The last quarter of 2011 produced interesting cases in the equipment leasing realm dealing with authentication of assignments of equipment leases and repossession of equipment when late payments are accepted after notice of default.
 
This article provides a summary of these cases as well as recent amendments to the Federal Rules of Bankruptcy Procedure which may impact a lessor’s current business practices. 

Authentication of Assignment of Equipment Leases
 
Assignments of leases, as with all documents, must be authenticated in order to be admitted as evidence at trial. One method of authentication is through testimony by a witness who has personal knowledge the document is what it is claimed to be. A lessor’s inability to properly authenticate an assignment of an equipment lease at trial recently resulted in a trial court’s dismissal of the lessor’s action for payments under a lease. In Lyon Financial Services, Inc. v. Dr. Manelle Fernando Medical Clinic, Inc., et al., 2011 Wisc. App. LEXIS 849, the lessor attempted to have an assignment of a lease admitted into evidence through the testimony of one of the lessor’s employees. The employee testified on cross-examination she was never employed by the assignor who purportedly signed the assignment, did not negotiate the assignment and was not sure if the assignment attached the schedule of assigned leases when the assignment was executed.

The Wisconsin trial court decided the evidence did not show the employee had personal knowledge the assignment was what the lessor claimed it to be so as to authenticate the assignment and as such, denied admission of the assignment into evidence.  The court also determined the assignment was not authenticated as a business record since the employee’s testimony only showed the lessor obtained a copy of a document that purports to be an assignment from the assignor. Without proof the lessor owned the lease, the court dismissed the lessor’s case. The trial court’s decision was affirmed on appeal.

To avoid authentication issues, a lessor taking leases pursuant to an assignment can take certain steps such as: (1) have the assignment notarized which is deemed by federal courts and most states to be self-authenticating; (2) have the lessee acknowledge the assignment at the time it is made or prior to trial via stipulation or discovery.
 
Repossession When Late Payments are Accepted After Notice of Default

Despite language in an equipment lease providing a lessor the remedy of repossession without notice or legal process, lessors often send lessees notices of default including a demand for the accelerated balance due under the lease by a certain date. These notices sometimes result in a lessee making a partial payment of the amount of the arrears had the lease payments not been accelerated.
 
The lessor’s acceptance of such a payment may hamper the lessor’s ability to exercise other remedies under the lease unless the lessor takes certain actions prior to exercising the other remedies. In TCF Equipment Finance, Inc. v. New Door of New York Corporation, et al., 2011 NY Slip Op 51917U; 2011 N.Y. Misc. LEXIS 4980, a Minnesota lessor sent a New York lessee a notice of default in November 2010, which stated the accelerated balance was due under the lease and that the lessee should make the leased equipment available for pickup. The lease contained language that the lessor, on or after a default, could exercise one or more of a list of remedies including repossession of the equipment without notice or legal process.

In December 2010, and February 2011, the lessee made payments totaling the arrears due on the lease had the lease payments not been accelerated. The lessor accepted these payments. The lessee claims in April 2011, it attempted to make the payments for January through April and the lessor refused to speak to the lessee.  The lessor subsequently filed a complaint against the lessee for breach of the lease and a motion for an order to repossess the equipment. The Supreme Court of New York, Kings County, applying Minnesota law, denied the lessor’s motion to repossess the equipment due to the lessor’s acceptance of the payments after the deadline in the notice and the lessee’s representation they attempted to make further payments. 

To avoid this situation, a lessor’s best bet is to simply send a new notice demanding strict compliance with the lease terms and not accept payments after a deadline in the notice. If the lessor wants to accept late payments, the notice should include clear and specific language that the acceptance of partial payments does not waive or limit the lessor’s ability to exercise other remedies at any time without additional notice.

Amendments to the Federal Rules of Bankruptcy Procedures

On December 1, 2011, certain amendments to the Federal Rules of Bankruptcy Procedures with regard to Proofs of Claims became effective. While some states adopted these amendments prior to the effective date, the new Federal Rules now supersede the state filings and therefore, it is a good idea to revisit certain practices and to highlight these amendments. Failure to comply with these amendments can jeopardize your company’s rights or claim in the bankruptcy case.

The Official Form 10 (12/11) (Proof of Claim) is amended to clarify that writings supporting the claim or evidencing perfection of security interest, not just summaries, are now required to be attached to the Proofs of Claims. If the writing is not available, an explanation as to why it is not available must be provided or included in the Proof of Claim.

It is always a good idea to include a breakdown summary of the amount sought in a Proof of Claim which would include interest, fees, expenses, and other charges. In addition, as of December 1, 2011, secured creditors must also include the amount necessary to cure any default as of the date of the petition in their respective Proof of Claim.

If the claim is a secured claim, evidence of the fact that the claim is secured and perfected must be included in the Proof of Claim. This would usually include filed copies of the mortgage, filed UCC Statement, promissory note, security agreement and any documents that support the claim of a secured interest.

Failure to provide any of this information will preclude the secured party from relying or presenting the omitted information as evidence at any hearing, contested matter or adversary proceeding unless the failure was substantially justified or is harmless. Thus, if a debtor objects to the claim and the creditor has failed to include the information required, the creditor may have its claim reduced since it would not be able to present the sums at a claims objections hearing. The court may also award attorneys’ fees and reasonable expenses caused by the failure.

Missing documents must be explained. The declarer (person signing the Proof of Claim) should be very careful not to state that documents have been “lost or destroyed” unless they have conducted an exhaustive search and can establish their diligent efforts as they may be examined under oath on the manner and scope of their investigation (Committee Note #7). Summaries of the documents alone are not acceptable and copies of the filed documents must be attached.