Equipment financing providers and investors continue to rely upon syndications and capital markets transactions to create liquidity, facilitate capital equipment acquisitions and offer investment opportunities. Because these transactions play such an essential role in our industry, ELFA’s Legal Committee established the ELFA Capital Markets Legal Subcommittee in 2017 to follow legal issues relating to this market segment. Over the past few months there have been a few developments and topics considered by our Subcommittee, some of which are discussed herein, together with some Subcommittee details.
Pursuant to the Master Discounting Agreement (the “MDA”), the assignee agreed that it
would have no recourse to the assignor relating to the creditworthiness of the obligors, with some exceptions, including if relating to the assignor’s breaches of representations or warranties to the assignee. The MDA included a representation by the assignor that “all written information furnished by Assignor is…true and correct in all respects as of the date of sale.”2 The assignee sued the assignor for breach of this representation based on testimony allegedly made by the guarantor at a bankruptcy hearing that his financial statements were “false in significant and material respects.”3 The assignor’s defense was that any such representation was qualified by a “to [assignor’s] knowledge” qualifier. The assignee’s argument that this qualifier was ambiguous was unpersuasive to the court because the assignee drafted the MDA and applicable contract law provided that ambiguities in a contract are to be construed against the drafter. The court also considered other MDA terms including the assignor’s collectibility disclaimer, the assignee’s responsibility to conduct its own credit review and (especially) the non-recourse basis of the assignment. Ultimately, the court granted the assignor’s motion to dismiss the assignee’s warranty claim because the assignee never alleged that the assignor had actual knowledge of the guarantor’s financial condition.
Practical Note: Careful drafting is important. Among other things, although the assignor was able to avoid liability by relying on the knowledge qualifier and other terms, it might have avoided this dispute if its “written information” representation pertained exclusively to information prepared by the assignor, or on its behalf.
In that context the Subcommittee considered the licensing requirements imposed by certain states on businesses that are engaged to collect amounts due to another party, including Delaware, North Dakota and West Virginia. Of the states that have licensing statutes, the legislative intent appears to be to protect debtors from debt collection companies, especially of a harassing nature, and not typical fiscal agent collections, but that distinction is not sufficiently clear in some of these statutes. Common exemptions applicable to our industry include (i) servicing on behalf of affiliates or where banks or mortgage companies are acting as the collecting agent, or (ii) application only to consumer transactions, to debt that is “delinquent” or “past due,” or to debt collection by a company as its “primary or secondary business.”
Practical Note: Although further review is required, many of these statutes are likely to be inapplicable to the billing and collection aspects of a fiscal agent. Assignors should be aware that these statutes exist and a license might be required, and determine, with legal counsel’s assistance, the best approach to this matter.
Insurance. Many assignees require, either prior to funding or on a post-closing basis, a new insurance certificate from the customer, naming the assignee as an additional insured and loss payee. Some assignors, especially if the parties are effecting the syndication on a non-notification (“blind”) basis, insist that the assignee accept the existing insurance certificate naming only the assignor in these capacities, together with “its successors and assigns.”
Practical Note: Although some assignees do not require a new certificate, it is prudent for the assignee to determine whether the subject insurance policy and related endorsement provisions will cover the assignee after giving effect to the assignment, without prior notice or other conditions. Many assignees require new certificates, especially if the assigned transaction involves expensive assets or more significant liability risks.
Risk Allocations and Protections. Risks typically allocated in syndication transactions include (i) taxes relating to the conveyance of the transaction and related equipment and (ii) third-party, tax or other liability claims associated with the periods either prior to or after the assignment. This allocation can be accomplished by a clear statement in the assignment documents of the allocated responsibilities among the parties. In addition, parties sometimes include indemnifications regarding breaches by that party of its representations or promises in the assignment documents. Such indemnification by the assignor can afford the assignee recourse in the event that the assigned transaction is not as represented. In some transactions an assignee may have the right to require that the assignor repurchase the transaction after such a breach by paying a “make whole” repurchase price, but assignors should consider any true sale implications.
Practical Note: Assignees considering these protections must also take into account the assignor’s bargaining leverage and the various practicalities involving the customer or potential adverse accounting treatment for the assignor.
2 See id.
3 See id.
2017 Cases
One of the few 2017 reported syndication-related cases1 involved a suit against an assignor by an assignee to recover its investment after the assigned lease was in default and the assignee’s enforcement efforts were thwarted by the guarantor’s bankruptcy.Pursuant to the Master Discounting Agreement (the “MDA”), the assignee agreed that it
would have no recourse to the assignor relating to the creditworthiness of the obligors, with some exceptions, including if relating to the assignor’s breaches of representations or warranties to the assignee. The MDA included a representation by the assignor that “all written information furnished by Assignor is…true and correct in all respects as of the date of sale.”2 The assignee sued the assignor for breach of this representation based on testimony allegedly made by the guarantor at a bankruptcy hearing that his financial statements were “false in significant and material respects.”3 The assignor’s defense was that any such representation was qualified by a “to [assignor’s] knowledge” qualifier. The assignee’s argument that this qualifier was ambiguous was unpersuasive to the court because the assignee drafted the MDA and applicable contract law provided that ambiguities in a contract are to be construed against the drafter. The court also considered other MDA terms including the assignor’s collectibility disclaimer, the assignee’s responsibility to conduct its own credit review and (especially) the non-recourse basis of the assignment. Ultimately, the court granted the assignor’s motion to dismiss the assignee’s warranty claim because the assignee never alleged that the assignor had actual knowledge of the guarantor’s financial condition.
Practical Note: Careful drafting is important. Among other things, although the assignor was able to avoid liability by relying on the knowledge qualifier and other terms, it might have avoided this dispute if its “written information” representation pertained exclusively to information prepared by the assignor, or on its behalf.
SUBCOMMITTEE TOPICS
Fiscal Agency Matters. Many syndication documents contemplate that the assigning party, or its controlled entity, will serve as assignee’s fiscal agent to bill and collect the rent or financing payments from the customer.In that context the Subcommittee considered the licensing requirements imposed by certain states on businesses that are engaged to collect amounts due to another party, including Delaware, North Dakota and West Virginia. Of the states that have licensing statutes, the legislative intent appears to be to protect debtors from debt collection companies, especially of a harassing nature, and not typical fiscal agent collections, but that distinction is not sufficiently clear in some of these statutes. Common exemptions applicable to our industry include (i) servicing on behalf of affiliates or where banks or mortgage companies are acting as the collecting agent, or (ii) application only to consumer transactions, to debt that is “delinquent” or “past due,” or to debt collection by a company as its “primary or secondary business.”
Practical Note: Although further review is required, many of these statutes are likely to be inapplicable to the billing and collection aspects of a fiscal agent. Assignors should be aware that these statutes exist and a license might be required, and determine, with legal counsel’s assistance, the best approach to this matter.
The ELFA Legal Committee has formed a group to track issues relating to syndications and capital markets transactions.
Insurance. Many assignees require, either prior to funding or on a post-closing basis, a new insurance certificate from the customer, naming the assignee as an additional insured and loss payee. Some assignors, especially if the parties are effecting the syndication on a non-notification (“blind”) basis, insist that the assignee accept the existing insurance certificate naming only the assignor in these capacities, together with “its successors and assigns.”
Practical Note: Although some assignees do not require a new certificate, it is prudent for the assignee to determine whether the subject insurance policy and related endorsement provisions will cover the assignee after giving effect to the assignment, without prior notice or other conditions. Many assignees require new certificates, especially if the assigned transaction involves expensive assets or more significant liability risks.
Risk Allocations and Protections. Risks typically allocated in syndication transactions include (i) taxes relating to the conveyance of the transaction and related equipment and (ii) third-party, tax or other liability claims associated with the periods either prior to or after the assignment. This allocation can be accomplished by a clear statement in the assignment documents of the allocated responsibilities among the parties. In addition, parties sometimes include indemnifications regarding breaches by that party of its representations or promises in the assignment documents. Such indemnification by the assignor can afford the assignee recourse in the event that the assigned transaction is not as represented. In some transactions an assignee may have the right to require that the assignor repurchase the transaction after such a breach by paying a “make whole” repurchase price, but assignors should consider any true sale implications.
Practical Note: Assignees considering these protections must also take into account the assignor’s bargaining leverage and the various practicalities involving the customer or potential adverse accounting treatment for the assignor.
About the Subcommittee
The Subcommittee is co-chaired by Eric Gazin of GE Capital and Dustin Lee of Fifth Third Equipment Finance Company. The Subcommittee’s goal is to consider pertinent legal issues and questions and to highlight them to the ELFA membership as necessary, including by tracking and reporting on cases and state and local statutes that may affect syndications and capital markets transactions. The Subcommittee kicked off 2017 with several meetings and has already undertaken a few projects including the writing of this article and other articles for publication in trade journals, preparing resources for ELFA’s Legal Resources webpage and exploring possibilities for webinars through ELFA.Endnotes:
1 United Leasing, Inc. v. Balboa Capital Corp., 2017 WL 3674926 (S.D.Ind. Aug. 25, 2017).2 See id.
3 See id.
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2018