For example, should a lessor list itself as “owner” or “lienholder” on a motor vehicle certificate of title? On its face, the answer seems simple enough. A lessor under a true lease is the owner of the vehicle while the lessor under a financing arrangement, such as a dollar-purchase-option lease or an equipment finance agreement, is a lender holding a lien against the vehicle. In practice, the issue is much more complex.
First, there is the potential for lessor liability. State vicarious liability laws have long imputed a driver’s negligence to the vehicle owner. Plaintiffs’ counsel looking for the deep pocket at the end of the litigation rainbow routinely check titles and look for a corporate owner. Many lessors have therefore opted to be listed as lienholders in lieu of owners in true leases, hoping to avoid liability while retaining the benefit of putting the world on notice of their interests. Fortunately, recent federal legislation has overridden state vicarious liability statutes in most cases. 49 USC §30106; Marks, “Lessor Liability and the Federal Leased Vehicle Liability Act,” Journal of Equipment Lease Financing, Vol 24, No. 1 (Winter 2006).
However, case law is still evolving. In addition, the federal statute leaves room for findings of actual lessor negligence. For example, injured parties have argued that a lessor is liable for failing to inspect equipment and discover defects likely to cause injury; for failing to deliver operating manuals to the lessee; or for failing to warn a lessee of equipment defects of which the lessor knew or should have known. See e.g., Indeck Power Equipment Co. v. Jefferson Smurfit Corp, 881 F. Sup. 338(NV. Ill 1995); Black v. Gorman-Rupp, 655 So. 2d 717(La. Ct. App. 1995).
There are other reasons why an owner might prefer not to have the title issued or re-issued in its name as owner. Some lessors prefer to be listed as lienholders in order to facilitate transfers of title to the lessee at the end of the lease term without the necessity of paying transfer or sales taxes, or even having the title reissued if the lessee/purchaser is comfortable relying on a power of attorney and acknowledgement of satisfaction from the lessor.
How would a court treat the lessor’s ownership interest when it was not disclosed as such, but was rather shown as a lien interest? There is little guidance from the cases, but where courts have encountered the reverse scenario of lienholders showing themselves as owners, the results have not always been clear or pretty.
The bankruptcy court deciding In re National Welding of Michigan, Inc., 17 B.R. 354 (B.W.D. Mich. 1982) rev’d 61 B. R. 314 (B.W.D. Mich. 1986) held that the lessor under a lease, which was determined to be a secured loan rather than a true lease, was not perfected at all when it listed itself as owner rather than lienholder. The case was reversed four years later based on two cases coming out of the Sixth Circuit Court of Appeals. See In re Paige, 3 B. R. and In re Angier, 684 F. 2d 397 (6th Cir 1982); See also In re Circus Time, 641 F. 2d 39 (1st Cir. 1981). These cases focused on the fact that the listing gave subsequent creditors or purchasers notice of the lessor’s/lender’s interest.
More than one Alabama case has held that, even when a pawnshop loan is made, the formalities of the state’s certificate of title law must be observed. Mere possession of the title is not enough to perfect the interest and if the lender waits until after the debtor is in bankruptcy to have a new title issued showing its lien, the lender is unperfected and unprotected. (e.g., Patterson v. Spradlin, 185 B. R. 354 (B.N.D. Ala. 1995); In re Mattheiss, 214 B.R. 20 (B.N.D. Ala. 1997)).
In the case, In re Otasco, Inc., 11 B.R. 976 (B.N.D. Ok. 1990), the court determined that a lease with a TRAC-style end-of-term option was a secured loan. To make matters worse, the court held that the lessor, which listed itself as owner on the title, was unperfected and the proceeds from the sale of the vehicles were therefore to be divided amongst all creditors on a pro-rata basis. That court summarized its Certificate of Title provisions as follows:
The court emphatically rejected the lessors argument that it substantially complied with the statute and that any such errors were “minor” stating:
Whether wrongly decided or not, these cases show there is ample precedent to avoid playing fast and loose with titling statutes, particularly when the effect is to deny notice to a subsequent lender or purchaser.
Similar risks can be unexpectedly lurking, despite common sense and standard industry practice, in syndications where an originator makes an outright assignment to a funder/assignee of the originator’s right, title and interest in the equipment lease and underlying vehicles being leased. It is a not-uncommon syndication practice for such transfers to occur without the title being reissued. Arguably, the original lessor may act as the purchaser’s agent, creating a sort of poor man’s titling trust.
This concept received much attention recently as a result of the case of In re Clark Contracting, 399 B. R. 789 ( B.W.D. Texas 2008). In that case, Wells Fargo elected not to re-title vehicle securing loans it had acquired from CIT. The court ruled that, unlike the UCC’s §9-310(c), which allows assignees to stand in the shoes of the assignor without re-filing, the Texas motor vehicle title law required reissue of the titles showing the assignee/lienholder’s name. Fortunately, industry advocates and the Texas Legislature acted quickly and, on June 19, 2009, the Texas Governor signed a new law negating the bankruptcy court decision. See Senate Bill 1592, S.B. 1592, 81st Leg., Reg. Sess. (Texas 2009). Subsequently, the federal district court reviewing the Clark Contracting decision overturned the bankruptcy court decision and reinstated Wells Fargo’s perfected security interest. See Clark Contracting Serv., Inc. v. Wells Fargo Equip. Fin. (Ch. 7 Case No. 08-50046-LMC, Adv. No. 09-726-FB (W.D. Tex. Apr. 14, 2010).
Despite the reversal of fortunes in this case, it may still give pause to vehicle lease portfolio purchasers and lenders. At the end the day, the interplay between the generally uniform provisions of the UCC and the various state Certificate of Title laws resembles a complex dance that must be attempted with caution. Unfortunately, that dance looks much more like a street crunking battle than a smooth waltz.
Kenneth P. Weinberg is a founding partner of Marks & Weinberg, PC. Weinberg has significant experience in dealing with virtually every type of equipment and facility lease financing. He has penned Dispatches From the Trenches since 2002, and routinely publishes articles in a variety of equipment leasing and financing journals. Weinberg graduated cum laude from the University of Georgia School of Law, J.D., and was executive articles editor of Journal of Intellectual Property Law. If you have any questions or comments about this column or other industry-related legal issues, contact Weinberg at 205-251-8307 or visit www.leaselawyer.com.
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