Monday, July 2, 2012
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Lease Companies on the Stock Exchange
It appears the position news from European leaders with a breakthrough plan to rescue banks, relieve debt-burdened governments has restored investor confidence, giving rise to the 277 point climb on Friday.
Leasing companies on the stock exchange did well also, some better than others, but the high of the day on many was not the “close” of the day.
Chesswood Group Limited
Marlin Business Services
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Career Crossroad—-"Just Laid Off!
Question: I have been in the Equipment Leasing industry awhile and was just laid off from my employer along with the entire Sales Team … I am looking to present myself and my Sales Team to potential employers. Any suggestions on how to go about this?
Answer: First, I am sorry to hear of your recent circumstance; but KUDOS that you are already taking the bull by the horns and preparing to make your next move. There are some companies that are open / interested in Sales Teams – as long as each member of the team carries some weight!
As you know, every company has a different business model and has a focus on particular lease types / equipment / asset niches, etc…
As such, the First Step is to do some research to determine which types of companies you are interested in. This will also determine what your presentation should focus on in terms of deals types, territories, etc…
The basics of your presentation should include:
1. Resumes of each Team Member
Career Crossroads Previous Columns
More True Lease Ink Split
by Tom McCurnin, Esq.
2011 was not a good year for judicial review of true leases. Some Courts got it right, but some courts got hopelessly bogged down on issues of intent. The following is a list of the cases which reviewed the true lease issue and a brief summary of the holding.
In re Warne , 2011 WL 1303425 (Bankr. D. Kan. 2011) – A 61-month lease of a semi-tractor that was non-cancellable and which contained an option to purchase at the end for $31,100 was a true lease even though the lessee had provided a security deposit equal to the purchase option price. The purchase option price was a reasonable estimate at the time of entering into the lease of the tractor's value at the end of the lease term. Although the lessee argued that the deposit was essentially a deferred down payment, it was clear that its purpose was for the lessor’s security in the event of default or destruction of the truck. The Court got the issue right, and was helped along by the fact that the equipment was worth near the amount of the stated purchase option.
VFS Leasing Co. v. J & L Trucking, Inc. , 2011 WL 3439525 (N.D. Ohio 2011) – A six-year finance lease of four trucks that gave the lessee the option to purchase the trucks at the end of the lease term for 8.84% of the purchase price the lessor had paid was a true lease because the option price was not nominal.
Gibraltar Financial Corp. v. Prestige Equipment Corp., 949 N.E.2d 314 (Ind. 2011) This was a curious fight between the secured creditor of Prestige and its judgment creditors, where the secured creditor argued that its UCC-1 attached to a leased machine press, and the unsecured creditors argued that the lease was a true lease. The lease contained an Early Buy Out for about 30% of the equipment cost followed by a purchase option the following year for fair market value. What should have been an easy determination that the transaction was a true lease was thoroughly muddied by the Indiana Supreme Court which resurrected the pre-1987 factors of lease vs. loan and focused on the economics of the transaction, before punting the decision back to the trial court.
In re Kentuckiana Medical Center LLC , 455 B.R. 694 (Bankr. S.D. Ind. 2011) – A non-cancellable medical equipment lease gave the lessee the options to purchase the equipment for $238,000. The forecasted value of the equipment was between $200,000 and $400,000. The Court ignored whether the purchase option was “nominal” and instead focused on the “economic realities test,” essentially ruling that the lessee would have to be a moron not to exercise the option, having already paid $2.9 million dollars. I’ve not heard of $238,000 being nominal. This is a first.
In re Del-Maur Farms, Inc. , 2011 WL 2847709 (Bankr. D. Neb. 2011) – A non-cancellable lease of equipment which gave the lessee the option to purchase the equipment at the end of the lease for 10% of the initial purchase price and, if the lessee did not exercise the option, an obligation to renew the lease for one year for a rent that exceeded the option price was a sale with a retained security interest. It is clear under the Code that a forced sale, as opposed to an option to purchase, is in fact a lease intended as security. This Nebraska Court got it right.
VFS Leasing Co. v. J & L Trucking, Inc. , 2011 WL 3439525 (N.D. Ohio 2011) – This case involved a lease of four trucks. The lease provided that the lessee could have an option to purchase the trucks at the end of the lease term for 8.84% of the purchase price, about $36,000. Although the purchase option was below the magic number of 10%, the Court ruled that the $36,000 payment was not nominal.
The bottom line to these cases is really simple: If a lease has a purchase option which does not equate to the fair market value of the equipment, at the time the option is to be exercised, the lessor is at risk. While some of the lessors fared well, many others failed to realize the simplicity of the test under the Uniform Commercial Code.
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"What is a Legal Lease?"
The documentation of an equipment lease must follow the requirements of the Uniform Commercial Code (UCC). Perhaps the most important thing to understand is that two parties may enter into a contract to do just about anything. So long as the agreement does not cross any legal barriers both parties are expected to live up to the requirements of the contract. When a breach occurs (one or both parties fail to honor the contract) and a civil court action is required to settle the dispute, the contract, as written and signed, will be used by the judge to determine corrective action or penalties.
The contract must clearly state do’s and don’ts, if the contract does not prohibit something, it is assumed the lessee has the right to do it. If the contract contains provisions that conflict with existing laws it is said to be “unenforceable” An example is: "If a contract claims to be governed by Article 2A, of the UCC, and then contains a provision that excludes it from 2A then the provision claiming to be governed by 2A is unenforceable (not illegal)."
The UCC, for Commercial transactions, is divided into Articles with each Article defining a type of business activity. Article 9 defines the requirements for money lending or secured lending. This Article acknowledges the borrower as the legal owner of the equipment and the lender as a lien holder. To “perfect” or record a lien the lender must file a recording document called A UCC-1. This UCC-1 must be filed in the State where the borrower has incorporated or registered to do business. If the borrower has an existing “blanket lien” (a lien on everything owned by the borrower) the new lender is restricted from having a first position and would be regulated to a secondary lien position in the case of a default. However, if the equipment is a new purchase and the lender has loaned the money to purchase it then Article 9 allows for a “Purchase money lien filing” that will have first lien position in front of the blanket lien holder providing the purchase money filing is filed within twenty days of the borrower taking possession. This twenty-day requirement starts with customer possession not signatures on loan documents. Therefore some record of delivery date needs to be retained in case of a court challenge in default.
Article 2A is for equipment leasing that is not a lending activity governed by Article 9. To distinguish the differences, the definition of an Article 2A transaction was published as an exception to a secured transaction and is found under the definition of a “Security Interest” as section (37). The reason for this article on leasing is to establish the rights of the lessor as the legal owner of the equipment. In the case of a third party lessor it establishes procedures for the lessor to pass on to the lessee the supply contract; a term for the usual equipment performance guarantees and the warrantees from the vendor, seller. This limits the third party lessor from responsibility for equipment performance or liability for non-performance, or injury, from malfunction.
To qualify as an Article 2A lease and be judged by the contents of 2A the lease transaction must meet the definition or the qualifications in section (37). If the transaction fails then it is considered an Article 9 secured transaction and the lessor must contend with the lien filing requirements of this article to maintain their lien position. Most Lessors’ file a lien-filing document called a financing statement also called a UCC-1 as a precautionary measure because under the law the filling of a UCC-1 cannot be used as evidence the Lessor considered the transaction to be a loan. There is no requirement for a lien filing in Article 2A because the lessor is considered the legal owner.
One difficulty presents itself when leasing non-titled equipment (personal or tangible property.) Without a lien filing, there is no location for a lessor to post a notice that the lessee is in possession of equipment that the lessee does not own. A potential purchaser finding no liens may assume the business asset is free and clear of all liens and the lessee has rights to sell it. This is one of the reasons for filing a UCC-1 or as some Lessor’s do, put labels or notices on the asset itself, stating “ This equipment is owned by ABC Leasing and may not be removed from this location without our permission. PH 123-456-7891.” Still, in many cases when assets are sold with out lessor knowledge and the buyers name is not recorded, many Lessor’s have little recourse in default situations except to take the Lessee to court for selling non owned assets.
In addition, laws change in each state, so it is advisable to consult your experienced attorney at least annually regarding procedures that may have changed regarding filing a UCC.
Mr. Terry Winders, CLP, has been a teacher, consultant, expert witness for the leasing industry for thirty years and can be reached at email@example.com or 502-327-8666.
He invites your questions and queries.
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Why I Became a CLP
Kyle W. Gilliam, CLP
Since obtaining my CLP, I have made many new connections within our industry that I can now lean on for help in making tough decisions as well as friends from all over the country that I can share best practices with. Earlier this year, I was honored with the opportunity to join the board of directors for the CLP Foundation. The board, along with our newly named Executive Director Reid Raykovich, CLP and our current President Rosanne Wilson, CLP are very excited about what the future holds for the Foundation. My only regret is waiting 10 years to pursue my CLP.
After spending a few years in commercial lending and private banking back in the mid 1990’s, I discovered that the favorite part of my job focused around equipment finance.
Not too long after our bank was acquired by Regions Bank, I applied for a position internally with Regions Leasing in Montgomery, Alabama. A few weeks later, I was offered the job and relocated to Little Rock, Arkansas. I was very blessed to have had a group of highly dedicated leasing professionals to mentor me early in my career. Ricky Mims, Derek Johnson, John Jordan, Tom Sansom and Dave Parr all played an important role in my professional development. After leaving Regions in 2003, I joined Bank of the Ozarks Leasing. There, I was exposed to another mentor J. Scott Hastings. Scott showed me a different side of the business than what I had been exposed to at Regions, another great learning experience for me.
In early 2007, I had the opportunity to put together an equipment finance division from the ground up at Arvest Bank. Arvest is a $13.1 billion dollar privately held bank doing business in Arkansas, Oklahoma, Kansas and Missouri. It allowed me to deploy the knowledge that I had gained over the years and combine best practices from each of my mentors. The supportive nature of our culture and team approach at Arvest Bank made the task of implementing a new division somewhat less challenging than it might have been at a different financial institution.
The CLP Foundation, along with the professional designation, is very much like what I described in the above mentioned paragraphs. There are many willing mentors standing by to assist those new to the equipment finance business, including those more seasoned professionals that might want to pursue their CLP designation. No matter what stage of your career, whether a Lessor, Broker, or simply a funding source, you will benefit from the CLP program ultimately by achieving your professional designation. The CLP designation is the one and only professional designation within our industry and proves to your company, customers, and co-workers that you are a dedicated and educated professional in the equipment finance industry. Currently, we have (4) CLP’s on staff with our soon to be 5th CLP going through the program.
My desire to become a CLP goes back almost a decade. The problem was, I was like any other dad or husband, I always had something pulling my attention away from me continuing my professional education. It was not until 2010 that I decided that this is the year, and what a year it was!
(Taken week before last off of the coast of Alabama at Kyle's family vacation home in Gulf Shores, Alabama)
Why I Became a CLP
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