Without all the sky-is-falling arm flapping hysteria, identity theft and protection of sensitive information IS an important issue that WILL be more important to YOU in the years...maybe months...to come.

Right now, state and federal law targets banks and other financial institutions and is focused on consumer transactions. There is more to consider than current regulations, however. Civil lawsuits, including class actions, can result from loss of confidential customer information, including information about lenders, funding sources, originators, vendors and other business associates.

The average breach costs $3.62 million. That includes the tiniest loss of records as well as Target and Equifax.

As we have warned before, this issue is not limited to computer records. The disgruntled employee who walks out with a stack of files under his or her arm is just as dangerous as the teenaged hacker or sophisticated foreign operator.

What do you need?

Matt Evans keeps abreast of these issues for our clients. 

If there was one thing that marked this year's Equipment Leasing and Finance Association Annual Convention in Orlando it was the focus on changes that will soon dictate the "new normal" in our industry.

To some degree, this was the intention of the excellent event planners at ELFA. Keynote speaker John Ellis focused on the importance of software in leasing. Breakout sessions included the benefits of eLeasing, taking customers through the digital experience and the new FASB rules.

But the focus on change went beyond the technology itself. The effect of this new technology, combined with other marketplace changes, on not only how we do business but what our business will be was a recurrent theme.

In the session on the benefits of eLeasing, ELFA Chairman Tony Cracchiolo of US Bank Equipment Finance posited a new leasing company in which the only staff is a panel of lawyers to enforce the provisions of documents that are marketed, prepared, signed and stored in digital medium.

While that was somewhat a tongue-in-cheek example of where we may be heading, his imaginary company seemed much more reasonable as one panelist after another extolled the virtues of joining the eLeasing evolution ("revolution"?).

These benefits included saving money on the document storage, reducing staff and, if properly managed, creating documents that are even more fraud resistant and notably safer for lessors and buyers of commercial equipment finance paper. We have and will continue to feature articles on the dues and don'ts of digital signatures and electronic documents.

Perhaps the most entertaining panel was the mock "Trial of the Century", where Alta Group CEO for the Latin American Region Raphael Castillo-Triana "prosecuted" the hell or high water clause for being outmoded. In addition to observing that the venerable term originated on 19th century cattle drives, he argues that the langauge was likely to be ignored by courts as more and more transactions includ e bundled software and services.

Alta Senior Managing Director for Legal Services, Paul Bent, defended the hell or high water clause (subjecting this writer to an eardrum-twisting southern accent for which I will never forgive him). A few words on the viability of the HOHW clause appear later this issue. There is no way in the world I am going to leave the topic without mentioning Allan Umans,  Pacific Rim Capital General Counsel,  who donned a brightly-colored choir robe and powdered wig in his role as judge. I will only say that allowing a lawyer to take a dramatic turn behind the bench is always fraught with peril, but Allan reminded us why we are transactional lawyers and not litigators.

Amid the good fun had by all, and the excellent work by witnesses for the prosecution and defense, a serious note was sounded. As we move into a digital world, our equipment finance transactions will and must evolve. Already the line between bank lending and "leasing" is blurring as leases include financial covenants and other credit protections while bank counsel discovered the added specificity of equipment finance documents offers protection for collateral beyond the customary "maintain in good condition, reasonable wear and tear excepted". We are indeed seeing more and more bundled transactions and the concept of service contracts or rental agreements where equipment is provided from inventory and may be replaced begin to look more attractive and more like what the customer is going to expect. Changes in the accounting rules are already reflecting this evolution and, whether it spells the end of hell or high water or not, we are going to have to not only think outside the box but abandon the restrictions of the 20th century altogether.

 

-       Wikipedia (without citation)

Customer agrees that Customer's obligation to pay rent and other amounts with respect to such Vehicle shall be unconditional and that Customer shall not be entitled to any reduction of, or setoff against, such amounts....

  -        Old GE Fleet Lease

 

Section 2. Rent

 

YOU PAY RENT

no matter what

YOU PAY RENT

no matter what

YOU PAY RENT

you pay it net

YOU PAY RENT

y'all get that yet?

 

BUT LET US SAY IT ONE MORE TIME

BEFORE OUR INK IS SPENT

NO MATTER WHAT NO MATTER WHY

YOU GONNA PAY THE RENT.

 

  -        2015 Rhyming Lease

 

It has been a frequent refrain for several years at the ELFA Legal Forum and now the Annual Convention: the Hell or High Water clause that has been the lynchpin of equipment leasing documentation appears to be following the T-Rex into the sunset. From seminars on "Hell or High Water Under Attack" to this year's "Trial of the Century" presentation, lawyers have pointed to cases in which, for one reason or another, lessors have been unable to rely on the familiar language.

 

The important part of that last sentence is "for one reason or another." There are several issues with the HOHWC, but they involve the use of the clause where it may not belong, or with expectations that are simply unreasonable.

 

Before turning to the situations where the HOHWC may not "work", let's remember what it does. Some, but by no means all, promissory notes include similar language. It is almost certainly unnecessary. Why? Because a promissory note is just what it is called: it is a promise by one party to pay another. It is by its very terms unconditional: "I promise to pay" is not the prelude to "if you ------." We can create a legal document under which I pay IF you perform, but that is not a promissory note. That document would be a contract...like a lease.

 

Once one of the parties has performed all that is required as an inducement to the other to pay, the contract is an executory contract. It is a one-way promise, which is why it is protected in bankruptcy: the creditor has already performed his end of the bargain, so there is nothing for the debtor to reject and save money by not requiring performance. (Yes, this is ultra simplistic).

 

The problem for us equipment finance guys is that a lease looks like a contract in which both parties have obligations, but we want it to be more like a note. All the lessor is supposed to have to do is provide or finance the equipment (which normally happens on the first day of the term) and not interfere with the lessee's quiet use and enjoyment. If it has the equipment, the lessee is, theoretically, supposed to pay rent. Period.

 

Of course, the problem is that lessees want to argue that the lessors owe them more than providing the equipment on day one and backing off as long as rent is paid. That is where we get claims that the equipment doesn't work or there are other agreements between the parties. In many ways, we use the HOHWC to put the lease on the same legal footing as a promissory note.

 

Many of the troubles arise when the Lease (or EFA for that matter) morphs away from the simple financial transaction we have described.

 

Many situations cited as evidence that the HOHWC will not protect a lessor involve bundled services contracts. These are often hardware leases in which the rent also covers computer maintenance, software upgrades or other service-type benefits to the customer. We have discussed these increasingly-common contracts in past issues. Suffice it to say that there are ways to protect the lessor against much of the risk, but the HOHWC was never intended to deny a customer the right to legal recourse if it is required for future services that are never going to be delivered.

 

Again, in a bundled arrangement (or some of them) the lessor is providing continuing consideration in the form of additional services, intangibles or perhaps goods such as repair parts. This is nothing like a promissory note and not really the same as a Lease. In some situations, the transaction can be structured so that the Lessor is simply providing the equipment or financing initially, with the customer looking to another party for the continuing and future benefits. In some cases, the effort is to separate goods provided by the Lessor (the lease portion) from the future consideration (a service contract).

 

The point here is that the weakness in the transaction is not the hell or high water clause, it is the non-lease or extra-lease elements of the deal.

 

Another common situation has been around for many years. Well-drafted leases make it clear that the lessor is not the vendor, the vendor's agent or otherwise playing the dual role of financer and salesman. If the former is the case, the lessor is simply providing financing for equipment the lessee picked out. The lessor knows, at least usually, a lot less about the equipment than the lessee. This is the case where the HOHWC makes perfect sense and, indeed, UCC Section 2A-407 provides that a finance lessor (who cannot be the vendor as well as financer) enjoys something like hell or high water protection in non-consumer leases and 2A-213 provides finance lessors with an automatic disclaimer of implied warranties.

 

But what if the lessor is, in fact, too close to the vendor. What if the vendor pays the lessor or its staff or vice versa? What about captive finance companies? What about the situation where the lessor participates in the sales process, making representations about the equipment and its value?

 

Courts have, for the most part, been slow to look beyond the HOHWC in these situations. Cases have held that a vendor captive can be a finance lessor Siemens Credit Corp.v.Newlands, 905 F. Supp. 757 (N.D. Cal. 1994). However, there are situations in which the lessor crosses a line (which exists somewhere in the ether) and gets too close to the vendor to claim finance lessor status or even rely on the HOHW language in the lease. The recent cases involving Brican America's leases to dentists, the well-known Norvergence actions and the class action resulting from the Medical Home Team bankruptcy are good examples.

 

Other examples generally break down to circumstances most of us would call "common sense." Hopefully, the integration clause of the lease, saying that prior and contemporaneous agreements are superseded, will shield the lessor, but they bear mention. If a proposal letter, approval or even emailed offer includes a quoted rate, but the actual lease rate is much, much higher because of interim rent, doc fees, vendor payments, etc., etc. the lessor could face an argument if the lessee can reverse-engineer the financing. Deals quoted as buck-outs that are documented as fmv leases, payments shown on a proposal as in arrears and in the documents as in advance, automatic renewals in full payout buck-out leases or even EFAs...one can posit a host of circumstances that an aggressive plaintiff's lawyer would paint as fraud.

 

The advice here? Don't think just because we put the HOHWC in big, bold letters, using red ink...heck, neon if you like...that your conduct cannot shoot a big hole in it. We advise clients to consider carefully vendor programs that might blur the line between financer and co-vendor. On the whole, this is a safe area and the sky is not falling because the vendor's name is used in a private label arrangement or the lessor trains the vendor salesmen in basic finance sales. It is easy to get too excited about a few aberrant cases, but this is also a situation where we must ask, "How safe do you want to be?"  

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