Monday, January 26, 2015
Today's Equipment Leasing Headlines
Update--Balboa Files: "It was an Operating Lease"
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Update--Balboa Files: "It was an Operating Lease"
Texas Court Misunderstood Nature of a True Lease and Article 2A
Balboa Capital v WCS Lending 2014 WL 4956459 (N.D.Tex.)
We hate it when judges misunderstand the nature of a true lease and then try to apply equitable solutions to a perfectly ordinary concept. In a true lease, the lessor gets to have rent and keep the equipment after the lease term is over.
In today’s case, the lessee signed a lease which was intended as a true lease, and then defaulted. The court thought it was unfair to allow the lessor money damages and possession of the equipment, because that would have been a double recovery. No, your honor, that’s exactly what is supposed to happen in in a true lease. The facts follow.
The lease was originally written by VAR Resources LLC (F/k/a VAR Resources, Inc., Texas, and then discounted to Balboa Capital Corporation, California. It was written to WCS Lending, LLC, 951 NW 51st Street, Suite 150, Boca Raton, Florida, and appears to be for 15 HP Elite notebooks, 15 lap top case, 50 HP 3500 computers, 30 monitors, 30 dual desks, and misc. items (no software noted). (1)
“VAR Resources, Inc, 2330 Interstate 30, Mesquite, Texas. Founded 1988, VAR Resources provides financing for computer hardware and software to businesses in the United States. Founded in 1988, our Account Managers have an expertise pertaining to the IT Channel.
“Established over 10 years ago, WCS Lending is a mid-sized nationwide mortgage banker that has won Inc. 500 recognition for America's Fastest Growing Private Companies from 2009-2011, and is ranked among the top 10 privately held mortgage bankers in the country.”
WCS Lending web site states they do not have an office in Texas, and appears the case is filed here due to it originally being written by VAR Resources, located in Texas as Balboa Capital documentation mentions California.(1)
Balboa Capital became lessor, taking over the VAR master lease (1) on a 36 month “fair market value” residual lease at $2,034.25 per month to lessee WCS Lending in 2013. There was no purchase option letter produced, and the master lease called for return of equipment. (2) Soon thereafter, the lessee defaulted, and the lessor filed suit against the company’s registered agent in Texas. There does not appear to be a personal guarantee as the only named Defendant was WCS Lending, LLC. (There is no record of service to WCL Lending headquarters in Florida.) The lessee didn’t answer the complaint and a default was entered against the lessee.
The lessor moved for default judgment requesting monetary damages of $ 88,592.82 (3)
"Past Due Lease Payments $32,313.15
The court thought that giving the Lessor money damages and possession of the equipment would be a double recovery under Article 2A.
Article 2A has three remedies provisions at Sections 527, 528 and 529. Only Section 529 can, in limited circumstances, none of which were present here, prohibit the lessor from obtaining both the lease balance and possession of the equipment in a true lease situation.
The court cited another UCC provision, § 1-305 which interestingly enough states that the remedies in the Code should be liberally construed to put the aggrieved party in as good a position as the party would be in, had the other party not breached. For a lease intended as security (a loan), that might preclude getting a lessor’s lease balance and possession. But for a true lease, where the equipment is to be surrendered at the end of the lease term, the lessor would always be entitled to possession and the lease balance. So why the District Court cited this provision remains a mystery. We can only speculate that the Court applied Article 2A in a vacuum without any analysis as to the fact that in a true lease context, the Lessor was indeed entitled to possession and rent.
At press time, according to Pacer (Public Access to Court Electronic Records), WCS has not responded nor chosen an attorney. The issue has not be addressed as if the original lease was a “capital lease" with a side letter purchase option or one stated in the original proposal from Balboa Capital. They also did not state whether this was a discounted lease to Balboa Capital from VAR Resources and therefore is this an “operating lease” in the eyes of the IRS? According to court filed documents, the lease is claimed by Balboa Capital to be a “true lease.”
What are the lessons here for the equipment lessor?
First, consultation with local counsel as to the standard remedies in the form lease might be appropriate before entering into such an equipment lease.
Second, perhaps the lessor might have considered a pre-judgment replevin and sold the equipment before seeking a monetary damage award, so as to avoid the “double recovery” issue altogether. But that said, in a true lease, the lessor is entitled to possession and damages—it is not a double recovery.
Third, if the lessor is seeking to enforce a lease for monetary damages and possession of the equipment, lessor’s counsel should be aware of decisions like these and prepared to educate the court on the nature of a true lease. The lessor is entitled to possession and damages and it is not a double recovery.
The bottom line is that with true leases Article 2A allows the equipment lessor to have its cake and eat it too, getting all accrued rentals, plus the present value of future rentals, and possession of the leased equipment so long as the facts and law are properly presented and analyzed.
West Law Balboa Case Default
Tom McCurnin is a partner at Barton, Klugman & Oetting
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Top Stories: January 20 - January 23
(1) Warren Capital, Novato, California Closed Employees Reportedly Let Go
(2) New Bulletin Board Complaint
(3) Texas Court Holds Balboa Capital May Not Obtain Judgment for Lease Balance & Be Awarded Possession of Equipment at the Same Time
(4) New Hires---Promotions in the Leasing Industry
(5) Maricle Found Guilty in Not Returning Advance Fees Appears to be Third Time
(6) Owners of failed Chicago bank must come up with another $50 million
(7) Correction---2015 Leasing Conferences
(8) Bryan S. Gunn Accused $1MM Fraud in Heavy Equipment Leasing Co.
(9) Leasing 102 by Mr. Terry Winders, CLP
(10) OnDeck Launches Marketplace for Institutional Investors
Marlin Near Hitting Year-end Low
Marlin Business Service Corp (NASDAQ:MRLN) came close to hitting its low for the year, closing Friday at $16.87. Volume was 28,122 with bidding at $16.76. The 52 week range has been $16.70 - $28.97. On Wednesday, TheStreet lowered shares of Marlin from a buy rating to a hold rating.
Could it be from Executive Salaries?
Or are Evergreen Clause leases catching up:
African-American Bank Closes in Chicago
The three offices of Highland Community Bank, Chicago, Illinois, were closed with United Fidelity Bank, FSB, Evansville, Indiana, to assume all of the deposits. Established November 9, 1979, the bank had 27 full time employees at their three offices in Chicago. In 2006, they had 43 full time employees.
The bank is one of the three black-owned banks left in Chicago. The two remaining are Seaway Bank & Trust Co. and Illinois Service Federal Savings & Loan Association of Chicago, both on the South Side. There have been other minority owned banks in Chicago and elsewhere that have failed in the last few years as they struggle as their neighborhoods have been hit hard and have had great difficulty in recovering economically.
The problems seem to hit in the year 2009 with the FDIC and Illinois Department of Financial Professional Regulations issuing a "Cease-and-Desist" order on September 9th, stating the bank's unsafe lending practices include failure to obtain adequate collateral and failure to enforce adequate loan repayment programs, as well as requiring the bank to boost its reserves for loan losses.
Year-end 2009 net worth was $8.5 million, down from from $11.8 million in 2008. Net profit went from positive to minus $3 million,
The Cease and Desist was too late as the numbers below show the downward descent of the bank:
Tier 1 risk-based capital ratio 3.56%
(in millions, unless otherwise)
2006 $50,000 ($61,000 commercial/industrial, -$8,000 lease rec., -$3,000 individuals, -3,000 other)
Construction and Land, 1-4 family multiple residential, Multiple Family Residential, Non-Farm Non-Residential loans.
Tier 1 risk-based capital ratio 3.56% as of December 31, 2014.
As of December 31, 2014, Highland Community Bank had approximately $54.7 million in total assets and $53.5 million in total deposits. In addition to assuming all of the deposits of the failed bank, United Fidelity Bank, fsb agreed to purchase essentially all of the assets.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $5.8 million.
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In any job search, honesty is a necessity. ALL information contained within a resume and formal application MUST be truthful; do not overstate your job duties, accomplishments, compensation, or education in any part of the interview process. Additionally, if there are employment gaps in your career history include these gaps in your resume/application and be prepared to explain them.
Being honest and possessing integrity is a trait all companies seek and is often one of the behavior profiles examined in potential employees. One slip and you will be immediately removed from any candidacy now and in the future.
In today’s technological world the reality that one can get away with faking anything, e.g. a degree or skill set, is next to impossible. Human-Resource executives, recruiters, and hiring managers are trained to keep an eye out for inconsistencies in education, experience, skills and references. Applications are also important; leaving any section of your application blank is a red flag to a potential employer. Fill out all areas of the application even if an answer does not favor you or put you in the best possible light, e.g. being fired (learn to turn a negative into a positive).
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If you find you made an error / mistake or failed to update your resume before submitting, take responsibility, and let the employer know.
Career Crossroads Previous Columns
CLFP Adds New 1 CLFP; Announces Reduced Exam Price
Teresa Billick has attained the Certified Leasing and Finance Professional designation.
She is an independent equipment finance broker in the Southern California area.
"In celebration of the 30th Anniversary of the CLFP (previously CLP) designation, the Foundation has decided to roll back the exam price to the price it was thirty years ago for 2015 only," Bob Fisher, CLFP, Vice President of the CLFP Board of Directors, announced. "Take advantage of the price reduction to earn your CLFP designation; the cost this year is only $550.00."
The CLFP designation identifies an individual as a knowledgeable professional to employers, clients, customers, and peers in the equipment finance industry. There are currently 229 Certified Lease & Finance Professionals and Associates throughout the world. For more information, call Reid Raykovich, CLFP at (206) 535-6281 or visit www.clfpfoundation.org.
((Please Click on Bulletin Board to learn more information))
(Terry retired January 1, 2015. To honor him and his many years of writing for readers of Leasing News, in the next few months we will bring up columns he has written that are still meaningful today--as most of them are. - Editor)
Sale-Lease Back Issues
Sale-lease back is a lease where the equipment is purchased from the Lessee instead of an equipment vendor. The Lessee retains the possession and use of the equipment, after the sale, but surrenders legal title and ownership to the Lessor. An appraisal of the equipment is necessary to show the Lessor is acquiring the asset(s) at its then Fair Market Value to avoid “fraudulent connivance claims” from other creditors.
When the Asset is sold to the Lessor it must be free of liens requiring the Lessor to check for liens recorded on financing statements (UCC-1) in the State where the lessee has registered his Charter papers and then you should require proof of purchase from the Lessee to establish their clear ownership.
The Lessee will have an accounting effect and an income tax effect from the sale of a Capital Asset.
The income tax effect will require some investigation. If there is a gain on the sale, which means the sale amount is greater than the "undepreciated" tax balance, some of the cash from the purchase price will go for income tax called recapture. On rare occasions, if it sells for more than the original purchase price, any proceeds over the original price will be taxed at the Capital Gains rate while the recapture will be at the standard tax rate.
The after tax cash, from the sale, will improve both cash and the net worth of the Lessee on their balance sheet. In addition the present value of the rent stream from your sale lease-back lease will be placed on the balance sheet as a Leased asset and a Lease liability.
A Sale-Lease back usually only occurs for two reasons: First, the Lessee is an acceptable credit and is suffering from a bad economic year and needs to increase profits. The Sale-Lease back of assets that have a value greater than book value will create a gain and may lift profits from negative earnings to positive earnings. This may shelter some of the gain lowering the tax effect. In any event the company will show a profit that year instead of losses, but it comes from a sale of assets and not operations.
Second, a Lessee may be wishing to sell or merge with a company that could increase its capabilities. The merger price may fail to recognize the assets that have been depreciated off the books so a Sale-Lease Back brings the value back on the books in the form of cash (if the tax effect is not too harsh). Also, the case of a Capital Lease for accounting purposes the Lease Liability and the Leased Asset are placed on the balance sheet for a double effect considering the cash and net worth also increased the balance sheet.
In both circumstances, the Lessee does not lose the use of the equipment.
In a Sale-Lease back, the lessee has to look to the cost. If assets are free and clear of liens then they could use it as collateral and borrow any required cash for operations. In a sale lease-back the gains and the tax effect plus the sales tax on the rentals may make it a very expensive way to borrow cash. Therefore a Sale-Lease back to raise cash is a very poor reason, but it is the one we hear most often.
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Leasing News Advisor
Steve Crane, CLP is an original member of the Leasing News Advisory Board, joining in July of 2000. He recently joined BSB Leasing as Vice-President and Manager of BSB's newly created Commercial Division, providing funding to brokers for financial statement transactions. Previously he was Vice President & Marketing Manager, Indirect Equipment Lease Origination, Bank of the West. During his career he has held positions at Westinghouse Credit, Ingersoll Rand Financial, CIT, and Taylor Financial. “I have known Kit Menkin for almost 30 years, going back to the CIT and Taylor Financial days of my career and am happy to be a part of The Leasing News Advisory Board.”
Steve and his wife Cheryl have two sons, Ryan, who is a firefighter in the San Jose area, and Alex, who recently graduated from The University of Oregon and is applying to medical school. Steve and Cheryl are big college football fans and enjoy traveling to games with their sons.
An avid outdoorsman, Steve enjoys backpacking, skiing, sailing, golfing and endurance sports. Since his sons have left the house he has more time on his hands and has taken up the sport of triathlon. Steve has competed in numerous Olympic and Half Ironman distance races and completed two Full Ironman races, including the inaugural Ironman Los Cabos.
Steve enjoys his work and is looking forward to many more years of participating on the Leasing News Advisory Board and the equipment financing industry
Screen Resolutions Affect What You See
Most readers do not realize the resolution size to which they have set their monitor set for will change the size of what is sent; meaning you may not be viewing the original size.
To properly measure size on the internet often the "pixel" size is utilized. Inches and meters don't work, nor do "pica" as for printed newspapers.
As a rule of thumb, the lower the number, the larger the graphics, including fonts will appear, but are not as sharp as the higher the number. In fact, the higher the number, the clearer and perhaps brighter the picture will appear on your screen. All operating systems also have ability to make changes. A graphic driver makes a big difference, and the better the quality they produce, the more expensive they are.
There are software programs, such as Liquid View and Pivot that can change the font appearance, without adjusting the screen size, as well as offering other features, such as color enhancement; available at www.portrait.com
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