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FIRM NEWS
Back From California
It was something of a coincidence that the ELFA Legal Forum this year was in California, the state that is giving everyone headaches over its licensing requirements.
At the risk of saying that we told you so, of us who have been in this industry since they were financing bi-planes and zeppelins have been complaining that sharp practices by some of our more aggressive lessors were begging for government regulation. Now Illinois seeks to follow California's lead (and leap frog ahead into the realm of total bedlam). We can only wonder what is next.
Several clients have asked us to address licensing and usury issues in various states. It is a hot topic for good reason. Before you shrug and say that these laws do not apply to you, consider this:
- Do you buy vendor paper?
- Some states require licenses for lending or leasing if your customer is in the state even if you have no location there.
- Are your deals priced on an interest rate in excess of 18%? Is the rate stated?
- Do you lease or finance motor vehicles? Do you ever sell those vehicles to lessees exercising a purchase option or to others?
On the plus side, the Legal Forum was one of the best ever this year (our compliments to the Legal Committee, especially chairperson Judy VanOsdel of TCFEF). For those of you who could not attend, check out the schedule at www.elfaonline.org (click on Events & Training/Calendar of Events/Legal Forum/Schedule) and let us know which topics you would like to know more about. We are not going to give out ELFA's handouts, but we will hit a few of the highpoints with you and give you the benefit of our notes from the sessions.
We are gearing up for a busy summer with new leasing companies opening and more and more banks getting into the business. As always, we welcome your input on any topics in this issue as well as any questions you may have.
Might as well keep smiling; frowning doesn't make things any better.
BSM
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Quick Notes From the ELFA Legal Forum
This year, as every year, we attended the Equipment Leasing and Finance Association Legal Forum. This year's Forum was held in San Francisco and Barry, Bill, Matt and Tammy all attended or participated in Forum-related activities. Bill presented a Lessor Liability overview as part of an insurance panel with Beth Henderson and Barry held forth on the "Hot Topics" panel along with industry veterans Michael Leichtling and Frank Peretore.
The following are a few notes from the Forum that may be of interest: - The California Department of Business Oversight has responded to the ELFA's questions (including one raised by Barry). See the article on the latest insanity elsewhere in this issue.
- If you thought California's licensing made no sense, check out Illinois Senate Bill 2865, which ELFA and others are opposing vigorously. The Illinois law would apply to all loans under $250,000 (regardless of the size of the borrower). Other onerous features include:
- Any loan in violation of the law would be unenforceable AND the law can be enforced by civil suits, which would encourage class actions.
- Lenders are required to post a $500,000 surety bond. Lenders are required to determine that monthly payments are less than 50% of the debtor's net monthly income.
- Numerous disclosures similar to those applicable to consumer loans under federal and state law would be required despite the fact that these are commercial loans.
- The state would have a broad right to refuse to issue licenses.
Please bear in mind that the Illinois bill is proposed legislation. The bill was temporarily withdrawn on the request of ELFA and as of this writing its future is uncertain. Other states are rumored to be exploring similar laws. - In addition to the news on the state front regarding the regulation of lenders, the ocean of federal regulatory laws continues its natural ebb and flow. More "flowing" and less "ebbing" as we might expect. One of many regulatory concerns on which we are keeping our eye is the continued jostling as to which federal agency has actual enforcement power over certain activities in our industry. Under Dodd-Frank, the Consumer Protection Financial Bureau ("CFPB") continues to assert dominance over commercial as well as consumer activities, which may or may not be what Congress intended. It has been reported that the CFPB this year has created additional enforcement and investigative teams, which could signal its intent to expand into commercial loan or possibly lease transactions.
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Several attendees were shocked to learn that some states have laws requiring the licensure of motor vehicle financers, including lessors. In many cases, these laws require dealer licenses for lessors or leasing companies who sell equipment to lessees or third parties at the end of the term. We have been dealing with these laws in several states, including Florida.
- Managed solutions (services bundled with equipment lease contracts) continue to be a challenge although more and more lessors are becoming comfortable with relying on waivers of defenses and other protections. Creativity and an educated risk-benefit analysis are necessary where vendors insist that services be included and not separately contracted for or separately billed.
- During the panel on "drafting tips from a litigator's perspective" several insurance-related issues came to the fore. In particular, being certain that the lessor is named additional insured on liability policies (and, if possible, casualty damage policies) is essential: without being an additional insured, the lessor cannot enforce the policy if the lessee refuses to cooperate. Moreover, it is essential that the box for "lender loss payee" be checked rather than "loss payee" alone as a lender loss payee enjoys additional protections, including the ability to file claims. We reported on these things earlier but they continue to be problems for many leasing companies.
- Some leasing companies, frustrated by stacking by merchant cash advance companies and subordinate liens by creditors in general, have begun to address this issue in UCC filings. They are adding something like the following to the collateral descriptions:
Debtor has contractually agreed not to pledge, mortgage, encumber or otherwise permit the collateral to be subject to any other lien, security interest, encumbrance or charge. Accordingly, the acceptance of any security interest by anyone other than the Secured Party will constitute tortious interference with the Secured Party's rights. This language may have the intended effect of driving off high-risk lenders whose subordinate loans may bankrupt your otherwise (moderately) healthy borrower. However, it remains to be seen whether such provisions will result in successful litigation in "tortious interference" cases. Just because you call it tortious interference does not make it so. If you include such a provision in your UCC filings expect to receive calls from creditors requesting waivers of such a provision, particularly if your security interest is not limited solely to the specific equipment your company is financing. Consult with your lawyer before crafting such language to include in the filing. If the statement about the prohibition on further liens on the collateral is not consistent with the lease or EFA, your company could incur liability to the customer.
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New News from ELFA
This just in from Dennis Brown at ELFA:
California Department of Business Oversight (DBO) Deputy Commissioner, Legal Division, Lila Mirrashidi [ [email protected] ] is assisting in efforts to determine a method for the holder of a California Finance License (CFL) to broker deals to banks and other exempt institutions. She previously indicated a CFL broker must ensure that it has proper authority to broker a loan to non-CFL licensees and now offers a procedure to gain this authority. Provided below without editing by ELFA are instructions from DBO Deputy Commissioner Lila Mirrashidi:
During the initial licensing process, there is a question on the application. Item #8 asks if the applicant conducts or intends to conduct any other business at the proposed place of business. It also asks them to describe the business.
If subsequent to licensing the licensee wants to conduct other activity at the licensed place of business, the licensee will need to submit a letter directed to the attention of Patricia Speight, Special Administrator, requesting approval to conduct the other activity. The letter should include a detailed description of the type of activity they intend to conduct and an explanation that they will comply with applicable laws, including DBO laws. Also, the records would need to be maintained separately.
Ms. Speight's address is:
DBO
Patricia Speight, Special Administrator, CFL
320 W. 4th Street, Suite 750
Los Angeles, CA 90013
BSM NOTE: Special props to Marshall Goldberg and Andy Alper, who have been keeping on this developing matter for ELFA and for Ken Greene, who published a clarification from DBO earlier this month. As always, we are indebted to the soon-to-retire Dennis Brown of ELFA, who decided at some time in his life that he wanted to make a living dealing with these issues and the people who administer them.
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Many Happy (Equipment) Returns
Before you turn the page, most of what follows DOES apply to dollar-out leases and some to EFAs. Why? Because even if you are not relying on the value of equipment returned by the lessee at the end of a lease, that equipment is your collateral.
What will the equipment be worth if you must take it due to a lessee or borrower default? Your lease documents probably require that the lessee deliver the equipment to you after a default "in the condition required hereunder."
The first language to be reviewed is the maintenance and use provisions. Does the customer agree to keep the equipment "in good operating condition, reasonable wear and tear excepted"? That may be fine for some types of equipment, but consider whether you need more. Technology equipment may require maintenance by the vendor or other qualified experts. Even yellow iron and other low-tech items may not retain their value unless routine maintenance includes regular oil changes, vendor-recommended upgrades and other specifics.
Language regarding equipment use is also an in-term protection that may affect return obligations. Use in the service or business for which the equipment is designed or intended, in accordance with legal and insurance requirements and in the location specified all impact collateral value.
Turning to the specifics of the return language, certain issues should be familiar:
- WHERE is the equipment to be delivered?
- WHO PAYS for de-installation, packing and delivery.
- WHO SELECTS the delivery service
- Must the equipment be RECERTIFIED or otherwise inspected before delivery?
- WHAT CONDITION is really required? Is the Lease or EFA specific about
- Engine condition
- Tire and brake life
- Upgrades that should have been made during the term in order to retain vendor support, insurance qualification or even legality
- Other specifics relevant to the specific equipment involved
There are a host of other return-related issues often overlooked. Some equipment should be stored by the lessee, perhaps permitting inspection by prospective purchasers. Equipment that must be de-installed will not be income-producing if this activity can occur after the lease term ends. Liens must be removed, of course, but the Lease should be clear that the lessee or borrower is responsible for taxes that are due while the equipment in its possession - even if the Lease is otherwise terminated or expires. Some lessors charge return fees, restocking fees or inspection charges. This language should be as clear and specific as possible.
What if the lessee does not return the equipment in the proper condition or on time? Must the lessor give 30 days notice before calling a default? What would the damages be? Does the term continue until the equipment is returned in the required condition? What if the lessee files for Chapter 11 protection at the end of the term - can it keep using the equipment at a rent the judge considers fair value?
Whether it is on expiration of a Lease or retaking of equipment following a default, the importance of tailoring general lease language to specific equipment should not be overlooked. A little time and thought may translate to big dollars.
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Marks & Associates, P.C.
400 Century Park South
Suite 100
Birmingham, AL 35226
(205) 251-8301
_________
P.O. Box 11386
Birmingham, AL 35202
Nothing in this newsletter constitutes legal advice or is intended as a substitute for consultation with a qualified lawyer, accountant or other professional.
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