By Stephen T. Whelan

This summer, the equipment finance industry dodged a bullet in an important Minnesota Supreme Court ruling.  The Court ruled that a financier of a lease could bring a breach of contract action against an equipment vendor and lease arranger which had warranted (in a program agreement) that a lease was valid and fully enforceable, when in fact it violated State law.

The facts of the case are that Lyon Financial Services purchased a copy machine from Illinois Paper and leased it to the Village of Bensenville, Illinois, for a term of six years.  Less than two years into the lease, the Village stopped paying Lyon, citing Illinois law that municipal leases can last no more than five years. Lyon sued Illinois Paper, claiming that Illinois Paper’s warranty, that all of its leases were valid and fully enforceable agreements, was false.

In the case, Lyon Financial Services, Inc. d/b/a U.S. Bancorp Business Equipment Finance Group v. Illinois Paper and Copier Company, the Minnesota Supreme Court examined the following question:  Does a financing entity need to demonstrate that it has relied on an equipment lease lessor’s, borrower’s or seller’s representation that the contract being financed is valid and enforceable against the underlying obligor?  To minimize transaction costs and enhance deal velocity, financing parties typically require the lessor, borrower or seller to represent and warrant that the lease or equipment finance agreement is valid and enforceable against both itself (as the originator of the contract) and the lessee or other obligor.  Unless the deal size is substantial, the financier will not receive an opinion of counsel for the obligor.

The trial court ruled against Lyon Financial.  However, the appellate court sympathized with the financier and certified to the Minnesota high court the question of whether Lyon could rely upon Illinois Paper’s representation of law.  That court cited Minnesota public policy favoring freedom of contract and upheld the enforceability of what it termed as a “representation of future legal compliance.”

Although the Illinois courts still must resolve some factual issues before determining the ultimate outcome, the Minnesota decision enables parties to equipment finance arrangements to rely on representations and warranties rather than having to incur the expense of counsel opinions.

Lessors and lenders can breathe a sigh of relief (kudos to ELFA member company Askounis & Darcy PC for winning this case).  Nevertheless, they should re-examine their financing agreements.  It is important to include language that the parties have entered into the relationship, and any contracts financed pursuant thereto, in reliance upon all of the representations, warranties, covenants and agreements in the master program contract.

Stephen T. Whelan is a partner in the New York office of law firm Blank Rome LLP and a member of the ELFA Board of Directors.