What happens when an equipment finance agreement doesn’t spell out its interest rate — and can that omission unravel the whole deal?
Sometimes the hardest questions to answer are those you feel should be the easiest. Why is the sky blue? How are you doing, and how is everything going? Honey, does this dress make me look fat?
A question that has bounced around the legal profession since time immemorial is “must equipment finance agreements (EFAs) disclose interest rates?’ The corollary question, of course, is “are EFAs invalid if they don’t include an interest rate?” or “can we collect interest if the interest rate isn’t stated?”
Two recent cases involving Balboa Capital Corporation highlight this issue. In Balboa Capital Corporation vs. Okoji Home Visits MHT, LLC 111 F. 4th 536 (5th Cir. 2024), the 5th Circuit affirmed a lower court’s decision that Balboa’s Monthly Payment Agreements and Installment Payment Agreements (assigned to Balboa by Ascentium) were unenforceable because they lacked essential terms, mainly the total financing amount and the cost of financing.
Unfortunately for Balboa, not only did the court rule that interest was not collectible, but also that the entire agreement was unenforceable. Although the contracts were not EFAs, the principle is still relevant in the EFA context.
The 5th Circuit is comprised of courts in Louisiana, Mississippi and Texas. Balboa is located in California, which is part of the 9th Circuit. The choice-of-law provisions in the agreements at issue in the Okoji case called for California law, and the Court agreed that California law governed. Still, the 5th Circuit found that the agreements were unenforceable for failing to meet the requirements in California for a valid contract. This is noteworthy since California Civil Code Section 1550 does not require a contract to state the interest rate:
It is essential to the existence of a contract that there should be:
1. Parties capable of contracting;
2. Their consent;
3. A lawful object; and,
4. A sufficient cause or consideration.
However, the Okoji court found that the consent element was lacking because there was no meeting of the minds as to the “essential terms” of the loan agreements. This, in part, was due to the way the agreements and corresponding invoices were presented to the borrowers (i.e., separately, not as a single document), and it may have been the impetus for this adverse decision. But, as they say, bad facts make bad law.
Balboa was understandably disappointed by the Okoji decision. Then, like manna from heaven, along came Dr. Mylissa’s Medical Boutique LLC v Balboa Capital Corporation No. 02-25-0271-CV (2025), a restricted appellate case from the Court of Appeals, Second Appellate District of Texas.
The Dr. Mylissa case may be welcome news to Balboa, but it is not a magic wand that has eliminated all of the uncertainty about the absence of interest rates in certain types of contracts. Indeed, the fairly recent enactment of the California commercial finance disclosure laws makes interest disclosure mandatory, provided, however, that the entity offering the financing product and the type of transaction fall within the purview of those laws. Many types of entities and transactions are exempt, including banks and subsidiaries of federal banks, true leases and certain types of alternative financing arrangements. So the mandate that interest be disclosed is hardly all-inclusive, and only a few states even mirror California’s commercial finance disclosure laws, each with its own protocols.
Bottom line, it is always best to disclose an interest rate. But, the absence of that disclosure may not be fatal. It depends on what court you are in and the specific facts of your transaction.
On a personal note, I was glad to see Balboa get some favorable treatment from the higher courts. The company has embraced many changes over the years I have worked with them. I know the principals personally, and it is nice to see those changes rewarded.
Ken Greene is an attorney at his SoCal firm, the Law Office of Kenneth Charles Greene. The Law Offices of Kenneth Charles Greene present this article. In his regular column, The Greene Room, he brings clarity to complex, high-stakes issues that matter to our readers, exploring the ever-evolving intersection of finance and law. Stay tuned to Monitor for more ongoing, timely insights from Greene.
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