Leases.

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From: Business Lawyer(Vol. 76, Issue 4)
Publisher: American Bar Association
Document Type: Article
Length: 9,306 words
Lexile Measure: 1970L

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CASE LAW DEVELOPMENTS

This survey covers several 2020 cases involving disputes among parties to equipment leases or other personal property financings, or involving third parties claiming to have related rights or interests. The courts in these cases considered many of the fundamental issues often raised by parties when litigating commercial enforcement or bankruptcy protections or rights associated with such leases and financings. The issues covered in cases summarized in this article include whether a transaction documented as a lease creates a true "lease" or a security interest, the enforceability of certain lessor remedies, vicarious liability, the enforceability and shortcomings of forum selection clauses, the enforceability of hell-or-high-water clauses, and the rights of assignees.

TRUE LEASES

When asked to determine whether a transaction that is documented as a lease creates, for commercial law purposes, a "true" lease or a security interest, courts often analyze the proper characterization of the transaction by applying the Uniform Commercial Code (the "U.C.C."), including its text, official commentary, and interpretive case law. Although a transaction may be documented as a lease, the economic and other terms of that purported lease, and the related practicalities associated with the rights and obligations provided for in those terms, will be considered when characterizing the transaction. The rights, obligations, and remedies of the parties will be governed by U.C.C. Article 2A if the transaction is deemed a true lease or by U.C.C. Article 9 if it is deemed to create a security interest. Although there could be similarities between the U.C.C.-based analysis and the analyses from non-commercial contexts, such as accounting or tax treatment, (1) the analysis in those other contexts is often set forth in related laws, regulations, or interpretations. However, if none is provided, courts will sometimes undertake the U.C.C.-based analysis to determine the proper characterization of the transaction. (2)

In Huntington Technology Finance, Inc. v. Neff, (3) the court applied the so-called "bright-line" test followed by a fact-specific inquiry into the nature of the transaction to determine the lease characterization. (4) The parties entered into a purported lease agreement pursuant to which the defendants "leased" an electronic billboard mounted on a bus terminal. At the end of the initial term, the defendants could either purchase the billboard for approximately $1.2 million or exercise a "Three Year Renewal with End-of-Term Ownership" (5) option. If the defendants elected the second option, they would continue to lease the billboard for three additional years and would purchase the billboard at the expiration of that renewal term for one dollar.

The defendants argued that the agreement in question was not in fact a true lease, but rather created a security interest in favor of the plaintiff. This distinction would have afforded the defendants certain defenses that they purportedly waived in the lease and in the guarantees, which waivers are permitted by U.C.C. Article 2A, but not under U.C.C. Article 9. (6) The court, however, rejected this argument, holding that the defendants failed to meet their burden to demonstrate that the transaction was...

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Gale Document Number: GALE|A681135810