Business Leasing and Finance News (BLFN)
MAY - JUNE 2009

Better Late...

Although we are running this issue behind schedule, we offer a diversity of insights we hope you will find to be worth the wait.

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FOUNDER'S NOTE
By David G. Mayer

                            Winds Up

Last month several of my Patton Boggs colleagues and I attended the American Wind Energy Association (AWEA) WINDPOWER® 2009 Conference and Exhibition in Chicago. We joined a record-breaking crowd of 23,200 wind energy enthusiasts, ranging from engineers and contractors to developers and project lenders. To my surprise, given the tough economy, I felt a palpable sense of excitement amid cautious optimism about the future growth and profitability of the wind energy business.

I wondered how the attendees thought they could profit from wind energy. Perhaps they believed that the United States is approaching the end of one of the worst economic crises any of us has ever seen, the crisis that nearly paralyzed funding for wind energy projects. They may have believed, as I do, that the national cap and trading system for greenhouse gas emissions, if enacted, should spur the development of wind energy. See EPA Climate Change – Climate Economics and Waxman-Markey Bill.

Maybe they thought that the U.S. Treasury stimulus grants of 30 percent of qualified project costs would boost wind energy’s fortunes. The grants could push ahead new projects that stalled during the recession or pull existing projects out of the ditch they were forced into when the banking crisis hit them. Participants heard in presentations that, under the new stimulus law, Treasury would release a relatively simple tax form in July that project sponsors could use to receive their cash grants within 60 days after filing the completed form. See Stimulus Cash Grants Hold Promise to Energize Wind Power Industry, Business Leasing and Finance News (March – April 2009).

Although few attendees put much stock in the Department of Energy (DOE) loan guarantee program, due to DOE’s lack of past performance on a similar program, the attendees still appreciated the support DOE could provide to wind projects.

Attendees rallied around the idea of “Yes to RES” as demonstrated by wearing a round green lapel button, referring to a “renewable energy standard” at the federal level. According to a poll taken by Garin Hart Yang Research Group, 75 percent of voters favored the RES, which would require utilities to produce at least 25 percent of their electricity from renewable energy resources by the year 2025.

Despite all the upbeat news, most wind energy experts have agreed that 2009 will not be nearly as good a year as the past few have been for increases in megawatts (MW) of wind energy. According to AWEA, installed MW of wind energy will drop from 8,545 MW in 2008 to 5,000 in 2009. A relatively small group of wind project lenders have survived the banking crisis. These lenders indicated that they will limit funding to customers whom they expect to bring them more business in the future. Usually (if not always) lenders will enter into “club” deals (financings with banks they know and trust) to fund these projects. In other words, the lenders said they will not fund unknown developers, projects with less-than-convincing economics or structures with “hair” on them (complexity beyond the basics). Syndications have bitten the dust, at least for now.

Some attended the AWEA conference to find out whether the wind could lift them up from their diminished businesses and provide a soft landing into wind energy opportunities. Others attended to learn how wind energy could help them make money on project development and financing. In one meeting, I talked with the company secretary (equivalent to a U.S. general counsel) of the only electrical utility in an African country greatly in need of wind power. In another meeting, I talked with a senior officer of a company looking for ways to adapt its tower-building products and services to the wind energy market. In yet another series of meetings, I had extensive talks with members of a wind energy subsidiary of a sophisticated private equity fund looking to acquire an experienced wind energy team and a wind energy portfolio pipeline of projects.

At the end of the conference, it seemed to me that many attendees expected wind energy to offer them potential opportunities in the future, with only a few starting to work on old projects. Mindful of just how hard the recession has impacted wind energy generally and them personally, almost everyone in Chicago seemed to be chasing his or her own dreams for a better tomorrow. Let’s hope that each of them find success soon and, in doing so, develops and finances enough wind energy to help, even in small part, to quench the ever growing thirst for energy in the United States and around the world.

1. Debtor Insolvencies and Defaults Test Cape Town Convention

With the global economy in extremis, aircraft lenders and lessors (creditors) outside of the United States may need uniform remedies to respond to defaults and insolvencies of their debtors. Creditors may want to exercise self-help remedies to recover their aircraft. Can the Cape Town Convention really help or does it merely set traps for the unwary?

Cape Town Convention: What It Is and What It Is Supposed to Do

The Cape Town Convention is the informal reference to “The Cape Town Convention on International Interests in Mobile Equipment” (Cape Town or the Convention). For aircraft, the related law is called the “Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Cape Town, 2001)” (Protocol) (collectively, the Cape Town Convention).

As a basic overview, the Cape Town Convention provides uniform laws to facilitate aviation finance, leasing and purchasing worldwide. It also provides rights and remedies for creditors and improves potential access to capital for debtors primarily in developing countries.

*Insight Point: As the Convention moves forward into its fourth year, certain business aviation parties have often complained that the Convention complicates a filing regime that worked well without Cape Town. Similarly, some knowledgeable parties in commercial aviation leasing and finance regard their contractual rights as far superior to the Cape Town Convention offering and do not gain significant benefits from the Cape Town Convention.

The Cape Town Convention provides notice to the world of interests in aircraft equipment in support of aircraft asset-based financing transactions. It covers “international interests” in aircraft engines, airframes and helicopters, referred to generally as “aircraft objects.”

Creditors and debtors register interests in aircraft objects electronically, at one central registry in Ireland called the “International Registry.” As an electronic notice filing only, no document is filed at the International Registry. Aviareto Limited operates the International Registry. The International Registry is an asset-based system and it registers an interest against uniquely identifiable, high-value assets and not against the related parties.

The Federal Aviation Administration (FAA) remains the national registry in the United States and the “entry point” to the International Registry for aircraft ownership to be registered in the country. The FAA issues a code to enter the electronic world of the International Registry upon submission of an AC Form 8030-135. For more on the objectives of The Cape Town Convention, see the Official Commentary (Revised Edition) by Sir Roy Goode CBE, QC (Rome 2008).

More Countries Ratify Convention

The Cape Town Convention was adopted November 16, 2001. The Protocol, which entered into force January 13, 2006, became effective March 1, 2006.

*Tip: The list of contracting states is updated as countries ratify the Convention. Check the list before entering into documents on aircraft that may be registered in a particular country.

The 29 countries (including the European Community) that have ratified the Protocol as of May 15, 2009 consist of: (1) Afghanistan, (2) Albania, (3) Angola, (4) Bangladesh, (5) Cape Verde, (6) China, (7) Colombia, (8) Cuba, (9) Ethiopia, (10) European Community, (11) India, (12) Indonesia, (13) Ireland, (14) Kenya, (15) Luxembourg, (16) Malaysia, (17) Mexico, (18) Mongolia, (19) Nigeria, (20) Oman, (21) Pakistan, (22) Panama, (23) Saudi Arabia, (24) Senegal, (25) Singapore, (26) South Africa, (27) United Arab Emirates, (28) United Republic of Tanzania, and (29) United States. The Cape Town Convention has entered into force for all the countries, except it enters into force Aug. 1, 2009 for the European Community.

*Technical Point: The Cape Town Convention (as a whole) enters into force in a country that ratifies it, called a “contracting state,” on the first day of the month following the expiration of three months after the date of the deposit of its instrument of ratification, acceptance, approval or accession regarding aircraft objects.

Insolvency Protections Under Cape Town

With a global recession pounding the earnings and prospects of the aviation business, any loan or lease of an “aircraft object” (certain airframes and engines) must include protection for creditors in the event of a debtor’s insolvency.

The Cape Town Convention offers two alternative insolvency provisions that the parties can use in their transactions. Alternative A, the so-called “hard” or “rules-based” version looks similar to Section 1110 of the U.S. bankruptcy code. This alternative requires an insolvency administrator or debtor to deliver possession of the aircraft object to the creditor (lessor or secured lender) or cure all defaults (i.e., pay up all past due rent) by the end of a specified waiting period. After the expiration of that period no exercise of remedies permitted by the Cape Town Convention may be prevented or delayed, and the creditor would otherwise be entitled to take possession of the aircraft object under applicable law. See Article XI – “Remedies on insolvency” of the Protocol for the text of “Alternative A.”

Alternative B is the “soft version” of the insolvency provisions. If a debtor defaults and the creditor requests the debtor to surrender the aircraft object, the debtor can notify the creditor that the debtor will cure all defaults and perform all obligations. However, if the debtor neither cures nor performs its obligations, then the creditor must make and evidence its claims in court to recover possession. The process would undoubtedly take more time, effort and cost than Alternative A.

*Technical Point: The United States made no election and therefore applies its national law under the federal bankruptcy code. Contracting states can make declarations whether to use the “soft” or “hard” insolvency pursuant to Article 23 of Convention.

Five Traps for the Unwary Under Cape Town Convention

As the Cape Town Convention registrations continue, and interpretations proliferate, more traps for the unwary arise. These traps could impair collection from debtors or repossession of aircraft, including the following five:

Trap 1: The basic rule of priority rules under the Cape Town Convention can make all the difference in recovering an aircraft object or payments from a distressed debtor. Unlike the result that may occur based on U.S. law, the Cape Town Convention clearly says that the first to register wins (with only a few complexities). The failure to abide by this simple principle can destroy the priority of a creditor’s interests and/or dramatically reduce the value of its rights in or title to an aircraft object. See Convention, Article 29 – “Priority of competing interests.” When a default exists, a creditor can not afford a mistake under this rule.

Trap 2: Do not forget to study the “declarations” of each country under the Cape Town Convention pertaining to the type of bankruptcy relief it will permit and types of registrations it will allow on the International Registry (with related priorities). For example, China made declarations that relate to priority on nonconsensual interests a creditor must consider in any transaction with China, subject to the Cape Town Convention.

Trap 3: The Cape Town Convention provides for the separate registration of engines, unlike the FAA, which uses an AC Form 8050-2 Bill of Sale that covers only the airframe. Do not confuse these rules. Always register engines under the Cape Town Convention separately and note that, despite the general rule, the Cape Town Convention treats installed engines on helicopters as one object with the airframe, which means creditors can not separately register helicopter engines. See Comment 5.3 to the Protocol discussing the treatment of an installed helicopter engine as part of the airframe and not a separate object under the Convention.

*Tip: Play this engine issue safe rather than being sorry. Register the helicopter engine as a separate object both as an outright sale and a prospective sale. Avoid a court finding that you should have registered your interest in the helicopter engine as a separate “aircraft object” from the airframe. A dispute on this issue with a troubled debtor will be potentially expensive and difficult to resolve.

Trap 4: Some contracting states have adopted the “soft version” of the insolvency provisions in the Cape Town Convention. These standards, if covered by a declaration, may weaken the ability of the creditor to exercise remedies in an insolvency of a debtor.

*Tip: Although the Cape Town Convention allows you to choose the law you apply to a transaction, it also preempts national law on any matters on which it has different provisions. Nonetheless, with a few exclusions, you can “derogate from or vary the effect of” provisions of the Cape Town Convention by contract. See Article 15 of the Convention.

Creditors may gain the most protections by drafting their own remedies in the documents, but, in non-U.S. jurisdictions, they can also enhance their remedies by incorporating the best parts of the Cape Town Convention into the documents.

*Insight Point: You may find that other solutions like insurance coverage may provide comfort in international transactions as well as or better than the Cape Town Convention. See Repossession Insurance Mitigates Risk of Cross-Border Financing, Business Leasing and Finance News, Issue 54 (June 2006).

Trap 5: The Cape Town Convention requires creditors to act in a commercially reasonable manner when exercising extra-judicial remedies (self-help remedies).

*Warning: Before exercising such remedies, confirm that the relevant contracting state did not preclude the use of self-help under Article 54 of the Convention. See Article 54 – ”Declarations regarding remedies.”

The heart of the Cape Town Convention is in the right place. It intends to promote commercial and private aircraft transactions worldwide and allows creditors to use uniform rules on debtor insolvencies and defaults. But in this period of global financial crisis, many creditors find that having good intentions is not enough. The fundamentals of credit risk and risk aversion still prevail and keep many creditors out of the lending and leasing business for many assets, including aircraft. Until the crisis subsides, many aircraft transactions and debtors will remain idle waiting for the day that, once again, the world financial markets will be ready for take off.

Thanks to Frank Polk of McAfee & Taft in Oklahoma City for commenting on this article.

2. Five Steps to Evaluating Vendor Financing Risks in a Volatile Market

In an economic downturn, short-term survival may outweigh long-term economic considerations for vendors/manufacturers (vendors) or for lessors or other equipment financiers (funders) in vendor leasing/finance programs. Vendor fraud—whether by oversight or an intentional act—is especially harmful to the leasing industry in general and to vendor finance programs in particular. Consequently, funders in vendor financing transactions necessarily reexamine their standards of identifying, measuring and mitigating risk in vendor financing programs.

The following five steps may prevent or limit reputational and economic damage in evaluating, structuring, funding and operating these programs:

Step 1: Perform Extensive Diligence on Vendor and Lessee Creditworthiness

Funders should reassess their reliance on mechanical risk-management technology, which cannot replace independent judgment. Pure electronic processes for small and middle-ticket transactions may mislead lessors in this environment of higher risk. Funders should also routinely dig deeper than 18 months ago in assessing vendor and lessee creditworthiness. To accomplish their objective, lessors:

• Scrutinize lessees in high-risk industries that have either stopped funding or reassess early warning signs of financial distress. Funders should monitor industry projections and review the vendors’ profit and loss numbers. Even safe bets deserve a second look.
  
  
• Identify lessee performance risks involving, for example, the type and extent of equipment use, the compliance with maintenance and insurance requirements and the payment of associated taxes when due. Funders have become especially sensitive to vendor operations that:
  
  
  • offer lengthy product guarantees,
  • sell to risky customers (showing credit, industrial, financial or operational distress),
  • fail to perform up to expectations of their customers/lessees,
  • report recurring operating losses,
  • experience continuous working capital deficiencies,
  • fund despite unlikely renewals of a lessee’s primary credit lines,
  • engage in legal proceedings with financial institutions or customers/lessees,
  • lose key customers and/or suppliers and/or face cash demands of trade creditors and
  • face potential work stoppages by production or service employees tied to the products and services affected by the funder.
    
    
• Enforce objective standards in credit and equipment acceptance with all applicable documentation in place (fully signed, reviewed and retained in safe files).

Step 2: Limit Undisclosed Vendor Financing Arrangements

In an undisclosed vendor leasing arrangement, funders or vendors do not typically inform lessees of the funder’s financing arrangement with the vendor (or a vendor’s captive leasing company). Especially in a tough economy, undisclosed relationships may tempt a vendor (or a vendor’s captive leasing company) to withhold relevant information, especially that relates to the lessees’ financial distress.

To protect from non-disclosure of adverse financial issues, funders more frequently:

• Negotiate for disclosed lessee-lessor relationships. In other words, funders can minimize the potential to be harmed by adverse actions or the inaction of the vendor (or a vendor’s captive leasing company) by disclosing the funder’s existence to the lessee even if the vendor (or the vendor’s captive leasing company) continues to service the account with the lessee. Disclosure allows funders to control the lessee’s direction of the payments without misleading the lessee or taking undue credit risk to the vendor. Vendor misstatements may expose funders to grave financial consequences.
  
  
• Require vendor’s personal and/or corporate guaranties to improve the likelihood of performance by vendors of their obligations, representations, warranties and indemnities in the vendor program agreement.
  
  
• Ensure the vendor has the right to transfer service agreements to a third-party funder of the lease and/or the equipment to improve or maintain residual value of the equipment if the lessee fails to maintain the service agreement.
  
  
• Insist on receiving timely financial statements, certifications and other reports on the vendor and the end-user lessee to spot potential for defaults or advance recognition of a need to restructure a lease or even the vendor agreement between a funder and the manufacturer/vendor. Funders no longer rely simply on non-payment as a trigger to find out too little too late to recover from a distressed debtor situation.

*Tip: Funders should establish a strong relationship with vendors/manufactures. Nurturing the relationship is critical as a way to manage risk of fraudulent actions or lack of transparency to a vendor’s business.

Step 3: Confirm Product Technology Works as Warranted

Even seemingly legitimate vendors can present warranty compliance risk.

*Remember: Take the now infamous example of Norvergence and the millions earned with a product called the “Matrix.” Founded in 2001, the telecom company pitched its product as able to deliver unlimited broadband, landline and cell phone service with no per-minute charges. The Matrix, however, was not what it appeared to be; it was no more than a firewall and router, incapable of providing Internet service on its own - a fraud. Norvergence simply bought services from companies such as Sprint or Qwest Communications, and then re-branded and resold the services under its own name. In June 2004 when Norvergence was forced into bankruptcy, more than 7,200 lessees were locked into leases totaling approximately $230 million. In subsequent settlements, well-known lessors agreed to write off more than $53.9 million of Norvergence debt.

Funders may accept the representations and products of well-known and creditworthy vendors, but, chastened by Norvergence and the like, funders either refuse to enter vendor programs or fund unless they confirm that the vendor’s product works as warranted. To do so, funders may:

• Conduct a site visit on every significant deal to confirm the equipment has been installed and is operational.
  
  
• Run technology testing on the asset to assure that it operates in accordance with specifications and the vendor representations of its functionality.
  
  
• Interview other product users to confirm positive experience with the product and that no claims have been asserted against the lessors or the manufacturer/seller.
  
  
• Hire or use an equipment specialist to evaluate the operations, viability and market appeal of the asset.

Step 4: Look for Strong Vendor and Lessee Management

Present market instability requires funders to look deeper than ever into the quality of a vendor’s management team as well as its economic and credit strength. Funders often dedicate time to become familiar with the vendor’s plan for overcoming present market challenges and the current viability of the company. Management should exhibit a deep understanding of the relevant marketplace, including the competition’s strengths and weaknesses and the lessee’s buying habits and preferences—in order to meet strict criteria established by vendors and investors for quality management.

Many funders, lenders and lessors use the age-old concept of evaluating creditworthiness of borrowers by the “5Cs”. Funders can apply these concepts to other enterprises with obligations to meet, such as the obligation of a vendor or vendor-leasing subsidiary to each of their customers. The 5C’s are as follows:

1. Character (reputation) – prime determinate of a borrower’s willingness to repay a loan or meet an obligation (arguably the most important element in any business relationship).
2. Capacity (cash flow) – ability of the organization to generate liquidity to pay its debts.
3. Capital (real net worth) – the real tangible net worth as support for repayment.
4. Collateral (security) – assets available to collateralize an obligation or debt.
5. Conditions (economic environment) – systemic market risk and recession, high-risk industries and related businesses.

*Tip: Especially with new vendor leasing programs, as a vendor or funder, you should ramp up your program slowly so you get some real world experience with the lessees and equipment involved in your program. This experience will assist you in identifying and resolving potential problems in your program and incorporating the benefits you receive by taking reasonable business risks. Use common sense as you apply each of the 5 Cs.

Step 5: Mitigate Potential Fraud Risks

In a down economy, short-term survival measures may increase the potential for fraud. To investigate potential fraud scenarios funders:

• Hire a third party to conduct an in-depth study or audit of the vendor’s financial processes, including assessing the potential for fraud;
  
  
• Monitor bank transactions. Watch for duplicative, overstated or understated transactions; and
  
  
• Apply the lessons learned from fraud cases such as Norvergence, LeNatures (cooked books) and others, to avert potentially similar schemes in your transactions. See “Does Le-Nature’s Fraud Case Show When No Amount of Diligence Is Enough?” Business Leasing and Finance News (Dec. 2006) for more extensive tips on averting fraud schemes. For a list of types of fraud schemes in vendor leasing programs, see “Types of Fraud,” Lease Police (2007).

In the current down market, lessors, funders, vendors and even lessees often (but not always) look for red flags that may indicate that a vendor leasing or financing transaction is not all that it is cracked up to be. Realistically, small-ticket and mid-ticket deals do not have the size necessary to merit in-depth due diligence. The parties should, in all events, use risk-management procedures as a way to withstand or avert errors or financial mistakes.

Even when the parties conduct extensive due diligence, their efforts may not be enough to fully mitigate risk, especially to stop those who intend to commit fraud. But, if the parties fail to do appropriate due diligence and test the 5Cs in these troubled markets, the potential for fraud may not be the only challenge they encounter.

Thanks to Jaynacia L. Abraham, an associate in the Dallas office of Patton Boggs for contributing this article; and thanks to Brad Gunstad, executive vice president and general counsel at TCF Equipment Finance, Inc. for editing this article.

3. Case & Comment: Golden West Refining v. SunTrust Bank – No “Perpetual” Letters of Credit

Some letters of credit do not remain in effect as long as the parties may expect. Golden West Refining v. SunTrust Bank, 538 F.3d 1233 [Case No. 06-56006] (9th Cir. 2008) demonstrates the importance of knowing when a letter of credit is perpetual, as may be intended, and when it is not. Ironically, under Section 5-106(d) of the Uniform Commercial Code (UCC) perpetual does not mean unending as commonly defined. This case and the UCC say why.

*Terms to Know: This case involves a standby letter of credit, which substitutes for performance or payment of the party (applicant) that requests the letter of credit be issued. For more technical definitions, see UCC Section 5-102(a). An evergreen letter of credit “is effective for a designated period, usually one year, and will be renewed automatically for an additional period, unless the issuer gives notice of its decision not to renew prior to an expiry.” 1 John F. Dolan, The Law of Letters of Credit, ¶ 5.03[3][b] n.232 (4th ed. 2007). An evergreen letter of credit may also be one in which the beneficiary may give notice not to renew the letter of credit before its expiry date.

BACKGROUND: Golden West sold two real estate leases to CENCO, Inc. In turn, CENCO, Inc., as lessor, leased the property to Golden West as tenant. Golden West required CENCO indemnify Golden West from liabilities arising under the lease. To secure performance of the indemnity, Golden West required CENCO to deliver a $5 million irrevocable letter of credit. SunTrust (as successor to Crestar Bank) issued a $5 million evergreen letter of credit on CENCO’s account.

The letter of credit stated that it “shall expire one year from the date hereof provided however, that it shall be deemed automatically renewed without amendment for additional one year periods.” In other words, the letter of credit renewed each year indefinitely until Golden West notified Sun Trust of its election not to renew the letter of credit for an additional year. Although Golden West did not elect to terminate the letter of credit, SunTrust refused to honor it when Golden West attempted to draw on the letter of credit about seven years after SunTrust issued it.

The district court of the Central District of California heard the case and ruled against SunTrust, and SunTrust appealed to the U.S. Court of Appeals for the Ninth Circuit (Court). The Court noted how the issue arose: “SunTrust dishonored the letter of credit . . . on the grounds that it had been canceled … [because] it was ’perpetual’ and therefore had expired under UCC § 5- 106(d). SunTrust’s dishonoring of the letter of credit, rejecting Golden West’s draw, precipitated this dispute.”

ISSUE: Did SunTrust’s letter of credit cancel after five years (before drawn) because it was “perpetual” under UCC Section 5- 106(d)?

OUTCOME/DECISION: No. The Court affirmed the District Court holding that the evergreen letter of credit was not “perpetual” under Section 5-106(d) of the UCC because it did not say it lasted in perpetuity or words to that effect. Therefore, SunTrust’s letter remained in effect when drawn and was not treated as “perpetual” by the Court under UCC § 5-106(d).

LAW OF THE CASE: Under Section 5-106(d) of the UCC, a “perpetual” letter of credit does not mean it continues without end; rather, the UCC states a perpetual letter of credit remains effective for only five years.

In this case, the Court read Section 5-106(d) of the UCC literally, which provides:

(d) A letter of credit that states that it is perpetual expires five years after its stated date of issuance, or if none is stated, after the date on which it is issued.

SunTrust argued that its letter of credit was perpetual under Section 5-106(d) of the UCC and therefore expired after five years—two years before the date Golden West attempted to draw under it. The district court disagreed. Under UCC Section 5-106(d), SunTrust’s letter of credit was not perpetual, had not expired and remained in effect on the date of the draw by Golden West. It reasoned that the letter of credit stated a date of expiration (one year) with automatic renewals (one more year), and, therefore, could not be perpetual under UCC § 5-106(d). The Court agreed that, on its face, “[t]he plain language of UCC § 5-106(d) requires that a letter of credit state that it is perpetual to qualify as a perpetual letter of credit.”

*Comment: The outcome of this decision seems odd and counterintuitive. You would think that a perpetual letter of credit means one that lasts forever. But the Court’s holding made clear to the contrary. If a letter of credit states it is perpetual or similar words, then the interpretation of those words default to Section 5-106(d), which limits the effective period to five years. Yet, when the parties state that the letter of credit remains in effect year after year without any further action or amendment (i.e., an evergreen letter of credit), then the letter of credit can last indefinitely until the beneficiary cancels it. Comment 4 to Section 5-106 throws in another twist on the term “perpetual.” It states that “[a] letter of credit that may be revoked or terminated at the discretion of the issuer by notice to the beneficiary is not ‘perpetual’.” Thus, if either the beneficiary or issuer can terminate a letter of credit, it is not perpetual under Section 5-106(d).

Many letters of credit are issued for one-year periods with automatic renewals. It seems that, at least in the 9th Circuit Court of Appeals, the dictates of the Golden West case should be strictly followed. In the broader scheme of business, the banking crises these days may make this case less important for long-lasting letters of credit as the credit worthiness of the issuing bank may be as much in issue as that of the account party.

 

4. Finance 101: What Is a “Novation?"

A “novation” is a term of art that states interpret and apply differently. For example, in New York, the courts have held that a novation occurs when one party (in “deal 2”) replaces the original party and its original contract duties, obligations and liabilities in “deal 1” and the following elements all exist: (1) a previously valid obligation (in deal 1); (2) agreement of the parties to a new contract (enforceable new contract in deal 2); (3) complete extinguishment of the old contract obligations, duties and liabilities (i.e., terminate deal 1 entirely); and (4) a valid new contract (enforceable new contract in deal 2). See Holland v. Fahnestock & Co. Inc., 210 F.R.D. 487, 498 (S.D.N.Y. 2002). With respect to element (3), the deal 1 contract must have no further force or effect and all duties, obligations and liabilities thereunder must be released and terminated forever (not just for the period after the novation).

In contrast, California has found a novation occurs when the obligations terminate after the novation or replacement date of the deal 2 party (new deal) for the deal 1 party (i.e., the replacement of a party in deal 1 for the new party in deal 2). See Wells Fargo Bank, N.A. v. Bank of America NT&SA, 32 Cal. App 4th 424 (Cal. 2e. Dist. Ct. App. 1995).

Novations do not require new parties, only new obligations, duties and liabilities that replace old ones. Thus, a novation can occur by substitution of: (x) a new obligation between the same parties, (y) a new debtor (obligor) for an old departing debtor, or (z) a new creditor (obligee) for a departing old creditor (old obligee). For example, see Cal. Civ. Code §1530 (2008).

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About Patton Boggs LLP

Patton Boggs LLP is a law firm of approximately 600 attorneys and other professionals located in Washington, DC, Northern Virginia, New Jersey, New York, Dallas, Denver, Anchorage, and internationally in Abu Dhabi, United Arab Emirates and Doha, Qatar.

Patton Boggs has major practice areas in business, intellectual property, public policy, and litigation. These areas are composed of many practice groups designed specifically to meet client needs and the trends in developing legal markets. David G. Mayer often focuses on capital equipment and facility financing and development in energy, transportation, infrastructure, aviation and technology transactions, work-outs and litigation.

The firm provides a broad array of skills in domestic and international business transactions, including equipment finance and leasing, corporate finance, secured transactions, syndications, mezzanine finance, aviation and transactions law, federal leasing, project finance, real estate, health care, pharmaceuticals, technology transactions and public policy work.

The equipment finance practice at Patton Boggs regularly involves the buying, selling, financing and leasing of personal property of all kinds, including business aircraft, energy facilities, power plants (including wind farms and other renewable energy facilities) and technology and health care assets.

When these transactions encounter defaults or other disputes, Patton Boggs responds with a team of business transaction lawyers, who have extensive restructuring and workout experience, litigators, who manage court actions and alternative dispute resolution proceedings and bankruptcy lawyers, who assist in restructuring transactions, handle workouts, advise on potential bankruptcy filings and litigate and otherwise participate in the entire bankruptcy process.

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Patton Boggs’ Assessment:
Beyond President Obama's
Busy First 100 Days
_{APRIL 29, 2009}

Click here to download Patton Boggs’ overview [pdf]

In its final form, the American Economic Recovery and Reinvestment Act of 2009 (H.R. 1) bill passed February 13 is the largest combined spending and tax bill in American history, with a total of $789.5 billion in spending and tax cuts. The bill will impact a wide range of businesses and industries from health care to energy to education and transportation.

To provide a sense of the package's overall funding levels, Patton Boggs has prepared a general overview of the bill by subject area (please note we are not reporting on every aspect of the bill).

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NEW>>Internet Radio Interview on Business Aviation

Capital Thinking Internet Radio (Patton Boggs podcast), with host Kevin O’Neill: Interview of Ed Bolen, president and CEO of the National Business Aviation Association and David G. Mayer, Patton Boggs partner, in June or July 2009 (date to be announced), regarding the significant challenges and trends in business aviation (BA) today. Ed and David plan to address the potential economic recovery of the BA market, the critical public policy challenges for BA and the reality of dealing with distressed transactions in the continuing recession.

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Partial List of Publications and Radio Interviews

The following is a partial list of articles written or co-authored by David G. Mayer and a mention of a radio show appearance by David G. Mayer:

Capital Thinking Internet Radio (Patton Boggs Podcast), with host Kevin O’Neill: Interview of David G. Mayer Patton Boggs Partner on March 12, 2009 regarding trends in financing and development of natural gas storage facilities. To listen to the interview, click on Mayer Interview.

“U.S. Court of Appeals Upholds Graves Amendment in Garcia v. Vanguard,” by Connie Ariagno and David G. Mayer, with the assistance of Tyson Wanjura, LNJ Leasing Newsletter (Dec. 2008).

“Equipment Leasing and CERCLA Liability,” by Russell V. Randle and David G. Mayer, LNJ Leasing Newsletter (Dec. 2007).

“Navigating the New Reality of Equipment Leasing and CERCLA Liability,” by Russell V. Randle and David G. Mayer, LNJ Leasing Newsletter (Nov. 2007).

“Unique Pad Gas Lease Supports Project Financing and Development of Gas Storage Facility in U.S.,” by David G. Mayer (with Fortis Capital Corp.), Asset-Based Lending Review, Financier Worldwide (Nov. 2006).

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Thanks to BLFN’s Team

I would like to thank BLFN’s team at Patton Boggs LLP. The team includes Tyson Wanjura, an associate in Dallas and the Patton Boggs staff: our staff writers, Jennifer Becker and Jackie Gilbert, our marketing manager, Mark Holub, our project manager, Melissa Green, Penny Utley, our subscription coordinator, and our designer, Kiasha Sullivan. Thanks also to Douglas C. Boggs, a business group/securities partner and Web site reviewer for BLFN, and our chief marketing officer, Mary Kimber, for assisting BLFN through our firm’s editing, design and posting process.

All the best,

David

David G. Mayer
Founder: Business Leasing and Finance News
(formerly Business Leasing News)
Partner: Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 phone)
(214) 758-1550 (fax)
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© David G. Mayer 2009

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