Marks & Associates, P.C. 
September 2017
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Ready... Set... Fall

Once again, our Labor Day cookouts behind us, we ready ourselves for what we hope will be four months of apologizing to spouses for being too busy to do take the old chair up to the attic or enjoy that weekend with the in-laws.

Don't look here for a comment on the American economy or the uncertain future that awaits us. Personally, I look forward to sticking my nose in my paperwork and hoping the world will solve itsproblems without me.

That said, the most dangerous thing for our industry (and the economy as a whole) is always uncertainty, although the markets are clearly more comfortable with a Republican administration, however controversial (let the record show I am playing nice).

Getting down to business: Once again, we advise clients take a good look at their documentation and policies. Has your business taken a new direction or have your priorities changed as to future plans? Are you up-to-date with current state regulatory laws, including licensing and usury laws? We are currently contacting clients about updating usury and licensing surveys and offering annual updates as well.

Now is also a good time to make sure your staff is fully up to speed on U.C.C. and documentation matters, especially purchase money security interests, vehicle title laws, inventory issues, collateral descriptions and even the basics about where and when to file a financing statement. Remember: there are no stupid questions, only stupid mistakes.

One item that may serve as a good yardstick for determining how prepared you are for what we hope will be a very busy season is your closing checklist. Silly as it may sound, it is not uncommon for this very important paperwork to go unexamined for years. A quick look at the checklist will give you an overview of the procedures your back offices following and a few questions such as, "Who signs this?", "What do you look for here?" and the like may identify problems and misunderstandings before the cost you money.

Another question: Are you adhering to best practices where chattel paper (holding the original copy) is concerned? Are you ready for the electronic age? The language of both your Lease and Assignment/Security /Program Agreement with your funder or originator are crucial to these issues.

As always, Matt, Ian, Tammy and I wish you peace and prosperity in the coming season. Our hearts go out to those in Texas and Florida who are suffering from what I think will be an unusually bad hurricane season. Somewhere on some South Sea Island a young lady has refused to jump into the volcano or perhaps a mean old lady with a crooked nose in the middle of some European forest has thrown the wrong frog in her cauldron, but the weather seems as irascible, unpredictable and downright insane as... Well, you know.

NOTE: This Article is from a few years ago, but bears republishing - keep it around to use if you face a customer who thinks you are in the rent-a-thingie business


Among the challenges we face in selling leasing to business executives who are unfamiliar with sophisticated equipment financings is the task of explaining that an equipment lease is not the same thing as a vendor-financed installment sale financing or a short term rental agreement. This article will touch on some of the aspects of third party equipment financings and some of the explanations and arguments that might be presented to the uninitiated and his or her lawyers. It is intended to be shared with prospective lessees, which is why it may seem a bit basic to experienced lessors and counsel..

Birds of Different Feathers: Finance Leases v. Vendor Rental Agreements

When we say "equipment lease" we are nearly always referring to a finance lease as defined under Uniform Commercial Code Section 2A-103. A finance lease is a lease in which the lessor is not the manufacturer or vendor of the equipment and is only acquiring the equipment for purposes of leasing it to the lessee. Another requirement of the legal definition is that the lessee must have access to the warranty information under the purchase contract with the vendor or be furnished with the description of that contract. In other words, the lessor in a finance lease is acting in the same capacity as a lender making a loan in which the equipment is collateral: the lessee selects the equipment and determines that it is appropriate for its use and that the vendor is reliable, the lessor provides money only.

Under the statutory scheme, in a finance lease the following occur automatically unless otherwise specifically stated in the lease: (1) the lessee is required to make rental payments and otherwise perform under the lease whether or not the equipment works as intended; (2) the lessor assigns all of its rights against the vendor to the lessee; (3) the lessor is not deemed to make any "implied warranties" of merchantability or fitness for use; and (4) the lessee has no power to revoke acceptance after it has taken acceptance of the equipment.

In order to insure there is no implication that these rights are waived, and to make clear the parties' intentions so there could be no question, a well-drafted commercial finance lease restates some or all of these statutory provisions.

A finance lease is therefore distinguishable from a rental agreement under which a rental company maintains an inventory of equipment, keeps it in good repair and provides it to the lessee for use on a specific project or, usually, a period of less than a year. These rental agreements often include language under which the lessor, and not the lessee is responsible for the maintenance and care of the equipment and also for its performance.

Similarly, some vendors are willing to accept payments over time either through an installment sales contract secured by the equipment or a lease transaction. In these vendor leases, it is not uncommon for vendors to agree to terms that favor the lessee, recognizing that the vendor is not only a lessor but the party who should be responsible for the performance of the equipment and any damage it may cause.

Walking Like a Duck: The Distinctive Features of Finance Leases

In light of this distinction, and keeping in mind that the position of a finance "lessor" is essentially the same as a secured lender, the following common issues should be easily resolved:

1. There should be no limitations on the warranty disclaimer. It should be clear that the lessee, as the party who has selected the equipment, is solely responsible for any failure of the equipment to operate as warranted and that the lessee will look directly to the vendor, rather than the lessor, if there is a problem. For this reason, the lessor assigns any rights it may have to the warranty warranties to the lessee, at least so long as the lessee is not in default under the lease and during the duration of the lease term. The lessee should not sue the lessor for damage to the lessee's business caused by the failure of the equipment, meaning that the lessee should have no rights to consequential damages and the like.

2. The lessee should agree to make rental payments whether or not the equipment operates and whether or not it has some claim against the lessor . It often requires some explanation to the lessee, but the lessor must be in a position to assign the lease to a third party and give assurances to that party that the lessee will continue to pay rent and render other performance (such as insurance and maintenance obligations) even if the lessee has a claim against the lessor and irrespective of whether the equipment works properly. Just as the lessor is not deemed to make any warranties with regard to the equipment, the lessor has the right to expect the lessee to make all payments "come hell or high water" (hence this language is often referred to as the "hell or high water" clause). 

Note that this does not mean that the lessee waives all rights to sue the lessor, whether or not the lease is assigned. The lessor should remain legally liable if it has made promises to the lessee outside of the lease transaction, such as a promise to provide future financing. The lease itself, however, should not be affected by any of these claims. Just as the lessee must continue to make payments on a promissory note for a loan to finance its purchase of equipment whether or not the lessee believes it has a claim against the lender, rent payments under the lease are absolute and unconditional and not subject to deduction or set-off.

3. The lessee should be responsible for damage caused by the equipment to third parties. Some lessees insist that the lessee indemnity should not include indemnification of a lessor against the lessor's own negligence. While this may seem reasonable on its face, it means that the lessor he lessor must insist that it only be responsible for its willful misconduct, and, if it is willing to say so, its gross negligence.

One of the unfortunate results of labeling a finance lease a "lease" rather than a "loan" is that the lessor is the nominal owner of the equipment. As such, the lessor may be confused with a short term rental operation and may find itself the target under a line of cases holding that renters are responsible for damage caused by the equipment. This liability includes "vicarious liability" under which negligence by the lessee is imputed to the lessor as a matter of law. There are also "products liability" cases in which due to the nature of the equipment and its function or simply because the equipment is placed in the stream of commerce by the owner/renter, the lessor may be held legally liable for damage caused by the equipment whether or not the lessor has been negligent.

Even if proof of lessor negligence is required, lessors have good reason to fear that a confused and often biased jury holding that the lessor should be responsible for damage caused by "its own" equipment. Also, the lessor may actually be sued on the basis that it was negligent in trusting the lessee to operate the equipment and not oversee trusting the lessee to operate the equipment or in not overseeing the operation closely and inspecting both the equipment and the qualifications of its operator.

The presumption must always be that any lawsuit or other third party claim is the responsibility of the lessee. This is because the lessee has the right to use the equipment with minimal restrictions and the lessee is responsible for the equipment itself. For this reason, arguments that the lessee should only indemnify the lessor for damage caused due to the lessee's negligence are unreasonable. The lessor should know that it will not be the subject of any lawsuit or other claim and that should such a situation arise, the lessor will be indemnified and the lessee will maintain the defense litigation.

Lessors are sometimes willing to agree to be responsible for their own "gross negligence and willful misconduct", essentially meaning they are responsible if they or their employees and agents deliberately commit an act resulting in a third party claim or commit such an act with a conscious and voluntary disregard of the need to use reasonable care.

Moreover, one of the most important aspects of indemnification is that the lessee will be responsible for maintaining defense, meaning that it (or its insurance) will provide legal representation and whatever work is necessary to provide for the lessor to be dismissed as a defendant. If the lessee is in a position to argue that the lessor might be negligent, the lessee may not provide this defense. It is important to bear in mind that any obligation of the lessee's insurer to provide legal defense or make payments is limited to the terms of the contract so even if the lessee is acting in good faith, its insurer may take any avenue available to avoid providing protection.

4. The Lessee should be responsible for delivering the equipment to the Lessor or the next owner or lessee. In order for the lessor to offer the lessee the benefits of an assumed residual value, meaning that the lessor does not have to collect 100% of its investment with interest at a high rate through the rentals alone, the lessor needs to know that the equipment will be returned in saleable condition and that the lessee will bear the costs of return, returning promptly as required under the lease. This will require the lessee to redeliver the equipment to a location specified by the lessor and to do so promptly.

Very often, vendors are willing to make concessions at the end of the lease term in part because they are in the used equipment business and often because they are in a unique position to control end of term valuations. These considerations are not available to lessors under a finance lease because finance lease lessors do not have ready access to the after market for equipment and are most often banks and other financiers for whom remarketing is more expensive and difficult.

5. The Lessee should be prepared to waive certain UCC rights. Because UCC Article 2A is designed to cover both short term rental agreements and finance leases, it contains certain rights and remedies only equipment renters need or should expect from their lessors. For example, UCC Section 2A-518 deals with "cover", an Article 2 (Sales) concept applicable to the relationship between buyer and seller, not borrower and lender. The lessee can preserve its rights under this and other Sections of Article 2A in its contract with the vendor and, if desired, can arrange complementary rights under the lease so that the vendor, and not the lessee or lessor, bears certain burdens. Otherwise, rights under Sections 2A-508 through 518 should be waived in order to be clear as to the parties' intent.

6. The Lessee is obligated for Full Payout. Some lessees think that they should be able to terminate the lease and walk away without "penalty." In a finance lease, the lessor does not have an inventory of similar equipment to market and the early termination and return of the equipment both denies it the benefit of its bargain and leaves it with equipment to market. For this reason, early termination options require that the lessee either find a buyer to cover the remaining investment (discounted present value of rents and assumed residual) or makes payment of that amount itself. As with a loan being paid early, the lessor expects the return of its investment at a minimum and in most cases demands some form of premium for the early payoff.

Ugly Duckling, Beautiful Swan

At the end of the day, a finance lease is not much different from a traditional bank loan in concept. Traditionally, a company borrows from a bank or other lender, signs a note and uses the money to buy equipment which it pledges to the bank as collateral. If the equipment does not work, the company may have a claim against the vendor, but it cannot withhold payment on the note or sue the lender. If the equipment injures someone, the lender faces little or no risk of liability; only the borrower/user will be liable for damage caused by equipment it operates.

A finance lease lessor expects essentially the same transaction, while often offering its customers terms that are not available in a straight loan. All this may sound unreasonable to customers and counsel thinking they are "just renting equipment". Once they understand that they must approach the financing on the basis that the lessor is providing money, not equipment, the path is easier.

The bottom line is that a finance lease must be freely assignable among banks and other financers as an absolute, unconditional payment obligation similar in virtually every way to a secured promissory note. If it does, it will glide through the stream of commerce, affording the lessee the available credit, attractive rates and minimal restrictions on its business that have made leasing popular for over 50 years. If not, it will be an outcast, an unmarketable obligation that has little value to any financer. That is simply not the business of finance lessors and it is in everyone's best interest to understand this at the outset.


We recently published an updated survey of the usury and licensing laws of  some states in Leasing News. We are at work on updating our research in these areas on a 50-state basis and will contact clients for whom we have done this work in the past.

For those with whom we have not yet consulted, or who are not up-to-date, these are a few excerpts from the Leasing News article. Checkout archives for more.

In general, the factors that determine whether licensing or usury issues are likely to exist include whether leases or loans are offered, whether motor vehicles are being leased or financed, the size of the transaction and how high the proposed rate will be.

Many states also have laws affecting lease and loan brokers and the sale of off-lease motor vehicles.

Florida : Charging interest at a rate exceeding 18% on loans of less than $25,000 is considered a consumer finance loan and requires a license. In addition, an interest rate exceeding 25% is a second degree misdemeanor and charging an interest rate exceeding 45% is a third degree felony.

Maryland : Loans under $15,000 made to a borrower other than a corporation face a 24% usury limitation and require licensing. Failure to obtain the license is a misdemeanor subject to fines and/or imprisonment not exceeding 3 years.

Michigan : If the borrower is a "business entity" but the lender is not a bank, credit union or similar institution, the maximum interest rate is 25% and that rate is subject to criminal penalties. Any person guilty of criminal usury may be imprisoned for up to 5 years and/or fined up to $10,000.00.

New Jersey : Loans for business purposes under $50,000 are limited to 16% interest (or a rate tied to federal rates, if higher). In addition to its civil usury rates New Jersey's criminal usury rates are: (a) 50% for to loans to corporations, limited liability companies and limited liability partnerships; and (b) 30% to other borrowers Violation of criminal usury laws subjects the lending party to criminal usury liability and a fine up to $250,000.

Rhode Island : The maximum interest rate any entity may charge may not exceed the greater of 21% per annum or 9% above a published index. Violation of the usury statute can result in forfeiture of the entire principal and interest and imprisonment for not more than five years.

Tennessee : Tennessee's usury rate is a variable published "formula rate". The willful collection of usury is a misdemeanor punishable by up to eleven (11) months, twenty-nine (29) days in jail or a fine not to exceed two thousand five hundred dollars ($2,500), or both.

As always, we appreciate your corrections and input. 

Birmingham Office
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 │
Matthew D. Evans   
Direct:  205.251.8302  │

Atlanta Office
Centennial Tower
101 Marietta Street NW #3600
Atlanta, GA 30303
(770) 988-5949

P.O. Box 566726
Atlanta, GA 31156
Ian J. Platt  
Direct:  770.988.5949  │

The  material in  our newsletter s and on  our web site is for informational purposes only and is not legal advice.  Neither your review or use of any of such  materials  nor any correspondence which does not expressly confirm an attorney-client relationship create s an attorney-client relationship between you and  our firm or any of  our attorneys. You should not act upon any  information  in any of our newsletters or on our web site without seeking advice from a qualified attorney, accountant or other professional. Please note that you should not send  us any confidential information until you have received written agreement from  one of our attorneys to perform legal services. Unless you have received such  a written agreement, we will not consider any information you send us as confidential. No representation is made that the quality of the legal services to be performed  by our firm or any of our attorneys is greater than the quality of legal services performed by other lawyers.