States Lead Renewable-Energy Push, The Wall Street Journal (S.W. Ed.), Page A:8, Col. 3 (Sept. 22, 2004). With this bill becoming law on October 4th, developers and financiers will spearhead the reduction of dependence on to foreign oil and, perhaps more significantly, increase the use of renewable energy by taking advantage of the production tax credit. They must take action immediately because, once again, the tax credit will remain available for only short time.
[Top]
3.
Federal Leasing Expands as Government Deficits Grow
As budget-busting deficits increase with no end in
sight, the federal government has often relied on leasing to hold
its costs down for acquisitions of needed capital assets and stretch
its limited budget dollars. No time seems more appropriate than now
for the federal government to expand its use of leasing to acquire
needed capital assets.
*Example: In an
attempt to consolidate and reduce the cost of IT systems, the Bush
administration announced last month that information technology
centers would be established to provide service to many government
agencies that should not have, or cannot afford to purchase, their
own systems. The plan would involve leasing software and technology
assets to address agency requirements in financial management, human
resources, case management for law enforcement agencies and health
care management. In taking this step, the administration intends to
increase IT efficiency and free up agencies’ financial resources for
other projects. See:
OMB’s new goal: Leased IT systems, by Karen Robb, Federal
Times Online (Sept. 13, 2004).
Federal Agencies That Lease Assets
Most federal agencies as diverse as the Department of
Defense and the National Institutes of Health have the authority to
enter into leases for capital assets including real, personal and
even intangible property (including certain IT assets). Vendors or
their leasing resources, which may be captive finance and leasing
companies, can offer leasing solutions to these federal agencies.
Why Federal Leasing Sells
Deficits have constrained capital or procurement
budgets of federal agencies. Consequently, agencies have sought
other means to acquire assets for their operations. Leasing fits in
a "bucket" of expense under an agency’s operations and maintenance
budget. By contrast, a procurement budget requires extensive efforts
to budget and buy assets with related cost "scoring" under complex
government rules. By including a certain amount of annual operations
and maintenance costs in their budgets, agencies often can acquire
the same assets they may otherwise be unable to purchase
immediately by making a series of year-to-year payments through leasing.
Leasing also provides the federal government with the
following options to control the disposition of the assets:
-
Lease to Ownership Program (LTOP) - An
agency makes lease payments with automatic ownership at the end
of the lease term;
-
Lease with Option to Purchase (LWOP) - An
agency makes lease payments and retains the right to exercise an
option to purchase the asset at the end of the lease term; or
-
Lease or Rental - An agency leases or
rents an asset for a fixed term and can either renew the lease
or return the asset at the end of the lease term.
*Warning: Lessors should use caution and consider
federal leasing only for those assets that the agency determines
essential to its needs for the entire lease term. Federal leases
typically require a funding reauthorization and/or lease renewal
each budget year (October 1 to September 30). Agencies may not
allocate or even request funding for less than essential assets.
Further, federal agencies enjoy special powers under the Federal
Acquisition Regulation (FAR). The FAR provides the rules used by
agencies to acquire supplies and services with appropriated funds.
See:
48 C.F.R.
§1.000 et seq.,
including any applicable agency supplement to the FAR. For example,
the government can (i) refuse to renew a lease, (ii) terminate a
lease for default or cause, (iii) fail to continue a lease because
it does not get necessary appropriations, or (iv) terminate a lease
for convenience. The "termination for convenience" provision allows
the government to exercise its right to completely or partially
terminate performance of work when it is in its own interest to do
so. See: See:
FAR Part 52 including
FAR 52.249,
FAR 52.212-4(l)
or a similar clause.
GSA - Major Player in Federal Leasing
The General Services Administration (GSA) plays a major role in
federal leasing today. The GSA established a program for leasing
under long-term government contracts with commercial firms to
provide access to over four million commercial services and
products. The GSA lists these vendors as its GSA Schedule
contractors, and GSA also refers to its lists as "Multiple Award
Schedules" and "Federal Supply Schedules".
A federal agency or other eligible organization acts as a customer
of the GSA and selects equipment or other needed items only from the
GSA Schedule. Then the agency decides whether it gains advantageous
pricing and budgeting by leasing or purchasing the equipment or
other item. The "contracting officer," who is the federal
government’s primary acquisition representative (along with a
program officer), generally compares the leasing terms offered by
leasing companies qualified to participate in the GSA Schedule as
well as those offered by the GSA Schedule equipment sellers.
*Technical Point:
To complete the lease-buy analysis, the contracting officer uses the
guidelines under Section 13 of
OMB Circular A-94,
to determine the economic impact of leasing versus purchasing. This
circular covers goods, equipment, buildings, facilities,
installations, and land for large and small ticket leases. In
determining whether to lease, the contracting officers consider life
cycle costs, economic life, purchase price, taxes, services,
residual value, and certain imputed costs such as property taxes and
insurance.
Federal Leasing - Opportunity and Risk
The federal government has enormous needs for equipment and other
capital assets. Although many agencies have run out of cash for
procurement, they still have the option to lease. The option to
lease looks like a growing opportunity for the leasing industry and
the federal government remains one of the best credit risks on
earth.
*Tip: Federal leasing involves unique skills, analysis and approach.
As a lessor, find qualified counsel that includes government
contracts lawyers who can help you traverse the complex terrain of
the FAR and other contractual rules the government builds into its
contracts. Gain a full understanding
of the federal government’s special powers so that you can weigh the
risks and rewards of leasing or financing to the federal government.
I would like to thank one of our government contracting/leasing
partners,
Michael Guiffré,
for editing this article.
[Top]
4.
Case & Comment: Dragnet Clause Rules in Pride Hyundai, Inc. v. Chrysler Financial Co.
By recognizing that a dragnet clause
"created a new dynamic between the parties," the court in
Pride Hyundai, Inc. v. Chrysler Financial Co., 369 F.3d 603
(1st Cir., May 27, 2004), established valuable precedent for secured
lenders and lessors.
FACTS: An automobile dealer,
Pride Hyundai, Inc. and affiliates (Pride), entered into "retail"
financing arrangements with Chrysler Financial Co. (CFC) in which
CFC financed individual installment purchase contracts for customers
of the dealership. CFC required Pride to establish a reserve that
CFC could then charge to protect CFC’s returns against defaults and
early prepayments by Pride’s customers. Subsequently, CFC expanded
the relationship with Pride and entered into a "wholesale" inventory
financing. In that transaction, CFC made advances against vehicle
inventory called a "floor plan arrangement." The floor plan
documents contained a broad grant of a security interest, which, in
part, read as follows:
Debtor hereby grants to Secured
Party a first and prior security interest in and to each and
every Vehicle financed hereunder . . . . The security interest
hereby granted shall secure the prompt, timely and full payment
of (1) all Advances, … and (6) each and every other indebtedness
or obligation now or hereafter owing by Debtor to Secured Party
including any collection or enforcement costs and expenses or
monies advanced on behalf of Debtor in connection with any such
other indebtedness or obligations.
*Term to Know:
This provision contains a "dragnet clause." See Leasing
101 below: "What Is a Dragnet Clause" for more on this topic.
The second wholesale financing
arrangement contained a grant of a first priority security interest in
virtually all of Pride’s assets, including vehicles, to secure all
debt incurred by Pride to CFC, no matter when it was incurred. The
clause, therefore, covered all of Pride’s obligations under the
retail arrangement too, including the reserve account payments, even though the retail deal
constituted a different type or class of debt and existed before the
parties ever entered into the wholesale financing containing the
dragnet clause.
Pride and CFC had strong disagreements
over time. Pride defaulted on its obligations and negotiated various
settlements with CFC that ultimately failed. Eventually, Pride found
a new lender to pay off CFC. Not surprisingly, to close the new deal
the new lender required CFC to release its first priority security
interest in Pride’s assets. CFC insisted, as most secured lenders
would expect, that Pride must fund the reserves arising out of the
retail financing before CFC would provide the release. Pride
disagreed that CFC had the right to hold up Pride’s new loan deal
and defaulted on the CFC loan.
Pride insisted that it never granted, or
intended to grant, a security interest to CFC under the retail
financing where CFC only required Pride to maintain reserves for
defaults or prepayment. CFC argued that the dragnet clause secured
all of Pride’s obligations under both the retail and wholesale
agreements. CFC made it clear that Pride would not receive CFC’s
release of the blanket security interest until Pride funded the
retail agreement reserve. On August 9, 2001, Pride filed suit
against CFC alleging, among other things, that (1) CFC violated the
covenant of good faith and fair dealing and (2) CFC tortiously
interfered with prospective contractual relationships.
ISSUES: Was the grant of security
by Pride under the dragnet clause valid under
Section 9-204 of
Revised Article 9 (RA9) of the
Uniform Commercial Code (UCC)? Even if valid, did the dragnet clause,
as applied in the Pride case, violate the standard of good faith
under
RA9-102(43)?
LAW: Effective July 1, 2001,
approximately six weeks before Pride commenced its case, RA9 became
effective in almost all states, including Massachusetts where the
Pride dispute occurred. Consequently Massachusetts law, including
RA9, applied to this case. The changes in RA9 determined the outcome
of the case for CFC. See:
RA9-702(a) & (c) (transition rules).
First, RA9 contains a modified version
of
Section 9-204, the provision that deals with dragnet clauses.
Like its predecessor, RA9-204 explicitly permits the use of dragnet
clauses. It states that "[a] security agreement may provide that
collateral secures . . . future advances or other value, whether or
not the advances or value are given pursuant to commitment." Under
former Section 9-204, the statutes said "collateral may secure
future as well as past or present advances if the security agreement
so provides." While the UCC language remained similar in RA9, the
drafters significantly changed the comments to RA9-204.
*Technical
Point: UCC comments explain the intent and operation of
the UCC provisions. However, states rarely, if ever, adopt the comments
as part of the enforceable UCC provisions.
Comment 5 to RA9-204 says that
determining the obligations secured by collateral is solely a matter
of construing the parties' agreement. The comment also states that
the drafters intended to reject cases decided under former Article 9
that applied other tests, such as whether a future advance or other
subsequently incurred obligation was of the same or a similar type
or class as earlier advances and obligations secured by the
collateral. While the comment is not binding, it is highly
persuasive of how the UCC should work. Had former Article 9 been in
effect, the class distinction between Pride’s wholesale and retail
financings may have prevented the dragnet clause from protecting
CFC. However, under RA9, CFC benefited by the rejection of case law
and focused on the clear language of the financing contracts.
Second, RA9 changed the concept of "good
faith." Previously, the applicable definition contained in Section
1-201(19) only imposed on parties a duty of "honesty in fact in the
conduct or transaction concerned." See: former Section 1-201(19).
The amendments provided that, for RA9 purposes, "[g]ood faith means
honesty in fact and the observance of reasonable commercial
standards of fair dealing." See:
RA9-102(43).
*Warning:
Confirm that the applicable law of your case has a statute
similar to the Massachusetts version of RA9-102(43). Good faith
could be defined like the definition in former Article 9 under
UCC Section 1-201(19).
OUTCOME: CFC won the day on all
points. The court affirmed the District Court and ruled in summary
as follows:
Given the clear and unambiguous
language of the dragnet clause in the wholesale financing
agreements, the lack of any evidence of a violation of the duty
of good faith, and the absence of other special circumstances
rendering such an interpretation unreasonable or against public
policy, we hold that the dragnet clause did apply to the
contingent debt arising out of the retail financing agreements.
Pride and CFC entered into
negotiated contracts with clear language granting CFC the first
priority security interest under a dragnet clause. Although the
lender, CFC, held the stronger negotiating position, the court
found that the clear contract language trump the borrower’s
subjective intent, any course of dealing between the parties,
and industry practice that suggests a restricted use of the
dragnet clause. In essence, because Pride could have negotiated
with CFC to enable Pride to bring in their new lender, the
actions by CFC did not constitute commercially unreasonable
practices.
*Comment:
This case offers some very powerful tools for lenders and
lessors. However, the extent to which lenders and lessors may use a
dragnet clause is unknown. In any event, lenders and lessors might obtain
the same kind of results as CFC if you:
-
Draft clear, unambiguous
language in written contracts that grant broad, commercially
reasonable, negotiated security interests. Clear language
generally should win the day over arguments about contrary
subjective intent.
-
Balance the use of a dragnet
clause against the standard of acting in good faith in a
commercially reasonable manner. Even with stronger negotiating
power, lenders and lessors can act in a commercially reasonable
fashion and gain the benefit of the dragnet clause.
-
Apply the dragnet clause in
different types of deals. For example, it may be feasible for a
secured guaranty to include an enforceable dragnet clause by
which the guarantor collateralizes its obligations under loan
agreements or leases. Alternatively, a lender that also leases
equipment to its borrower may include a dragnet clause in its
loan agreement to protect the lender against lease defaults by
its borrower/lessee.
The Pride decision is not a carte
blanche opportunity for lenders or lessor’s to abuse dragnet
clauses. Debtors will surely continue to test them in future cases,
and perhaps courts will strike down some of the clauses that violate
a state’s public policy or constitute commercially unreasonable
provisions under the facts of a case. However, for the moment, the
Pride case opens the door to reasonable but wide applications of
this fundamental type of collateral provision.
[Top]
5. Leasing 101:
What is a "Dragnet
Clause"?
The court in
Pride Hyundai, Inc. v. Chrysler Financial Co., discussed in
BLN’s Case & Comment, Article 4 above, describes
dragnet clauses as follows:
"Dragnet clauses purport to secure
all of a debtor's obligations to a creditor, regardless of
whether those obligations arise prior to, concurrent with, or
after the instrument containing the dragnet clause itself."
In other words, a
dragnet clause can grant a security interest in assets to
collateralize an existing loan of any type—secured, unsecured,
personal or real property loans. In addition, the dragnet clause may
capture other past or future obligations of the debtor. Also known
as an "anaconda" or "all monies" clause, a dragnet clause is more
than a future advance provision in which security granted today acts
as collateral for loans made later after the debtor meets conditions
to borrow on a line of credit or other working capital loan
agreement.
For example, a guarantee may grant a
security interest in all assets of the guarantor to support the
payment of the guarantee for current, past or future guaranteed
debt. In the real estate area, a dragnet clause refers to a mortgage
that secures all debts that the mortgagor (debtor) may at any time
owe to the mortgagee (lender). Real estate could secure obligations
under a lease or loan unrelated to the real estate. Dragnet clauses
have been controversial because the debtor may complain that he or
she did not intend to secure all the types of obligations or loans
described in the dragnet clause (that is, the clause drags various
types of obligations into the net of collateral security).
[Top]
6.
BLN Briefs: IT Managers Buy Instead of Lease; Bonus Depreciation Expires Soon
IT Managers Buy Instead of Lease.
Companies realize they will often not return computers and servers
to lessors. More than in the past, lessees and others may opt to buy
equipment rather than lease. Lease end return and penalty
provisions also dissuade companies from leasing. See:
Sidebar: IT Switches from Hardware Leasing to Purchasing,
Computerworld (Sept. 27, 2004).
Bonus Depreciation Expires Soon
Except for Qualified Aircraft.
Except for certain qualified aircraft, most bonus depreciation expires
December 31, 2004. Specifically, bonus depreciation remains
effective, with exceptions, for property that is acquired by a
taxpayer: (1) after September 10, 2001 (for purposes of the
additional 30-percent first-year depreciation allowance), or (2)
acquired after May 5, 2003 (for purposes of the additional
50-percent first-year depreciation allowance), and placed in service
before January 1, 2005 (or, in the case of certain property, placed
in service before January 1, 2006.) See:
Leasing Gets a Bonus From New Depreciation Regulations,
Business Leasing News (October 2003).
However,
Section 212 of the
American Jobs Creation Act of
2004 extended bonus depreciation for certain
qualified aircraft. The aircraft must (1) be new, (2) cost at least
$200,000 and include a deposit of the lesser of 10 percent of the
cost or $100,000, (3) be subject to a binding contract before
December 31, 2004, and (4) be placed in service before December 31,
2005.
*Action Item:
Although certain bonus depreciation will survive after
this year, if you want to benefit from it, act now to lease or buy
equipment that qualifies for bonus depreciation. Note that as a
general exception some larger aircraft, with a cost in excess of $1
million and/or production periods of more than two years, may
qualify for an extended placed in service date of January 1, 2006.
Follow the criteria for qualified aircraft closely, including the
placed in service requirements.
[Top]
7.
Reader Feedback; Recent Publications;
ELA Convention Speeches; Training Offered
Reader Feedback
Thanks to all the readers of BLN for
their comments about the September edition.
One reader e-mailed: "Your review of the BankVest case is the
best I've seen so far." The BankVest case appeared in
BLN’s Case & Comment section in September 2004.
Recent Publications
Here are two feature articles I wrote
that were published in August 2004:
-
Beating True Lease Challenges: A
Lessor’s Guide to Structuring and Defending True Leases,
LNJ Leasing Newsletter, by David G. Mayer (August 2004).
-
Bankruptcy Court Provides
Guidance on True Leasing of Software, ELA ‘s Equipment
Leasing Today, by David G. Mayer (August 2004).
Upcoming Speeches at ELA Annual
Convention
On Tuesday, October 26, 2004, I will
lead a panel at the 43rd Annual Equipment Leasing Association
Convention, entitled "Back to the Future: True Lease
Opportunities and Structuring." The panel is scheduled for
10:30 a.m. to 12:00 p.m. and is repeated from 2:00 p.m. - 4:00
p.m. The Conference will be held from October 24 –
26th, at the Marriott Desert Springs Resort and Spa in Palm Desert,
California. For more information and registration, click on
ELA Convention.
Training - Substance the Easy Way!
To help improve your business
operations, deal processing and risk management, I offer private
training seminars tailored to your specific needs at your designated
location. My interactive and informative training includes topics I
cover in BLN. I customize the format and content for your specific
training needs - no canned programs.
After one of my
private training sessions, here’s what one of the company’s senior
managers said: "David, thanks again for an excellent
presentation. You helped us tackle a complex, but important topic.
Your expertise is first-rate and you are an excellent teacher to
boot—that’s a rare combination."
Feel free to call me at (214) 758-1545
to discuss the possibilities.
[Top]
8. About Patton Boggs LLP and My Practice
About Patton Boggs LLP and My Law Practice
I am a part of the Patton Boggs LLP Business Transactions Group in our Dallas office. Patton Boggs LLP is a law firm of about 400 lawyers located globally in multiple locations. The firm has extensive capabilities in over 50 distinct areas of legal practice that include leasing, secured transactions, personal property financing, securitizations, syndications, power project regulatory, development and finance disciplines, mezzanine financing, bankruptcy, real estate, public policy, litigation, intellectual property and technology law, and much more.
The leasing and secured transaction practices regularly involve the buying, selling, financing and leasing of real and personal property of all kinds, including business aircraft, energy, facility, production, power plant, technology and health care assets. We also structure, negotiate and close secured transactions of all kinds, tax-exempt and federal leasing arrangements, and corporate and portfolio acquisitions, among a full range of financing and acquisition transactions. Despite the improving economy, we continue to assist our clients with troubled deals and bankruptcies, including repossessions, lift stay actions, true lease contests, deficiency litigation, workouts and forbearance arrangements.
If I, or any other lawyer at Patton Boggs LLP, can help you with your legal or business challenges, feel free to call me call me at (214) 758-1545
or e-mail me at
dmayer@pattonboggs.com for information about any of these areas or the many others available at Patton Boggs LLP, or to discuss anything I have written in Business Leasing News. We welcome the opportunity to build a relationship with you!
[Top]
A Message From the Founder, David G. Mayer
Bravo for Some
Unconventional Success
When
she started at her company in 1997, the real players in the industry
hardly noticed her company. Over a few years time, she accomplished
a legendary turnaround of the company from staid to the dynamic,
from a modest earner to five years of consistent year-over-year
growth. She built her company’s brand into a powerhouse in a crowded
and competitive field. The CEO is Rose Bravo, the leader of Burberry
Group. She demonstrates impressive business acumen that applies
across industries and professions and provides some important
guidance for the leasing industry as it approaches the 43rd Annual
Convention of the
Equipment
Leasing Association.
The Convention will be held October 24-26 in Palm Desert, California
at the Marriot Desert Springs Resort.
In an
interview for The Wall Street Journal, Ms. Bravo discussed some of the
challenges and methods by which she transformed Burberry Group from the boring
raincoat maker to a plaid super-luxury retailer. In the course of doing so, she
has dramatically increased its market presence and built an even more valuable
brand. See:
Plotting Plaid’s Future, The Wall Street Journal (S.W. Ed.), Page
B:1, Col. 6 (Sept. 9, 2004).
As we
approach the ELA’s 43rd Annual Convention, the interview struck a cord with me.
The theme of the Convention is "Breaking Out." As described on the
ELA’s convention site:
We innovate, we adapt, we keep our eyes on the goal and, with a
little help from the economy, equipment leasing breaks out. But
it's not all open field running before us. The flexibility and
resilience that got us this far remain indispensable on a
changed playing field.
The
challenges before the equipment leasing industry seem no less difficult than
those Ms. Bravo faced and conquered. The convention will offer useful programs
and unparalleled networking that can help you accomplish in your business or
profession what Ms. Bravo has accomplished in hers.
What did
she do that applies to us? How did she build her bottom line and brand despite
tough competition, like we experience in our fields? Here are a few of ideas
that I developed from her example and interview:
Surround yourself with great people, valuing each member of your team and
what they do and say.
Reinvent yourself every day, always thinking about how to enhance the unique
value you offer your customer or client, constantly applying creativity and
innovation to your tasks.
Maintain your core customer while pursuing new ones, learning from your
mistakes and delivering a product or service that differentiates you from the
competition.
Execute,
execute, execute. Don’t worry where you will get the next idea or opportunity.
In the end, quality, speed, experience and results sell like nothing else. Put
your product and service out in the market at your highest and best level
without compromise.
As we
approach convention time, think about ELA’s theme—Breaking Out. Ms. Bravo
demonstrated how Burberry could break out of a pattern of slow growth into
successive years of dynamic progress and earnings. Will you attend the ELA
Annual Convention and plant the seeds so your organization can do the same?
I hope to
see you at the ELA Annual Convention! I will be speaking there and would very
much like to meet you. It would be a privilege to hear your ideas and, perhaps,
share some of my own.
Have a
great October and do feel free to
e-mail
me, or call me at (214) 758-1545.
Thanks
to the BLN Staff
I
extend a special thank you to my editors at Patton Boggs LLP for
their comments on this edition, Atwood Jeter, Adrian McCoy, Sheila
McCoy and our primary web site review partner, Jeff Turner. The
technical team, consisting in part of George Barber and Winston
Jackson, provides you the easy-to-use e-mail navigation and artistic
appearance of BLN. Claire Campbell, our Chief Librarian provided
research for BLN.
PLEASE FORWARD THIS E-MAIL TO OTHERS.
You may, for this purpose, disregard Patton Boggs' distribution restriction at the bottom of this email.
[Top]
All the best,
David
David G. Mayer
Founder and Publisher
Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)
E-Mail: dmayer@pattonboggs.com
© David G. Mayer 2004
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To SUBSCRIBE, change your address or to
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here. To correspond with BLN, send your message to bln@pattonboggs.com.
Thanks.
The "For Dummies" part of my book, Business
Leasing For Dummies (BLFD)®, is a registered trademark of Wiley
Publishing, Inc.
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Disclaimer:
BLN information is not intended to constitute, and is not a substitute for, legal or other advice. Comments, tips, warnings, predictions, etc. in BLN provide general insights only. You should consult appropriate counsel or other advisers, taking into account your relevant circumstances and issues. The
Disclaimer
linked here also shall be deemed to apply to Business Leasing News in any e-mail format. BLN does not endorse or validate information contained in any link or research material used in BLN. You should independently evaluate such information or material. Readers are urged to print information under linked pages as they are subject to change over time. Comments made in BLN
do not represent the views of Patton Boggs LLP, but rather those of David G. Mayer.
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