial by Jury

Hitachi Capital America Corp. v. Shiloh Imaging Center, LLC, 2012 WL 876778
(U.S.Dist.Ct. W.D.Okla. March 14 2012)
Illustrating, perhaps, a potential for extreme sympathy from the bench, this court
refuses to enforce a jury trial waiver found in a lease that was part of a provision printed
in all capital letters – and also refuses to enforce the same waiver in related guaranties
printed in all caps and in bold. Although stating that such printing indicated that the
lessor did not attempt to bury the waiver provisions, the court holds that a “gross
disparity in bargaining power between the parties” made the waiver unenforceable. The
court characterizes the lessor as a “large national corporation” while referring to the
defendant as a “small local limited liability corporation” (and referring to the guarantors
as a “small town doctor” and other “unsophisticated” individuals). The court notes that
the waiver was never brought to the attention of the defendants, who were not
represented by counsel.

In re Key Equipment Finance Inc., 2012 WL 669043 (Tex.App. Feb. 27, 2012)
This appellate court grants relief to an assignee of a business equipment lease
from a lower court’s denial of a motion to strike the lessee’s demand for a jury trial. The
court finds that although the jury waiver provision was not conspicuous in comparison to
any other provision in the lease contract, the assignee had met its burden of showing that
the lessee, a sophisticated party whose practice it was to have its in-house counsel review
all contracts, had knowingly accepted the provision.

Key Equipment Finance Inc. v. Poag & McEwen Lifestyle Centers, LLC, 2010 WL
2696195 (U.S.Dist.Ct. W.D.Tenn. July 6, 2010)
Applying a four-factor test used by courts to determine whether a waiver of the
right to a jury trial was knowing and voluntary, the court rejects the lessee’s arguments
that the waiver should not be enforced. With regard to one of the factors – whether the
clause was inconspicuous – the court notes that although the lessee had argued that the
waiver was in fine print in a form agreement, the waiver provision in fact appeared in all-
capital typeface, making it distinct within the text of the relatively short agreement.

AEL Financial LLC v. City Auto Parts of Durham, Inc., 2009 WL 2778078 (U.S.Dist.Ct.
N.D.Ill. August 31, 2009)
In granting the lessor’s motion to strike defendant’s jury demand, the court finds
that the jury waiver provision in the equipment lease and related guaranty are not
unconscionable, notwithstanding the lessee’s claims that the provision was inconspicuous
and that the lessee did not see the provision. The court goes on to state that evidence of
fraud in the inducement by the lessor would not change this result, but appears to leave
the issue open in the event that fraud in factum had occurred with respect to defendants’

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entry into the documents containing such a waiver (in which case the entire agreement
could be void).

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).

IFC Credit Corporation v. United Business & Industrial Federal Credit Union, 2008 WL
126552 (U.S.Ct.App.7th Cir. Jan. 15, 2008)
After bringing suit against a lessee for unpaid rent, this NorVergence assignee
lost its case after the Federal District Court had ruled the jury trial waiver in the lease to
be invalid and the jury found against the assignee. On appeal, the Seventh Circuit (in an
opinion authored by Judge Easterbrook) reverses the judgment and remands for a new
trial before a judge. The Court of Appeals finds no more reason under Illinois law to
deny validity to an agreement for a bench trial than any number of other provisions in the
lease. The court also has occasion to make some interesting remarks concerning the
difference between fraud in the factum (the ground on which the defendant prevailed
before the jury) and fraud in the inducement, in the context of assignees who claim to be
holders in due course. The former kind of fraud – one of the “real defenses” that apply
even to a holder in due course – would have voided the entire contract including the jury
trial waiver. The example used by the court to illustrate this type of fraud (“If a person
signs a contract thinking it to be something else – say, a request for sales literature – then
the pact is void.”) strongly suggests that this court agrees with the plaintiff which had
argued that the defendant’s defense of fraud in the factum was simply a misnamed
defense of fraud in the inducement, which would not have rendered the contract void and
which would not have been a defense against holders in due course.

See IFC Credit Corp. v. United Business & Industrial Federal Credit Union, 2006 WL
3692403 under the first topic heading above: “Ability to Collect Rentals under Article 2A
Finance Leases...”

Popular Leasing USA, Inc. v. Terra Excavating, Inc., 2005 WL 2468069 (U.S.Dist.Ct.
E.D.Mo. Oct. 6, 2005)
This decision holds that the lessee/defendant did not knowingly and voluntarily
waive its right to a jury trial inasmuch as the waiver clause was placed inconspicuously at
the end of a paragraph titled “Applicable Law”, which paragraph was printed in the same
small font as most of the rest of the lease. The court comments that, although the Eighth
Circuit has apparently not yet decided which party bears the burden of proving that such
a waiver is knowing and voluntary, the court is persuaded that the party seeking to

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enforce the waiver should bear the burden. The court notes its disagreement with other
judges in the same district that have reached a contrary conclusion regarding a jury trial
waiver documented on the same form of lease (which is the same form of lease at issue in
a number of the forum selection clause cases discussed above).

FGDI, Inc. v. Bombarier Capital Rail Inc., 383 F.Supp.2d 1350 (M.D.Fla. 2005)
A master lease was amended by the parties so as to change the governing law and
venue from Minnesota to Florida. While the original paragraph in the master lease
(entitled “Governing Law”) also contained an irrevocable waiver by both parties of the
right to a trial by jury, the paragraph in the amendment (entitled “Governing Law and
Venue”) did not. The court grants the plaintiff’s demand for a jury trial after finding that
(i) there is a strong preference in the federal courts for permitting jury trials, (ii) the jury
waiver provision in the amended lease was ambiguous (in that it was not clear whether
the paragraph in the amendment was intended to replace all or merely a part of the
original paragraph), and (iii) ambiguities in contracts should generally be construed
against their drafters.

Wells Fargo Bank, National Association v. Stargate Films, Inc., 795 N.Y.S.2d 18
(App.Div. 2005)
A brief opinion holding that an equipment lease’s waiver of a right to trial by jury
does not apply to a sufficiently pleaded defense by the lessee that amounts to a claim of
fraudulent inducement challenging the validity of the lease. The court goes on to say that
the lease assignee/plaintiff’s claim to be a holder in due course, entitling it to enforce the
“hell or high water” clause in the lease regardless of the lessee’s fraud defense, was
premature and therefore not properly raised on this appeal.

Assignments of Leases

Liberty Bell Bank v. Rogers, 2018 WL 834197 (U.S.Ct.App. 3dCir. February 13, 2018)
This affirmation of a District Court summary judgment in favor of the plaintiff
regarding its federal RICO claim and of the damages awarded illustrates elements of a
fraud perpetrated on bank assignees by various affiliated originators of office equipment
leases. The originators obtained loans from the banks ostensibly to finance the
equipment leases, which loans were secured by the leases. However, in certain cases the
equipment was never purchased, some leases were cancelled, the same leases were
financed by more than one bank, and some loans were repaid from empty bank accounts
via a check kiting scheme. It is not clear whether the banks were able to recover any of
their losses.

First Guaranty Bank v. Republic Bank, Inc., 303 F.Supp.3d 1200, 2017 WL 8777420
(U.S.Dist.Ct. D.Utah November 17, 2017)
Leases of medical equipment had been assigned by the original lessor to Republic
Bank which in turn assigned them to First Guaranty (FG). When two lessees under three
of the fifty-three leases assigned to FG ceased making payments owing under the leases,
FG sued Republic and requested a writ of attachment (since Republic had commenced an

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orderly liquidation of itself) on a variety of theories – such as a breach of a warranty
regarding FG’s right to collect lease payments; a failure to deliver certain supplemental
documents to FG; and a failure to timely inform FG that one of the lessees had declared
bankruptcy. The court holds that FG’s inability to establish a convincing connection
between any of these claims and its non-receipt of the payments under the defaulted
leases necessitates a denial of FG’s motion for a writ of attachment

United Leasing, Inc. v. Balboa Capital Corp., 2017 WL 3674926 (U.S.Dist.Ct. S.D.Ind.
August 25, 2017)
This case illustrates how important it can be to both the buyer and seller of lease
transactions to be clear about precisely what is being represented, or not, by the seller
with regard to such issues as financial statements issued by the lessee. When an assignor
qualifies its representations with a “to its knowledge” preamble, and also disclaims any
representations with respect to the creditworthiness of the lessee, the assignee will not be
able to recover for losses due to false lessee financials unless the assignor clearly knew
about that deception. Here the assignor’s motion to dismiss the assignee’s breach of
warranty claim is granted.

Hollywood Boulevard Cinema, LLC v. FPC Funding II, LLC, 23 N.E.3d 381, 2014 IL
App (2d) 131165, 2014 WL 6230021 (Ill.App. Nov. 17, 2014)
This case discusses the issue of under what circumstances a third party – i.e., not a
party to an assignment of a transaction – has standing to challenge the validity of that
assignment. Here the guarantor of a lease challenged the alleged assignment of the lease
from the original lessor (IFC Credit Corporation, which had filed for bankruptcy after the
alleged assignment, and which had been terminated as servicer of the lease after its
bankruptcy filing) to the defendant, FPC. To complicate matters further, FPC had
pledged the lease as collateral for a loan made to FPC. While this court holds that the
guarantor clearly had standing to challenge the sufficiency of evidence of the assignment
(presumably to establish to whom the guarantor owed its obligations) – but that the
guarantor had forfeited this argument due to insufficiency of his pleadings – he did not
have standing to question whether the assignment was voidable (though he may have had
standing to raise a defense that the assignment was absolutely invalid – i.e., void). The
court cites other federal court cases discussing third party rights to challenge assignments
and also notes that no particular form of assignment is required and that an assignment
can be either oral or written. In this case, the guarantor had cited a provision in the
purchase agreement between IFC and FPC that seemed to require a written assignment
listing the lease to be conveyed as a condition precedent to any assignment.

Wells Fargo Equipment Finance, Inc. v. Titan Leasing, Inc., U.S.Ct.App. 7th Cir., No.13-
2291, September 30, 2014
A railroad equipment vendor entered into a lease for a locomotive with a lessee,
after which time various issues occurred during its delivery to the lessee causing the
lessee to dispute the condition of the locomotive, never to use it and never to make
payments under the lease agreement. Prior to the time that the locomotive was finally
delivered to the lessee following repairs necessitated by problems during the initial
delivery attempt, the vendor assigned the lease to its leasing affiliate who simultaneously

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assigned the lease to the plaintiff pursuant to a non-recourse note and security agreement
under which representations were made regarding equipment delivery and acceptance as
well as other matters. The Seventh Circuit reverses a District Court decision in this case
(2012 WL 6184896, N.D.Ill. December 7, 2012) denying the plaintiff’s claims that these
warranties were breached (the breach of which would entitle the plaintiff to receive a
prepayment of its note). Although the District Court had focused almost exclusively on
the specific criteria in the lease as to what constitutes delivery and acceptance
(concluding that there had been delivery and acceptance under those terms), the Circuit
Court agrees with Wells Fargo that a broader understanding of those words was intended
in the security agreement and goes on to say that such warranty plus others in the security
agreement (which were also breached) are “designed to ensure that the lessee is satisfied
with the locomotive. A satisfied lessee is more likely to pay.”

Federal Deposit Insurance Corporation v. Lowis & Gellen, LLP, 2013 WL 788188
(U.S.Dist.Ct. N.D.Ill. March 1, 2013)
In this case, the FDIC, as receiver for a bank, brought suit against a law firm for
giving incorrect advice about perfecting the bank’s security interest in chattel paper
constituting collateral for loans made by the bank to IFC Credit Corporation which had
allegedly double-pledged collateral securing the bank’s loans and which subsequently
filed bankruptcy. The law firm defendant then bought suit against another law firm
alleging that the other firm, which had been retained by the bank to represent it in matters
related to IFC, was responsible for forcing IFC into bankruptcy quickly – the result of
which was to render a UCC filing by the second law firm on behalf of the bank covering
the chattel paper preferential. The outcome of this particular case was a refusal of the
court to dismiss the complaint of the first law firm against the second law firm. But the
case illustrates what can happen when an interest in chattel paper is not properly
perfected and/or not perfected in a timely manner. The FDIC alleged that on advice of
the first law firm the bank believed that it had perfected its interest in the chattel paper by
having IFC hold possession on behalf of the bank – which is not a permissible means of
perfecting by possession under Article 9. The bank also allegedly was told that no UCC
filing to perfect its interests in the chattel paper was necessary because the funded leases
had been on IFC’s books for less than ninety days – also incorrect. Eventually, the
second law firm filed a financing statement for the bank against IFC, but that turned out
to have been filed within ninety days of IFC’s bankruptcy filing, resulting in such filing
being found avoidable as a preference under bankruptcy law.

In re Roden (Farmers Exchange Bank v. Roden), 2013 WL 414450 (Bankr.N.D.Ala. Jan.

30, 2013)
Although the case concerns whether or not the managing member and sole
employee of a leasing company should be held personally liable for a non-dischargeable
debt in his own bankruptcy, it illustrates the risks for lease assignees in permitting the
assignor to collect rentals from its lessees and then remit them to the assignees. The
particular bank assignee bringing suit in this case had made a series of loans to the
leasing company secured by particular leases and the related equipment. The leasing
company collected the payments from these lessees as well as other lessees whose leases
had been assigned to other lenders, and deposited all payments into a single bank

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account. When certain lessees – not those assigned to the plaintiff in this case – defaulted
under their leases, the managing member of the lessor decided to, in effect, have his
lenders share the losses by remitting less than what was due the plaintiff so that he could
pay other lenders in part. The court finds that the amount that the plaintiff was shorted is
a non-dischargeable debt of the managing member who had misdirected the funds.

In re Brooke Corporation (Northern Capital, Inc. v. The Stockton National Bank and
Brooke Capital Advisors, Inc.), 458 B.R. 579 (Bankr.D.Kan. Sept. 28, 2011)
While not involving the assignment of leases specifically, this case may be of
interest to finance companies which assign their leases but continue to collect the
payments from lessees and then remit such payments to the assignees. In this case, a
bankruptcy trustee for an obligor on a loan attempted to recover payments made by the
obligor to a bank that had sold participations in such loan to a number of other banks.
Although the lead bank had remitted to each of the participants their share of each
payment, the trustee argued that the lead bank was liable for the recovery of all payments
which qualified as preferential under the Bankruptcy Code as “the initial transferee of
such transfer.” Rejecting various arguments of the trustee and of the participants, the
court holds that under the terms of the participation agreements, the lead bank was
merely a conduit and should not be deemed the initial transferee (a term not defined by
the Code). Under the participation agreements, the lead did not have true dominion and
control over the funds even though the funds received from the obligor were commingled
with the lead’s other funds.

Standard Office Systems of Atlanta, Inc. v. U.S. Express Leasing, Inc., 2011 WL 223472
(U.S.Dist.Ct. D.N.J. Jan. 24, 2011)(slip copy)
This case raises more questions than it answers, but the questions are interesting.
The plaintiff/original lessor entered into leases of office equipment with its customers and
sold them and the related equipment to defendant/finance company under a master
purchase agreement. After a lessee defaulted under two leases, the finance company
discovered that the actual vendor of the equipment was not the plaintiff, but a different
distributor of office equipment. The finance company argued that this breached a
representation made by the plaintiff in the master purchase agreement – that the plaintiff
was to be the owner of the equipment when it sold the lease to the defendant – entitling
the defendant to demand a repurchase of the transaction by the plaintiff (the master
purchase agreement provided for repurchase as a remedy for a breach as opposed to a
simple indemnity for losses resulting from the breach). When the defendant set off this
repurchase amount against other amounts owed to the plaintiff by the defendant, the
plaintiff brought suit. In deciding in favor of the defendant that it suffered a material
breach of representation by the plaintiff, the court never makes clear the flow of title to
the equipment. For example, if the plaintiff only “brokered” (a term used by the plaintiff
and accepted by the court without a clear description of what this in fact meant) the
transaction between the actual equipment distributor and the lessee, what sense can be
given to the existence of a lease between the plaintiff and the lessee? If the lease was a
true lease, title at some point must have passed to the plaintiff – e.g., either from the other
distributor or from the lessee (via a sale/leaseback). If the lease only created a security
interest, then perhaps title passed directly from the other distributor to the lessee – in

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which case the plaintiff would have held a security interest in the equipment. The case
contains no such analysis. The court also ruled against the plaintiff’s argument that the
master purchase agreement only required that the defendant would obtain either good title
to the equipment (regardless of how title flowed) or a first priority security interest in the
equipment (which could have been the result of the lease creating a security interest).
The court cites the statement in the lease (found in many lease forms) that the
plaintiff/lessor owns the equipment as an indication that the plaintiff was representing
such to the defendant. Whether or not the court accurately interpreted the master
purchase agreement or understood the flow of title to the equipment, the case
demonstrates the advantages of having a repurchase remedy for breach of representations
rather than a simple indemnity.

Overland Leasing Group, LLC v. First Financial Corporate Services, Inc., 2009 WL
4981632 (U.S.Dist.Ct. D.N.J. December 17, 2009)
After an assignee purchased a lease and related equipment from a lessor, the
lessee filed for bankruptcy and the assignee brought suit against the lessor for fraud and
breach of contract – for misrepresenting the condition (that it was in good working order)
and cost of the equipment to the assignee and for failing to repurchase the lease and
equipment from the assignee as a result of such misrepresentations. This decision denies
the lessor’s motions for summary judgment, finding that there are genuine issues of
material fact regarding the assignee’s claims. (The assignee had also sued accountants
who had done work for the lessee, but the court granted the accountants’ motions for
summary judgment.)

Gaia Leasing LLC v. Wendelta, Inc., 2009 WL 4810685 (D.Minn. Dec. 11, 2009)
An assignee of a lease and the related equipment had sued the lessee following the
lessee’s default. Prior to the lessee’s default, however, the original lessor entered
bankruptcy proceedings (involuntarily) and the lessee filed a motion claiming that the
assignment had not taken place until after the bankruptcy filing and therefore the lease
and leased equipment remained property of the bankruptcy estate to be dealt with in the
lessor’s bankruptcy proceedings. Notwithstanding considerable ambiguity with respect
to the dates of assignment of the lease assignment agreement and related bill of sale for
the equipment (a four and one-half month difference between what the assignee argued
was the actual assignment date and wording on the lease assignment agreement
concerning what was to be the “effective date” of the assignment), this court agrees with
the assignee and denies the lessee’s motion. In particular, the court refers to language in
the bill of sale (“…does hereby unconditionally and irrevocably sell…”) as “absolute
language” indicating an immediate assignment. While this decision is limited simply to
picking the actual date of effectiveness of the assignment, it should cause leasing
attorneys to consider the consequences of a lessor’s bankruptcy as it relates to the
language and legal structure of an assignee’s prior assignment from that lessor. If the
assignee’s financing takes the form of a non-recourse loan secured by the lease and
equipment, such collateral remains property of the lessor and part of its bankruptcy
estate. On the other hand, a lease assignment – whether or not accompanied by a transfer
of some interest in the equipment – can be structured an absolute sale of such lease,

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rather than a mere security interest. Article 9 treats both structures similarly for certain
purposes, but leaves it up to other law to decide whether a true sale has taken place.

Bremer Bank, National Association v. John Hancock Life Insurance Company, 2009 WL
702009 (U.S.Dist.Ct. D.Minn. March 13, 2009), aff’d 601 F.3d 824 (8th Cir. 2010)
This case, a U.S. District Court decision affirmed by the Eighth Circuit Court of
Appeals, 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 (i) an “equity squeeze protection” clause in the documents
and (ii) 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.

Federal Deposit Insurance Corp. v. Kipperman (In re Commercial Money Center, Inc.),
392 B.R.814 (Bankr.App.Panel 9th Cir. 2008)
This case decides one of the issues left open by previous rulings in this interesting
legal drama. Following a purported assignment of payment streams under equipment
leases to a bank, the assignor (CMC) filed for bankruptcy and its trustee sought to recover
the rights to such payment streams from the bank by arguing both that the assignment of
these payment rights was not an assignment of payment intangibles and thus could not
have been automatically perfected according to the provisions of Article 9 – even if the
assignment qualified as a true sale – and also that the assignment was a loan (i.e., not a
true sale), requiring a different means of perfection even if the assignment could be
characterized as an assignment of payment intangibles. Overruling an earlier decision of
the bankruptcy court, this bankruptcy appellate panel previously ruled that the transaction
did involve an assignment of payment intangibles – “stripped” away from the underlying
equipment leases which are classified under Article 9 as chattel paper – which
assignment would have been automatically perfected under Article 9 if it qualified as a
sale. (This particular decision has been questioned by various legal practitioners and
scholars and is criticized in a draft of an amendment to the Official Comments to Article
9 being proposed for adoption by the Permanent Editorial Board of the UCC. If rental
payments can be “stripped” away from leases and lose their character as chattel paper, the
priority rules favoring purchasers of chattel paper could be in jeopardy.) But that panel
also agreed with the lower court that the substance of the transaction was in fact a loan

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secured by the payment streams, in which case perfection could not be automatic. This
panel now decides that the bank did not perfect its interest in the payment streams by
taking possession of the leases through an agent – the one remaining hope for the bank
(in the case, represented by the FDIC – the receiver for the bank) since there had been no
UCC filing done by the bank listing either the leases or the payment streams as collateral.

FirstMerit Bank, N.A. v. Vision Financial Group, Inc., 2006 WL 2806566 (U.S.Dist.Ct.
W.D.Pa. Sept.28, 2006)
Vision Financial financed a lessee’s purported purchase of a furnace through a
sale-leaseback transaction and then assigned the lease to FirstMerit. Although both the
original lessor and assignee had performed due diligence – including a tour of the lessee’s
facility with a view of equipment said to be the furnace, and a review of a manufacturer’s
invoice and copies of checks from the lessee to pay the manufacturer – it subsequently
came to light that the lessee was defrauding both financing sources and had never
purchased the furnace described in the lease. FirstMerit sued Vision Financial for
rescission of the lease assignment based on the doctrine of mutual mistake. After citing
provisions in the assignment agreement in which Vision Financial clearly disclaims
representations about the equipment and states that it has no knowledge of any facts
impairing the validity and value of the lease, this court holds that the assignment clearly
allocated the risk of mistake regarding the existence of the furnace to the assignee.

Day v. Case Credit Corporation, 427 F.3d 1148 (8th Cir. 2005)
An equipment dealer for Case International Harvester first orally negotiated terms
for financings (mostly leases) of farm equipment and then fraudulently prepared written
agreements (representing sales) with higher payment terms, employing forged signatures
of it farmer-customers, before assigning such agreements to Case Credit. When Case
became aware of the fraud, it attempted to have the farmers sign verifications of the
written agreements – which the farmers initially refused to do because of the inflated
payment amounts, but then agreed after assurances from Case that the verification forms
would only be used to confirm their possession of the equipment. Case later allegedly
attempted to use these verifications to collect the full higher amounts. Holding that Case
could enforce neither the forged written agreements – since they were void – nor the oral
agreements – on the basis that no one ever contemplated that oral agreements would be
assigned – the Eighth Circuit reversed the District Court’s grant of summary judgment in
favor of Case under a contract theory of liability. While the Circuit Court agreed with the
District Court that there was no evidence that Case had acted as an agent of the fraudulent
dealer, it agreed with the farmers that evidence of Case’s “unclean hands” conduct might
bar it from recovering on a theory of unjust enrichment, and remanded to the District
Court for further proceedings.

Savings Bank of Manchester v. Ralion Financial Services, Inc., 881 A.2d 1035
(Conn.App. 2005)
After the lessee defaulted on its lease entered into with the lessor/defendant, the
assignee of the lease sued the lessor for alleged misrepresentations in the assignment
documents regarding, among other things, the location of the equipment at the time of the
assignment. Reversing the judgment of the trial court in favor of the assignee, the

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appellate court holds that since the assignee’s loan officer had testified that he knew the
equipment had not been delivered to the place designated in the lease at the time of the
assignment, the assignee could not have reasonably relied on that misrepresentation and
therefore could not prevail in its action for negligent misrepresentation.

General Electric Capital Corporation v. ePlus, Inc., 2005 WL 700954 (U.S. Dist. Ct.
S.D.N.Y. March 24, 2005)
As an assignee of certain leases, the plaintiff attempted to recover post-petition
rentals from the lessee’s successor under Bankruptcy Code Section 365(d)(10) after such
successor had filed bankruptcy. After the bankruptcy and district court (on appeal) both
held that the lease was not a true lease (i.e., it was instead a lease that created a security
interest), the plaintiff brought a summary judgment motion against the lessor’s successor
based on an alleged breach of its warranty in the non-recourse loan and security
agreements that it had good title to the equipment. The court holds that the phrase
“except for the interest of the Lessee under the Lease” qualifying the good title warranty
created enough of an ambiguity to deny summary judgment. The court also noted
evidence offered by the defendant of examples of warranty clauses that much more
clearly guarantee true lease characterization. This case indicates why lessors, who are
unsure about the characterization of leases they wish to finance, should consider
warranting either good title or a first priority security interest.

Lessors’ Rights in Bankruptcy Proceedings

Williams v. Ford Motor Credit Company, LLC, 2016 WL 2731191 (U.S.Dist.Ct.

E.D.Mich. May 11, 2016)
This Chapter 7 proceeding involves the bankruptcy of an individual who initially
decided to assume one of its two motor vehicle lease agreements and accordingly signed
a lease assumption agreement with Ford Motor Credit. The agreement explicitly stated
that it was being entered into pursuant to a provision in the Bankruptcy Code permitting
debtors to assume pre-petition personal property leases and not requiring bankruptcy
court review or approval (11 U.S.C. Sec. 365(p)). When the debtor changed its mind, the
argument was raised that the agreement was not enforceable since it had not been
approved by the court as a reaffirmation of debt requiring court approval under 11 U.SC.
Sec. 524(c). This court affirms a Bankruptcy Court order holding that an assumption
agreement entered under the former Code section is enforceable following discharge even
if the debtor did not affirm the obligation with Court approval under the latter Code
section. This court acknowledges that other federal courts have been deeply divided on
this issue in bankruptcy proceedings.

In re Republic Airways Holding Inc., 547 B.R. 578 (Bankr.S.D.N.Y. 2016)

The airline debtor in this bankruptcy proceeding was seeking, pursuant to Section
1110 of the Bankruptcy Code, to return numerous aircraft that it either owned, subject to
a security interest granted to a financing source, or leased from a financing source. This
court rejects any suggestion that such a return must comply with all of the return
conditions for surrender in the underlying leases or security agreements between the

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parties, and states that this is the position of other courts ruling on the same issue. Here,
in particular, the court rejects Citibank’s suggestion that the debtor return the aircraft with
their matching engines as was required by the underlying agreements. The court does
permit Citibank to make a claim for any costs related to what it might have to do to put
the aircraft in the condition required by the underlying agreements.

In re Equipment Acquisition Resources, Inc. (Brandt v. The CIT Group/Equipment

Financing, Inc.), 2012 WL 4754957 (Bankr.N.D. Ill. Sept. 28, 2012)
[See the summary in the Ability to Collect Rentals section above.]

In re Smith, 449 B.R. 35 (Bankr.E.D.Pa. 2011)

The individual debtor in bankruptcy attempted to assume a motor vehicle lease
and then purchase it in his Chapter 13 plan by making payments over the five year life of
the plan. Agreeing with the objecting lessor, the court finds that Section 365 of the
Bankruptcy Code requires that in order to assume the lease and exercise an option under
the lease to purchase the vehicle, the purchase price would have to be paid in a lump sum.
Additionally, a necessary condition of assuming the lease under Section 365 would be to
cure his monetary default under the lease (or provide adequate assurance of a prompt
cure) as well as providing adequate assurance of future performance under the lease.

In re Double G Trucking of the Arlatex, Inc., 2010 WL 5525387 (Bankr.W.D.Ark. Dec.

20, 2010)
After the bankruptcy court ruled that a TRAC lease of three tractors was a true
lease, the lessee in bankruptcy (which had argued that the lease was instead a secured
transaction and therefore that the lessor was entitled to adequate protection payments
only) rejected the lease and, a month later, surrendered the tractors to the lessor. The
lessor attempted to obtain administrative expense treatment (with its special priority) for
all obligations owing as to all three tractors – both during the first 59 days after the
bankruptcy filing (the period after which the Bankruptcy Code generally requires
fulfillment of all obligations under the lease until the lease is rejected) and for all the time
thereafter until it obtained possession of the tractors. The court rules that since one of the
tractors was inoperative during the entire period after the filing and therefore benefit to
the estate resulted only from the actual use of the other two operable tractors, the lessor
was entitled to administrative expense treatment for only those two tractors for the initial
59 day period. With respect to the subsequent period of time, the court holds that the
bankruptcy statute requires payment of the full lease rental for all three tractors (i.e.,
regardless of benefit to the estate) until rejection of the lease (not, as the lessor had
argued, until the equipment was surrendered).

Ali v. CIT Technology Financing Services, Inc., 6 A.3d 890 (Md.Ct.App. 2010)
This case concerns a lessor’s rights after bankruptcy. After defaulting on its lease
with the plaintiff/lessor (more precisely, the successor to the original lessor), the lessee
filed a petition in bankruptcy, which case was subsequently dismissed after the lessee had
not complied with bankruptcy procedures in completing an acceptable plan of
reorganization. When the lessor filed suit to enforce its rights under the lease six months
after the dismissal of the bankruptcy case, the lessee argued that the suit was barred under

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Maryland’s three-year statute of limitations. This appellate court upholds decisions in
two lower courts and concludes – in what is apparently a case of first impression in
Maryland – that a federal bankruptcy petition constitutes “a petition in insolvency” under
a very old (but repeatedly recodified) Maryland statute serving to toll the statute of
limitations such that the lessor could maintain this action against the lessee.

Barber v. Reynolds Motor Leasing Company (In re My Type, Inc.), 2009 WL 1705851
(Bankr.C.D.Ill. June 17, 2009)
This bankruptcy court decision begins with the following sentence: “Rearing its
ugly head in this case is the issue of whether a lessor of a fleet of trucks whose leases are
recharacterized as disguised security agreements is thereby rendered unperfected because
the lessor is identified on the titles as owner instead of lienholder.” After certain of the
lessor’s leases were so recharacterized by the court, the trustee alleged that the lessor was
unperfected on such leases. This court, however, agrees with the majority of decisions
holding that in cases where leases are determined in fact to create security interests, the
lessor/secured party is nevertheless properly perfected in the vehicle when its name
appears on the certificate of title as owner and not as lienholder.

In re Northwest Airlines Corp., 2008 WL 756388 (Bankr.S.D.N.Y. March 21, 2008)

This dispute between two parties to a leveraged aircraft lease transaction – the
owner trustee and beneficial owner of the aircraft on the one hand and the indenture
trustee and lenders on the other – involved determining who had the right to claim lease
rejection damages after the bankrupt airline rejected an aircraft lease. The bankruptcy
court determines that this right continues to reside in the owner because the foreclosure
sale conducted on behalf of the lenders included only title to the aircraft without any
mention of rights under the lease including damages for its rejection.

In re Student Finance Corporation, 2007 WL 4225573 (Bankr.D.Del. November 28,

2007)
After the lessee filed bankruptcy, the lessor undertook a number of different
actions (including drawing on a letter of credit and sending a letter accelerating the
balance under the lease), the effect of which – according to the bankrupt lessee’s trustee –
was to breach or terminate the lease and thus prevent the lessor from recovering lease
rejection damages pursuant to Bankruptcy Code Section 365(d)(5). Interestingly, this
court finds that the exercise of certain of these remedies by the lessor was void – as a
violation of the automatic stay – and therefore the lease was not terminated before the
relevant date with regard to the lessor’s claim for lease rejection damages. The court thus
denies the trustee’s summary judgment motion, and orders a status hearing to examine
the claims further.

In re Federal-Mogul Global Inc., No. 05-2423 (U.S.Ct.App.3d Cir. March 15, 2007)(not
precedential)
The Third Circuit holds that the equipment lessor was entitled to payment of a full
month’s rent with respect to leases rejected by the bankrupt lessee in the middle of such
month, reversing holdings by both the Bankruptcy and District courts that the lessee was
entitled to pro-rate the rental amount for that month. Since the leases all required the

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payment of a full month’s rental in advance at the beginning of each month and nothing
in the bankruptcy code itself or in the prior proceedings authorized an amendment of the
terms of the lease, this appellate court finds no grounds for permitting pro-ration of the
payments.

U.S. Bancorp Equipment Finance, Inc. v. Edwards’ Transportation, Inc., 2005 WL

6083461 (U.S.Dist.Ct. S.D.W.Va. August 9, 2005) (Slip Copy)
After a lessor of truck tractors had consented to the assignment and assumption of
the lessee’s interests in the lease and equipment to another party, that other party filed for
bankruptcy. The lessor then brought suit in federal District Court against the original
lessee and guarantors on the lease, all of whom had agreed to remain liable following the
assignment and assumption. This court grants a motion by the defendants to exercise the
court’s discretion and refer the matter to the bankruptcy court based upon the relatedness
of the claims to matters in the bankruptcy – and notwithstanding the fact that the lessor
would not be able to obtain a jury trial in the bankruptcy court.

In re The IT Group, Inc., 331 B.R. 597 (Bankr.D.Del. 2005)

The court finds in favor of defendants from whom allegedly preferential payments
were sought to be recovered based upon the “Kiwi Defense.” This defense is predicated
on a Third Circuit decision involving Kiwi Airlines, which held that assumption of an
unexpired lease or executory contract under Section 365 of the Bankruptcy Code bars the
later recovery under Section 547 of pre-petition payments made during the preference
period under such lease or contract.

CIT Communications Finance Corporation v. Midway Airlines Corporation (In re

Midway Airlines Corporation), 406 F.3d 229 (4th Cir. 2005)
This Circuit Court agrees with the majority interpretation of Bankruptcy Code
Section 365(d)(10) as it relates to a case where no post-petition payments had been made
on a lease prior to its rejection. The court holds that the lessor’s claim for all payments
owing under the lease following the sixty-day period after the bankruptcy filing should be
entitled to administrative expense treatment, rejecting the trustee’s and bankruptcy
court’s position that the lessor was entitled only to a reduced allowance because the
equipment was of little use to the lessee. The court also rules, however, that immediate
payment of the amount claimed by the lessor was not required.

In re Smith, 315 B.R. 77 (Bankr.W.D.Ark. 2004)

Decision illustrating that if a lease has been assumed by a debtor in bankruptcy
and is later rejected, the damages resulting from such breach are generally entitled to
administrative priority.

Bartholomew v. General Electric Capital Corporation (In re Tricord Systems, Inc.), 2004
WL 2066817 (U.S. Dist.Ct. D.Minn. August 27, 2004)
In a case in which the lessor drew on a letter of credit while its lessee was in
bankruptcy, the court affirms that letters of credit are not assets of the bankruptcy estate
and that drawing on them is not a violation of the automatic stay. However, the district
court remanded to the bankruptcy court the issue of whether the lessor drew on the letter

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of credit for an amount greater than the amount to which it was entitled under the lease
agreement. After remand and another appeal to the District Court, the lessor was held
liable for drawing too much. 2005 WL 910531 (D.Minn. April 15, 2005)

In re BankVest Capital Corp., 360 F.3d 291 (1st Cir. 2004), cert. denied, 124 S.Ct. 2874
(2004)
The First Circuit holds that Section 365(b)(2)(D) does not require that non-
monetary defaults be cured before the debtor in bankruptcy can assume an unexpired
lease. The court finds the wording of the statute to be ambiguous, finds no helpful
legislative history, and agrees with most bankruptcy commentators who have written that
such an interpretation is consistent with general bankruptcy policy. The court also
indicates its disagreement with the contrary holding of the Ninth Circuit in In re
Claremont Acquisition Corp., 113 F.3d 1029 (9th Cir. 1997). Although the Supreme
Court denied a petition for writ of certiorari, this issue was finally resolved in favor of the
Claremont court’s position by recent amendments to the Bankruptcy Code.

Lease Formation; Authority to Bind a Lessee Under a Lease

De Lage Landen Financial Services v. St. Bernard’s Episcopal Church, 2012 WL 489149
(N.J.Super.A.D. Feb. 16, 2012)
This appellate court affirms the grant of summary judgment by a trial court in
favor of the assignee of a lease of a copy machine. After entering into a five-year lease, a
church made payments for over two years before a new treasurer determined that a much
lower cost copier would be adequate for its needs. The church obtained such a lower cost
machine and packed the one it had used to be picked up by the assignee. Instead, the
assignee brought suit for the amount of remaining lease payments. Among the lessee’s
arguments was that the executive assistant who signed the lease on behalf of the church
had neither the actual nor apparent authority to bind the church. This decision rejects that
argument, finding that the use of the machine and payment of the rentals for over two
years ratified the lease even if the person who had signed was not authorized.

Frontier Leasing Corporation v. Links Engineering, LLC, 2010 WL 1838406 (Iowa

Supreme Ct. May 7, 2010)(not yet released for publication)
In an action by a leasing company to enforce a defaulted lease, the lessee argued
that the person signing the lease on its behalf did not have authority to do so. The lessee
owned a golf course and the signatory was a golf professional hired to run the day-to-day
operations of the golf course. The lessee asserted that the golf professional did not have
the authority to enter into financing arrangements on its behalf. While a lower court had
granted summary judgment in favor of the leasing company, the Iowa Supreme court
reverses, finding that the facts (to be further investigated on remand) could have
supported a conclusion that the signatory had neither actual nor apparent authority – the
latter predicated on common law principles (e.g., estoppel, ratification) that might lead to
a conclusion that an agent had the authority to bind its principal.

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First Union Rail Corporation v. Heller Performance Polymers, Inc., 2007 WL 4224341
(U.S.Dist.Ct. N.D.Ill. November 27, 2007)
Without reference to Article 2A, this decision employs certain basic elements of
contract law (e.g., offer and acceptance, consideration, and definiteness of terms) that can
be found in Article 2A to determine whether agreement to renew leases for rail cars had
been reached. Notwithstanding the facts that (i) proposal letters and riders sent by the
lessor to the lessee refer to a requirement for entry into “appropriate lease
documentation” and (ii) such documentation was never signed, this court finds that the
combination of documents such as the original master lease agreement, certain unsigned
riders and related proposal letters, and the actions of the parties, served to create a
binding lease agreement.

G.E. Capital Information Technology Solutions, Inc. v. Oklahoma City Public Schools,
173 P.3d 114 (Okla.Civ.App. 2007)
This case illustrates some of the special issues that can arise in the municipal
leasing context. After the lessor of copy machines to public schools in Oklahoma City
sued the school district with respect to leases that had not been paid and equipment that
had not been returned (all evidently due to financial hardships suffered by the district),
the school district attempted to defend by claiming that those who signed the leases did
not have the requisite authority to do so. Both the trial court and this appellate court rule
that the actions of the district in approving the payments made to the lessor served to
ratify the lease contracts – at least to some extent. However, this court also distinguishes
between ratification of certain renewal terms on the one hand and limits imposed by non-
appropriation requirements that would restrict the extension of leases past the end of a
fiscal year. The court also highlights the difference between ratification of renewal terms
and the consequences of default (resulting from the district’s not returning certain
copiers).

Weinreis v. Hill, 719 N.W.2d 354 (N.D. 2006)

The North Dakota Supreme Court affirms a trial court’s finding that a leasing
company acted negligently and not in good faith when it purchased an aircraft in a sale-
lease back transaction and paid the proceeds to the individual who represented himself to
be the president of the corporate lessee, rather than to the lessee itself, notwithstanding a
variety of reasons to question such individual’s authority. The decision also upholds the
trial court’s judgment requiring the leasing company to reconvey the aircraft to the
corporation.

Wells Fargo Financial Leasing, Inc. v. Executive Landscaping, Inc., 2006 WL 1738420
(Conn.Super. June 9, 2006)
Summary judgment is denied this lessor concerning the issue of whether the party
who signed a lease – the defendant’s controller – had either actual or apparent authority
to act for the lessee. Statements by the lessee’s president were found inconclusive as to
the controller’s actual authority and the fact that two lease payments were made did not
constitute evidence of apparent authority since the invoices were apparently sent to the
controller for payment.

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Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., 408 F.3d 460 (8th Cir. 2005)
This Circuit Court panel (with one dissent) finds in favor of a group of lessors
that, notwithstanding the title “Term Sheet Proposal” regarding the acquisition and lease
of certain aircraft, such document evidenced a binding preliminary agreement according
to a series of factors established under New York law. Both the majority and dissenting
opinions are instructive regarding the elements that can turn a non-binding proposal into
a binding agreement.

Banc One Leasing Corp. v. Scat Recycling, L.L.C., 892 So.2d 98 (La.App. 2004)
Summary judgment in favor of a lessor is reversed by an appellate court finding
material issues of fact regarding the actual and/or apparent authority of the lessee’s
accountant to sign a lease on behalf of the lessee. The lessee’s operating agreement, a
copy of which had been given to the lessor, indicated that only its two members (a
husband and wife) were authorized to incur such obligations. Evidence indicating that
the accountant had forged documents stating that he was one of the owners of the lessee
was one example of a number of contested issues of fact held to preclude summary
judgment.

IOS Capital, LLC v. Allied Home Mortgage Capital Corporation, 150 S.W.3d 148
(Mo.App. 2004)
After the branch manager of an office of the purported lessee signed a lease
(presented by the equipment vendor, but with an unaffiliated lessor) for a photocopy
machine (and presumably after the lessor paid the equipment vendor for the machine),
that particular office was closed by the lessee and the branch manager was terminated – a
few days before the equipment was delivered to the office. In this action for breach of
lease and for conversion (the whereabouts of the machine was unknown to both parties),
the purported lessee successfully argues that the lessor was not justified in relying upon
either actual or apparent authority of the employee to enter into the lease. The case does
not indicate whether the lease contemplated the signing of a delivery and acceptance
certificate before the lease was to commence.

Hybrid Transactions

C9 Ventures v. SVC-West, L.P., 136 Cal.Rptr.3d 550 (Cal.App. 2012)

One company ordered helium-filled tanks and balloons from a second company in
connection with an event planned by the first company. The tanks and balloons were
delivered with a standard form invoice on the reverse side of which was an
indemnification provision. After a boy was injured by one of the tanks, both companies
were sued and both paid the same amount to settle the case. However, the supplier of the
tanks had cross-claimed for indemnity against the other company based on the unsigned
indemnity provision, and the trial court decided this issue in favor of the supplier after
construing the transaction as a sale (of helium) governed by Article 2. This appellate
decision reverses the trial court, holding that the essence of the transaction was a lease of
the tanks, rather than a sale of helium, and therefore should be analyzed under Article 2A.
Noting that Article 2A’s rules are different than those of Article 2 with regard to what

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terms are enforceable in the context of an oral agreement, the court holds that the
indemnity provision was not enforceable in the context of the facts of this case.
Interestingly, this court goes on to comment that the trial court was incorrect even if
Article 2 were held to govern – which means that under the facts of this case which UCC
Article governed did not matter. One lesson of this case is that, to the extent the rules of
Article 2 and Article 2A would lead to different outcomes, how a “hybrid” transaction is
characterized – as a sale or as a lease – can be of considerable importance.

Sovereign Immunity from Suit

Dallas County Hospital District v. Hospira Worldwide, Inc., 2013 WL 1803572

(Tex.App. April 30, 2013)
When a lessor of hospital equipment brought suit for breach of contract and
quantum meruit to collect unpaid lease payments from a county hospital district, the
lessee defended by claiming sovereign immunity. The trial court rejected the hospital
district’s argument that it was not a local governmental entity for purposes of a Texas
statute waiving sovereign immunity for breach of contract claims against local
governmental entities that had been given the statutory authority to enter into contracts.
This appellate court agrees – but only with regard to the lessor’s breach of contract claim.
The court reverses the trial court in part by also holding that the statutory waiver of
immunity does not extend to claims in quantum meruit – dismissing that part of the
lessor’s claim with prejudice.

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