|Legal & Legislative Update - Sept 2016|
Legislative and Legal Update
As outside legal counsel for the NVLA, David Gemperle and Ken Rojc provide periodic Legal and Legislative Updates. In this legal update, we will provide an overview of the legislation and caselaw from the past year impacting commercial and consumer leasing.
Lessees commonly assert that a lease was really a loan. The distinction is important because the rules in bankruptcy, property recovery and enforcement are more favorable in leasing than in secured lending. For example, in bankruptcy a lease may be reaffirmed without formalities under the recent holding in Williams v. Ford Motor Credit Co., LLC, No. 15-CV-14201, 2016 WL 2731191 (E.D. Mich. May 11, 2016). We have seen recent challenges to lease characterization that show how courts assess these claims. The analysis almost always starts with Uniform Commercial Code Article 1 which states the following:
A. Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
B. A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: (1) the original term of the lease is equal to or greater than the remaining economic life of the goods; (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods; (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. UCC 1-203.
The question of whether consideration will be “nominal” is judged from the time of the initial lease, as explained in In re Johnson, No. 15-00104-NPO, 2015 WL 1508460 (Bankr. S.D. Miss. Mar. 27, 2015). In Matter of Wells, a court evaluated a specific vehicle purchase option price of exactly 20% of the original value and held that the price was not nominal, so the lease was a true lease. Matter of Wells, No. 15-80056-CRJ-13, 2015 WL 3862969 (Bankr. N.D. Ala. June 22, 2015). That is a favorable decision, since 20% is a common benchmark many lessors use. Lessors under 20% in particular should have a clear statement that the lessee waives the right to argue that the lease was really a loan. That type of provision worked for the lessor in another recent case, In re Gutierrez, where a U.S. Bankruptcy Court held that even if the UCC 1-203 test is satisfied, a debtor can waive there right to have the UCC test apply. In re Gutierrez, 526 B.R. 449 (Bankr. D.P.R. 2015). In any case, lessors should consider including a “springing” security interest in their forms, such as “To protect Lessor's rights in the Equipment in the event this Lease is determined to be a security lease, Lessee hereby grants to Lessor a security interest.” Lease quoted from GE Capital Commercial, Inc. v. Silver Labs, Inc., No. A-2284-12T3, 2015 WL 2236645 (N.J. Super. Ct. App. Div. May 14, 2015). That should provide protection against other creditors in the event a Court holds the transaction to be a loan.
Less common (at least outside of Ohio) is the assertion that a retail installment sale statute applies to a lease based on broad definitions in a retail installment sales act. In Burin v. General Motors, LLC, a consumer asserted that an administrative fee of $595.00 was impermissible despite the fact that Ohio has no comprehensive law governing consumer leasing. The Ohio Retail Installment Sales Act, Ohio Code. § 1317.01 et seq. (“RISA”) states that “’consumer transaction’ means a sale, lease, assignment, or other transfer of an item of goods, or a service.” Ohio Code § 1317.01(P). However, the definition of “retail installment sale” was narrower: “‘Retail installment sale’ includes every retail installment contract to sell specific goods, every consumer transaction in which the cash price may be paid in installments over a period of time, and every retail sale of specific goods to any person in which the cash price may be paid in installments over a period of time.” Ohio Code § 1317.01(P). The Court concluded that the lease was not subject to RISA even though it was a “consumer transaction” because it did not meet the definition of “retail installment sale.” The “cash price” was $48,511, but the amount to be “paid in installments” during the three year lease period was only $24,183.79. Under the schedule of payments, the entire cash price would not be paid in installments. Furthermore, the lease plainly stated that it was not a purchase agreement. The relationship therefore was not subject to RISA and the administrative fee was permissible. Burin v. Gen. Motors LLC., No. 1:16CV77, 2016 WL 1465741 (N.D. Ohio Apr. 14, 2016).
We have seen many introductions of global positioning system and ignition interrupt bills and a few actual enactments in the past year. Effective July 1, 2016, Tennessee requires consent in order to avoid a misdemeanor charge. 2016 TN H.B. 2095. Similarly, Wisconsin has required consent to avoid a Class A misdemeanor since July of 2015. Since May 31, 2016, Rhode Island has required dealers to get written consent to install tracking and interrupt devices, but that consent can come from either the lessee or the lessor. California also has a consent rule, but it does not apply to leasing. 2015 CA AB 265. While most states still do not have a specific rule, we recommend that Lessors utilizing electronic tracking devices (including those with a starter-interrupt feature) implement procedures to obtain express written consent to place the devices in vehicles. This authorization can be usually included on the face of the lease or in a separate consent authorization form.
Consumer Leasing Act does not Apply where Co-Lessee is an Entity
On July 23, 2016, the United States Court of Appeals for the Fifth Circuit held that a lease is not subject to the Consumer Leasing Act (“CLA”), 15 U.S.C. §§ 1667-1667f (or the implementing Regulation M, 12 CFR § 1013.1 et seq.) where one of two co-lessees is an entity even if the other co-lessee is a natural person that intends to use the vehicle for personal use. That indicates the benefit of ensuring that when lessors are dealing with small business owners that the business entity should is listed as a lessee, even if it is the business owner’s credit that is checked. Dixon v. TMCC, 2015 WL 4496114 (5th Cir. July 23, 2015).
Effective July 1, 2016, Iowa law limits documentary fees to $180 in both purchase and lease transactions. In South Carolina dealers must submit their closing fees for approval by the Department of Consumer Affairs, with specific proof of actual costs needed if the proposed fee is above $225. The $225 amount in South Carolina is actually safe-harbor created in response to a November court holding that a dealer’s fee was “unconscionable” even though the dealer had filed the fee with the South Carolina Department of Consumer Affairs. Freeman v. J.L.H. Investments, LP, 414 S.C. 362, 778 S.E.2d 902 (S.C. 2015). Consumer lessors should track or periodically review fee rules to ensure that all charges are permissible.
On July 13, 2016, the FTC finalized a Consent Order for two Ohio motor vehicle dealers concerning allegedly deceptive and non-compliant lease advertising. The Consent Order shows that the FTC expects lessors to describe offer limitations, such as the need for a high credit score, to be explained without technical language. The FTC considered the statement “800 BEACON Score Required” to be problematic. Decision and Order In the Matter of: Progressive Chevrolet, Docket No. C-4578 (July 13, 2016).
We will continue to track these, and other, motor vehicle leasing developments in our monthly publication Auto Alert, which is available on a subscription basis.
Nisen & Elliott, LLC
David E. Gemperle
Kenneth J. Rojc