Marks & Associates, P.C. 
Newsletter
April 2015
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The State of the Industry

(or some of it)

 

I was looking through the 2014 Equipment Leasing & Finance Foundation's State of the Equipment Finance Industry report the other day in hopes of giving a bank client some ammunition to use with his board of directors. The cover of the report shows a roller coaster and that sums up not only the wild ride a lot of us have been having but the mixed up-and-down news in the report.

 

Of course we are hearing news that is hardly news: there is a lot of cash floating around but lessors are finding it hard to get their hands on it, competition is intense, spreads are tight and we have not yet recovered from 2008-2010.

 

The good news is very good, however. It appears that the "propensity to finance" is way up. What this means is that more and more businesses are finding it necessary to retool and looking to equipment finance for the cost of their equipment.

 

Another item which looked good is, unfortunately, easily explained: portfolio performance is at an all time high. That makes sense because fewer deals are being done and credit is just beginning to loosen.

 

All this brings about the (probably expected) cautionary comment from the lawyer: the most dangerous times for our industry are when things first go bad and when they just begin to look good again. We've been preaching for some time about not forgetting the lessons of the Recent Unpleasantness. Once the economy stabilizes a bit more, interest rates pick up enough for investors to get decent returns on their cash, and funds again flow to the leasing companies, we are going to see a mild surge in business.

 

Already, we are seeing more and more new players. Many of these do not have experience in the industry. All of us need to recognized that, while these are very healthy signs generally, they also can smell like blood in the water to the sharks who gave our industry a bad name with fraudulent transactions of all sorts. The increased competition and suppressed yields can also tempt some to engage in sharp dealing with unsuspecting lessees and borrowers, a sure-fire path to increased government regulation.

 

Here is hoping we are preaching to the choir and that I can be forgiven for telling you what you already know.

 

                                                      Barry Marks

 

We're Off Covention-eering

This month:

Barry and Matt will attend the ELFA Legal Forum in Nashville.

Barry will speak at the NAELB convention in Phoenix.

Bill will be in Denver for the joint ELFA-AGLF Municipal Leasing conference.

As always, we'd be happy to share what we learn (and overhear) for any of you who cannot attend any of these. 
 

Lessor Liability: Fact or Fiction

(and What Good is Insurance)?

 

Volumes could be (and have been) written about whether a finance lessor will be treated like a lender or an owner should the leased equipment harm someone.

Without getting into the theory involved, courts in many states recognize that there is a difference between an equipment lessor/renter, such as a rental car agency, and a party taking title solely in order to provide financing. The former, leasing from inventory, is most often charged with ensuring that the equipment is safe. These lessors may be liable for equipment which is defective or is, by its nature, hazardous. The latter, finance lessors, are most often treated like lenders for whom the equipment is merely collateral.

As many of us know, the line was blurred in the case of automobile leasing for many years, until Congress enacted the Graves Amendment, under which state laws permitting recovery against vehicle lessors without a showing of negligence were overridden. Under the federal law, a motor vehicle lessor can still be found liable under certain circumstances, most notably if it is shown to be actually negligent.

As predicted, there has been a spate of lawsuits since the Graves Amendment trying to establish that the lessor of a motor vehicle is negligent in some fashion. For this reason, motor vehicle lessors should not rest too easy because of the federal law. Indications that equipment might be defective, such as letters from the lessee complaining that the brakes are not functioning properly, manufacturer recall notices, and reports indicating that a model vehicle has safety issues should be taken very seriously. Inspections should be handled carefully and should pay particular attention to maintenance of safety features. Any indication that the lessee is not monitoring its employee's driving records, using only licensed servicers and drivers or any other irregularly should be dealt with promptly. Above all, liability insurance requirements should be strictly enforced.

This brings about another, too often misunderstood issue regarding insurance. While we advise that the lessor always obtain a certificate of insurance showing that the lessee has the required liability coverage before closing, courts have consistently held that a false insurance certificate, or one that does not fully disclose limitations of the lessee's policy, is not binding on the insurance company. In other words, if the insurance does not actually cover the lessor as additional insured or does not provide the coverage indicated in the Certificate, the lessor might have recourse against the insurance agent issuing the Certificate but has no claim against the insurance company for insurance that does not actually exist.

The only safe practice when dealing with a lessee who may not be able to honor its indemnification obligations on hazardous equipment such as aircraft, motor vehicles or anything environmentally-sensitive, is to obtain an actual policy endorsement from the insurance company.

 

Motor Vehicle Leasing: Are you a Dealer?

 

If we were to ask whether you are a "Motor Vehicle Dealer" you would probably smile ... or perhaps you would be mad. A recent survey shows that the public trusts car salesmen less than Congress.

Equipment lessors provide financing. They do not operate car lots. Unfortunately, if you lease vehicles some states may treat you like a car dealer.

Several states require leasing companies to obtain motor vehicle leasing licenses from the state's motor vehicle department in order to lease vehicles. Although these statutes were probably intended to address car dealers that lease cars, they can also capture unsuspecting finance leasing companies. Examples include Louisiana, Ohio and Texas. In the case of Ohio, the requirement is clearly only intended to address true leases since the motor vehicle leasing dealer's license is triggered when the company leases vehicles and remains on the title as owner of the vehicle.

Arguably, leasing companies should obtain licenses from the Kentucky Motor Vehicle Commission in order to lease vehicles in Kentucky. Some out-of-state lessors either avoid this state or take the risk of proceeding without this license since "motor vehicle leasing dealers" in Kentucky are also required to have a physical location in the state where the vehicles are leased, just like a car dealership. This rule is designed to discourage "curb-stoning", the practice of pretending to be a casual seller of an automobile when, in fact, one actually is a dealer with an inventory parked somewhere. However, for many multi-state lessors maintaining a Kentucky location is simply impractical.

A trickier issue is whether the requirement of a motor vehicle dealer's license is triggered when the leasing company sells a vehicle under a true lease pursuant to the end of lease purchase option. While there are generally clear exemptions for repossession sales by lenders, that is not necessarily the case for a sale under purchase option. For example, the motor vehicle dealer license may be necessary to convey title to a lessee located in Florida or Colorado. The applicability of the dealer license may depend on how many vehicles you sell in a given state. One possible means of addressing this problem would be to use a licensed dealer as an intermediary in the case of third party marketing and, if absolutely necessary, even where the sale is to the lessee.

We recommend that you consult your lawyer if there is question about whether your company must obtain a motor vehicle dealer license. The statutes are adopted by state legislatures which probably have no experience in leasing. This can lead to confusing or misleading laws. For example, the activities that can make a person a "motor vehicle dealer" under Fla. Stat. 320.27 include entering into "lease-purchase" transactions with customers. One could read this statute to require leasing companies to obtain motor vehicle dealer licenses. However, this statute exempts from the definition of motor vehicle dealer "banks, finance companies, or other loan agencies that acquire motor vehicles as an incident to their regular business;... and motor vehicle rental and leasing companies that sell motor vehicles to motor vehicle dealers licensed under this section." The staff of the Florida Department of Highway Safety and Motor Vehicles interprets this to exempt lessors unless the lessor is also the equipment vendor.

TRIVIA TEST

1.  What was the name given to Davy Crockett's rifle in the Walt Disney series?

2.  What other T.V. series starred the same actor?

3.  Who played the native American sidekick in that latter series?

4.  (Changing things up a bit) Who was the first American in Space?

5.  (That was a trick question.)  Who was the first human American in space? 

  


Marks & Associates, P.C.
505 North 20th Street
Financial Center - Suite 1615
Birmingham, AL 35203
(205) 251-8301
_________
P.O. Box 11386
Birmingham, AL 35202


      • Barry S. Marks - 205.251.8303  - barry@leaselawyer.com
      • William L. Phillips, III - 205.251.8306 - bill@leaselawyer.com
      • Matthew D. Evans - 205.251.8302 - matt@leaselawyer.com

Nothing in this newsletter constitutes legal advice or is intended as a substitute for consultation with a qualified lawyer, accountant or other professional.