Marks & Associates, P.C. 
Newsletter
April 2019
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It's Spring and the Conferences Are In Bloom     

And so (sniff) id da grass and ragweed (ahhh...). The weather id insane around (ahhh...) here. Thirty degree temp'ture swings (ahh...) and the a/c on one day, heat da next (ahh-choooo!). Allergy season is a great time to be away from Birmingham, so Matt, Tammy and I will be heading out to San Diego for the ELFA Legal Forum the weekend of the 27 th and returning the evening of the 29 th .
 
As always, we will be keeping up with voicemail and email.
 
As some of you know, Matt attended the ELFA Funding Symposium in Chicago a couple of weeks ago. I stayed home and sneezed.
 
Spring is also one of the times of the year when we learn of new state law incursions into equipment finance. The latest, as reported by Scott Riehl of ELFA is a case amounting to an extension of VERMONT laws protecting consumers from AUTOMATIC RENEWALS to cover commercial transactions. Rathe Salvage v R. Brown & Sons. We are studying the case, but the Vermont supreme court was pretty clear:
 
"We hold unequivocally that business entities are entitled to the same rights under the Act as other consumers." The "Act" is Vermont House Bill 593 (Act 179) , "Automatic Renewal Provisions in Consumer Contracts." 
 
ELFA members can obtain additional information on the Association's website. We will publish more about this law and other state laws presenting challenges to equipment finance throughout the year. In an effort to get this information out as soon as possible, we are rushing ahead with this somewhat slim newsletter, but by popular demand (at least some requests), we are publishing our answers to the "test" in the February issue.
 
Hope to (sniff) see y'all sometime soon. Please keep in touch.
 
BSM
JUST FOR "FUN" TEST
We have emailed answers to those who asked and here (in bold) for the rest of you are OUR answers to the questions from our test. Note that there may be some good answers you may want to argue are better than the ones we chose. Want to email us explaining why and that you have an answer for the last question? Have at it.
 
Multiple Choice
Directions:   Choose the letter of the best response.
 
1.  The UCC section that applies to leases with $1.00 purchase options is:
(a)              Article 2.
(b)            Article 2A.
(c)            Article 9.
(d)            Article 3.
 
2 .        A Fair Market Value Purchase Option:

(a)        Is the only way to structure a true lease.
(b)        Requires lessor to refund amounts in excess of assumed residual.
(c)       Means the lease is not a true lease for state law purposes.
(d)       Protects the lessor from lawsuits if the equipment harms someone.
(c)        None of the above
          
3.        Without a personal guaranty, the owner of which of the following businesses is responsible for debts of the business?
 
(a)             A sole proprietorship.
(b)            A limited liability partnership.
(c)            A limited liability company.
(d)            A corporation.
 
4 .        A "finance lease" under Article 2A of the UCC is best described as:
 
(a)             A lease with a $1.00 purchase option.
(b)    A lease in which the Lessor is not the manufacturer of the leased equipment.
(c)            A lease in which the manufacturer of the equipment is the lessor.
(d)            Not a lease at all, Article 2A uses this term for leases that are really loans.
 
5.        Your customer under a $1.00 purchase option lease tells you it has granted blanket liens on all of its assets to its banks. You plan to enter into a lease of manufacturing equipment that is about to be delivered to the lessee by a vendor. What can you do to protect yourself?
          
(a)             Do a UCC lien search and refuse to fund unless the banks and any other lien holder releases its security interest. (ANY other lienholder?)
(b)            Pay the vendor directly and file your UCC within 20 days after delivery of the equipment to the lessee to be sure you have PMSI protection .
(c)              Ignore the bank's lien because your rights in the equipment are superior.
(d)            Have the lessee pay the vendor and reimburse the lessee but file your UCC as soon as possible.
 
6.        A properly worded purchase order will:
 
(a)       Protect the Lessor from manufacturer's defects
(b)      Transfer ownership to the Lessor upon payment
(c)      Allow Supply contract to be exercised by Lessee
(d)     All of the above
(e)     None of the above (although a & b are possibly true)
 
7.        It is not necessary to file a UCC financing statement with respect to which of these types of transactions (although it is a best practice to do so just-in-case!)

(a)        A lease with a $1.00 purchase option.
(b)            A sale-leaseback transaction.
(c)            A lease of manufacturing equipment.
(d)           A lease governed by UCC Article 2A. (maybe b & c)

8.         Which type of "bankruptcy" is for business reorganizations?
 
(a)             Chapter 7
(b)           Chapter 11
(c)            Chapter 13
(d)            Chapter 10

  9.         If your lessee files bankruptcy you:
 
(a)               May immediately go and pick up the equipment.
(b)            May immediately pick up the equipment if the lease is a true lease but not a financing lease.
(c)            Must take action only through the bankruptcy court until the automatic stay is released.
(d)          May take action through the bankruptcy court or a state court against the lessee
 
10.      Which of the following is a legal entity formed by filing with the Secretary of State in most states?
 
(a)             A sole proprietorship.
(b)            A general partnership
(c)            An unincorporated association.
(d)           A corporation
 
 
11.      Following a default by a lessee under a true lease, who then files for bankruptcy, a lessor may take which of the following actions?
 
(a)    Enforce the default provisions of the lease and immediately recover the  equipment from the lessee
(b)     Require the lessee to pay the contract rent pending assumption or rejection of  the lease in the bankruptcy court.
(c)    Enforce a guaranty of the lease obligations by the lessee's parent entity (b is probably correct but not always)
(d)    All of the above
(e)     N one of the above
 
12.     Corporate Resolutions (Board Resolutions) are required by many funders as evidence of which of the following.
 
(a)             The authority of the lessee and its officers to enter into the Lease.
(b)            The acceptance of the equipment.
(c)            The existence of the corporation.
(d)            The lease satisfying usury laws applicable to non-consumer transactions.

 
 
13.      A clause providing that the lessee must protect the Lessor against liability, tax penalties and other risks is called?
 
(a)             A tax benefit clause.
(b)            Representations and warranties.
(c)            An indemnity.
(d)            A liability clause.
 
 
14.      The UCC is a uniform body of laws governing commercial transactions that has been adopted by.
          
(a)              Every state and is uniform throughout.
(b)            The U.S. Congress.
(c)            Every state although some have made changes or enacted only parts of it.
(d)            Every state except Louisiana, New Mexico and Maine.
 
15.      Where do you file a UCC financing statement covering business equipment if your lessee/borrower is a corporation?
 
(a)             In the state where the corporation was incorporated .
(b)            In the state where the equipment will be located.
(c)            In the location where the equipment will be used.
(d)            In the state where the corporation has its principal place of business.
 

16.     Which of the following should never be significantly altered?

 
(a)              Default grace periods.
(b)            Choice of law.
(c)            The notice provision.
(d)   
 T
he "hell and high water clause". (although an exception for failure to observe lessee's quiet enjoyment is sometimes required by strong lessees).
(e)            All the above.
 
17.      A provision under which default under other obligations is a default under the lease is called a:
 
(a)             Cross Default.
(b)            Cross Collateralization.
(c)            Incorporation clause.
(d)            Parent guaranty.
(e)            Integration Clause.
 

18.     A fixture is:

 
(a)              Personal property affixed to real estate so that it is not easily removable.
(b)            Identified as such according to state law.
(c)            Sometimes a tenant improvement.
(d)            Equipment that requires filing in the real estate records to perfect.
(e)            All the above.
 
19.      You should always check UCC records for which of the following:
 
(a)              Every transaction.
(b)            A purchase from a vendor.
(c)            A purchase from a seller who is not a vendor.
(d)            Financing of equipment delivered to the lessee a month ago.
(e)            (b) and (d)
(f)     
   (c) 
and (d)
 

20.     You should check UCC records in which of the following:

 
(a)             A Sale and Leaseback .
(b)            If we want a purchase money security interest.
(c)            In every transaction.
(d)            Never for a lease with a fair market purchase option.
(e)            Never for a lease with $1 purchase option.
(f)             (a) and (b)
 
21.      If the lessee plans to sublease your equipment on a long term basis the equipment may be:
 
(a)             Goods.
(b)           Inventory.
(c)            Subject to claims of the lessee's trustee in bankruptcy.
(d)            Repurchased by the vendor.
 

22.     If a lessee intends to lease your equipment for short periods only the equipment may be:

 
(a)        Goods.
(b)       Inventory.
(c)       Subject to claims of the lessee's trustee in bankruptcy.
(d)       Repurchased by the vendor.

23.     If equipment is "inventory" which of the following is true:

 
(a)             You need to check UCC records.
(b)            Your normal UCC filings will not be adequate.
(c)            A party purchasing the equipment may take free of your interest if the lease is a $1 out lease.
(d)         A party purchasing the equipment may take free of your interest even if the lease is a true lease.
(e)            All of the above.
 

24.     You cannot obtain a purchase money security interest in which of the following:

 
(a)                Equipment purchased on a sale and leaseback.
(b)            Equipment purchased from the vendor if the lessee had possession for more than twenty (20) days.(It is theoretically possible if you had a UCC in place already, but not the best answer)
(c)            Equipment purchased from the vendor if the lessee paid for the equipment and is being reimbursed by your financing.
(d)           Inventory unless we take special procedures.
(e)            None of the above.
(f)             All of the above.
 

25.     It is not necessary to file a UCC financing statement with respect to which of the following types of equipment (although it is a best practice to do so just-in-case!)


(a)        Titled Vehicles
(b)       Railcars
(c)       Aircraft
(d)       All of the Above
(e)            Only items (b) and (c) above
(f)             None of the above
 
 
26.     The property/casualty insurance certificate should designate you as
 
(a)            Insured
(b)            Assignee
(c)            Loss Payee
(d)           Lender Loss Payee

 
27.      A provision under which property pledged to secure a borrower's obligations under one agreement also secures borrower's obligations under another agreement is called what kind of clause?:
 
(a)            Cross Default.
(b)           Cross Collateralization.
(c)            Incorporation clause.
(d)            Parent guaranty.
(e)            Integration Clause.
 
 
28.      Which of the following is likely not a true lease for purposes of state law.
 
(a)           Lease with fixed price purchase option of 20%.
(b)            Twenty year lease of standard laptops with FMV purchase option.
(c)            Lease where lessee must purchase equipment at the end of term.
(d)            TRAC Lease.
(e)            Both (b) and (c) above.(Beware leases for full useful life of equipment, even with a fair market value purchase option)
(f)             None of the above.
 
 
29.      If your customer leases (or subleases) equipment to one or more third parties your credit department requires assignment of the sublease, which of the following is advisable?:
 
(a)        O btain copy of the third party lease
(b)            Obtain legal review of third party lease
(c)            Obtain copy of board resolution from third party lessee
(d)            Obtain possession of sole original of third party lease
(e)            Have lessee execute a form of sublease/lease assignment
(f)             Have third party lessee execute acknowledgment of assignment
(g)            All of the Above
(h)            All of the Above except (b) and (c)
 
 
II.        True/False
 

1.  If the parties agree that a transaction is a lease it will be treated as a lease for federal income tax purposes by the IRS. (False)

 

2.  If the parties agree that a transaction is a lease it will be treated as a lease by the Bankruptcy Court. (False)

 
 

3.  If the parties agree in the lease documents that a transaction is a lease it will be treated as a lease by State Court. (False)

 
 

4.  A lease with a $1 purchase option is never a true lease. (True)

 
 

5.  A lease with a $1 purchase option is treated as a secured loan for most legal purposes. (True)

 
 

6.  A lease with a $1 purchase option is always treated as a loan for state sales and property tax purposes. (False)

 
 

7.  The lessee's right to quiet enjoyment is protected by Article 2A in a UCC Finance Lease. (True)

 
 

8.  The lessor's hell or high water assurance and disclaimer of implied warranties are automatically protected in a finance lease under UCC Article 2A. (True)

 
 

9.  Article 2A provides that the lessee in a finance lease has the benefit of the supplier's warranties. (True)

 
 

10.  A cure period is time a lessee has to perform obligations before it is in default. (True)

 
 

11.  A lease with a fair market value purchase option is always a true lease for legal and tax purposes. (False)

 
 

12.  A TRAC lease is always a true lease. (False)

 
 

13.  A lease with a fair market value purchase option is always an "operating lease" for accounting purposes. (False)

 
 

14.  A true lease for tax purposes is always an operating lease for accounting purposes. (False)

 
 

15.  An operating lease for accounting purposes only qualifies as a true lease for tax purposes. (False)

 
 

16.  There is more risk of liability for damaged caused by leased equipment in a true lease than a lease with a $1 purchase option. (True)

 
 

17.  Proof of property insurance is required for all transactions, unless there is a credit exception. (True)

 
 

18.  Proof of liability insurance is required for all transactions, unless there is a credit exception. (False)

 
 

19.  The law provides that the lessor never has risk of environmental spills or damage caused by leased equipment. (False)

 
 

20.  Negligence and gross negligence are the same thing. (False)

 
 

21.  Leases and guaranties must generally be in writing to be enforceable. (True)

 
 

22.  Financial Covenants are uniform (e.g. all Debt Service Coverage Ratios are the same). (False)

 
 

23.  The additional precautions necessary when leased or financed equipment is "inventory" is never necessary with titled vehicles. (False)

 
 

24.  The UCC does not apply to liens against titled vehicles when leased or financed equipment is "inventory." (False)

 
 

25.  If a broker represents to his funder that the Equipment has been delivered and it turns out that the deal was a fraud (no Equipment) the broker will have breached his agreement even if he did not know about the fraud (True).

 
 

26.  Same question as Number 25 but the representation was made "to broker's best knowledge". (True)

 
 

27.  If a broker makes no representations regarding a deal it will never be responsible for lessee/vendor fraud. (False)

 
 

28.  In order to prove fraud it is always necessary to prove that the guilty party knew that he or she was making untrue statements. (False)

 
 

29.  If a broker breaches a representation to his or her funder he will always do better under an indemnity then a buy-back requirement. (False)

 
 

30.  Generally, n order to sell leases in any state a broker must be qualified to do business with a Secretary of State. (False)

 
 

 

31.  Generally, in order for a broker to have an office in a state the broker must be "qualified to do business" with a Secretary of State. (
True)

 

 
 

32.  An oral agreement is never enforceable. (False)

 
 

33.  An oral agreement can never change the terms of a written agreement. (False)

 
 
 

 

34.  All lawyers are jerks.
(Well....)

 

 
 
 
End Notes
 
 

1.  Do you need a state license in the state where your customer is located?

a.  Do you have an office and/or employee in the state?

b.  Do you do vehicle (car, truck, trailer) leasing?

c.  Do you sell off-lease or repossessed vehicles to your lessees or others?

d.  Do you charge more than 18% interest, finance charge or implicit rates?

(consider all add-on fees as interest for this purpose).

e.  Do you frequently do transactions under $25,000?

f.  Is the state California?

g.  Are you a bank? A bank subsidiary?

 

2.  Do you need to disclose the rate of interest in an EFA or buck-out lease?

a.  In what state are your customers located?

b.  Do you disclose the cost of the equipment?

c.  Do any fees to or from the vendor affect the amount the customer is actually financing?

d.  Have you quoted an interest rate to the customer in a proposal letter, email or other communication and is the rate the customer is paying the same?

e.  Is your answer to "d" affected by fees or other charges the customer will pay, or by your answer to "c"?

f.  Is there any way for a customer to calculate the actual rate of interest from information contained in the documents?

 

3.  Are you in possession of the only signed copy of your Leases or EFAs? Are your copies only faxes or pdf's?

 

4.  Are your documents now signed electronically? Do your procedures and documents address this change?

 

5.  Does your Application include ECOA (Reg B), FCRA and other government disclosures?

 


400 Century Park South
Suite 100
Birmingham, AL 35226
(205) 251-8301

Direct Mail To: 
P.O. Box 11386
Birmingham, AL 35202
 
Barry S. Marks   
Direct:  205.251.8303 │ barry@leaselawyer.com
 
Matthew D. Evans   
Direct:  205.251.8302  │ matt@leaselawyer.com
 


___________________________________
 
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