Greetings From Florida...and Elsewhere
We don't know about y'all, but Spring is travel season for us. Leasing conferences, including the annual ELFA Legal Forum (this year in St. Pete Beach) and major NEFA and NAELB events generally have us living out of suitcases in April and early May. In addition to the big conferences, there are regional and local meetings.
One way to tell young leasing professionals from veterans is whether they think that sounds like fun. TSA, flight delays, confused cab drivers, rental car returns and waking up in hotels trying to remember where they put the bathroom gets old.
What doesn't get old is equipment leasing and finance. Wherever and whenever we get together with bankers, vendors, leasing company executives and other lawyers, we learn new things. What is perhaps even more important is that we get a "feel" for our industry and its direction.
This year in St. Pete Beach, ELFA President Anthony Cracchiolo, who is also President and CEO of U.S. Bank Equipment Finance, delivered a fascinating appraisal of where we are and where we are going. Tony found a couple of minutes to amplify his observations right after his speech. (It was also fun comparing histories on things like seeing our first fax machine (then called telecopiers) and how computers changed turnaround times from an amazing 24/48 hours - the Federal Express era - to..."I need it yesterday").
The bottom line to our chat was that there is ample evidence we are about to catch a big wave in equipment finance. We observed that equipment replacement cycles are running out, whatever the economy, in the years following the Great Recession. Tony added a half-dozen examples of how equipment financing opportunities are cropping up in new sectors and even the cautious are recognizing that the trillion dollars of commercial equipment is more likely to be supported by some form of equipment leasing and finance than ever before.
The meteoric rise of merchant cash advance and working capital lenders was largely fueled by advances in electronic payment practices and credit scoring, as well as pressure on bank lenders. The same factors will benefit us. As interest rates rise, margins should spread out and credit concerns ease.
Wait a minute. We are lawyers. Our blood type is not "be positive" like sales guys, it's either "be negative" or a scholarly "oh.....negative." We pepper any prediction or claim of understanding of economic factors with a hundred disclaimers ("Listen to me...you should not be listening to me"). We make terrible investors and worse business owners.
All that being said (and true), we could not possibly come back from this year's Legal Forum without a strong feeling that things are looking up. While the halcyon days of the 90's and early 2000's may not return anytime soon, we think that all of us can look to a bright future, whatever the effects of domestic political uncertainty and the increasing insanity of world turmoil.
We are doubling down with a new Atlanta office and renewed commitment to equipment leasing and finance as well as expansion into other forms of commercial lending. We hope you are prepared to do the same.
There. I hope y'all feel better now.
News from the ELFA Legal Forum
As in years past, our lawyers attended the annual Legal Forum, the industry's premier event for lawyers. This year, Barry Marks, Matt Evans, Ian Platt and our legal assistant, Tammy Hogan, joined over 250 lawyers and other leasing professionals from all over the country. The Forum is a valuable means of keeping up with trends in legal representation as well as developments in state and federal law relevant to equipment finance.
Matt participated in a panel on lease documentation, focusing his comments on insurance issues for lessors and lenders. Barry spoke on state licensing and usury issues as part of the Forum's annual "Hot Topics" seminar.
Our firm joined with Cassels Brock, a leading Canadian law firm, in hosting a dinner for clients and friends. In this and future issues, we will share some of the information we picked up at the Forum. As always, we welcome questions and comments on legal developments.
Our big news is that Barry was presented with the Ed Groobert Award for Legal Excellence, being one of less than a dozen lawyers so honored since the award was established. An excerpt
from the press release is set out below, and Tammy can furnish anyone interested with the entire write-up, which includes a brief history of Barry's leasing work as well as information about ELFA.
The Equipment Leasing and Finance Association (ELFA) has awarded Barry S. Marks, founding shareholder of Marks & Associates, P.C., the Edward A. Groobert Award for Legal Excellence. Mr. Marks received the award on May 8 at the ELFA Legal Forum in St. Pete Beach, Florida. ELFA Legal Committee Chair Allan Umans, VP & General Counsel at Pacific Rim Capital, Inc., presented the award to Mr. Marks in recognition of his significant contributions to the Association and the equipment leasing and finance industry.
Other Association News
Barry was unable to attend the National Association of Equipment Leasing Brokers conference in Memphis, but he was honored to be a co-recipient of the NAELB's President's Award for his work with the Association. He was previously the winner of the Granieri Award for lease education and was the Association's counsel for its first seven years. The announcement of the award is below.
Each year the NAELB President's Award is presented to individuals chosen by the president, who have been emissaries of the association through their volunteerism, committee service and support of the NAELB. This past year, NAELB President, Mike Parker, received so much advice and support he could not narrow it down to just one person to receive this award... so he didn't.
Please join us in congratulating Barry Marks, Esq., CLFP with Marks & Associates, P.C. and Spencer Richman, CLFP, BPB with American Financial Network for being selected as the 2017 NAELB President's Award recipients.
ELFA LEGAL FORUM RECAP
We will go over the long list of interesting recent cases in our next issue. With our entire office at the ELFA Legal Forum, we were able to blanket the sessions and cover all those of real interest. We also brought home a wealth of materials. Here are a few things we learned (there is always more to learn!) or as to which we were able to share information with other attendees. If you have requested an in-depth review of any of the sessions, we will be sending it to you soon. If anything below strikes you as meriting research or advice, please let us know:
Co-Lessees and upstream guaranties.
There was a lot of talk in one session on about co-lessees and upstream (subsidiary) guaranties - although that was not what they were being called in the session. We have warned in the past that co-lessees are not generally a good option in lieu of a traditional parent/owner guaranty. There are many co-lessee issues, especially in the case of true (fmv) leases, although careful drafting can address most of them.
The problem is that if a financially stronger subsidiary co-leases with its parent, or if it guaranties its parent's obligations, courts may find that there is no consideration and/or that the guaranty is a voidable fraudulent transfer. There are things we can do, such as reciting (if we can find or create) consideration. The same rule often holds true of brother/sister affiliates as where two companies owned by the same parent guaranty one or another's obligations.
Leasing in Mexico.
Among other things, a lively session on Canadian and Mexican leasing, hosted by our good friend and dinner co-host Jon Fleisher of Cassels Brock, resulted in the observations that it saves time for actions in Mexico if the original lease or loan document is already in Spanish as well as English when signed. Otherwise, the court appoints a translator and...need we say more? Even then, repossessions are likely to take from 4 months to a year.
Leasing in California.
Nothing new in the horror that is the California Finance Lender law, except that now it is the subject of further amend to apply it to mere "finders." The main reason we note the subject here is so that anyone who thought only foreign countries like the one waiting to pay for the wall are backward, anti-business and weird won't think we are immune from such things.
Leasing in New Jersey.
Speaking of which, New Jersey Revised Statutes 56:12-60 et seq, the Consumer Protection Leasing Act, defines a lease as follows:
"Lease" means a contract or other agreement between a lessor and a lessee, other than a fleet lease, a fair market value commercial lease, or a TRAC lease, entered into after the effective date of this act for the use of a motor vehicle by the lessee for a period of time exceeding 120 days, whether or not the lessee has the option to purchase or otherwise become the owner of the motor vehicle at the expiration of the lease. A lease shall not be deemed to be a retail installment contract, as defined in subsection (b) of section 1 of P.L.1960, c.40 (C.17:16C-1), unless the lessee, for no or for a nominal consideration, becomes the owner, or has the option of becoming the owner, of the motor vehicle at the end of the term of the lease. NJ 56:12-61 (emphasis added)
In other words, a lease of a motor vehicle for a fixed price purchase option that is an approximate fair market value is arguably a consumer lease! There are many adverse consequences to this designation, so do not enter into a lease with anything other than a nominal purchase option ($1.00 for example), a TRAC or literally "fair market value" purchase option with a New Jersey lessee. No 10%, 20% or agreed-price purchase options for vehicles. Thanks, Tony Lamm for something new to us.
Managed/Bundled Equipment Finance Structures.
The services portion of the agreement undermines its lease-like qualities, so hell or high water provisions and other lease protections may be vulnerable to attack. The strength of the vendor, or whoever is supplying the services or other consideration to the lessee/borrower is essential. If the vendor/service provider fails, the customer is likely to argue that (1) the services were an essential part of the agreement and (2) as the services are not "goods" the transaction is not governed by UCC Article 2A and the lease is not a finance lease. While the hell or high water language of the lease should protect the lessor, there is room for a judge to exercise some discretion. A vendor guaranty or buyback is one additional protection that may be added by a cautious lessor or lender, but its value is also dependent on the credit of the vendor. (We have written about this before; it remains a hot topic in the industry).
Digital Transformation of Equipment Leasing
. Although use of electronic documentation has become more popular in commercial finance generally, equipment leasing industry has been slow in adopting the improvement, with use less than 20%. There is still no on point case law regarding electronic documentation in the equipment finance context, although there has been helpful case law supporting perfection and control from electronic documentation in cases involving mortgages and other financial instruments. One key issue remains how lenders will treat electronic chattel paper, especially where lessors need flexibility in "papering out" electronic documents such as pdf's and faxes. This is an emerging area of the law and our industry best practices in which we are heavily involved.
Legal Update. The annual survey of cases of note is one of the highlights of the conference. Special thanks to Pamela Martinson, Larry Holmes and Marc Hamroff for their hard work and superb analysis, much of which we repeat here. We have been unable to locate some of the cases in time for this issue, so we are relying on that analysis but the rage, silliness and any typos are all ours.
"Nominal consideration" consideration includes return cost.
In re Ajax Integrated
, LLC (NY). What happens if a "true" lease requires the Lessee to pay more to return the equipment than to exercise the purchase option? UCC 1-203(d) happens:
"(d) 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."
If it the purchase option price is $1,000,000 but the cost to deinstall, recertify, pack, insure and ship the equipment is $2,000,000 the $1,000,000 is nominal, just as if it were $1.00.
And the Insane Jurist of the Month Award goes to.
The judge in
In Re Lightning Bolt Leasing, LLC
(Bankruptcy decision in Fla., the state where a judge tried to declare the Graves Amendment unconstitutional) ruled that a TRAC lease was NOT a true lease ignoring (unless maybe it was improperly presented).
"In the case of motor vehicles or trailers, a transaction does not create a sale or a security interest 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 sale or other disposition of the motor vehicle or trailer."
The judge shrugged off this statute, which IS THE LAW on this issue, with this observation:
"shifting the entire risk of ownership, as opposed to a certain adjustment (the TRAC payment obligation), as is the case here, is not within the protection of the statute."
Well, you see yer honor, the purpose and effect of the TRAC is to shift the entire risk of ownership (which is to say the depreciation, additional maintenance cost, etc.) to the lessee.
Saying a lit-tle too much.
In re Sterling United.
Hey, kids, what's wrong with this description of collateral on a UCC financing statement?
"all assets of the Debtor... including, but not limited to, any and all equipment, fixtures, inventory, accounts... and located at or relating to the operation of the premises at ...."
Well, boys and girls it is OK to just say "all assets" in a financing statement (the filing ) even though it is a no-no to say only that in a security agreement ( the contract). And as we all know, saying too much can lead to...imperfection. If you said "What does and located at or relating to mean? go to the head of the class.
Does it mean "all assets including the ones at the location" or "all assets that are at the location?" The debtor moved and took his assets with him. The judge didn't know what the words meant, so he asked a linguistics professor. I think we all agree that if a linguistics professor is the one deciding what your legal documents mean, you are in trouble. The lender got lucky on this one.
No No Novation.
In re Fair Finance Company. Was an amended and restated loan agreement merely an amendment that left the existing security interest in place (with priority) or did it terminate the old loan and replace it with a new one, meaning the security interest was also terminated and replaced. If the latter, there was no consideration for the granting of the new security interest and it may have been a fraudulent transfer, voidable in bankruptcy.
The document said that the debtor granted the lender a security interest, the same sort of language used for a new debt. If the language said that the existing security interest was continued and the original debt outstanding, but on amended terms, things might have been better for the lender. Always be careful any time you amend a loan or lease document or change anything in the deal as part of a workout, additional advance , release of collateral or other post-closing event.
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