50 State Compendium-A Sneak Preview - Equipment … State Compendium-A Sneak Preview Marshall F....

50 State Compendium50 State Compendium--A A Sneak PreviewSneak Preview

Marshall F. Goldberg, Glass & Goldberg, ModeratorKimberly Ashby, GreatAmerica Leasing CorporationDaniel E. Murphy II, Captive Capital CorporationByron L. Saintsing, Smith Debnam Narron Wyche Saintsing & Myers, LLP.

Add Add CorporateCorporate

LogoLogoHereHere

What is It?What is It?

• An Online Reference That Covers State-Specific Legal Challenges, Quirks, and Pitfalls For the Leasing Industry.

• A 50-state Compendium of “Red Flag Issues” Which Will Provide Answers That Address Compliance With Selected State Statutes and Regulations Deemed Problematic by Attorneys Who Practice in These Jurisdictions and Business People Who Operate in them.

• A “Living Document" To Be Revised Periodically as States Repeal, Adopt or Amend Laws.

What is it Not?What is it Not?

• A Replacement for Legal Research on Westlaw, Lexis or other Legal Resources.

• A Compilation of the Laws of All 50 States. For Example, Most States Do Not Apply Their Usury Laws to Commercial Transactions and Therefore a Usury Discussion Would Be Included Only Where Relevant.

• Legal Advice and the Materials Will Include Disclaimers.

What Will it Contain?What Will it Contain?

• Topics• Issues• Statutes/Cases• Comments

TopicsTopics

• The Topics Section Will Describe the Distinct State Specific Problem Areas To Be Discussed

Examples of TopicsExamples of Topics

• Foreign Entities Capacity to Sue in WA• Homestead Laws in Florida• Evergreen Contract Provisions in IL. • Jury Waiver Clauses in Texas• Leases Secured by Real Property as

Additional Collateral in CA• Foreign Corporation’s Capacity to Sue

in New York

IssuesIssues

• The Issues Section Will Describe the Specific Problems as They Relate To the Leasing Industry

Examples of IssuesExamples of Issues

• What Steps Must a Foreign Entity Undertake Before It Has the Right to File Suit in WA?

• Are Fees In Excess of the Amount Involved in Litigation Recoverable in NY?

• Do Foreign Corporations Have the Capacity to Sue in Iowa If the Corporation is Unauthorized to Do Business in Iowa?

• Are There Special Licensing Requirements for Lenders and Leasing Companies in California and, If So, What are the Consequences for Failure to Comply?

Statutes/CasesStatutes/Cases

• This Section Will Provide the Reader With a Short Legal Answer to the Problem and a Start Point for Additional In Depth Research.

Examples of Examples of Statutes/CasesStatutes/Cases

• Foreign entities transacting business in WA generally must register with the WA Secretary of State as a condition precedent to filing suit in a WA court. See, e.g. RCW 25.10.490 (foreign limited partnerships); RCW 23B.15.010 (corporations). The registration statutes contain numerous exceptions, which may exempt certain foreign entities from Washington’s registration requirement. See, e.g. RCW 25.10.540(4); RCW 25.15.350 (foreign limited liability companies); RCW 23B.15.010(2) (corporations).

• New Jersey enforces conflict of laws provisions with respect to contracts made for loans, and notes payable. As to contracts for loans, where interest is in excess of the rate "allowed by the law of the price of the contract was made, or is to be performed," then the amount actually lent is recoverable by the lender. See N.J. Stat. Ann. 31:1-3. The amount actually lent, however, does not include interest or costs. See id. As to promissory notes, the law of the state where the note was made and is payable governs the conflict of law analysis in New Jersey. See Seacoast R.V. Co., v. American Timber Co., 89 N.J. Eq. 293 (Ch. 1918).

CommentsComments

• The Comments Section Will Enable the Author to Illuminate Why This Issue Is a Special or “Red Flag” Situation Distinct to the State

Examples of CommentsExamples of Comments

• “California is the only state that we know of that has such a requirement…”

• “NY Courts appear to require strict compliance to the letter of the statutes (citing cases)…”

• “PA is similar to, but different from, statutes in DE and CT (see description of DE and CT above)…”

• “Evergreen clauses are generally enforceable if...NY has, however, a special statutory requirement that a lessor must notify the lessee of ......at least X days before the expiration of the lease.”

• “Texas is one of the few states that apply the usury laws to a commercial transaction.”

Handout MaterialsHandout Materials

• The Materials Are Working Drafts in Thirteen States of How The Compendium is Envisioned.

States Included in States Included in MaterialsMaterials

– California– Delaware– Florida– Georgia– Illinois– Iowa– North Carolina

States Included in States Included in MaterialsMaterials

– New Jersey– New York– Pennsylvania– Texas– Virginia– Washington

Author RecognitionAuthor Recognition

• Lawrence F. Flick, II, Blank Rome (DE, PA, NJ) • Howard Toland, Haley Sinagra Paul, & Toland (FL)• C. Richard McQueen, Greene Buckley Jones & McQueen

(GA)• James H. Mobley, Jr., Mobley & Mobley (GA)• Sugar Friedberg & Felsenthal, (IL)• Moyer & Bergman (IA)• Smith Debnam Narron Wyche Saintsing & Myers (NC)• Marshall F. Goldberg, Glass & Goldberg (CA) • Terese L. Arenth, Morritt Hock Hamroff Horowitz (NY)• King & Higgs (VA)• Glen A. Nordt, Coats Rose Yale Ryman & Lee (TX)• McGavick Graves (WA)

How Can You Help?How Can You Help?

• Offer to Prepare the Materials for Your State or States With Which You Have Familiarity

• Provide Input on What You or Your Clients Would Like to See Included

• Provide Comments on Format and Text• Offer to Sit on a Rotating Subcommittee

to Monitor the Structure and Content

We Need VolunteersWe Need Volunteers

• Right of First Refusal to Existing ELA Members

• Next to Firms or Companies Who Join ELA

• If All State Slots Are Not Filled, Then to Outside Companies and Firms Based Upon Recommendation

Benefits of ParticipationBenefits of Participation

• The Authors and Their Companies Will Be Acknowledged on the Web Page for Their Participation

Who Will Maintain The Who Will Maintain The Materials?Materials?

• The Equipment Leasing Association Will Maintain the Website with the Assistance of a Revolving Subcommittee of the ELA Member Lawyers.

• It Is Envisioned That The Materials Will Be Monitored For Changes and Accuracy by All of the ELA Member Lawyers as a Whole

Ed Groobert’s ThoughtsEd Groobert’s Thoughts

• “I think that it is hard to predict at this point how the document will grow, and we should just let the author for each state include what he or she thinks is relevant at this time. Later, others may write us and say, ‘gee, you really should have included the state's odd ball law that requires xxxx’, or someone may suggest that a state's usury law is really different for some reason or other. In short, I think it is hard to start a project like this and rigidly structure it or predict where exactly it will wind up.”

MOYER & BERGMAN, P.L.C. ATTORNEYS AT LAW Commerce Exchange Building 2720 First Avenue NE Cedar Rapids, IA 52402 (319) 366-7331 Fax (319) 366-3668 [email protected] IOWA

TOPIC ISSUES STATUTES/CASES COMMENTS Accord and Satisfaction

What constitutes an accord and satisfaction in Iowa?

An accord is an agreement in which parties agree to discharge a preexisting contract or cause of action by giving and accepting a substituted consideration in settlement of the claim, and the satisfaction is the execution or performance of the agreement. Seidler v. Vaughn Oil Co., 468 N.W.2d 474, 475 (Iowa Ct. App. 1991). The debtor and the creditor must both intend the substituted consideration as an accord and satisfaction of a preexisting claim. Id.; see also Electra Ad Sign Co. v. Cedar Rapids Truck Ctr., 316 N.W.2d 876, 879 (Iowa 1982).

Accord and satisfaction only applies to unliquidated claims (a claim is unliquidated if there is a genuine dispute regarding either debtor’s liability or the amount due). Seidler v. Vaughn Oil Co., 468 N.W.2d 474, 476 (Iowa Ct. App. 1991).

What is the effect of checks rendered in full satisfaction?

Iowa has adopted in full UCC section 1-207 regarding performance or acceptance under reservation of rights. Subsection (1) states, “A party who, with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice”, “under protest” or the like are sufficient.” Importantly, subsection (2) states, “Subsection (1) does not apply to an accord and satisfaction.” Certainly, before section 1-207 was amended by adding subsection (2), judicial authority was divided on the issue of whether section 1-207—presently subsection (1)—applied to an accord and satisfaction. Accordingly in Iowa, the common law rules for accord and satisfaction still apply, and are not inconsistent with the present UCC section 1-207. See, e.g., Seidler v. Vaughn Oil Co., 468 N.W.2d 474,(Iowa Ct. App. 1991) (setting forth common law requirements for accord and satisfaction when analyzing whether a check stating “Full, Final Settlement for Damages to Tractor” constitutes an accord and satisfaction). Provided all the elements of an accord and satisfaction are met in Iowa, and if the claim is unliquidated, a check rendered in full satisfaction of a debt does satisfy any preexisting contractual debt owed by debtor/payor.


Attorneys’ Fees Can attorneys' fees be

recovered in an action to enforce the Lease?

Iowa Code § 625.22 provides: “When judgment is recovered upon a written contract containing an agreement to pay an attorney’s fees, the court shall allow and tax as part of the costs a reasonable attorney’s fee to be determined by the court.” See EFCO Corp. v. Norman Highway Constructors, Inc., 606 N.W.2d 297, 301 (Iowa 2000) (affirming district court award of attorney fees in lease enforcement action); 3S Inc. v. Zarek, 504 N.W.2d 153 (Iowa Ct. App. 1993) (affirming district court grant of attorney fees that exceeded amount of judgment). Attorneys’ fees are also awarded to the prevailing party for a successful appeal. Schaffer v. Frank Moyer Constr., Inc., 628 N.W.2d 11, 23 (Iowa 2001).

Can attorneys' fees be recovered if incurred in defense of a counterclaim?

Iowa courts have held that attorneys' fees may be awarded in the successful defense of a counterclaim. The Court expressly left open the issue of whether attorneys' fees should be denied when there is a partially successful defense to payment. Federal Land Bank of Omaha v. Woods, 480 N.W.2d 61 (Iowa 1992).

Dissolved/De facto Corporations

Can corporations plead dissolution as a defense to their contractual obligations in Iowa?

Pursuant to Iowa Code section 490.1405(1), (2)(e) and (2) (f) (2001 & Supp.), a dissolved corporation continues its corporate existence and may only conduct business to the extent that it is winding up and liquidating its business affairs. Dissolution, according to the Iowa Code, does not prevent the commencement of a proceeding by the corporation or against the corporation, nor does it “abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution.” Iowa Code § 490.1405(2)(e),(f) (2001 & Supp.).

For a dissolved corporation’s known claims against it during the wind-up period, the dissolved corporation must state in a written notice to known claimants that the deadline for filing any claims against it must not be fewer than one hundred twenty days from the effective date of the written notice; a claim against the corporation will be barred if claimant does not “deliver the claim” within that time period. Iowa Code § 490.1406. For all


Dissolved/De facto Corporations (Continued)

claims unknown to a dissolved corporation, that corporation may publish notice of its dissolution, but such notice must state that any claims against the corporation will be barred unless a proceeding to force the claim commences within five years after the publication notice. Iowa Code § 490.1407.

Can officers/directors of a dissolved corporation be held personally liable for actions taken by the corporation?

Iowa Code § 490.832 (2001 & Supp.) addresses the personal liability of directors, which, according to case law, appears to extend to personal liability in the context of a dissolved corporation. See Hanrahan v. Kruidnier, 473 N.W.2d 184 (Iowa 1991)(recognizing the applicability of code section 490.832 to suits brought against officers and directors of a dissolved corporation). Section 490.832 provides that the personal liability of an officer or director will depend in part on what is contained in that corporation’s articles of incorporation with respect to eliminating or limiting the personal liability of an officer or director. The articles of incorporation control director/officer personal liability only to the extent it does not conflict with or abrogate liability of an officer or director for a breach of duty of loyalty, bad faith acts or omissions, intentional misconduct in knowing violation of a law, or transactions where a director would derive an improper personal benefit. Iowa Code § 490.832. In short, officers and directors of a dissolved corporation may be held personally liable for actions taken by the corporation. Cf. Stambaugh v. Haffa, 253 N.W. 137 (Iowa 1934)(holding officer or director of corporation is not liable for corporation's fraud, where he or she has not participated therein or consented thereto with knowledge of fraud).


“Evergreen” Provisions “Evergreen” Provisions (Continued)

Are automatic renewal payments enforceable in Iowa?

Iowa courts have held that automatic renewal provisions in a lease are enforceable if the perpetual nature of the lease is unmistakable. "In order to be enforceable, a provision for extension or renewal must be definite and certain in its terms, particularly with respect to the duration of the additional term and the amount of rent to be paid. . . . The terms and conditions of a renewal should be specified with such definiteness and certainty that the court may determine what has been agreed upon, and if it falls short of this requirement it is not enforceable." W.M. Petty v. Faith Bible Christian Outreach Ctr., Inc., 584 N.W.2d 303, 306 (Iowa 1998).

Foreign Corporations’ Capacity to Sue in Iowa

Do foreign corporations have the capacity to sue in Iowa if the corporation is unauthorized to do business in Iowa?

Iowa Code section 490.1502(1) (2001 & Supp.) (“Consequences of transacting business without authority”) states, “A foreign corporation transacting business in this state without a certificate of authority shall not maintain a proceeding in any court in this state until it obtains a certificate of authority.” The operative word in that section is “maintain.” Iowa case law has interpreted subsection (1) of this statute as allowing a foreign corporation not authorized to do business in this state to commence or instigate a proceeding, but it cannot maintain a proceeding until the corporation complies with the statute by filing its certificate of authority. In effect, the court proceeding is held in abeyance until the corporation is authorized to do business in Iowa by filing the certificate of authority. Inn Operations, Inc. v. River Hills Motor Inn Co., 152 N.W.2d 808, 813 (Iowa 1967).

Inn Operations, Inc. v. River Hills Motor Inn Co., 152 N.W.2d 808, 813 (Iowa 1967) also took this reasoning one step further in acknowledging that the failure to obtain a certificate of authority does not prevent a foreign corporation from defending any action, suit or proceeding in any court in Iowa. Id.

Foreign Judgments Can foreign judgments be domesticated in Iowa?

Iowa has adopted the uniform enforcement of foreign judgment act in Iowa Code Chapter 626A. A foreign judgment against an Iowa resident may be enforced in the State of Iowa and given full faith and credit even if the judgment is obtained by default in the sister state. Edward Rose Building Co. v. Cascade Lumber Co., 621 N.W.2d 193 (Iowa 2001).


Forum Selection Clause Forum Selection Clause (Continued)

Does Iowa enforce forum selection clauses?

The Iowa Supreme Court has held that forum selection clauses are standard in commercial transactions and will be upheld in Iowa. EFCO Corp v. Norman Highway Constructors, Inc., 606 N.W.2d 297, 299 (Iowa 2000). In EFCO, the defendant attempted to void a forum selection clause on a forum contract by arguing that the contract was one of adhesion. The defendant argued the forum selection clause appeared on the reverse side of the form contract and the officer of the company executing the agreement had testified that he did not read the choice-of-forum clause. The Iowa Supreme Court concluded: “We believe that this evidence is insufficient to establish the invalidity of the choice-of-forum clause as a matter of law.” Id. at 300.

Governing Law Clauses

Does Iowa enforce contractual choice of law clauses?

An Iowa court will uphold a choice of law provision in a contract. Law of a foreign jurisdiction must be pleaded and proved. Pennsylvania Life Insurance Co. v. Simoni, 641 N.W.2d 807, 810-11 (Iowa 2002). If a party fails to assert foreign law to prove it, the Iowa court will apply Iowa law. Id.

Interest, Usury and Late Charges

What is the maximum lawful interest rate in Iowa?

The Iowa usury statute is found in Iowa Code Chapter 535. It provides that interest shall not exceed 5 percent unless the parties agree in writing for a higher rate. Iowa Code § 535.2. The parties may agree to any rate of interest if the loan is for business purposes. Iowa Code § 535.2 The Iowa Supreme Court has held that a late payment charge is considered “interest” as that term is defined in the usury statute. State ex rel. Turner v. City of Altoona, 274 N.W.2d 366, 367 (Iowa 1979) (finding a municipalities' 10% penalty for late payment of water bill to be a violation of usury statute).

Possessory Liens What types of possessory In Iowa, one type of possessory lien is an artisan’s lien (a type of If the bailee parts with his or her


Possessory Liens (Continued)

liens exist in Iowa? bailee’s lien), where any person who “renders any service or furnishes any material in the making, repairing, improving, or enhancing the value of any inanimate personal property, with the [consent] of the owner, express or implied, shall have a lien thereon for the agreed or reasonable compensation for the service and material until such compensation is paid. . . .” Iowa Code § 577.1 (2001). The nature of an artisan’s lien in Iowa is generally aircraft and equipment. The holder of an artisan’s lien has a recognized right in the specific personalty involved, which is commonly designated as a security or encumbrance as security for payment of a debt. Iowa Truck Ctr., Inc. v. Davis, 204 N.W.2d 630 (Iowa 1973). Iowa also has storage liens for persons who store motor vehicles, boats, boat engines, and boat motors. Iowa Code § 579.1. Persons with a storage lien shall have a lien on all property coming into their hands for their charges and expenses associated with keeping the equipment, but such lien will be subject to all prior liens of record. Id. Mechanic’s liens are another type of possessory lien in Iowa. Every person who furnishes labor for or performs labor upon any building of land for improvement, alteration, or repair shall have a lien upon such building or land to secure payment for the material or labor furnished or labor performed. Iowa Code § 572.2(1). “If material is rented by a person to the owner, the owner’s agent, trustee, contractor or subcontractor, the person shall have a lien upon such building, improvement, or land to secure payment for the material rental.” Iowa Code § 572.2(2). In order to successfully enforce a mechanic’s lien, substantial performance of the contract is required. Bidwell v. Midwest Solariums, Inc., 543 N.W.2d 293, 295 (Iowa Ct. App. 1995). “Substantial performance allows only the omissions or deviations from the contract that are inadvertent or unintentional, not the result of bad

possession, before he or she has been paid, the lien is lost, and it will not be reinstated by bailee again coming into the possession of the goods, without the consent or agreement of the bailor. Nevan v. Roup, 8 Iowa 207 (1859).


faith, do not impair the structure as a whole, are remedial without doing material damages to other portions of the building, and may be compensated for through deductions from the contract price.” Id.

Unconscionability Unconscionability (Continued)

In Home Federal Sav. & Loan Ass’n v. Campney, 357 N.W.2d 613, 618 (Iowa 1984), the Iowa Supreme Court considered whether a due-on-sale clause contained in a mortgage was unconscionable. The Court noted that due-on-sale clauses are standard provisions which serve the social and economic purpose of maximizing the number of home loans granted to first-time borrowers. The clause at issue in that case was not the type of “nefarious provision, inimical to the public good, that the doctrine of unconscionability is designed to invalidate.” Id.

Vicarious Liability

Can lessors be held vicariously liable for acts of the lessee?

In Iowa, where a vehicle sustains damage by reason of the negligence of the driver, and the vehicle was driven with owner’s consent, the owner of the vehicle would be liable for such damage. Iowa Code § 321.493(1)(a). An “owner” generally means the person to whom the certificate of title for the vehicle has been issued or assigned to, however, if the vehicle is leased, “owner” means to whom the vehicle is leased, not the person to whom the certificate of title has issued. Id. “’Leased’ means the transfer of the possession or right to possession of a vehicle to a lessee for a valuable consideration for a continuous period of twelve months or more, pursuant to a written agreement.” Id; accord Lyons v. Andersen, 123 F. Supp.2d 485 (N.D. Iowa 2000).

SMITH DEBNAM NARRON WYCHE SAINTSING & MYERS, L.L.P. 4700 New Bern Avenue Telephone: (919) 250-2000 Post Office Box 26268 Facsimile: (919) 250-2100 Raleigh, NC 27611-6268 www.smithdebnamlaw.com

NORTH CAROLINA

Copyright © 2003 Smith Debnam Narron Wyche Saintsing & Myers, L.L.P. All rights reserved.

TOPIC ISSUE STATUTES/CASES COMMENTS Accord and Satisfaction

What constitutes an accord and satisfaction in North Carolina?

An 'accord' is an agreement whereby one of the parties undertakes to give or perform, and the other to accept, in satisfaction of a claim, liquidated or in dispute, and arising either from contract or tort, something other than or different from what he is, or considered himself entitled to; and a 'satisfaction' is the execution or performance, of such agreement. The word "agreement" implies the parties are of one mind - all have a common understanding of the rights and obligations of the others - there has been a meeting of the minds. . . . Agreements are reached by an offer by one party and an acceptance by the other. This is true even though the legal effect of the acceptance may not be understood. Zanone v. RJR, 120 N.C. App. 768, 772 (1995). Thus, when there is dispute as to the amount due, and the debtor tenders an amount as “payment in full,” which the creditor accepts, then accord and satisfaction has occurred. The doctrine of accord and satisfaction has been codified in North Carolina, if the payment is made by check. "Article 3 of the Uniform Commercial Code is invoked when a dispute arises over a payment made with a negotiable instrument. . . ." Futrelle v. Duke University, et al., 127 N.C. App. 244, 248 (1997). NCGS 25-3-311 provides that for a plaintiff's claim to be discharged under the doctrine of accord and satisfaction, a defendant must prove that: (1) he in good faith tendered an instrument as full satisfaction of the claim; (2) the amount of the claim was unliquidated or subject to a bona fide dispute; (3) plaintiff obtained payment of the instrument; and (4) the check or accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.

Accord and satisfaction is an affirmative defense in North Carolina.


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS Artisan’s and Service Liens

Does a mechanic’s lien have priority over a lessor’s rights or security interest in North Carolina?

Any person who tows, alters, repairs, stores, services, treats, or improves personal property other than a motor vehicle in the ordinary course of his business pursuant to an express or implied contract with an owner or legal possessor of the personal property has a lien upon the property. N.C.G.S. § 44A-2. This lien shall have priority over perfected and unperfected security interests. Though it would appear that this lien would not have priority over a lessor of equipment, N.C.G.S. § 44A-1 defines owner as: a. Any person having legal title to the property, or b. A lessee of the person having legal title, or c. A debtor entrusted with possession of the property by a secured party, or d. A secured party entitled to possession, or e. Any person entrusted with possession of the property by his employer or principal who is an owner under any of the above. Thus, under North Carolina law, an equipment lessor is subject to being subordinate to a mechanic’s lien.

The liens provided for in Chapter 44A of the North Carolina General Statutes are possessory liens only.

Attachment When may a creditor obtain an order of attachment in North Carolina?

In North Carolina attachment may be had in any action, the purpose of which, in whole or in part, is to secure judgment for money, or in any action for child support, maintenance and support, or alimony, but not in any other action. N.C.G.S. §1-440.2 (2003). To secure an Order of Attachment, the Plaintiff must furnish a bond in an amount deemed necessary by the Court (but no less than $200), N.C.G.S. §1-440.10, and must file an affidavit stating: (1) In every case: a. The plaintiff has commenced or is about to commence an action, the purpose of which, in whole or in part, or in the alternative, is to secure a judgment for money, and the amount thereof,

All of a defendant's property within this State which is subject to levy under execution, or which in supplemental proceedings in aid of execution is subject to the satisfaction of a judgment for money, is subject to attachment. N.C.G.S. §1-440.4 (2003).


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS b. The nature of such action, and c. The ground or grounds for attachment (one or more of those stated in G.S. 1-440.3); and (2) In those cases described below, the additional facts indicated: a. If the action is based on breach of contract, that the plaintiff is entitled to recover the amount for which judgment is sought over and above all counterclaims known to him; b. If it is alleged as a ground for attachment that the defendant has done, or is about to do, any act with intent to defraud his creditors, the facts and circumstances supporting such allegation. N.C.G.S. §1-440.11 (2003). A verified complaint may be used as the required affidavit. An Order of Attachment may be issued when the defendant is: (1) A nonresident, or (2) A foreign corporation, or (3) A domestic corporation, whose president, vice-president, secretary or treasurer cannot be found in the State after due diligence, or (4) A resident of the State who, with intent to defraud his creditors or to avoid service of summons, a. Has departed, or is about to depart, from the State, or b. Keeps himself concealed therein, or (5) A person or domestic corporation which, with intent to defraud his or its creditors, a. Has removed, or is about to remove, property from this State, or b. Has assigned, disposed of, or secreted, or is about to assign, dispose of, or secrete, property. N.C.G.S. §1-440.3 (2003).

Attorneys’ Fees Are attorneys’ fees provisions in a lease enforceable in North Carolina?

Pursuant to N.C.G.S. § 6-21.2 (2003), attorney’s fees provisions in a lease are enforceable, but are capped at 15% of the outstanding balance. Further, if the agreement provides for the collection of “reasonable attorney’s fees,” then such provision shall be construed to mean 15%

Though § 6-21.2(5) gives no time limit on the giving of the required notice, and may be given after an action is instituted, Gillespie v. De Witt, 53 N.C. App. 252 (1981), the better course of action is to


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS of the outstanding balance. Pursuant to N.C.G.S. § 6-21.2(5) (2003), the holder of an unsecured note, a secured note, conditional sales contract, or a lease must notify the party sought to be held on such obligation that he will be held to the attorney’s fees provision in addition to the outstanding balance, and that he has five (5) days from the date of mailing of the notice to pay the outstanding balance without being liable for the attorney’s fees. This provision shall not apply, however, if the debtor has defaulted or violated the terms of a security agreement, and has refused, upon demand, to surrender the collateral, with the result being that the secured party is required to institute an ancillary claim and delivery proceeding to secure possession of the collateral. Id.

give the written notice in a letter prior to instituting a collection action or to give the notice within the pleadings themselves.

Foreign Corporations Capacity to Sue in North Carolina

Does a foreign corporation have the capacity to sue a debtor in North Carolina if the corporation is not authorized to conduct business in North Carolina?

North Carolina has adopted the Model Business Corporations Act, as codified in Chapter 55 of the North Carolina General Statutes. Under the Act, a foreign corporation transacting business in North Carolina, and thus required to obtain a certificate of authority, may not bring suit in the state unless it has obtained a Certificate of Authority prior to trial. N.C.G.S. § 55-15-02 (2003). The Model Act intentionally does not define what constitutes “transacting business” in the state, but rather in § 55-15-02(b) sets out certain activities that do not constitute transacting business in the state. North Carolina modified the Model Act, however, to require that a foreign corporation failing to obtain a Certificate of Authority shall be liable to the State in an amount equal to all fees and taxes which would have been imposed by law upon such corporation had it duly applied for and received such permission, plus interest and all penalties imposed by law for failure to pay such fees and taxes, as well as a civil penalty of ten dollars ($ 10.00) for each day, but not to exceed a total of one thousand dollars ($ 1,000) for

The statute specifically provides: “An issue under this subsection must be raised by motion and determined by the trial judge prior to trial.” N.C.G.S. § 55-15-02 (2002). Thus, a debtor failing to raise the issue prior to trial cannot raise the issue by post-trial motion. Spivey & Self, Inc. v. Highview Farms, Inc., 110 N.C. App. 719 (1993). In Leasecomm Corporation v. Renaissance Auto Care, Inc. 122 N.C. App. 119 (1996), the North Carolina Court of Appeals held that under the old version of § 55-15-02 an assignee of a note from a corporation that failed to obtain a certificate of authority could not bring suit on the assigned note, even though the assignee was duly registered, because the assignor of the note was an out of state corporation which had not obtained a certificate of authority in North Carolina.


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS each year or part thereof, it transacts business in this State without a Certificate of Authority. N.C.G.S. § 55-15-02(d) (2003).

Though Leasecomm has not been expressly overruled by the courts in North Carolina, the Legislature, in amending the section, failed to include new § 55-15-02(b), which provides the assignment provision. Thus the statutory basis for the decision no longer exists. However, please see Lender’s Licenses for another potential trap for the assignee.

Forum Selection and Choice of Law

May a lease or other contract contain a clause mandating action or arbitration to be instituted or heard in another state?

Pursuant to N.C.G.S. § 22B-3 (2003), any provision in a contract entered into in North Carolina that requires the prosecution of any action or the arbitration of any dispute that arises from the contract to be instituted or heard in another state is against public policy and is void and unenforceable. This prohibition shall not apply to non-consumer loan transactions or to any action or arbitration of a dispute that is commenced in another state pursuant to a forum selection provision with the consent of all parties to the contract at the time that the dispute arises.

Under this section a "non-consumer" loan is one that is not extended to a natural person and not used for family, household, personal, or agricultural purposes. L.C. Williams Oil Co. v. NAFCO Capital Corp., 130 N.C. App. 286, 502 S.E.2d 415 (1998). Thus, a forum selection clause in a commercial loan will likely be enforceable.

Landlord’s Liens Does a landlord’s lien have priority over a lessor’s rights or security interest in North Carolina?

N.C.G.S. § 44A-2(e) provides that a landlord’s lien is only applicable to nonresidential demised premises, and only attaches to property to which the tenant holds legal title. Thus, a landlord’s lien would not attach to leased property, as the lessee does not hold legal title to the property. Further, pursuant to the section, this lien will not have priority over any security interest in property that is perfected at the time the landlord acquires the lien. Id.

Late Fees Are late fees regulated and considered interest in North Carolina?

Late fees on loans governed by North Carolina usury statutes are capped at 4%. N.C.G.S. § 24-10.1. Further, under North Carolina law late fees are considered interest, and are subject to the forfeiture provisions of N.C.G.S. § 24-2. Swindell v. Federal Nat'l Mtg. Assoc., 330 N.C. 153, 409 S.E.2d 892 (1991).

See “Usury” below


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS Lender’s License/ Privilege Taxes

Must finance companies by licensed and/or pay privilege taxes to conduct business in North Carolina?

N.C.G.S. § 105-88(a)(1) provides that every person, firm, or corporation engaged in the business of making loans or lending money, or accepting liens on or contracts of assignments of security or evidence of debt for repayment of such loans in installment payment or otherwise must pay for the privilege of engaging in that business an annual tax of two hundred fifty dollars ($ 250.00) for each location at which the business is conducted. N.C.G.S. § 105-269.13(a)(1) provides that a loan made by a person who does not comply with N.C.G.S. § 105-88 is not collectible and is not subject to execution in North Carolina.

N.C.G.S. § 105-269.13(c) further provides that “An assignment to a person of a debt listed in subsection (a) of this section is subject to the collection restrictions imposed by this section.”

Liquidated Damages Are liquidated damages clauses enforceable in North Carolina?

A provision in a contract liquidating the damages for the breach of the contract is valid if it provides for liquidated damages derived from a good-faith effort to estimate in advance the actual damage which would probably ensue from the breach. Knutton v. Cofield, 273 N.C. 355, 160 S.E.2d 29 (1968). However, a penalty, a sum fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach, will not be enforceable. Id.

Prepayment Penalty May a lender impose a prepayment penalty in North Carolina?

In North Carolina prepayment provisions are valid and enforceable. In re Carr Mill Mall, Limited Partnership, 201 B.R. 415 (Bankr. M.D.N.C. 1996). A borrower may prepay a loan in whole or in part without penalty where the loan instrument does not explicitly state the borrower's rights with respect to prepayment or where the provisions for prepayment are not in accordance with law. N.C.G.S. § 24-2.4 (2003). North Carolina does, however, limit the amount of lawful prepayment premiums in some circumstances. N.C.G.S. § 24-10(b) provides that a loan secured by real property in an original principal amount of one hundred thousand dollars ($ 100,000.00) or less may be prepaid in part

Except as provided in N.C.G.S. § 24-10(b), any lender and any borrower may agree on any terms as to prepayment of a loan.


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS or in full, after 30 days notice to the lender, with a maximum prepayment fee of two percent (2%) of the outstanding balance at any time within three years after the first payment of principal and thereafter there shall be no prepayment fee, provided that there shall be no prepayment fee charged or received in connection with any repayment of a construction loan.

Replevin Is replevin an available remedy to creditors in North Carolina?

The remedy of Claim and Delivery has replaced the common law action of replevin in North Carolina. To maintain an action in claim and delivery, the plaintiff must post a bond in double the value of the property it seeks, N.C.G.S. § 1-475 & 477, and file an affidavit that shows: (1) Plaintiff is the owner of the property claimed and particularly describing it, or is lawfully entitled to possession of the same; (2) the property is being wrongfully detained by the defendant; (3) the alleged cause of detention thereof; (4) the property has not been taken for taxes, assessment, or fine pursuant to statute, or seized under attachment or execution against property of the plaintiff; and (5) the actual value of the property. N.C.G.S. § 1-473 (2003). A claim and delivery proceeding is held before the clerk. The clerk will serve the defendant with a notice of the hearing, and a form for defendant to waive his right to a hearing. If the defendant does not sign the waiver form, the clerk must conduct a hearing. If the clerk finds for the plaintiff then it will issue an order requiring the sheriff to seize the property and deliver it to the plaintiff.

Usury What is the maximum interest rate allowable in North Carolina?

If the principal amount of a loan is three hundred thousand dollars ($ 300,000) or more, any borrower may agree to pay, and any lender or other person may charge and collect from the borrower, interest, fees, and other charges as may be agreed upon between the parties, and the borrower and anyone claiming by or through the

Late fees on loans governed by North Carolina’s Usury Statutes are capped at 4% and are considered interest.


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS borrower is prohibited from asserting usury as a claim or defense. N.C.G.S. § 24-8(b) (2003). Parties to a loan, purchase money loan, advance, commitment for a loan or forbearance other than a credit card, open-end, or similar loan may contract in writing for the payment of interest at any rate agreed upon by the parties where the principal amount is more than twenty-five thousand dollars ($ 25,000). N.C.G.S. § 24-1.1(a)(2) (2003). However, no lender shall charge or receive from any borrower or require in connection with any loan any borrower, directly or indirectly, to pay, deliver, transfer, or convey or otherwise confer upon or for the benefit of the lender or any other person, firm, or corporation any sum of money, thing of value, or other consideration other than that which is pledged as security or collateral to secure the repayment of the full principal of the loan, together with fees and interest provided for. N.C.G.S. § 24-8(a) (2003). For such loans where the principal amount is twenty-five thousand dollars ($ 25,000) or less, the maximum interest rate allowable for loans made during a calendar month is the rate published by the Commissioner of Banks on the 15th day of the prior month. Such rate shall be the latest published noncompetitive rate for U.S. Treasury bills with a six-month maturity as of the fifteenth day of the month plus six percent (6%), rounded upward or downward, as the case may be, to the nearest one-half of one percent ( 1/2 of 1%) or sixteen percent (16%), whichever is greater. If there is no nearest one-half of one percent ( 1/2 of 1%), the Commissioner shall round downward to the lower one-half of one percent ( 1/2 of 1%). N.C.G.S. § 24-1.1(c) (2003). The taking, receiving, reserving or charging a greater rate than permitted under Chapter 24, when knowingly done, shall result in the forfeiture of the entire interest which the note or other evidence


NORTH CAROLINA


TOPIC ISSUE STATUTES/CASES COMMENTS of debt carries with it, or which has been agreed to be paid thereon. N.C.G.S. § 24-2 (2003). Further, if usurious interest has already been paid on the note, the person or his legal representatives or corporation by whom it has been paid, may recover back twice the amount of interest paid in an action in the nature of action for debt. Id. Pursuant to N.C.G.S. § 1-53 (2003), the statute of limitations for the recovery of the penalty for usury and the forfeiture of all interest for usury is two years. As for an action to recover the penalty for usurious interest paid, the statute runs upon the payment of the usurious interest. Thus, a separate cause of action accrues for each payment made, with the cause of action being barred two years after the payment is made. Henderson v. Finance Co., 273 N.C. 253, 160 S.E. 2d 39 (1968). The statute of limitations on a cause of action for the forfeiture of all interest under the note, however, runs from the execution of the note, and thus, is barred two years after execution of the note. Haanebrink v. Meyer, 47 N.C. App. 646, 267 S.E.2d 598 (1980).

Waiver of Jury Trial Is a clause waiving the right to a trial by jury in a contract enforceable in North Carolina?

Pursuant to N.C.G.S. § 22B-3 (2003), any provision in a contract requiring a party to the contract to waive his right to a jury trial is unconscionable as a matter of law and the provision shall be unenforceable.

This section does not prohibit parties from entering into agreements to arbitrate or engage in other forms of alternative dispute resolution.

Warehouseman’s Liens

What lien rights do warehousemen have in North Carolina?

North Carolina has adopted Article 7 of the Uniform Commercial Code, and its provisions for Warehouseman’s Liens. N.C.G.S. § 25-7-209 (2003).

Marshall F. Goldberg GLASS & GOLBERG Glass & Goldberg 21700 Oxnard Street, Suite 430 Woodland Hills, CA 91367 (818) 715-7000 (818) 715-7025 Fax www.glassgoldberg.com

© 2003 Glass & Goldberg

TOPIC ISSUE STATUTES/CASES COMMENTS Licensing Requirements:

Are there special licensing requirements for lenders and leasing companies in California and, if so, what are the consequences for failure to comply?

Yes, with certain exceptions, there are licensing requirements. Under the Commercial Finance Lenders Law (“CFFL”), a finance lender or broker must be licensed from the Commissioner of Corporations before transacting business in California. (Fin. C. § 22100). A “finance lender” is defined to include any person who is engaged in the business of making consumer loans or making commercial loans. (Fin. C. § 22009.) “Commercial loan” is defined to mean a loan of a principal amount of $5,000.00 or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes (Fin. C. § 22502.) In a loan or forbearance situation, failure to obtain a license could subject the lender to the laws of usury.

Fin. C. § 22009 states that the definition of finance lender shall be interpreted to include a personal property broker as referenced in the California Constitution. Therefore, Leasing Companies should assume that they are required to obtain a Finance Lender's License. Banks are exempt from the licensing requirement and the provisions of the CFFL.

Qualification to Do Business in State:

Must a Foreign Corporation qualify to do business in California before it has the right to sue for breach of a lease or loan agreement?

Not automatically. A foreign corporation must qualify to do business only if it is transacting business in the State. If required to qualify, a corporation may not bring suit in the state until it has complied with the qualification requirements and paid the necessary penalties. Cal. Corp. C. § 2203(c)

Some examples of situations that do not constitute transacting business in the State under Cal. Corp C. §2203(c) include: holding meetings, maintaining bank accounts, offices or agencies for the transfer, exchange and registration of its securities, effecting sales through independent contractors, soliciting or procuring orders (whether by mail or through employees or agents or otherwise, where such orders require acceptance without this state before



TOPIC ISSUE STATUTES/CASES COMMENTS becoming binding contracts), creating evidences of debt or mortgages, liens or security interests on real or personal property or conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature. Some examples of situations that do not constitute transacting business in the State by a foreign lending institution include: acquisition by purchase, by contract to purchase, by making of advance commitments to purchase or by assignment of loans, secured or unsecured, or any interest therein, if such activities are carried on from outside this state by the lending institution, the ownership of any loans and the enforcement of any loans by trustee's sale, judicial process or deed in lieu of foreclosure or otherwise, the modification, renewal, extension, transfer or sale of loans or the acceptance of additional or substitute security or the full or partial release of the security or the acceptance of substitute or additional obligors thereon,



TOPIC ISSUE STATUTES/CASES COMMENTS if the activities are carried on from outside this state by the lending institution, the acquisition of title to the real or personal property covered by any mortgage, deed of trust or other security instrument by trustee's sale, judicial sale, foreclosure or deed in lieu of foreclosure. Cal. Corp. C. § 191,

Usury: Are lenders and leasing companies subject to California Usury Law?

When a seller finances the purchase of real or personal property by extending payment of the price over time and charging a higher price for carrying the financing, California usury laws do not apply (so-called "time-price doctrine"). Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 802-803, 35 Cal.Rptr.2d 418, 426. True leases are also not subject to the usury law because they do not involve a loan or forbearance of money. Also, properly licensed commercial finance lenders are exempt from the constitutional restrictions on interest on commercial loans. They are regulated by the Commercial Finance Lenders Law, (“CFFL”) enacted in 1982. (Fin. C. 26000 et seq.) The interest rate that may be charged in California in the absence of an exemption is 10% for loans or forbearance of any money, goods, or things in action to be used primarily for personal, family or household purposes (consumer transactions), and the higher of 10% or 5% per annum plus the rate prevailing on the 25th day of the month preceding the earlier of the date of execution of the contract to loan or the date of making the loan as

A contract is null and void as to the usurious interest portion of the contract. In such case, the lender may not bring an action at law to recover any interest and the debt cannot be declared due until the full period of time it was contracted for has elapsed. The borrower is entitled to recover a penalty equal to three times the usurious interest paid, if it brings the action within one year after making such payment. Cal. Civ. C. § 1916-3(a). The borrower or his or her representative generally remains liable, however, for any unpaid principal (and legal interest thereon-- i.e., 10%) from the date the obligation matured through the date of judgment. The borrower may offset against the unpaid principal balance all usurious interest payments made and any treble interest granted by the court. In

http://web2.westlaw.com/Find/Default.wl?DB=3484&SerialNum=1994237558&FindType=Y&ReferencePositionType=S&ReferencePosition=426&AP=&RS=WLW2.84&VR=2.0&SV=Split&MT=California&FN=_top


http://web2.westlaw.com/Find/Default.wl?DB=1000298&DocName=CAFIS26000&FindType=L&AP=&RS=WLW2.83&VR=2.0&SV=Split&MT=California&FN=_top



TOPIC ISSUE STATUTES/CASES COMMENTS established by the Federal Reserve Bank of San Francisco on advances to member banks under Section 13 and 13a of the Federal Reserve Act for all other loans or forbearance of money, goods or things. Cal. Const. Article 15 § 1

addition, a lender, which makes or negotiates a usurious loan, is guilty of loan-sharking, a felony which is punishable by imprisonment in the state prison for not more than five years or the county jail for not more than one year. Ca Civil § 1916-3(b)

Late Charges: Are Late Charges subject to Usury Laws?

Contractual late charges on overdue commercial accounts are not subject to usury laws because they do not constitute payment for the loan or forbearance of money. Southwest Concrete Products v. Gosh Const. Corp. (1990) 51 Cal.3d 701, 704, 274 Cal. Rptr. 404, 406, Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 801-802, 35 Cal.Rptr.2d 418,425.

The courts have held that late charges are a contingency under the debtor's control (i.e., timely payment) and therefore cannot be considered to be usurious. However, if the claimed late charges are unrelated to Plaintiff’s actual damages, the obligation may be deemed to be an unenforceable penalty or interest on a loan or forbearance of money and therefore usurious.

Landlord’s Liens: What are the rights of a Lessor or Secured Creditor as against the claims of a lessee’s real property landlord?

Where personal property remains on the premises after a tenancy has terminated and the premises had been vacated by the tenant, the landlord is required to give 15 days written notice if personally delivered or, if mailed, 18 days written notice to any person the landlord reasonably believes to be the owner of the property, Cal. Civ. §1983. The notice shall describe the property in a manner reasonably adequate to permit the owner of the property to identify it and must advise the person to be notified that reasonable costs of storage may be charged before the property is returned, where the property may be claimed, and the date before which the claim must be made. If the

Both under Article 9 (Secured Transactions) and Article 10 (Leases), perfected security interest in fixtures and leases have priority over the conflicting interest of an encumbrancer or owner of the real estate if (a) the security interest or lease is purchase money, the interest of the encumbrancer or owner arises before the goods become fixtures, a fixture filing covering the fixtures is filed before the goods become fixtures or within 20





TOPIC ISSUE STATUTES/CASES COMMENTS landlord stores the personal property on the premises, the cost of storage shall be the fair rental value of the space reasonably required for such storage for the term of the storage, Cal. Civ. § 1990(c). Frequently, landlords will claim they own the property by virtue of its becoming affixed to the realty. Whether a particular item is actually a “fixture” and a realty interest, or only personal property even though attached to the realty, is a question of fact to be determined by various tests depending on the identity of the claimants. A creditor can protect its rights in the property by recording a fixture filing, which perfects a security interest in the fixtures. The "fixture filing" is recorded in the county where the real property is located. When recorded, the fixture filing is indexed by the county recorder by listing the debtor's name and the name of any property owner in the grantor index. Thereafter it becomes constructive notice to any purchaser or encumbrancer of the real property. Cal. Comm. C. § 9-502

days thereafter, and the debtor has an interest of record in the real estate or is in possession of the real estate; or (b) a fixture filing covering the fixtures is filed before the interest of the encumbrancer or owner is of record, the security interest or lease has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner, and the debtor or lessee has an interest of record in the real estate or is in possession of the real estate; or (c) the fixtures are readily removable factory or office machines or readily removable equipment that is not primarily used or leased for use in the operation of the real estate, or consumer purposes; or (d) the conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after the security interest or lease was perfected by any permitted method; or (e) the owner or encumbrancer of the property consents to subordinate or waive its claims in the personal property (Landlord or Mortgagee Waiver). U.C.C. 9334 and U.C.C. 10309.

Artisans and Service Liens

Do Artisan and Service Liens take priority over the liens of

Yes, these liens have priority in all property lawfully in the possession of the Artisan or Service Provider for

Since the Artisan or Service Provider must be lawfully in possession of the

http://web2.westlaw.com/Find/Default.wl?DB=1000298&DocName=CACLS9313&FindType=L&AP=&RS=WLW2.83&VR=2.0&SV=Split&MT=California&FN=_top



TOPIC ISSUE STATUTES/CASES COMMENTS a secured lender or lessor? reasonable charges, for work done and materials

furnished, at the request of the owner of the property. Cal. Civ. C. § 3051. For any lien over the amount of $300.00 to be effective, notice “against the holder of the legal title” must be given in writing by personal service or registered mail to the legal owner prior to the commencement of the work, services, care or safekeeping. Cal. Civ. C. § 3051 (a)

property, the priority lien should not apply to true leases because the lessee is not the owner of the property, unless the lessor has given the lessee actual or ostensible authority to hire the third party.

Forum Selection Clauses:

Are Forum Selection Clauses upheld under California law?

Yes, in the absence of a showing that enforcement would be unreasonable, a forum selection clause appearing in a contract entered into freely and voluntarily by parties who have negotiated at arm's length will be upheld. Smith, Valentino & Smith v. Superior Court (1976) 17 C.3d 491, 131 C.R. 374, 551 P.2d 1206, 2 Cal. Proc. (4th), Jurisdiction, §347. This is true regardless of whether there are minimum contacts with the state. See National Equip. Rental, Ltd. v. Szukhent (1964) 375 U.S. 311, 315-316, 84 S. Ct. 411, 414.

Examples of “unreasonableness” are: the formation of the contract was induced by fraud, overreaching, unequal bargaining power, the complaining party "will for all practical purposes be deprived of his day in court" because of the grave inconvenience or unfairness of the selected forum, the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy or the enforcement would contravene a strong public policy of the forum state. Carnival Cruise Lines, Inc. v. Shute, supra, 499 U.S. at 595, 111 S.Ct. at 1528; The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at 12- 13, 15, 92 S.Ct. at 1914-1915

Choice of Law Clauses Are Choice of Law Clauses recognized in California?

Choice of law provisions are usually respected by California courts, which is consistent with the modern approach of Rest. 2d, Conflict of Laws section 187 subdivision (2). Smith, Valentino & Smith v. Superior

The Conflicts of Law Restatement relied upon by the court in the Smith case, requires the court to recognize the law of a foreign state if either: (1) the

http://web2.westlaw.com/Find/Default.wl?DB=661&SerialNum=1976114808&FindType=Y&AP=&RS=WLW2.83&VR=2.0&SV=Split&MT=California&FN=_top



http://web2.westlaw.com/Find/Default.wl?DocName=WITPROCChIIIs347&FindType=Y&AP=&RS=WLW2.83&VR=2.0&SV=Split&MT=California&FN=_top

http://web2.westlaw.com/Find/Default.wl?DocName=WITPROCChIIIs347&FindType=Y&AP=&RS=WLW2.83&VR=2.0&SV=Split&MT=California&FN=_top









TOPIC ISSUE STATUTES/CASES COMMENTS Court (1976) 17 C. 3d 491, 131 C.R. 374, 551 P. 2d 1206. chosen state has a substantial

relationship to the parties or their transaction, or (2) there is any other reasonable basis for the application of the law. However, if either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is a fundamental conflict with California law, the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue.

Attorney’s Fees Clauses

To what extent are attorney’s fees clauses enforceable in California?

In an action on a contract, which expressly provides for the award of attorney’s fees to either party, the prevailing party is entitled to them, whether or not the prevailing party is the party specified in the contract. This provision cannot be waived. Cal. Civ. C. § 1717

Jury Waiver Clauses Are Jury Waiver Clauses enforceable?

Yes, in Trizec Properties, Inc. v. Superior Court (1991) 229 Cal.App.3d 1616, 280 Cal.Rptr.885, the court concluded that jury waiver provisions in commercial contracts are enforceable...

To be enforceable, the waiver provision “must be clearly apparent in the contract and its language must be unambiguous and unequivocal, leaving no room for doubt as to the intention of the parties.” Trizec at 1619, 280 Cal. Rptr. at 887.

Liquidated Damage Clauses

Are there restrictions to the enforceability of liquidated damage clauses in California?

Yes, Under Cal. Civ. C. § 1671, liquidation clauses are enforceable if at the formation of the contract it was mutually recognized that damages from a breach would be impracticable or extremely difficult to determine with

The Atel court found that by the time of trial, some payments had been made. Some equipment continued to be leased. There was no “credit default” of the



TOPIC ISSUE STATUTES/CASES COMMENTS certainty, and (2) the amount or formula stipulated by the parties represented a reasonable endeavor to ascertain what such damages might be. Vregora v. LA Unified School District 152 Cal App 3d. 1178, 1186, 200 Cal. Rptr 103 (1984). The burden of proof is on the party seeking invalidation to show that “the provision was unreasonable under the circumstances existing at the time the contract was made”. Cal. Civ. C. 1671(b). A liquidated damage clause will be considered unreasonable and hence unenforceable, if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. An amount disproportionate to the anticipated actual damages is termed a “penalty”. Ridgley v. Topa Thrift & Loan Assn. 17 Cal 4th 970, 977, 953 P2d 484 (1998). A recent 9th Circuit decision, interpreting California law, has held that, when a lessee continued to perform under the Lease after an initial payment default, the lessor was not entitled to enforce the liquidated damages clause of the contract because it was a penalty. Atel Financial Corporation v. Quaker Coal Company 132 F. Supp 2d. 1233.

lease as there was no admission, in writing, of an inability to make payments as they come due, which was standard under the lease. By requiring the lessee to pay the present value of all monies during the rest of the lease, plus the anticipated residual value of the equipment, the liquidated damage clause would multiply plaintiff’s likely actual damages many times over. The court felt that while such formula might be reasonable in the event of the destruction of the equipment, where no future value in the equipment remained, it was highly disproportionate to the loss of a few loan payments. The anticipated residual value operated without regard to the post-default status of the equipment and whether that status brought Plaintiff any compensation. By continuing to lease the equipment, plaintiff continued to receive income from the equipment, but escaped offset provisions because continuing leasing by the defaulting lessee was not anticipated. The court concluded that the liquidated damage clause gave plaintiff an amount grossly



TOPIC ISSUE STATUTES/CASES COMMENTS disproportionate to its actual damages. It should be noted that ATEL applied the incomplete arrears payments and all subsequent rentals received against the liquidated damages amount, while continuing to invoice the lessee for rents as they fell due, which the lessee paid in full until all rents were paid.

Replevin: How does a creditor recover its leased equipment or collateral under California law?

Under California Law, a creditor is permitted to proceed with self help, unless it would cause a breach of the peace. In the event judicial intervention is necessary, the court may order the issuance of a Writ of Possession. This is a provisional remedy that enables a Plaintiff to obtain possession of its property prior to judgment, Cal. Civ. Pro. §512.010, upon a showing of the probable validity of the creditor’s claim to possession of the property. Cal. Civ. Pro. §512.060. This remedy is temporary and can only be pursued in connection with an action on the underlying claim. Cal. Civ. Pro. §512.010. The hearing on the Application for Writ of Possession allows a creditor, as early as 21 days of instituting a lawsuit, to secure a replevin order. Cal. Civ. Pro. §1005. The court is required to waive the creditor’s undertaking upon a showing that the obligor or lessee has no interest in the property (i.e. the market value of the property is less than the amount owing on the secured obligation or lease). Cal. Civ. Pro. §515.010. The obligor or lessee is entitled to retain the property upon the filing of an undertaking sufficient to compensate the creditor for all costs awarded under a

The advantage to a Writ of Possession is that it gets the defendant’s attention and may result in the immediate return of the equipment. At the time of the hearing on the writ application, the court is authorized to impose an order directing transfer of the property to the creditor, without intervention of the Sheriff. Failure to turn over the property, may subject the person in possession of the property to contempt of court. Cal. Civ. Pro. §512.070. The main disadvantage is that plaintiff’s right to possession is provisional and ultimately dependant on the outcome of the underlying suit. If plaintiff does not obtain a judgment in the action, plaintiff must redeliver the property to the defendant and is liable for defendant’s actual damages caused by the wrongful possession (including liability for



TOPIC ISSUE STATUTES/CASES COMMENTS judgment and all damages proximately caused by the creditor’s failure to gain or retain possession. Cal. Civ. Pro. §515.020. An ex parte writ of possession may be issued on 24 hours notice, upon a showing that there is an immediate danger the property will become unavailable for levy by reason of being transferred, concealed or removed from the state or will become substantially impaired in value by acts of destruction or by failure to take care of the property in a reasonable manner and the property is not necessary for the support of the defendant or his family. Cal. Civ. Pro. §512.020.

conversion if the property has been sold and cannot be returned to defendant) Cal. Civ. Pro. §512.120

Writs of Attachment: Is a creditor entitled to seize assets of an obligor or guarantor pending trial?

Upon default under a loan or lease obligation, California Law allows a creditor, as early as 21 days of instituting a lawsuit, to secure an otherwise unsecured obligation pending trial. Cal. Civ. Pro. §483.010, Cal. Civ. Pro §484.040, Cal. Civ. Pro. §1005. With a prejudgment Writ of Attachment, the creditor may record a lien on real property, Cal. Civ. Pro. §488.315, place a keeper in the business of the debtor, Cal. Civ. Pro. §488.335 or instruct the Sheriff to hold bank deposits pending trial, Cal. Civ. Pro. §488.455. In order to obtain a Writ of Attachment, the creditor must apply to the court and establish that the claim arises out of the conduct by the defendant of a trade, business or profession. Cal. Civ. Pro. §483.010. A Writ of Attachment is also available as against a guarantor if the “sum total of the circumstances justifies the conclusion that the guarantor occupied himself to a substantial degree

The benefits to a Right to Attach Order are numerous. An attachment is a very strong tool in forcing an early settlement of cases. Without the right to an attachment, a creditor may wait years before its lawsuit is brought to conclusion and a judgment obtained. By then the assets of the guarantor may be long gone. Furthermore, if the creditor is ultimately awarded a judgment, the judgment lien will be effective as of the date of the attachment lien and will prevail as against intervening consensual and non consensual encumbrancers. If debtor files bankruptcy within 90 days of the



TOPIC ISSUE STATUTES/CASES COMMENTS and on a continuing basis in promoting his own profit through provision of credit or management to the primary obligor.” Advance Transformer Co. v. Superior Court, 44 Cal. App. 3d 127, 118 Cal Rptr. 350 (1974). For example, a Writ of Attachment is not available against a signing spouse who has no involvement in the company or a relative or friend, who provides the start of capital for the business. A creditor is normally entitled to a Writ of Attachment against the primary obligor for the unsecured balance (the difference between the fair market value of the equipment and the amount of the debt). For example, if the equipment is worth $100,000 and the debt is $120,000, the Writ of Attachment would be for $20,000. The obligation of a guarantor is considered to be a separate obligation from that of the primary obligor and is therefore wholly unsecured. Consequently, a Writ of Attachment may be granted for the entire contract balance, without regard to the value of the equipment, if there is a waiver contained in the guarantee of the right to compel the creditor to first look to the collateral securing the primary obligation. Engelmann v. Bookasta 264 Cal. App. 2d 915. 71 Cal Rptr. 120 (1968). In addition, a Writ of Attachment may be granted against the assets of a Revocable Trust where the obligor is the Trust Beneficiary. Cal. Prob. §18200. The bond amount for a Writ of Attachment is a statutory amount of $10,000. Cal. Civ. Pro §489.220.

judgment lien but more than 90 days from the attachment lien, the lien will not be avoided, to the extent there is equity in the property, because it relates back to the time of the attachment lien. Another benefit is that upon receiving a Writ of Attachment, a creditor may conduct discovery into the assets of the debtor, including sending interrogatories, taking depositions, etc. Cal. Civ. Pro. § 485.230. Without the Order for Attachment, discovery before trial is limited to issues on the merits.

Homestead Law: Is it true in California that an owner of property who

Yes, California has an automatic “dwelling exemption”, which applies (without any affirmative action on the part

A judgment lien recorded after a declared homestead does not attach to



TOPIC ISSUE STATUTES/CASES COMMENTS resides on the premises has an automatic homestead exemption, and if so, for how much?

of the debtor) to the principal “dwelling” in which the judgment debtor or the debtor’s spouse resided on the date the judgment creditor’s lien attached to the dwelling and resided continuously thereafter until the date the court determines that the dwelling is a homestead. Cal. Civ. Pro§ 704.710. The automatic “dwelling exemption” applies only to forced judicial sales of the debtor’s dwelling. If the debtor voluntarily sells the property, the proceeds are not exempt. California also has a “declared homestead”. Cal Civ Pro. § 704.910. In such case, the debtor must own the premises and reside at the premises or his wife must reside at the premises at the time of the declaration. However, moving away from declared homestead does not necessarily destroy the exemption. If the declared homestead (as opposed to the automatic homestead) is sold voluntarily, the traceable proceeds of sale will be exempt, in amount equal to exemption, for period of six months after date of sale, or the proceeds may be invested in a new dwelling within six months and retain the same effect of the prior recorded homestead declaration. Ca. Civ. Pro. § 704.960(a).

The exemptions under both the dwelling and declared homesteads are $50,000 for the debtor, $75,000 if the judgment debtor or the debtor’s spouse who resides in the homestead is, at the time of the attempted sale, a member of a “family unit” and $125,000 if the debtor is over 65 years old, is disabled or has a low income. Low income is

the property, except to the extent the equity in the property exceeds the liens and encumbrances and exemption. Cal. Civ. Pro. § 704.950, whereas in the absence of a declared homestead, an abstract of judgment would immediately attach and reach any equity in the dwelling above the amount of any liens and encumbrances recorded before the abstract. In re Pike (9th Cir. BAP 1999) 243 B.R. 66, 70. The effect is to make it impossible for the debtor to pass clear title even if there is no equity above the exemption



TOPIC ISSUE STATUTES/CASES COMMENTS defined as not married and at least 55 years old with a maximum of $15,000 gross annual income or married and at least 55 years old with a maximum combined gross income of $20,000.Cal Civ. Pro. § 704.730 and Cal. Civ. Pro. § 704.950

MCGAVICK GRAVES, P.S. 1102 Broadway, Ste 500 Tacoma, WA 98401 Tel: (253) 627-1181 Fax: (253) 627-2247 www.mcgavickgraves.com [email protected]

© 2003 McGavick Graves, PS

WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS Attorneys Fees Under what circumstances are

attorney's fees recoverable in WA?

Attorney's fees are recoverable in WA only to the extent provided by statute or contract. Any unilateral contractual attorneys fee provision is made bilateral by application of RCW 4.84.330.

In WA suit on a contract containing an attorney's fee provision always carries the risk that attorney's fee will be awarded to the opposing party.

Chattel Liens What rights do laborers and material providers possess against the personal property they improve?

Every person or entity that performs labor or furnishes material in the construction or repair of any chattel possesses a lien under the chattel lien statute. RCW 60.08.010. The chattel lien statute applies most often in the context of auto-repair. Chattel lien holders can perfect their liens through possession or the filing of a lien notice. Id. If the lien notice option is exercised, the chattel lien holder must file its notice within 90 days of delivery of the chattel to the debtor. Id.; Burns v. Miller, 107 Wn.2d 778, 782 (1987). RCW 62A.9-333(b) continues the Washington variation to former 9-310 by providing that a possessory lien has priority over a security interest only if the lien is statutory and the statute expressly confers priority. A prior perfected security interest or leasehold interest prevails over a chattel lien in the same collateral. Ibrahim v HAPO Federal Employees Credit Union (1981) 28 Wash.App. 597, 625 P.2d 176.

Choice of Law Does WA Enforce Choice of Law Clauses?

WA follows the approach of Restatement (Second) Conflict of Laws §187. Choice of law clauses will be given effect unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of the state which has a materially greater interest and the laws of the latter state would apply under the "most significant relationship" rule if no choice

Recent amendments to Article 1 of the UCC, if adopted in the state where an action is commenced, would require enforcement of a choice of law clause in a commercial contract even if the chosen state has no nexus to the transaction. WA has not yet adopted these amendments.



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS had been made by the parties. O'Brien v. Shearson Hayden Stone, 90 Wn.2d 680, 586 P.2d 830 (1978). In consumer leases, choice of law clauses are not enforceable if other than jurisdiction where lessee resides, where goods are to be used, or where lease executed. RCW 62A.2A-106.

Criminal Possession of Leased Equipment

Does WA have any criminal provisions relating to lessee's wrongful possession of leased equipment?

Yes, RCW 9A.56.100 makes it a felony in certain cases for a lessee to retain possession of leased equipment after the transmission of notice meeting the statutory requirements.

The giving of the statutory notice of criminal possession in appropriate circumstances can be very effective.

Deeds of Trust What are the conditions to and effects of non-judicial foreclosure of a deed of trust (DOT) encumbering real estate located in WA?

Conditions to non-judicial foreclosure 1. DOT must not encumber real estate used primarily for

agricultural purposes and must so state. 2. No court action to enforce the debt secured may be

pending except proceedings to appoint a receiver or enjoin waste.

Effect of non-judicial foreclosure: 1. Anti-deficiency provisions - WA law limits lenders to

the amount realized upon the sale of the underlying real property in the event the underlying obligation is consumer-related. RCW 61.24.100(1). If the underlying obligation is commercial, lenders may pursue other security (liens, guaranties, security agreements) to recoup any deficiency. RCW 61.24.100(3)(b).

2. Impact on Guarantors - Guarantors of commercial debts secured by DOT are liable for deficiencies if proper notice procedures are followed. RCW 61.24.100(3)(c); RCW 61.24.042.

Include a statement in DOT encumbering real estate located in WA to the effect that the property is not used primarily for agricultural purposes. Also be sure to give the requisite statutory notices to guarantors of a debt secured by a DOT which is being foreclosed non-judicially. DOT can also be judicially foreclosed as a mortgage in WA in which case the anti-deficiency provisions of the DOT statute do not apply. The trade off is that the debtor has redemption rights following a sheriff’s sale which are not available following a sale by a trustee.

Foreign Entities Capacity to Sue in WA

What steps must a foreign entity undertake before it has the right to file suit in WA?

Foreign entities transacting business in WA generally must register with the WA Secretary of State as a condition precedent to filing suit in a WA court. See, e.g. RCW



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS 25.10.490 (foreign limited partnerships); RCW 23B.15.010 (corporations). The registration statutes contain numerous exceptions, which may exempt certain foreign entities from Washington’s registration requirement. See, e.g. RCW 25.10.540(4); RCW 25.15.350 (foreign limited liability companies); RCW 23B.15.010(2) (corporations). For example, foreign entities transacting business in interstate commerce or conducting an isolated transaction completed within the course of thirty days do not need to register in WA. Id. Most importantly, foreign corporations do not need to register when making loans or creating or acquiring evidence of debt or liens on personal property, or when securing or collecting debts and security interests in personal property. RCW 23B.15.010(2)(g), (h). In any event, the failure of a foreign entity to register does not impair the validity of any contract or act of the foreign entity. See, e.g. RCW 25.10.540(2). Moreover, a foreign entity that fails to register may do so after it transacts business so as to allow it to file suit in WA. See, e.g. RCW 25.10.540(1); RCW 23B.15.020 (foreign corporations).

Forum Selection Clauses

Does WA enforce forum selection clauses?

WA generally enforces forum selection clauses if those clauses are reasonable. Mangham v. Gold Seal Chinchillas, Inc., 69 Wn.2d 37, 45 (1966); Bechtel Civil and Minerals, Inc v. South Columbian Basin Irrig. Dist., 51 Wn.App. 143, 147 (1988). However, in the event the Retail Installment Sales Act applies or the transaction is a consumer lease, a forum selection clause is invalid unless it provides for venue in the county of buyer’s residence, place of business, or county where the contract is signed. RCW 63.14.150, RCW 62A.106.

In designating a particular state as the forum for dispute resolution do not make it the exclusive forum but rather retain the option of commencing an action in any forum that might have jurisdiction. Otherwise a secured creditor/lessor may be prevented from commencing a replevin action.



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS Landlord's Lien What are the rights of a WA

landlord in leased goods or collateral located on the leased premises?

WA recognizes a landlord’s lien for unpaid rent against a tenant’s personal property located on the leased premises. RCW 60.72.010. The lien continues for ten days after the personal property is removed from the leased premises. Id. The statutory lien is limited in amount to two months rent. Id. The landlord’s lien does not attach to leased personal property. RCW 60.72.010; Swanson v. White, 83 Wn.2d 175 (1973). However, a landlord’s lien attaches and takes priority over a security interest in the tenant’s personal property unless the secured creditor perfects its security interest prior to the commencement of the tenancy. Id.; Paris American Corp. v. McCausland, 52 Wn.App. at 439 (holding that the sale of equipment and retention of security interest constitutes a “lien of mortgage” under the landlord’s lien act).

A secured creditor should always obtain a subordination/waiver agreement from a landlord where collateral will be located on the leased premises. Personal property lessors should follow the same policy as a safeguard against characterization of their agreement as a secured transaction rather than a true lease.

Late Charges Are late charges subject to Usury Laws?

Late fees are not considered in determining whether a transaction is usurious because late fees are within the borrower's control. Lew v. Goodfellow Chrysler-Plymouth, Inc., 6 Wn.App. 226, 232 (1971).

Liquidated Damages Are liquidated damages clauses in lease agreements enforceable in WA?

Liquidated damage provisions in a true lease are enforceable if the liquidated sum was, at the time the agreement was executed, a reasonable estimate of the compensation necessary to make the lessor whole should the lessee breach. No requirement that a lessor establish that actual damages are difficult to ascertain or the absence of other remedies. RCW62A.504(1). A party need not sustain actual damages in order to collect liquidated damages pursuant to a liquidated damages clause, although actual damages may be a factor in determining reasonableness. Wallace Real Estate Inv. v. Groves, 124 Wn.2d 881, 881 P.2d 1010 (1994).



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS

Oral Credit Agreements Does WA require that credit agreements be written?

A credit agreement is not enforceable in WA against a creditor unless the agreement is in writing and signed by the creditor, provided the agreement does not relate to a credit card or consumer credit and the creditor has given the following notice to the debtor simultaneously with or before the credit agreement is made: Oral agreements or oral commitments to loan money, extend credit or to forebear from enforcing repayment of debt are not enforceable under Washington law. (RCW 19.36.110 through RCW 19.36.140) RCW 19.36.100 defines credit agreement as: “an agreement, promise, or commitment to lend money, to otherwise extend credit, to forebear with respect to the repayment of any debt or the exercise of any remedy, to modify or amend the terms under which a creditor has lent money or otherwise extended credit, to release any guarantor or cosigner, or to make any other financial accommodation pertaining to a debt or other extension of credit”.

Once the statutory notice is given, it is effective as to all subsequent credit agreements between the creditor and the debtor its guarantors, successors and assigns. A creditor should give the statutory notice early in the negotiation of credit extension to a WA debtor. The notice may be included in the written agreement or in a separate document.

Parol Evidence Do WA courts allow extrinsic evidence to vary the terms of an integrated contract?

WA has adopted the Restatement (Second) of Contracts §§ 212, 214(c) (1981) and therefore extrinsic evidence is admissible as to the entire circumstances under which the contract was made, as an aid in ascertaining the parties' intent. This is true even if the contract is fully integrated and unambiguous. Berg v Hudesman 115 Wn.2nd 657 (1990).

Give the statutory notice referenced in the prior section.

Prejudgment Attachment

Do WA courts allow prejudgment attachment?

Prejudgment attachment is allowed in a variety of circumstances including when a party sues on a contract, express or implied. RCW 6.25.030(10). Attachment

When commencing an action in WA on a equipment contract or guaranty, a creditor should consider making

http://web2.westlaw.com/Find/Default.wl?DocName=REST2DCONTRs212&FindType=Y&AP=&RS=WLW2.84&VR=2.0&SV=Split&MT=Westlaw&FN=_top





WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS requires a show cause hearing upon prior notice unless exigent circumstances exist. RCW 6.25.070; Tri-State Develop. Ltd. v. Johnson, 160 F.3d 528, 532 (9th Cir. 1998). When grounds for prejudgment attachment exist, the statute authorizes the issuance of an order requiring that the defendant appear and give information under oath regarding nonexempt assets that may be subject to attachment. RCW 6.25.070.

application for a prejudgment writ of attachment and an order requiring that the defendant appear and give information regarding non-exempt assets. These steps require that the defendant address the in the early stages of litigation and also allows the creditor to gain information about the defendants ability to pay the claim.

Products Liability Does WA impose product liability on lessors of personal property?

Washington’s Product Liability Act imposes liability on manufacturers and “product sellers.” RCW 7.72.040. The Act defines “product sellers” to include “parties who are in the business of leasing or bailing such products.” RCW 7.72.010(1). However, the Act excludes finance lessors from its coverage and defines “finance lessor” as “one who acts in a financial capacity, who is not a manufacturer, wholesaler, distributor, or retailer, and who leases a product without having a reasonable opportunity to inspect and discover defects in the product, under a lease arrangement in which the selection, possession, maintenance, and operation of the product are controlled by a person other than the lessor.” RCW 7.72.010(1)(d). The Washington Court of Appeals, in an unpublished opinion, has applied the Act to a commercial lessor. Hofstrand v. Coast Crane Co. of Wash., 113 Wash.App. 1060 (2002) (unpublished decision). However, the Court of Appeals held that the lessor did not breach its duty to the plaintiff and held in favor of the lessor. Id.

If a lessor is in the business of leasing and does not constitute a “finance lessor,” the Act imposes liability under certain defined circumstances. RCW 7.72.050(2)(c).

Products liability represents another example of the benefits of finance lease characterization. In addition to drafting lease documents as finance leases, lessors should be careful to disclaim all warranties and to clarify that lessees have not relied on any representations of lessors.



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS Liability will be imposed if:

(a) No solvent manufacturer who would be liable to the claimant is subject to service of process under the laws of the claimant's domicile or the state of Washington; or (b) The court determines that it is highly probable that the claimant would be unable to enforce a judgment against any manufacturer; or (c) The product seller is a controlled subsidiary of a manufacturer, or the manufacturer is a controlled subsidiary of the product seller; or (d) The product seller provided the plans or specifications for the manufacture or preparation of the product and such plans or specifications were a proximate cause of the defect in the product; or (e) The product was marketed under a trade name or brand name of the product seller.

RCW 7.72.040(2). In addition, a lessor who fits within the statutory definition of “product seller” will be liable to the claimant if the product seller is negligent, breaches its own express warranty, or intentionally misrepresents facts or intentionally conceals information. RCW 7.72.040(1).

Replevin How does a creditor or lessor recover its leased equipment or collateral under Washington law?

Washington allows self-help repossession as long as the creditor does not breach the peace. RCW 62A.9A-609(a)(1); Official Comment 3 to 9-609. Replevin under RCW 7.64 is the remedy customarily invoked to recover possession of collateral when the debtor refuses to permit self-help repossession. Replevin requires a show cause

Unless the collateral is in danger, set the replevin show cause hearing for the maximum 25 days after entry of the show cause order and serve the debtor with the complaint, containing a prayer for possession of the



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS hearing that can be held no sooner than ten days from the date of the show cause order and no sooner than five days after the show cause order is served on the defendant. RCW 7.64.020(3), (4). In no event can the show cause hearing be heard more than 25 days after the court enters the show cause order. RCW 7.64.020(3).

collateral and judgment on the debt, and show cause order within 5 days from entry of the order. The secured party may then obtain a default order and judgment awarding possession if the debtor fails to appear and answer the complaint, thereby obviating the need for the show cause hearing.

Retail Installment Sales Does WA apply heightened standards to sellers of consumer goods under installment sales contracts?

The WA Retail Installment Sales Act imposes certain enhanced duties on companies selling consumer goods under contracts which provide for payment in installments. RCW 63.14. Among other things, the Act requires contracts of a certain font size, detailed descriptions of contract terms, monthly statements, notices, limits on finance charges, and prohibition against forum selection clauses. RCW 63.14.

Companies engaged in the sale of consumer goods on contract should be certain to comply with the Retail Installment Sales Act since the consequences of non-compliance are severe.

Variations to Uniform Commercial Code (UCC) provisions relating to leases

Does WA have any UCC provisions relating to personal property leases which vary from the uniform UCC provisions?

Yes, the WA version of the UCC contains many non-uniform provisions relating to personal property leases, most of which favor lessors. These variations include a relaxation of statutory definition of "finance lease" found in RCW 62A.2A.103(1)(g), allowance of TRAC provisions in a true lease, $25,000 limitation in the definition of consumer lease, and the elimination of a number of consumer protection provisions.

Variations to uniform version of UCC Revised Article 9

Does the WA version of UCC Revised Article 9 vary from the uniform version?

Yes, the WA version of UCC Revised Article 9 contains many non-uniform provisions. These variations include the right to obtain waivers from guarantors which are not available under the uniform version of 9-602, relaxation of the notice of disposition requirements of 9-611, elimination of the upset price provisions relating to sales to related

Secured creditors should retain suretyship defense waivers, including waivers of notice of collateral disposition, in their WA guarantees.



WASHINGTON (WA)

TOPIC ISSUE STATUTES/CASES COMMENTS parties (9-615) and the application of the rebuttable presumption rule to the disposition of consumer goods (9-626).

Usury What is the Maximum rate of interest that can be charged in WA?

In absence of a written agreement, legal rate is 12% per annum. RCW 19.52.010(1). Any contract rate of interest is legal so long as the rate of interest does not exceed the higher of: (a) Twelve percent per annum; or (b) four percentage points above the equivalent coupon issue yield. RCW 19.52.020. Usury law applies to individuals only, and does not apply to true leases, retail installment contracts, or transactions primarily for agricultural, commercial, investment, or business purposes. A lender can rely on representation of the debtor as to business purpose if such reliance is reasonable. If usury is established, Debtor is entitled to costs, reasonable attorneys fees, accrued but unpaid interest and twice the amount of interest paid to the lender. RCW 19.52.030.

A lender or equipment lessor in a transaction involving commercial equipment should include a representation in the contract documents confirming the commercial purpose of the transaction.

Waiver of Jury Trial Do WA courts enforce jury waiver clauses?

Though jury waiver clauses are narrowly construed, WA courts honor contractual waivers of the right to a jury trial. Godfrey v. Hartford Cas. Ins. Co., 142 Wn.2d 885, 898 (2001).

A lender or equipment lessor should include a jury waiver in their contract documents.

I:\DOCS\MCL\ELA\2003\50 state survey\WashingtonRed Flags.doc

Lawrence F. Flick, II Working Draft Subject to Revision BLANK ROME LLP 210 Lake Drive Woodland Falls Corporate Park Suite 200 Cherry Hill, NJ 08002 856-779-3600 www.BlankRome.com

900200.00001/21142753v1 1

NEW JERSEY

TOPIC ISSUE STATUTE/CASES COMMENTS USURY

Are lessors subject to New Jersey interest Law?

N.J. STAT. ANN. 31:1-1 et seq. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) preempts certain loans subject to New Jersey’s state interest and usury laws. New Jersey imposes interest rate restrictions such that a lender may not charge an interest rate greater than 6% on oral contracts, and 16% on written contracts. See N.J. STAT. ANN 31:1-1(a). If a loan is secured by a first lien on real property, then the Commissioner of the New Jersey Department of Banking and Insurance will establish the allowable interest rate with a ceiling based on Monthly Index of Long Term United States Government Bond Yields plus 8% per year rounded off to the nearest quarter of 1% per year. See id. at 31:1-1(b). Loans of $1000 of more for business or agricultural purposes may only charge 5% or less in excess of the discount rate. See id. at 31:1-1(g). In addition, the Department of Banking and Insurance establishes the interest rate for any person making a loan that is equal to the allowable rate by national banks under federal law when that rate is greater than 8%. See id. at 31:1-1(g). In general, three types of loans are exempt from New Jersey’s interest rate restrictions – (1) loans of $50,000 or more; (2) bank loans for mortgages which are purchased by the Federal housing Administration, Federal National Mortgage Association, the Government National Mortgage Association, or Federal Home Loan Mortgage Corporation; and (3) loans made to corporations. See id. at 31:1-1(e). If a default rate of interest on an exempt loan is unconscionably high, however, it will be unenforceable. See Stuchin v. Kasirer, 237 N.J. Super. 604 (App. Div. 1990). If a loan is for a term less than one year, then interest must be paid at intervals, and may be computed on a daily or monthly basis, with the day being considered 1/360ths part of the year, and a month being considered 1/12ths part of the year. See N.J. STAT. ANN. 31:1-1(c). If a loan is made to a corporation in form, but is actually in substance, a loan to an individual borrower, then the loan may be considered usurious if the interest rate exceeds the maximum legal interest rate under New Jersey's usury laws. See In re Greenberg, 21 N.J. 213 (1956); Gelber v. Kugel's Tavern, 10 N.J. 191 (1952); Monmouth Capital Corp., 92

To constitute usury, the intent to disobey interest rate restrictions must be present. See Altman v. Altman, 8 N.J. STAT. ANN. 301 (Ch. 1950).


900200.00001/21142753v1 2

TOPIC ISSUE STATUTE/CASES COMMENTS N.J. Super. 480 (Ch. Div. 1966); First Mutual Corp. v. Grammercy & Maine, Inc., 176 N.J. Super. 428 (Law Div. 1980). New Jersey imposes several penalties for violations of the usury laws. In an action to enforce any note, bill, bond, mortgage, or contract for the repayment of a loan that charged an interest rate higher than the allowable rate, then the lender may recover only the amount lent. See N.J. STAT. ANN 31:1-3; Rosenstein v. Rosenstein, 116 N.J. L. 517 (E&A 1936); Schuran, Inc. v. Walnut Hill Associates, 256 N.J. Super. 228 (L. Div. 1991) (addressing violation of criminal usury statute). Before the loan has been fully paid, therefore, the lender forfeits all rights to interest and is prevented from recovering litigation fees in any action brought to recover principal. See N.J. STAT. ANN. 31:1-3; see also Pick v. Brand, Inc., 25 N.J. Misc. 329 (Sup. Ct. 1947); Gorrin v. Higgins, 73 N.J. Super. 243 (Ch. Div. 1962). The borrower may bring an action in Superior Court to compel a lender to accept repayment of principal. See N.J. Stat. Ann. 31:1-4. After the loan has been repaid, the borrower may recover the amount of interest paid in excess of the legal interest rate. See N.J. STAT. ANN31:1-3; see also Hupshman v. Broda, 247 A.2d 698 (N.J. Super. Ch. Div. 1968); D'Onofrio v. Galliotto Auto, 118 N.J. Eq. 271 (E&A 1935). The lender, however, is entitled to retain interest paid according to the legal rate. See Resolution Trust Corp. v. Minassian, 777 F. Supp. 385 (D.N.J. 1991). Any claim for usury violation is subject to the general statute of limitations under N.J. STAT. ANN. 2A:14-1; 2A:14-4. New Jersey also imposes criminal usury provisions which can be found at N.J. STAT. ANN. 2C:21-19. The criminal usury ceiling is a 30% annual interest rate, and 50% for loans made to corporations. See N.J. STAT. ANN. 2C:21-19. A corporation, limited liability company, limited liability partnership may not defend against an action to recover damages by claiming usury. See N.J. STAT. ANN. 31:1-6.

LICENSES

Do lessors need a license to conduct a leasing business in New Jersey?

Although New Jersey does not require a lessor to obtain a license to conduct a leasing business in the state, the New Jersey Corporation Business Activities Report Act requires foreign corporations to register with the state. See N.J. STAT. ANN. 14A:13-14. In particular, foreign corporations must file a Notice of Business Activities Report with New

The purpose of this Act is designed to identify all corporations operating in New Jersey.


900200.00001/21142753v1 3

TOPIC ISSUE STATUTE/CASES COMMENTS Jersey's Department of Taxation. Activities that trigger the requirement of a report include: (a) maintaining an office or other place of business in New Jersey; (b) maintaining personnel in New Jersey, even if the personnel is not regularly stationed in the state; (c) owing or maintaining real or tangible personal property directly used by the corporation in New Jersey; (d) owning or maintaining tangible and/or property in New Jersey used by others; (e) receiving payments from residents in New Jersey, or businesses located in New Jersey, that are greater than $25,000.00; (f) deriving any income from any source or sources within New Jersey; or (g) conducting or engaging in any other activity, property or interrelationships with New Jersey as may be designated by the Director of the Division of Taxation. See N.J.S.A. 14A:13-15. Corporations not required to file a report are those which either received a certificate of authority to do business, or filed a timely tax return under the Corporation Business Tax Act, or Corporation Income Tax Act. See N.J. STAT. ANN. 14A:13-16. Reports must be filed annually by April 15th.

LATE CHARGES

Does New Jersey impose any restrictions on late charges?

It appears that late fees are not usurious under New Jersey law. The court in Loigman v. Kerm, 250 N.J. Super. 434 (Law Div. 1991) held that New Jersey's usury statute did not apply to a default fee pursuant to a retainer agreement. In addition, the court in Sherman v. Cicibank, N.A., 272 N.J. Super. 435 (1995) held that interest, as defined by the National Bank Act, did not include late fees, and thus did not implicate New Jersey's usury law. New Jersey will enforce late fees in commercial transactions between sophisticated parties as long as the charge is reasonable. See Metlife Capital Financial Corp. v. Washington Avenue Assoc., L.P., 159 N.J. 484 (1999). Factors determining reasonableness may include standard industry practices, comparisons to statutorily determined and allowable late fees in other areas, and the totality of the circumstances. See id. If the purpose of the late fee is to impose a penalty, however, then the late fee will not be enforceable. See Stuchin v. Kasirer, 237 N.J. Super. 604 (App. Div. 1990).

Parties sometimes argue, and courts evaluate late fees as constituting liquidated damages. See discussion below regarding liquidated damages.


900200.00001/21142753v1 4

TOPIC ISSUE STATUTE/CASES COMMENTS LANDLORD’S LIENS

Does a lessor have claims against a lessee's real property landlord?

New Jersey gives a landlord of commercial premises a lien for unpaid rent or other charges against the personal property of the commercial tenant. This lien is a statutory lien provided for by N.J. STAT. ANN. 2A:42-1 to 42-3. The "landlord's lien" provides "that no goods or chattels of a tenant, which are kept upon leased real estate, may be taken by virtue of any execution, attachment or other process, unless the party suing out of the process, prior to removing such goods or chattels, pays the landlord all unpaid rent, not exceeding one year's rent." See Hartwell v. Hartwell Co., Inc., 167 N.J. Super. 91 (Ch. Div. 1979). This lien is a statutory right to a preference in payment over certain other creditors. See Hartwell, 167 N.J. Super. at 97. The statute establishes rights only as between the landlord and any non-lien holding creditor of the tenant following judicial process. See Farmers & Merchants National Bank v. Boymann, 155 N.J. Super. 120, 124-125 (Cty. Ct. 1977). New Jersey also provides for a renter's lien in certain cases. This lien gives the landlord or lessee of a mill, factory, or loft a lien on machinery and other chattels to the extent of the renter's interest for the amount of rent unpaid. See N.J. STAT. ANN. 2A:44-165 to 44-168. The statute provides that the lien has priority over any lien, interest, mortgage, judgment, or other encumbrance, created or acquired, after the machinery or chattels are placed on the premises. See id. This priority, however, extends only to the amount of unpaid rent, and is limited to an amount of rent for ten months. See id. New Jersey further provides that a landlord receives a lien for rent due upon all of the tenant's goods and chattels that are located on the premises, when the tenant assigns all of its assets. See N.J. STAT. ANN. 2A:19-31. A landlord with this type of lien must file an action in the Chancery Division of the Superior Court of New Jersey, and show cause that is supported by a verified complaint or affidavit. See Callen v. Sherman, Inc., 92 N.J. 114 (1983); see also N.J. Civ. P. R. 4:-52. In emergency situations, the landlord may employ self-help remedial processees in enforcing its lien. See N.J. STAT. ANN. 2A:33-9. In emergency situations, however, tenants may request a post-deprivation hearing. See id.; see also Callen v. Sherman's Inc., 92 N.J. 114 (1983). Under a landlord's lien on the assignor's goods, the landlord may seize goods or chattels within 40 days after the goods or chattels have been removed from the premises. See N.J. STAT. ANN. 2A:19-32. The landlord then must

The landlord's lien is junior to a perfected security interest under the Uniform Commercial Code. See N.J. STAT. ANN. 2A:42-1; Hartwell v. Hartwell Co., Inc., 167 N.J. Super. 91, 101 (Ch. Div. 1979). This priority exists even when perfection occurs after the property is placed on the premises. See id. A renter's lien, on the other hand, has priority over a perfected security interest. See N.J. STAT. ANN. 2A:44-166; see also Gibralter Fastners Corp. v. Slapo, 23 N.J. 459 (1957). This priority, however, does not extend to priority over purchase money security interests, if the purchase money security interest attaches before the machinery or chattels are placed on the premises. See In re


900200.00001/21142753v1 5

TOPIC ISSUE STATUTE/CASES COMMENTS proceed by obtaining an order to show cause. See N.J. Civ. Prac. R. 4:52-1(a). The landlord's lien covers any goods or chattels on the premises and all of the tenant's goods and chattels on the tenant's premises, and in the tenant's possession. See N.J. STAT. ANN. 2A:19-31; N.J. STAT. ANN. 2A:42-1. The property covered by the renter's lien, in certain cases, is "machinery and other chattels to the extent of the renter's interest therein, for the amount of unpaid rent." See N.J. STAT. ANN. 2A:44-166. New Jersey case law has defined the term "chattel," with respect to executions on a judgment, as including all kinds of property except fixtures. See Moran v. Joyce, 125 N.J. L. 558 (E&A 1941). A landlord's lien is limited to one year's unpaid rent. See N.J. STAT. ANN. 2A:42-1. In addition, the landlord's lien on the assignor's goods is also limited to one year's unpaid rent. See N.J. STAT. ANN. 2A:19-31. In order to enforce the lien, the landlord must, within ten days after the removal of the goods by virtue of execution, attachment or other process, give the sheriff notice of such process, and in such notice, must include the amount of rent in arrears, and make a claim for that rent. See N.J. STAT. ANN. 2A:42-2. A renter's lien attaches from the date the rent is unpaid, and does not require perfection in order to enforce the lien. See In re Holly Knitwear, Inc., 140 N.J. Super. 375 (App. Div. 1976); Schussel v. Emmanual Ross Company, 270 N.J. Super. 628 (App. Div. 1984).

Holly Knitwear, Inc., 140 N.J. Super. 375 (App. Div. 1976). A landlord's lien on assignor's goods is identical to those of a renter's lien. See id.

ARTISANS & SERVICE LIENS

What are the rights of a lessor against an artisan's lien or service lien?

New Jersey law provides that a processor or repairman has a lien against property for processing, repairing, storage, shipping or other charges, which arise by common law and statute. At common law, New Jersey recognizes an artisan's lien. See Ferrante Equipment Company v. Foley Machinery Co., 49 N.J. 432 (1967); Beck v. Neutrodynamics, Inc., 77 N.J. Super. 448 (Cty. Ct. 1962). For an artisan's lien, a claimant must prove the following: (1) the chattel was bailed to the claimant; (2) the claimant expended skill and labor in improvement of the chattel; (3) the claimant conferred upon the chattel additional value; (4) the claimant had the express or implied of owner to do the work; and (5) the claimant was

Although an artisan lien is a common law lien, New Jersey statute does recognize the existence of this lien. See N.J. STAT. ANN. 2A:44-32. This section provides that "a lien held by a person upon chattels in his possession for labor, or materials furnished in


900200.00001/21142753v1 6

TOPIC ISSUE STATUTE/CASES COMMENTS employed for the purpose of rendering a service. See Kalio Universal, Inc. v. B.A.M., Inc., 95 N.J. Super. 393 (App. Div. 1967). An artisan's lien depends on possession, and will be lost only if the lienholder's voluntarily abandons or surrenders possession and/or control of the property. See Beck v. Nutrodynamics, 77 N.J. Super. 458, 450 (1962). Surrender of property to a sheriff, pursuant to a writ of attachment, does not destroy this common law lien. See id. The artisan's lien covers only charges for work done, and arising because of the lienholder's providing services to improve the chattel. See O'Brien v. Buxton, 9 N.J. Misc. 876 (Cty. Ct. 1931). An artisan's lien is senior to a consensual lienholder. See Ferrante Equip. Co. v. Foley Mach. Co., 49 N.J. 432 (1967). New Jersey's Commercial Code provides that an artisan's or service lien takes priority over any interest of the lessor or lessee under a lease contract or a lease governed by New Jersey's Commercial Code Chapter on leases unless the lien is statutory and the relevant statute provides otherwise. See N.J. STAT. ANN. § 12A:2A-306. New Jersey also recognizes certain statutory repairmen and artisan's liens. These liens are determined by the specific types of property and services involved and include aircraft liens, dry- cleaning laundering and tailoring business liens, garage keepers and automobile repairman liens, maritime liens, monument liens, processors of goods liens, processors or motion picture film lines, and watch and jewelry liens. See N.J. STAT. ANN. 2A:44-1 to 44-174. A statutory lien holder has priority over a perfected consensual security interest if the statutory lien holder retains or obtains possession of the goods. See N.J. STAT. ANN. 12A:1-311.

the repair or construction thereof, shall not be waiver, merged or impaired by the recovery of a judgment for the monies due for such labor or material, but the lien may be enforced by levy and sale under execution upon a judgment." See id.

FORUM SELECTION CLAUSES

Does New Jersey enforce forum selection clauses?

New Jersey courts follow the "modern approach" to enforcing choice of law provisions. This approach enforces freely negotiated forum selection clauses, unless the clause contravenes strong public policy, is unreasonable and unjust, or stems from a fraud or undue influence. See Biordi Prods. Corp. v. Axam, Inc., 1989 WL 201020 (D. N.J. 1989); Fairfield Lease v. Liberty Temple, 221 N.J. Super. 647, 652 (1987);

Unless the New Jersey Commercial Code chapter on leases provides otherwise, leasing agreements are


900200.00001/21142753v1 7

TOPIC ISSUE STATUTE/CASES COMMENTS Paradise Enterprises Limited v. Sapir, 356 N.J. Super. 96 (2002); Danka Funding Co. v. Sky City Casino, 747 A.2d 837 (N.J. Super. 1999); Carroll v. United Airlines, Inc., 325 N.J. Super. 353 (1999). Additionally, a New Jersey court will not enforce a forum selection clause if enforcement would seriously inconvenience trial. See Copelco Capital, Inc. v. Shapiro, 331 N.J. Super. 1 (2000); Contracting, Inc. v. Tomasco Corp., 335 N.J. Super 73 (2000). New Jersey also requires forum selection clauses to provide adequate notice to protects the state's policies of fundamental fairness. See Copelco, 331 N.J. Super. at 4. With respect to an equipment lease agreement, one New Jersey court deemed a forum selection clause unenforceable because it did not provide proper notice in subjecting the lessee to jurisdiction in any state or federal court in the location of the lessor, or a future assignee. See id.

effective and enforceable according to their terms. See N.J. STAT. ANN. § 12A:2A-301. New Jersey's Commercial Code does not make any restrictions to commercial leases with respect to the forum selection clauses.

CHOICE OF LAW CLAUSES

Will New Jersey courts enforce the parties' choice of law?

New Jersey enforces conflict of laws provisions with respect to contracts made for loans, and notes payable. As to contracts for loans, where interest is in excess of the rate "allowed by the law of the price of the contract was made, or is to be performed," then the amount actually lent is recoverable by the lender. See N.J. STAT. ANN. 31:1-3. The amount actually lent, however, does not include interest or costs. See id. As to promissory notes, the law of the state where the note was made and is payable governs the conflict of law analysis in New Jersey. See Seacoast R.V. Co., v. American Timber Co., 89 N.J. Eq. 293 (Ch. 1918). The general rule for the conflicts of law analysis in New Jersey for ordinary contracts is the law of the state having the most substantial contacts to the contract in the parties. See Lesser v. Strubbe, 56 N.J. Super 274 (Ch. Div. 1959). Where the parties to a transaction stipulate that the law of a foreign state governs the transaction, then New Jersey courts will honor the chosen choice of law if the following three conditions are met: (1) there is no violation of a strong public policy of New Jersey; (2) there is not attempt to avoid the law of the state for unconscionable purposes; and (3) the chosen state has a


900200.00001/21142753v1 8

TOPIC ISSUE STATUTE/CASES COMMENTS reasonable relationship to the transaction. See Shotwell v. Dairymens, Inc., 22 N.J. Misc. 171 (Cty. Ct. 1944); Crinnion v. The Great Atlantic & Pacific Tea Co., 156 N.J. Super. 479 (App. Div. 1978). If the contracting parties specify a specific law applicable, then New Jersey’s Commercial Code applies that law, as long as the transaction bears a reasonable relation to the estate chosen. See N.J. STAT. ANN. 12A:1-105(1).

ATTORNEY’S FEES

Will New Jersey courts award attorney's fees?

The New Jersey Commercial Code chapter on leases provides that a court may refuse to enforce a lease agreement or any provision of the lease agreement if it finds that the agreements is unconscionable. See N.J. STAT. ANN. § 12A:2A-306(1). If the court finds the lease agreement unconscionable, then it may award attorney's fees to the lessee. See id. at 12A:2A-306(4)(a). If, however, the court finds that the lease agreement is not unconscionable then, it may award attorney's fees to the party against whom the claim of unconscionability was brought. See id. at 12A:2A-306(4)(b). Attorney's fees do not constitute interest, and thus, are not usurious. See Alcoa Edgewater No. 1 Federal Credit Union v. Carroll, 44 N.J. 442 (1965).

JURY WAIVER CLAUSES

Is a jury waiver clause in a lease agreement enforceable?

The New Jersey Constitution provides that, "the right of trial by jury shall remain inviolate." See N.J. CONST. ART. 1 § 9. Legal precedent indicates that parties may contractually waive the constitutional right of trial by jury in certain circumstances. See Franklin Discount Co. v. Ford, 27 N.J. 473 (1958); Rudbart v. Dist. Water Supply Comm., 238 N.J. Super. 41, 48 (App. Div. 1990). Jury waiver clauses, however, which are neither negotiated, or are conspicuously written in an adhesion contract, and not entered into with the assistance of counsel, should not be enforced. See Fairfield Leasing Corp. v. Techni-Graphics, Inc., 256 N.J. Super. 538, 544 (1992).

LIQUIDATED DAMAGE CLAUSES

Are liquidated damage clauses in a

Based upon the rationale that a liquidated damage clause was made pursuant to an arm's length bargain, courts in New Jersey will enforce these clauses in certain

New Jersey statutory law preserves the right of


900200.00001/21142753v1 9

TOPIC ISSUE STATUTE/CASES COMMENTS lease agreement enforceable?

circumstances. See Ellis v. Lionikis, 152 N.J. Super. 321, 328 (1977). Liquidated damage clauses are enforceable as long as they do not constitute a penalty. See Wasserman's Inc., v. Township of Middleton, 137 N.J. 238, 248 (1994); In re Timberline Property Development, Inc., 136 B.R. 382, 385 (Bankr. D. N.J. 1992). As a result, New Jersey courts will scrutinize such damage clauses to ensure that the clause does not constitute a penalty. See Norwest Bank Minnesota v. Blair Rd. Assoc., 2003 WL 1456919 (D. N.J. 2003). Liquidated damage clauses are differentiated from a penalty because a penalty is the promise to pay on an event of default, based upon a punishment or threat, rather than estimated actual damages. See Blue Sky MLS, Inc. v. RSG Systems, LLC, 2002 WL 1065873 (D. N.J. 2002). Liquidated damage clauses in commercial contracts negotiated between sophisticated parties are presumptively reasonable. See id.; Metlife Capital Financial Corp. v. Washington Ave. Assoc., 159 N.J. 484, 496 (N.J. 1999); Presbyterian Homes, 1988 WL 52245 (D. N.J. 1988). Whether a liquidated damage clause is enforceable depends upon whether the clause is reasonable. See Wasserman's Inc. v. Township of Middleton., 137 N.J. 238 (1994). Reasonableness will depend upon whether the provision constitutes a reasonable estimation of the harm caused by an event of default. See id.; River Road Assoc. v. Chesapeake Display and Parking Co., 104 F. Supp. 2d 418, 422-23 (D. N.J. 2000). Some New Jersey courts have limited enforceability of a liquidated damage clause to that in which the amount of damages is a reasonable estimate of the damages of an event of default, and the breach causes a harm that is incapable of estimation. See In re Timberline Property Development, Inc., 136 B.R. 382, 385 (Bankr. D. N.J. 1992) (citing Barr & Sons, Inc. v. Cherry Hill Center, Inc., 90 N.J. Super. 358, 376-77 (App. Div. 1966). Some courts have also found that a liquidated damage clause must be designed to provide actual compensation to the aggrieved party. See id. (citing Stuchin v. Kasirer, 237 N.J. Super. 604 (App. Div. 1990)).

set-off. See N.J. STAT. ANN. 2A:50-29. This right, however, is strictly limited to liquidated damages. See Curtis-Warner Corp. v. Thirkettle, 99 N.J. Eq. 806 (1926). The New Jersey Uniform Commercial Code chapter on leases provides that, the benefits provided pursuant to a supply contract between lessor and supplier extend to the lesser, to the extent of the lessee's interest and the final lease. See N.J. STAT. ANN. 12A:2A-209(1). If a supplier modified liquidated damages, with respect to the lessor, than this provisions provides that the modification is enforceable against the lessee. See id.; see also N.J. STAT. ANN. 12:2A-503 and 12:2A:12-504.


900200.00001/21142753v1 10

TOPIC ISSUE STATUTE/CASES COMMENTS The chapter on leases in New Jersey's Commercial Code provides that a lease contract may provide for liquidated damages. See N.J. STAT. ANN. 12A:2A-504. A liquidated damage clause, however, is enforceable only if the amount of damages, or the formula for determining the amount, is reasonable. See id. at 12A:2A-504(1). Reasonableness will turn on the estimation of the anticipated harm caused by default under the lease agreement. See id. If the liquidated damage provision is determined unenforceable, then the provisions governing leases under New Jersey's Commercial Code provides the appropriate remedy. See id. at 12A:2A-504(2)


900200.00001/21142753v1 11

TOPIC ISSUE STATUTE/CASES COMMENTS REPLEVIN

Is replevin a remedy?

A person seeking to recover goods in the wrongful possession of another may file a writ of replevin action to recover the goods. See N.J. STAT. ANN. § 2B:50-1; 4:61-1(a). A replevin action must first be brought in the Superior court of New Jersey. See id. If a defendant to a replevin action claims title to the goods, then the defendant must state this affirmative defense in the answer to the complaint. See id. at :61-3. In addition, the defendant must claim a return of goods, a statutory lien, or claim for damages in the counter claim. See id. While a judgment is pending a court may grant temporary possession to the plaintiff, if after notice and a hearing, the court finds a probability of judgment in the plaintiff's favor. See id. at 2B:50-2. A court may, however, grant temporary relief to the plaintiff without notice and a hearing in extraordinary circumstances so as to prevent removal of, or the irreparable damage to, the goods in question. See id. at 2B: 50-3. When temporary relief is granted prior to the entry of a judgment, the court may require the party be granted the temporary relief to post a security bond. See id. at 2B:50-4. If the party holding the property refuses to relinquish possession of goods pursuant to a replevin action, the court may enter an order in aid of execution or, if the plaintiff requests, an order for damages against the non-complying party. See id. at 2B:50-5. Once the writ of replevin has been filed with the court, the court may hold a hearing on the writ on no less than three days notice to the party in possession of the property. See N.J. STAT. ANN. 4:61-1(a). The party holding the property must file and serve any cross motions at least on day prior to the hearing. See id. If a summons or writ of replevin is not issued within 10 days after the filing of the complaint, then the action may be dismissed. See id. at 4:61-1(d). New Jersey's Commercial Code further provides that a lessee has the right of replevin only if the lessee is unable to obtain leased goods. See N.J. STAT. ANN. § 12A:2A-521.


900200.00001/21142753v1 12

TOPIC ISSUE STATUTE/CASES COMMENTS WRITS OF ATTACHMENT

Under what circumstances may a lessor seek the attachment remedy?

New Jersey has enacted legislation governing attachment called the "Attachment Act." See N.J. STAT. ANN. 2A:26-1 et seq. The Attachment Act provides that the New Jersey Superior Court may issue an attachment against the real or personal property of any debtor in the following circumstances: (1) If the person seeking an attachment is entitled to an arrest before a judgment is entered in a civil action (except that if attachment is founded upon a tort, then an attachment may not be issued against a corporation). (2) If the defendant is a resident of New Jersey and absconds, or the defendant is a non-resident of the state (except that attachment may not be issued against the rolling stock of a common carrier of a foreign state, or the goods of a non-resident in transit in the custody of a common carrier). (3) Where a cause of action existed against a decedent and property exists in the state subject to the plaintiff's claim. (4) If the plaintiff has an equitable claim where a money judgment is demanded against the defendant and the defendant absconds or is a non-resident and a summons cannot be served upon that person in the state. (5) If the defendant is a foreign corporation, but authorized to do business in New Jersey, and the foreign state authorizes attachments against New Jersey corporations. See N.J. STAT. ANN. 2A:26-2. The Attachment Act also provides that attachment may be issued against both the separate and joint property of joint debtors. See N.J. STAT. ANN. 2A:26-3. New Jersey does exempt certain property from the purview of attachments. In particular, household goods and furniture having value of $1,000 or less are exempt from attachment. See N.J. STAT. ANN. 2A:26-4. In addition, wages or other compensation for labor, or service due to a non-resident employee, are not subject to attachment by a non-resident. See N.J. STAT.

The Attachment Act provides the only attachment remedy. See Tanner Assocs., Inc. v. Ciraldo, 33 N.J. 51 (1960); Whiteman Food Prods. Co. v. G. Arrigoni & Co., 27 N.J. Super. 359 (1953). The writ of attachment is an extraordinary writ that should be used only when in personam jurisdiction is absent and not used when the debtor is within the reach of ordinary processes. See Augustus Co. v. Manzella, 19 N.J. Misc. 29 (1940); McQueeny v. J.W. Ferguson & Sons, Inc., 527 F. Supp. 729 (D. N.J. 1981).


900200.00001/21142753v1 13

TOPIC ISSUE STATUTE/CASES COMMENTS ANN. 2A:26-5. Plaintiffs seeking attachment, however, may be requested to post a bond in an amount fixed by the court. See N.J. STAT. ANN. 2A:26-7. Attachment binds the attached goods, chattels, rights, credits, monies, and effects of the defendant from the time of its execution. See N.J. STAT. ANN 2A:26-8. The property attached is security for any judgment that may be entered against the defendant. See id. If the principal debtor does not have any property that may be attached, then the execution of a writ of attachment does not give rise to a lien on the property. See Russell v. Fred G. Pohl Co, 7 N.J. 32 (1951). As to priority, the first in time, first in right rule governs. See Altschuler v. Onen, 5 N.J. Misc. 45 (1926). When an attachment is issued, the attachment operates as a lien on any real estate the defendant possesses in the state. See N.J. STAT. ANN. 2A:26-9. This rule applies even if the officer fails to do so. See id. The lien also arises on real estate that the debtor acquires between the time the attachment is issued, and the entry of the judgment against the debtor. See id. The lien continues to exist on the property until the plaintiff's claim is satisfied or discharged. See id. Any conveyance of attached property made between the issuance of the attachment, and the entry of an judicial order in favor of plaintiff is void. See N.J. STAT. ANN. 2A:26-10. When a judgment is finally entered, then the judgment creates a lien on property acquired either before, or after, the judgment's entry. See N.J. STAT. ANN. 2A:26-11.

HOMESTEAD LAW

Does New Jersey exempt the homestead from the grasp of creditors?

New Jersey exempts certain property from levy and execution. In particular, goods, chattels, shares of stock, or interests in any corporation, and personal property (except wearing apparel) less than or equal to $1,000 is not subject to execution or any civil process. See N.J. STAT. ANN. 2A:17-19. All real estate, however, is subject to execution if a judgment is obtained. See N.J. STAT. ANN. 2A:17-17.

Similarly, New Jersey does not exempt the homestead from bankruptcy protection

Whether in bankruptcy or not, real estate is vulnerable to creditors.


900200.00001/21142753v1 14

TOPIC ISSUE STATUTE/CASES COMMENTS even though it exempts various other kinds of property from creditors during bankruptcy. New Jersey has not "opted out" of the federal exemption scheme. As a result, debtors located in the state may choose the exemptions provided by other federal bankruptcy laws or state law. For the types of property New Jersey does exempt, see N.J. STAT. ANN. 17:18-12, 17B:24-6-12 exempting burial funds; N.J. STAT. ANN. 8A:5-11 exempting certain insurance policies; N.J. STAT. ANN. 43:15A-53 exempting pension and retirement benefits for public workers; King v. Green, 153 A.2d 49 (N.J. 1959) exempting tenancies by the entirety; N.J. STAT. ANN. 43:21-53 exempting workers' compensation; N.J. STAT. ANN. 34:15-29 exempting employment compensation; N.J. STAT. ANN. A:9-57.6 exempting disability, death, medical and hospital benefits; N.J. STAT. ANN. 52:4B-30 exempting crime victim compensation; and N.J. STAT. ANN. 2A:17-19 2A:26-4 and 38A:4-8 exempting household goods and furniture valued at $1,000 or less and personal property valued at $1,000.

KING & HIGGS, P.C. 30 Franklin Road, S.W., Suite 400 Roanoke, Virginia 24011 (540) 985-0123 Telephone VIRGINIA (540) 985-0742 Facsimile www.kinghiggs.com

Copyright © 2003 King & Higgs, P.C. All Rights Reserved 1


Common Law Tender of Payment

At common law, “the burden is on a debtor to prove an accord and satisfaction. The ‘accord’ is the agreement that a debtor will give and the creditor will accept something in settlement of a disputed claim. As with all agreements, there must be an offer and an acceptance, i.e., ‘[t]he thing agreed to be given . . . in satisfaction must be offered and intended by the debtor as full satisfaction, and accepted as such by the creditor.’ If either the giving or the acceptance in satisfaction be lacking, an accord and satisfaction cannot exist.” John Grier Constr. Co. v. Jones Welding & Repair, Inc., 238 Va. 270, 383 S.E.2d 719; 1989 Va. LEXIS 144; 6 VLR 385; 9 U.C.C. Rep.Serv. 2d (Callaghan) 1214 (1989), citing, Atkins v. Boatwright, 204 Va. 450, 454, 132 S.E.2d 450, 453-54 (1963) and Virginia-Carolina Elec. Works v. Cooper, 192 Va. 78, 80, 63 S.E.2d 717, 719 (1951). “[A]cceptance of a check on which appears ‘in full of account,’ or words of like import, does not in fact close the account unless it was accepted with intelligent appreciation of its possible consequences, coupled with knowledge of all relevant facts.” “The question whether the acceptance of a check or other remittance by a creditor in payment of an indebtedness to him amounts to an accord and satisfaction depends upon the circumstances surrounding the transaction, taking into consideration the conduct and declaration of the respective parties with relation thereto.” John Grier Constr. Co. v. Jones Welding & Repair, Inc., 238 Va. 270 383 S.E.2d 719; 1989 Va. LEXIS 144; 6 VLR 385; 9 U.C.C. Rep.Serv. 2d (Callaghan) 1214 (1989), citing, Mercury Insurance Co. v. Griffith, 178 Va. 9, 20, 16 S.E.2d 312, 316 (1941) and Kasco Mills v. Ferebee, 197 Va. 589, 593, 90 S.E.2d 866, 870 (1956).

Accord and satisfaction is an affirmative defense. Johnston, Trial Handbook for Virginia Lawyers, §9.5 (1986), citing 29 Am Jur 2d, Evidence § 142. Obtain competent legal advice before accepting partial payment tendered as “payment in full” or “final payment.”

TOPIC ISSUE STATUTES/CASES COMMENTS Accord and

Uniform Commercial

In transactions that are subject to the Uniform



Satisfaction (continued)

Code Effect on Co-Debtors

Commercial Code, the principals of the common law are codified at Va. Code Ann. § 8.3A-311 (1950, as amended). “Unlike the common law, however, the statute requires the claimant to overcome the presumption by satisfying an objective rather than a subjective test, that is, would a reasonable person have considered that the ‘instrument was tendered as full satisfaction of the claim?’” Gelles & Sons Gen. Contr., Inc. v. Jeffrey Stack, Inc., 264 Va. 285, 569 S.E.2d 406, 2002 Va. LEXIS 99, 48 U.C.C. Rep. Serv. 2d (Callaghan) 1429 (2002); citing, Webb Bus. Promotions, Inc. v. American Electronics & Entertainment Corp., 617 N.W.2d 67, 76 (Minn. 2000) A creditor may relieve a debtor from an obligation in full or in part without affecting the obligation from a co-debtor or joint contractor. Va. Code Ann. § 11-10. The contract must then be credited to the full extent of the released obligation. Va. Code Ann. § 11-11.

Attorney’s Fees

Common Law Consumer Lease Contracts; Unconscionability

Virginia generally adheres to the “American Rule,” so that “attorney's fees are not recoverable by a prevailing litigant in the absence of a specific contractual or statutory provision to the contrary.” Ryder v. Petrea, 243 Va. 421, 416 S.E.2d 686, 1992 Va. LEXIS 33, 8 VLR 2761 (1992). With regard to consumer lease contracts, if the court finds a consumer lease agreement or any clause within the lease agreement unconscionable, it may award attorney’s fees to the lessee. Va. Code Ann. § 8.2A-108(4)(a). If, however, the court finds that the lessee knowingly made a groundless claim of unconscionability against the lessor, then it may award attorney’s fees to the lessor. Va. Code Ann. § 8.2A-108(4)(b).

The general principal in Virginia is that each party pays for his own attorney. Courts will enforce contractual provisions concerning the recovery of costs and attorney’s fees.




Attorney’s Fees (Continued)

Usury

In an action for usury, the prevailing party can recover both court costs and attorney’s fees from the defendant. Va. Code Ann. § 6.1-330.57.

Foreign Corporations’ Capacity to Sue in Virginia

Qualification to Transact Business Litigation not “Transacting Business”

A foreign corporation must qualify for and obtain a certificate of authority from the Virginia State Corporation Commission (SCC) to transact business in Virginia. A foreign corporation transacting business in Virginia without a certificate of authority may not maintain a legal action in a Virginia court. Va. Code Ann. § 13.1-758(A). Such a corporation may, however, defend a legal proceeding against it without obtaining a certificate of authority. Va. Code Ann. § 13.1-758(E). It is not considered to be transacting intrastate business for a corporation to maintain, defend or settle legal proceedings. Va. Code Ann. § 13.1-757(B).

A foreign corporation not otherwise transacting business in Virginia may litigate in Virginia without obtaining a certificate of authority.


Forum Selection, Choice of Law Limited in Consumer Leases

Virginia law limits the right of parties to consumer leases with regard to choice of law and forum selection. Virginia courts will not enforce a choice of law in a consumer lease that is not of the jurisdiction where the lessee resided at the time of the lease contract or within thirty days thereafter, or where the goods are to be used. Va. Code Ann. § 8.2A-106(1). The judicial forum must be one which would otherwise have jurisdiction over the lessee. Va. Code Ann. § 8.2A-106(2).

There is no limitation on forum selection in non-consumer cases. Virginia uses a statutory scheme of “preferred” venue (Va. Code Ann. § 8.01-261), and “permissible” venue (Va. Code Ann. § 8.01-262).




Homestead Exemptions

Federal Homestead Exemption Not Applicable in Virginia Virginia Homestead Exemption “Poor Debtor’s Exemption”

Virginia has “opted out” of the federal homestead scheme contained in the Bankruptcy Code and has, as permitted by 11 U.S.C. § 522(b)(1), chosen instead to provide its own exemption scheme. Va. Code Ann. § 34-3.1. The “homestead” exemption permits a person (but not any other legal entity) to exempt from creditor process real and/or personal property of his choosing up to $5,000.00 in value. If the householder has dependents, he may exempt an additional amount of real and/or personal property, including money and debts, up to $500.00 per dependent. Va. Code Ann. § 34-4. Certain disabled veterans may exempt an additional $2,000.00. Va. Code Ann. § 34-4.1. The “poor debtor’s exemption” allows a person to exempt: (1) the family Bible; (2) wedding and engagement rings; (3) family portraits and heirlooms up to $5,000 in value; (4) a burial lot and “any preneed funeral contract” up to $5,000.00 in value; (5) wearing apparel up to $1,000.00 in value; (6) household furnishings up to $5,000.00 in value; (7) pets not kept or raised for profit; (8) “medically prescribed health aids”; (9) “tools, books, instruments, implements, equipment, and machines, including motor vehicles, vessels, and aircraft” which are used in his occupation, up to $10,000.00 in value; and (10) a vehicle not used in his occupation up to $2,000.00 in value. A perfected security interest in either of the last two categories, however, has priority over the exemption. Va. Code Ann. § 34-26.

Those categories of property that are not capped in value are exempt without regard to their value. For insolvency planning purposes, the poor debtor’s exemption statute specifically provides that “the purchase of an item claimed as exempt under this section with nonexempt property in contemplation of bankruptcy or creditor process shall not be deemed to be in fraud of creditors.” Va. Code Ann. § 34-26.

TOPIC ISSUE STATUTES/CASES COMMENTS Homestead Exemptions

Additional Exemptions

Additional exemptions exist for certain animals and farm implements owned by a



(continued) Exemptions from Garnishment Homestead Allowance in Claims Against Estates Waiver of the Homestead Exemption Property Held as Tenants by the Entireties

householder engaged in agriculture (Va. Code Ann. § 34-27), and for prepaid tuition contracts and savings trust agreements (Va. Code Ann. § 23-38.81). A percentage of the debtor’s disposable earnings are exempt from garnishment or other process. Va. Code Ann. § 34-29. The surviving spouse of a deceased debtor may receive a homestead allowance up to $15,000.00, or in the case of no surviving spouse, the $15,000.00 may be divided among the minor children. The homestead allowance has “priority over all claims against the estate, but not over the right to family allowance and exempt property.” Va. Code Ann. § 64.1-151.3. The homestead exemption may be waived under Virginia law. Va. Code Ann. § 34-22. Deeds of trust or other pledges or liens are void as to properly exempted property, except as to purchase money security interests. Va. Code Ann. § 34-28. Though not a true exemption, property held by husband and wife as tenants by the entireties is not liable for the individual debts of either debtor. In re Harry, 151 B.R. 735 (Bankr. W.D. Va. 1992); Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599 (1951). If joint debts are owed, the exemption fails as to joint creditors. See, In re Ballard, 65 F.3d 367 (4th Cir. 1995).

While waiver of the homestead exemption is permitted under Virginia law, it is not valid in the bankruptcy context. See, 11 U.S.C. § 522(e). A husband and wife may own both real and personal property as tenants by the entireties. Va. Code Ann. § 55-20.2.

TOPIC ISSUE STATUTES/CASES COMMENTS Landlord’s Liens

Procedure

In Virginia, a landlord may recover any kind of rent through distress or action. Va. Code Ann. § 55-227. The landlord may levy upon any goods found on the premises, or which may have been removed from the premises



Priority and Amount

not more than thirty days before the levy. Va. Code Ann. § 55-231. The landlord’s lien is superior to liens created after the commencement of the tenancy, up to a value of up to six months’ rent for residential or commercial property, and up to a value of twelve months’ rent if the property is used for farming or agriculture.” Va. Code Ann. § 55-233. A city’s tax lien against “specific chattels on the leased premises” will subordinate the landlord’s lien. United States v. Waddill, Holland & Flinn, Inc., 182 Va. 351, 28 S.E.2d 741 (1944), (rev'd as to priority of federal claim at 323 U.S. 353, 65 S.Ct. 304, 89 L. Ed. 294 (1945)).

Late Charges

Late Charges Permitted; Allowed Amount Excess Late Charges Void

A lender may require a late charge up 5% of the amount of an installment payment not timely made. A “timely payment” is defined as one made by the due date or within seven calendar days thereafter. Va. Code Ann. § 6.1-330.80(A). Late charges in excess of 5% are void as to the excess amount only. Va. Code Ann. § 6.1-330.80(C).

TOPIC ISSUE STATUTES/CASES COMMENTS Licensed Lenders

Consumer Loans

The Consumer Finance Act requires a lender to hold a license issued by the Virginia State Corporation Commission in order to lend to individuals for personal, family, household or other nonbusiness purposes when “any interest, charges, compensation, consideration or expense” is in the aggregate greater than the interest permitted by Va. Code Ann. § 6.1-



Mortgage Loans

330.55 [12%]. Va. Code Ann. § 6.1-249. Mortgage lenders brokers must obtain a license from the Virginia State Corporation Commission. Va. Code Ann. § 6.1-410.

Liquidated Damages

Liquidated Damage Clauses Allowed; “Reasonableness” Requirement

The Uniform Commercial Code as adopted in Virginia permits parties to include a liquidated damage clause in lease agreements. Va. Code Ann. § 8.2A-504. The clause must either set a “reasonable” amount of liquidated damages, or set forth a “reasonable” formula by which damages can be calculated “in light of the then anticipated harm caused by the default or other act or omission.” Id.




Prepayment Penalties

Installment Sales Contracts Real Estate Loans of Less than $75,000 Real Estate Loans on Owner-Occupied Property Right of Prepayment to Industrial Loan Associations; Applicability of Rule of 78

Except as otherwise provided by Virginia law, there is no regulation of prepayment penalties on secured or unsecured notes evidencing installment sales contracts. Va. Code Ann. § 6.1-330.81(C). Loans secured by a first deed of trust on real estate, in which the principal amount of the loan is less than $75,000 are required to permit prepayment of the unpaid principal at any time. The contract cannot provide a penalty in excess of one percent of the unpaid principal balance. Va. Code Ann. § 6.1-330.81(A). Any prepayment penalty in excess of said one percent will be unenforceable as to the excess amount. Va. Code Ann. § 6.1-330.81(B). Prepayment penalties on loans secured by a deed of trust on a home which is occupied or to be occupied in whole or in part by a borrower is limited to two percent of the amount of the prepayment. Va. Code Ann. § 6.1-330.83. Borrowers from industrial loan associations are entitled to prepay loans at any time. If interest was added to the face of the note at its making, the borrower is entitled to a rebate calculated according to the Rule of 78 for any unearned interest on the note. Prepayment penalties for industrial loan associations are capped at two percent of the amount of the prepayment. Va. Code Ann. § 6.1-330.84. Use of the Rule of 78 is prohibited on any loans with a maturity of greater than 61 months. Va. Code Ann. § 6.1-330.86:1.




Replevin

Replevin Replaced by Detinue in Virginia Pretrial Seizure of Property; Grounds

The action of “replevin” has been abolished in Virginia. Va. Code Ann. § 8.01-218. Recovery of possession of unlawfully detained personal property may be accomplished through an action in detinue. Under certain circumstances, the plaintiff may file a petition for pretrial seizure of the property. Va. Code Ann. § 8.01-114. The grounds for pre-trial seizure are outlined in Va. Code Ann. § 8.01-534, and involve, for example, imminent destruction, transportation or conversion of the property to which the creditor is entitled. If pre-judgment attachment is sought, the plaintiff must pay a bond at least double the estimated fair market value of the property. Va. Code Ann. § 8.01-115.

A detinue action is commenced by filing a warrant in detinue or motion for judgment in detinue. Va. Code Ann. § 8.01-114. The plaintiff must pay costs, fees and taxes at the time of filing. Va. Code Ann. § 8.01-114(A).

Statutory Liens

Innkeepers’ Lien Garagemens’ Lien

Virginia imposes a lien for payment of lodging in favor of “every innkeeper and the keeper of a boardinghouse or house of private entertainment” for possession of baggage and other personal property of a debtor and of his employer, if it is brought upon the premises of such establishment by the debtor. Va. Code Ann. § 43-31. Virginia imposes a lien in favor of keepers of livery stables, hangars, tie-downs, marinas or garages, or horses or any other animals, vehicles, boats, aircraft and harness, upon the animals, vehicle(s), boat(s), aircraft or harness, for the amount due for keeping, supporting and/or care thereof. Va. Code Ann. § 43-32(A).




Statutory Liens (continued)

Priority of Security Interests Towing and Recovery Services Owners’ Personalty

If there is a secured interest in a boat, aircraft or vehicle subject to the garageman’s lien described above, the keeper’s lien is limited as to the lienholder to reasonable storage charges up to $300.00 and for alteration and repairs up to $625.00. The keeper must provide written notice by certified mail, return receipt requested, to any secured party of record at the Department of Motor Vehicle or the Department of Game and Inland Fisheries, in order to claim an amount in excess of $150.00. The secured party then has seven days from receipt of the notice to take or refuse redelivery to its designee, or the keeper will receive priority for the full $300.00. Va. Code Ann. § 43-32(B). A person providing services of towing and/or recovery of a boat, aircraft or vehicle has a lien for all normal costs involved if within seven days of receipt of the property he gives written notice by certified mail, return receipt requested, to all secured parties of records at the Department of Motor Vehicles or the Department of Game and Inland Fisheries. Va. Code Ann. § 43-32(C). A lien created under Va. Code Ann. § 43-32 does not extend to any personal property not attached to or considered to be necessary for the proper operation of any motor vehicle, and such property should be promptly returned to the owner. Va. Code Ann. § 43-32(E).

Motor vehicles are titled through the Virginia Department of Motor Vehicles. Va. Code Ann. §§ 46.2-600, et seq. Boats are titled and registered through the Virginia Department of Game and Inland Fisheries. Va. Code Ann. §§ 29.1-700, et seq. This is a common area of dispute concerning aftermarket additions and modifications, particularly as to the priority between competing security interests.

TOPIC ISSUE STATUTES/CASES COMMENTS Statutory Liens (continued)

Mechanics’ Liens

Virginia law recognizes a mechanic’s lien attaching to personal property. If a mechanic has altered or repaired any article of personal



Warehouseman’s Lien Enforcement of Warehouseman’s Lien

property at its owner’s request, the mechanic has a lien thereon for his charges and can possess the property until the charges are paid. If the owner wishes to retrieve the property, he can do so by posting a secured bond to the court in the amount of the charges and court costs. Va. Code Ann. § 43-33. In Virginia, a warehouseman’s lien automatically attaches against a bailor “on the goods covered by a warehouse receipt or on the proceeds thereof in his possession for charges for storage or transportation (including demurrage and terminal charges), insurance, labor or charges present or future in relation to the goods, and for expenses necessary for preservation of the goods or reasonable incurred in their sale pursuant to law.” The lien can extend to like charges or expenses incurred on other goods owned by same bailor, if it is stated on the receipt that such a lien will attach. A warehouseman who voluntarily delivers good or unjustifiably refuses to deliver them loses his lien on said goods. Va. Code Ann. § 8.7-209. A warehouseman enforces his lien through public or private sale on commercially reasonable terms, after notification of all interested parties. The notification must include “a statement of the amount due, the nature of the proposed sale and the time and place of any public sale.” Va. Code Ann. § 8.7-210.




Usury

Legal Rates of Interest Judgment Rate of Interest Rate of Interest Constituting Usury Borrower’s Right to Claim Usury as Defense to Lender’s Suit Borrower’s Action for Excess Interest Amount

The legal rate of interest in Virginia in the absence of another contractual agreement is 8%. Va. Code Ann. § 6.1-330.53. The judgment rate of interest is 9%, and applies to both pre-judgment and post-judgment interest. Va. Code Ann. § 6.1-330.54. Unless other law applies, parties may contract for a rate of interest higher than the legal rate, but such rate cannot exceed 12% per annum. Va. Code Ann. § 6.1-330.55. In a suit by a lender against a borrower for payment of a loan, the borrower may claim usury as a defense. If the lender prevails in his claim, but the borrower also prevails in his defense, the lender may recover only the principal amount of the loan. Va. Code Ann. § 6.1-330.56. Additionally, within two years from the last scheduled payment or the date of payment in full, a borrower may sue to recover from a lender “the total amount of interest paid to [the lender] in excess of that permitted by applicable statute,” “twice the total amount of interest paid to [the lender] during the two years immediately preceding the date of the filing of suit or action,” plus “court costs and reasonable attorney’s fees.” Va. Code Ann. § 6.1-330.57(A). Courts will not impose this penalty on a lender who can prove “that interest or other charges in excess of those permitted by law was imposed or collected as a result of a bona fide error in computation or similar mistake….” Va. Code Ann. § 6.1-330.57(B).

Courts may award judgment interest higher or lower than the statutory rate based upon the written agreement of the parties. Note that the burden of proof for this defense is on the defendant.

TOPIC ISSUE STATUTES/CASES COMMENTS Usury

Effect of Waiver of Usury

Any waiver by the borrower of the advantages



(continued) Defense Limitation on Borrower’s Right of Usury Action or Defense; Exceptions to Usury Laws Loans for Educational Expenses Not Subject to Usury Defense

of the usury laws shall render the contract or agreement void as against public policy, but this does not apply to a waiver of benefits or release of rights made subsequent to a loan as part of a settlement of potential or pending claims by a borrower involving such loan. Va. Code Ann. § 6.1-330.58. Some exceptions to the above laws regarding usury apply. A borrower may not avail himself of the defense or action of usury in a loan made to him by a bank, savings institution, industrial loan association or credit union, if the principal amount of the loan is $5,000.00 or more. Va. Code Ann. § 6.1-330.61. A bank or savings institution that makes an installment loan can contract with the borrower for “finance charges and other charges and fees at such rates and in such amounts and manner as may be agreed by the borrower.” This exception also applies to loans for purchase of a motor vehicle “made by a subsidiary or affiliate of a bank or savings institution that is not a licensee under the provisions of the Consumer Finance Act.” Va. Code Ann. § 6.1-330.60(A). A loan made by a bank or savings institution to pay for educational expenses, including tuition, fees, books, supplies, room, board and personal expenses is enforceable as agreed by the borrower. Va. Code Ann. § 6.1-330.60(B).




Usury (continued)

Loans by Industrial Loan Associations

With regard to industrial loan associations, installment loans are enforceable as to interest as agreed by the borrower. The lender can charge, in addition to interest, a loan fee not exceeding two percent of the principal. Also, the lender can charge in advance an interest rate upon the entire amount of the loan. Va. Code Ann. § 6.1-330.68(A). The borrower may prepay and obtain a rebate of any unearned interest on the note calculated according to the Rule of 78.

If the loan is payable on demand or in a single payment, the lender can charge an interest rate of up to 18%, plus the same loan fee as outlined in § 6.1-330.68(A). Va. Code Ann. § 6.1-330.68(B).

Waiver of Jury Trial

Right to Trial by Jury in Actions at Law No Exclusive Right to Trial by Jury in Chancery (Equity) Cases

In actions at law, seeking primarily monetary relief of more than $100.00, exclusive of interest, either party may demand a jury trial. If neither party demands a jury trial, however, the right is waived, and the matter is heard before the bench. Va. Code Ann. § 8.01-336(B). The Court can sua sponte order a jury trial in a law matter. Va. Code Ann. § 8.01-336(C). In chancery actions, seeking primarily equitable relief, either party may have a plea in equity or an issue tried by a jury, but not the entire case. Va. Code Ann. § 8.01-336(C). The court may, on its own motion or on the motion of either party, direct an issue “out of chancery.” Va. Code Ann. § 8.01-336(D).

The right to a trial by jury in Virginia is established by Article I, Section 11, of the Constitution of Virginia, and by statute. Va. Code Ann. § 8.01-336.

TOPIC ISSUE STATUTES/CASES COMMENTS Writ of Attachment

Writ of Fieri Facias

A judgment creditor can request that the Clerk of Court issue a writ of fieri facias to the sheriff directing him to levy on property to



Pretrial Seizure of Property

satisfy a money judgment. Such property includes goods and chattels (except those exempt from levy under Title 34), including money and bank notes of the judgment debtor. Va. Code Ann. § 8.01-478. Under certain circumstances, the plaintiff may petition for pre-trial seizure of property. The grounds for pre-trial seizure are outlined in Va. Code Ann. § 8.01-534, and involve, for example, threat of imminent destruction, and transportation or conversion of property with intent to hinder, delay or defraud creditors.

SUGAR FRIEDBERG & FELSENTHAL 30 North LaSalle Street, Suite 3000 Chicago, IL 60602 (312) 704-9400 Fax (312) 372-7951 [email protected] ILLINOIS

29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Accord and Satisfaction

What constitutes an accord and satisfaction in Illinois?

Accord and satisfaction is a contractual method of discharging a debt or claim. Under Illinois law, accord and satisfaction requires: (1) a bona fide dispute; (2) an unliquidated claim; (3) consideration; and (4) a shared and mutual intent to compromise the claim. Accord and satisfaction presuppose that the contracting parties dispute the amount owed, but agree to give and accept something other than that which they thought was due in order to settle the claim.


Accord and satisfaction by use of an instrument (such as a check) is governed by statute, 810 ILCS 5/2-311. The statute provides that: (a) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, the following subsections apply. (b) Unless subsection (c) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim. (c) Subject to subsection (d), a claim is not discharged under subsection (b) if either of the following applies: (1) The claimant, if an organization, proves that (i) within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place, and (ii) the instrument or accompanying communication was not received by that designated person, office, or place. (2) The claimant, whether or not an organization, proves that within 90 days after payment of

However, “[p]artial payment of a fixed and certain demand which is due and not in dispute is not satisfaction of the whole debt even where the creditor agrees to receive a part for the whole.” A.F.P. Enterprises, Inc., 611 N.E.2d 619, (Ill.App.Ct. 1993) at 623.


29589v1

the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted. This paragraph does not apply if the claimant is an organization that sent a statement complying with paragraph (1)(i). (d) A claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant or an agent of the claimant having direct responsibility with respect to the disputed obligation knew that the instrument was tendered in full satisfaction of the claim. Tendering a check which states that it is in full satisfaction of the claim satisfies the criteria set forth in the statute. Bankers Leasing Association, Inc. v. Pranno, 681 N.E.2d 28, 34 (Ill.App.Ct. 1997). If there is a bona fide dispute as to the amount due, it makes no difference that the creditor protests that he does not accept the amount in full satisfaction. The creditor must either accept the payment with the condition or refuse it. Acceptance constitutes accord and satisfaction. See Nelson v. Fire Insurance Exchange, 510 N.E.2d 137 (Ill. App.Ct. 1987).


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Attorney Fees

Can attorneys' fees be recovered in an action to enforce a Lease?

Whether attorney fees are recoverable, and the extent of the fees recoverable will depend on the terms of the contract. “The general rule in Illinois is that in the absence of a statute or an agreement the successful litigant in a civil action may not recover attorney fees or the ordinary expenses of litigation from his adversary.” Touchdown Sportswear, Inc. v. Hickory Point Mall Co., 518 N.E.2d 647 (Ill.App.Ct. 1987) (citing, Saltiel v. Olson,, 426 N.E.2d 1204 (Ill. 1981) (affirming award of attorney fees under lease). “Provisions in contracts for the awards of attorney fees and costs, as is the case here, are an exception to the rule.” Id. (citing, Karim v. First Fed’l Savings and Loan Assoc., 462 N.E.2d 488 (Ill. 1984).

Even though courts find that the “better practice” is reserving issue of attorneys fees before closing proofs in action involving lease, failure to reserve the issue does not bar petition for attorney fees filed within 30 days of judgment. See Touchdown Sportswear, 518 N.E.2d, at 648-49.

What attorney fees may a lessor recover when a lessee has filed bankruptcy?

Lessors should make sure that their attorney fee provisions of their leases are broad and include not just costs of collection, but all costs incurred in protecting the lessors’ interests including fees expended in any insolvency proceeding. For example, if a lease provides the award of fees only for “collection”, that will not cover the fees incurred in protecting the lessor’s interest in the lessee’s bankruptcy. Much of the work in a bankruptcy relates to assumption or rejection of a lease under Section 365(b)(1) of the Bankruptcy Code or determining whether a plan of reorganization should be contested or not. See In re Entertainment, Inc., 223 B.R. 141 (Bankr. N.D. Ill. 1998) (the court examined the language of the attorney fees and costs clause to assess which of the attorney fees would be awarded). To ensure a lessor’s ability to collect all its attorney fees in the event of a lessee’s bankruptcy, the relevant clause should be broadly written and encompass collection of all attorney fees related to enforcing lease obligations.


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Dissolved/De facto Corpora-tions

Can corporations plead dissolution as a defense to their contractual obligations in Illinois?

Pursuant to Section 12.30 of the Illinois Business Corporation Act (805 ILCS 5/12.30), upon dissolution, a corporation terminates its corporate existence and may only conduct business to the extent that it is winding up and liquidating its business and affairs. However, dissolution, according to subsection (b) of this Section, does not prevent a lawsuit being brought against or by a corporation for a period of five years after dissolution. Section 12.80 of Illinois Business Corporation Act (805 ILCS 5/12.80) provides that the dissolution of a corporation does not take away nor impair any civil remedy available to or against the corporation for any right or claim existing, or any liability incurred, prior to such dissolution. Any such action or proceeding by or against the corporation may be prosecuted or defended by the corporation in its corporate name.

A dissolved corporation can bar any known claims against it by sending to those known creditors a prescribed written notice of the deadline for giving the dissolved corporation notice of claims against it. See Section 12.75 of the Illinois Business Corporation Act (805 ILCS 5/12.75)

Can officers/directors of a dissolved corporation be held personally liable for distributions made to shareholders upon dissolution?

In addition to any other liabilities imposed by law upon directors of a corporation, they can be liable to creditors of the corporation whose claims remain unpaid it they allow distribution of corporate assets upon dissolution. See Sections 9.10 and 12.75 of the Ilinois Business Corporation Act

Shareholders of a corporation can also be liable to creditors to the extent of the distributions received from the dissolving corporation. Suit must be brought within two years of the distribution being made.


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Evergreen contract Provisions

Are automatic contract renewals enforceable in Illinois?

Automatic renewals are governed by the Automatic Contract Renewal Act (815 ILSC 601/1 et. seq.). This act provides that if a contract is subject to automatic renewal clause, that clause must appear in the contract in a clear and conspicuous manner. If a contract does not comply with this act, the automatic renewal provisions are not enforceable by a party who prepared the contract or directed its preparation.

Foreign Corpora-tions’ Capacity to Sue in Illinois

Do foreign corporations have the capacity to sue in Illinois if the corporation is unauthorized to do business in Illinois?

Under Section 13.70 of the Business Corporation Act of 1983 (815 ILCS 5/13 et seq.), no foreign corporation transacting business in Illinois without authority to do so is permitted to maintain a civil action in any Illinois court, until the corporation obtains that authority. Nor shall a civil action be maintained in an Illinois court by any successor or assignee of the corporation on any right, claim or demand arising out of the transaction of business by the corporation in Illinois, until authority to transact business in Illinois is obtained by the corporation or by a corporation that has acquired all or substantially all of its assets. 815 ILCS 5/13.70(a) “Transacting business” in Illinois does not include occasional and isolated transactions. Vinylweld, Inc. v. Metro. Greetings, Inc., 360 F. Supp. 1360, 1362 (N.D. Ill. 1973) (citation omitted). “Furthermore, a foreign corporation is not required to obtain a certificate of authority if it is simply conducting interstate commerce.” Subway Restaurants, Inc. v. Riggs, 696 N.E.2d 733, 737 (Ill.App.Ct. 1998) (finding that lessor’s ten leasing transactions in Illinois did not constitute substantial amount of business in Illinois that would require obtaining a certificate of authority). See also the Foreign Corporation Lending Act (815 ILCS 125/0.01 et. seq.) which governs foreign corporations authorized by their charters to invest and loan money. They may, without qualifying to transact business in this state, invest or loan money, purchase or contract to purchase notes or other evidences of indebtedness secured by any security instruments.

The failure of a foreign corporation to obtain authority to transact business in Illinois does not impair the validity of any contract or act of the corporation, and does not prevent the corporation from defending any action in any court of this State. 815 ILCS 5/13.70 It merely relates to whether the foreign corporation can be the plaintiff in the suit before its becomes qualified.


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Foreign Judgments

Can foreign judgments be domesticated in Illinois?

Illinois adopted two uniform statutes governing the enforcement of judgments rendered by courts outside the State of Illinois. For foreign judgments of a “court of the United States or of any other court which is entitled to full faith and credit in this State,” 735 ILCS 5/12-651, Illinois adopted the Uniform Enforcement of Foreign Judgments Act, 735 ILCS 5/12 650 – 657 (the “Enforcement Act”). The Enforcement Act is intended to implement the federal Constitution’s full faith and credit clause and to facilitate the enforcement of interstate judgments by providing a summary procedure through which a judgment creditor may seek enforcement expeditiously in any jurisdiction where the judgment debtor is found. Doctor’s Associates, Inc. v. Durnee, 745 N.E.2d 1270, 1277 (Ill.App.Ct. 2001). A proper filing of a foreign judgment has the effect of initiating an enforcement proceeding and instantly rendering a final judgment"). 735 ILCS 5/12-652(a). The judgment debtor may attack enforcement, but collateral attacks by a judgment debtor are limited and may only be sustained on grounds that: (1) the rendering court lacked subject matter jurisdiction of the case or personal jurisdiction over the defending party; (2) that the foreign judgment was procured by extrinsic fraud; (3) that the judgment obligation has been satisfied, released, waived or discharged; (4) that the defending party was denied due process of law, or (5) any other ground that would otherwise render the foreign judgment invalid or unenforceable . Doctor’s Associates, 745 N.E.2d at 1277-78. With respect to judgments of foreign countries, Illinois adopted the Uniform Foreign Money-Judgments Recognition Act, 735 ILCS 5/12 618 – 626 (the “Recognition Act”). The Recognition Act only provides a mechanism by which an Illinois court recognizes the foreign judgment. The Recognition Act does not provide the procedure to file or enforce a foreign judgment. However, the Recognition Act does provide that a foreign judgment that is final and conclusive and enforceable where rendered is enforceable in the same manner as the judgment of a sister state which is entitled to full faith and credit. 735 ILCS 5/12-619, 620. Therefore, the methods to file and enforce a non-U.S. judgment are those set forth in the Enforcement Act. Pinilla v. Harza Engineering Co., 755 N.E.2d 23, 26 (Ill. App.Ct. 2001).

A seven-year statute of limitations governs the enforcement of both types of foreign judgments. 735 ILCS 5/12-108. See Revolution Portfolio, LLC v. Beale, 774 N.E.2d 14 (Ill.Ct.App. 2002)(regarding the Enforcement Act); Pinilla v. Harza Engineering Co., 755 N.E.2d 23 (Ill.Ct.App. 2001) (regarding the Recognition Act). The statute also provides that a judgment shall not be enforced after the expiration of the seven years from the time it is rendered except upon revival of the judgment. In Illinois, judgments can be revived up to twenty years after the judgment is rendered.


29589v1

Forum Selection Clause

Does Illinois enforce forum selection clauses?

Yes, provided the clause is in bold large print and not in “boilerplate” “A forum selection clause in a contract is prima facie valid and should be enforced unless the opposing party shows that enforcement would contravene the strong public policy of the state in which is case is brought, or that the chosen forum would be so seriously inconvenient for trial that the opposing party would be deprived of his or her day in court.” Yamada Corp. v. Yasuda Fire & Marine Ins. Co., Ltd., 305, 712 N.E.2d 926, 931 (Ill.App.Ct. 1999) (citations omitted) (enforcing forum selection clause in contract). “Furthermore a forum-selection clause made during an arms-length negotiation between experienced and sophisticated businesspeople should be honored and enforced absent some ‘compelling and countervailing reason’ otherwise.” Id. (internal quotation and citations omitted). Courts consider the following factors when determining whether or not a forum-selection clause is unreasonable: “(1) which law governs the formation and construction of the contract; (2) the residency of the parties involved; (3) the place of execution and/or performance of the contract; (4) the location of the parties and witnesses participating in the litigation; (5) the inconvenience to the parties of any particular location; and (6) whether the clause was equally bargained for.” Id. at 931. (citation omitted). In Mellon First United Leasing v. Hansen, 705 N.E.2d 121 (Ill.App.Ct. 1998), the appellate court affirmed the trial court’s refusal to enforce a forum-selection clause in an equipment lease where the lessee was an unsophisticated consumer in a small transaction and the relevant language was in “small print on the back of a preprinted form,” making the agreement like an adhesion contract. Id., at 125. The court considered that the lessee was not in the office equipment business, and there was no indicated that she had any particular expertise or equivalent bargaining power. Id. Even where a party did not object to forum selection clauses, courts still refuse to enforce them where the clause is part of a “boilerplate” agreement and objecting parties were in disparate bargaining positions (i.e. parties were forced to “take it or leave it”). See, e.g., Williams v. Ill. State Scholarship Comm’n., 563 N.E.2d 465 (Ill. 1990).


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Governing Law Clauses

Does Illinois enforce contractual choice of law clauses?

Yes--In contractual disputes, “Illinois law respects the contact’s choice-of-law clause as long as the contract is valid.” Kohler v. Leslie Hindman, Inc., 80 F.3d 1181, 1185 (7th Cir. 1996).

Lender’s License

When must a lender be licensed in Illinois?

The Illinois Consumer Installment Loan Act (205 ILCS 670/1) requires that no person or entity may engage in the business of making loans in a principal amount not exceeding $25,000 and receive a rate of interest greater than the lender would be entitled to receive if the lender were not licensed under this act unless the lender is so licensed.


What is the maximum lawful interest rate in Illinois?

The Illinois usury statute is the Interest Act (815 ILCS 205/0.01 et.seq.). The act provides that interest shall not exceed 5% except as otherwise provided in the act. The major exception to the Interest Act limitation is with respect to written contracts the maximum interest rate is 9%. Also, with respect to installment loan contracts for less than $25,000 in principal amount and for less than 181 months which require 2 or more payments, the maximum rate is 9%. However, there is no limit on the amount interest is charged in many situation such as (i) the lender is a state bank or a branch of an out of state bank and the rate is agreed to by the lender and the borrower and (ii) any loan made to a corporation, a business association or copartnership or to a person owning and operating a business as sole proprietor or to any persons owning and operating a business as joint venturers, joint tenants or tenants in common, or to any limited partnership, or to any trustee owning and operating a business or whose beneficiaries own and operate a business, except that any loan which is secured (1) by an assignment of an individual obligor's salary, wages, commissions or other compensation for services, or (2) by his household furniture or other goods used for his personal, family or household purposes shall be deemed not to be a business loan excepted from the interest limits.

Review the Interest Act has other restrictions and other exceptions from restrictions.


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Possessory Liens\land-lord liens that can trump the lessors’ right to equipment

What types of possessory liens exist in Illinois? Can lessor’s lien be junior to that of a lessee’s landlord?

Artisan’s possessory liens of the common law are long recognized by Illinois law. The common law lien has no provision for forfeiture or sale, but is limited to the right of possession until the amount due is paid. Navistar Financial Corp. v. Allen’s Corner Garage and Towing, 505 N.E.2d 1321, 1323 (Ill.App.Ct. 1987). Common law possessory liens take priority over earlier perfected security interest. National Bank of Joliet v. Bergeron Cadillac, Inc., 361 N.E.2d 1116, 1117 (Ill. 1977). The only exception to this concerns liens created by statute. If a lien is created by statute and the statute explicitly states that the statutory lien is subordinated to a prior perfected security interest, then the statutory lien will be subordinate. Id. (based upon U.C.C. section 9-310 which Illinois adopted, which is codified under section 9-333). A landlord’s lien of distress for rent is recognized under Illinois law in 735 ILCS 5/9-301. The statute is silent as to whether the landlord’s lien is subordinated to a prior perfected security interest of a lessor under a financing lease where a UCC financing statement has been filed in favor of the lessor. U.C.C. section 9-333 provides that the landlord’s statutory lien takes precedence. However, there is Illinois law (pre-dating enactment of U.C.C. section 9-333) which gives priority to a prior perfected security interest as against a landlord’s lien under a distress warrant. See First State Bank of Maple Park v. DeKalb Bank, 530 N.E.2d 544 (Ill.App.Ct. 1988).


29589v1

TOPIC ISSUES STATUTES/CASES COMMENTS Vicarious Liability

Can lessors be held vicariously liable for acts of the lessee?

Under an equipment lease agreement, a lessor may be held vicariously liable for acts of the lessee that cause injury to a third party. To succeed on a vicarious liability theory, a party “must plead both a pre-tort relationship and a qualitative distinction between its conduct and that of the parties by whom [it] seeks to be indemnified.” Kemner v. Norfolk and Western Ry. Corp., 544 N.E.2d 124, 127 (Ill.App.Ct. 1989). The “classic pretort relationships which give rise to a duty to indemnify are between lessor and lessee, employer and employee, and master and servant.” Id.; see also White v. Touche Ross & Co., 516 N.E.2d 509, 514 (Ill.App.Ct. 1987) (citing Van Slambrouck v. Economy Baler Co., 475 N.E.2d 867 (Ill. 1985)). In Dixon v. Chicago and North Western Transp. Co., 601 N.E.2d 704 (Ill. 1992), the Illinois Supreme Court held that the “right to be indemnified by another may be express, as in a contractual provision, or it may be implied.” Id. at 709. Contracts for indemnification are to be carefully scrutinized and strictly construed. Sorrentino v. Waco Scaffolding & Shoring Co., Inc., 358 N.E.2d 1244, 1246 (Ill.App.Ct. 1976).

Implied indemnity arises in situations in which a promise to indemnify can be implied from the relationship between the tortfeasors. Dixon, 601 N.E.2d at 709. “[T]he scope of implied indemnity in a defective products case should be limited to those situations in which the indemnitee was not negligent or otherwise at fault in causing the loss.” Id. “Where the party seeking indemnity was not at fault, it can rightfully seek to shift its entire liability to the truly responsible party.” Id.; see also Richardson v. Chapman, 676 N.E.2d 621, 630 (Ill. 1997) (permitting lessor of truck to obtain contractual indemnity from lessee under the terms of the parties’ lease agreement, and from the negligent truck driver under implied indemnity theory). In strict liability cases (e.g., those involving inherently dangerous products), an agreement will not be construed as indemnifying a party against its own strict liability unless the language of the agreement clearly and specifically shows this was the intent of the parties. Patton v. T.O.F.C., Inc., 398 N.E.2d 313, 319 (Ill.App.Ct. 1979) (indemnification provision in equipment sublease was specific enough to require sublessee to indemnify sublessor for


29589v1

liability on third party’s strict liability claim for injuries attributable to a defect in the leased equipment). “A lessor can be strictly liable only if it is engaged in the business of leasing the injury-causing product.” Id. The Illinois Contribution Act extinguished causes of action for implied indemnity except in “cases involving some pretort relationship between the parties which gives rise to a duty to indemnify, e.g., in cases involving vicarious liability (lessor-lessee . . .); or cases involving ‘upstream’ claims in a strict liability action.” Bristow v. Griffitts Constr. Co., 488 N.E.2d 332, 337 (Ill.App.Ct. 1986). In other words, “the doctrine of implied indemnity remains effective in cases where one party’s liability is solely derivative.” Id.

“True Lease” versus “Disguised Security Interests”

Under what circumstances, would an equipment lease be considered a “disguised security interest”?

The standard for determining whether a lease constitutes a “true lease” or a “security agreement” for a financing transaction is set forth in Section 1-201(37) of the Illinois Uniform Commercial Code. Pursuant to that provision: [w]hether a transaction creates a lease or a security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee; and

* * * * * (d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement 810 ILCS 5/1-201(37) (emphasis added). Rather than the intent of the parties being the primary consideration, the focus of the Illinois statute is on the “economic realities” of the transaction. Taylor v. Subway Equip. Leasing Corp. (In re Taylor), 209 B.R. 482, 484 (Bankr. S.D. Ill. 1997) (citations omitted) (holding that equipment lease was security agreement). “Under this approach, the lease will be construed as a security interest as a matter of law if the debtor cannot terminate the lease and one of the enumerated requirements is satisfied.” Id. (citation omitted). “If the Court determines that the transaction is not a disguised security agreement per se, it must then look

For the lessor to be protected, especially in the event of a bankruptcy of the lessee or foreclosure by the secured lender of the lessee, a lessor should always file a protective UCC financing statement against the lessee identifying the equipment leased. If the filing is made as required by the UCC when the equipment is delivered, the lessor


29589v1

at the specific facts of the case to determine whether the ‘economics of the transaction’ suggest such a result.” Id. (citation omitted). Should the parties intend to draft a disguised security agreement, they should consider that a monthly “buyout” provision is not the equivalent of an option to terminate for purposes of determining whether agreement created lease or security interest under Illinois law. Id. at 485-86. An option to terminate differs from a buyout option in that, under a termination clause, a lessee is free to cease performance under the contract without incurring further obligation. Id. at 485. As to whether the option to the purchase equipment at the end of the lease constituted nominal consideration, courts have not created any “bright line” test for determining “nominal” consideration. Id. at 486. The Seventh Circuit stated in In the Matter of Marhoefer Packing Co., Inc., 674 F.2d 1139, 1144-45, (7th.Cir. 1982) that the “proper figure to compare” the option price with is “not the actual fair market value of the leased goods at the time the option arises, but their fair market value at that time as anticipated by the parties when the lease is signed.” Section 1-201(37)(x) of the Illinois UCC provides, in pertinent part, that additional consideration is nominal if “it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.” 810 ILCS 5/1-201(37)(x) In short, a purchase option is nominal where “in light all of the facts and circumstances,” a lessor has “no sensible alternative but to exercise the purchase option.” In re Taylor, 209 B.R. at 486 (citation omitted). If an option price is not nominal, a court cannot, as a matter of law, categorize a contract as a security agreement under Section 1-201(37). Then, a court proceeds to analyze the agreement in light of the following factors to determine whether the economics of the transaction indicate a security agreement rather than “true lease”: (1) whether the lessee has the option to renew the lease or to become the owner of the property; (2) whether the amount of rent exceeds the fair market value of the property (3); whether the debtor is responsible for payment of taxes, insurance and other costs incident to ownership; and (4) whether the useful life of the property exceeds the length of the term of the lease. Id. at 487.

will have superior right to the leased equipment in the event the equipment is held to be owned by the lessee and the lease transaction deemed a financed sale.

HALEY, SINAGRA, PAUL & TOLAND, P.A. One Financial Plaza, #1900 100 Southeast Third Avenue Fax (954)-467-1372) Fort Lauderdale, Fla 33394 E-mail [email protected] Phone (954) 467-1300

Usury The statutory interest rate in Florida effective in 1994, on judgments or in the absence of a specific contractual provision is set by the Comptroller's Office. The Department of Business and Finance is to set the interest rate before December 1 of each year and it is then published annually in the Florida Administrative Weekly at least once between the period December 1 and January 1. The year 2003 interest rate established pursuant to Section 55.03, Florida Statutes, has been set at 6% per annum or .0001644 per day.

PRIOR YEAR RATES

YEAR PER ANNUM DAILY RATE

2002 9% .0002466

2001 11% .0003014

2000 10% .0002740

1999 10% .0002740

1998 10% .0002740

1997 10% .0002740

1996 10% .0002740

1995 8% .0002192

10/01/81 thru 12/31/94: 12% .0003333

Fla Stat 687.03 provides that it is unlawful for any person … to charge a rate of interest on transactions with a rate of interest greater than the equivalent of 18% per annum simple interest, however if the obligation exceeds $500,000 in amount or value 25% simple interest would be the maximum. A contract is null and void as to the usurious interest portion of the contract. In such cases, only an action for the principal sum can be enforced by the court and the lender shall forfeit the entire interest charged. The borrower is entitled to recover a penalty equal to double the interest and its attorney fees. FS 687.04 et seq. The borrower may offset against the unpaid principal balance all usurious interest payments made and any treble interest granted by the court. In addition, a lender, which makes or negotiates a usurious loan, may be guilty of loan-sharking or shylocking (FS 687.071), which provides for a variety of criminal penalties depending upon the amounts of interest charged and or taken.

True leases or conditional sale contracts, where the seller finances the purchase of property by extending payments over time and charging a higher price for carrying the


financing are not subject to the usury law because they do not involve a loan or forbearance.

Lease Requirements Under Fla 466.0285 No person other then a dentist …may control the use of any dental equipment. Any lease agreement, rental agreement, or other arrangement between a non-dentist and a dentist; whereby the non-dentist provides the dentist with dental equipment or dental materials shall contain a provision whereby the dentist expressly maintains complete care, custody and control of the equipment or practice. Any contract or arrangement entered into or undertaken in violation of the section shall be void as contrary to public policy. The dangerous instrumentality doctrine has been applied to automobiles in Florida and one who authorizes or permits an instrumentality that is peculiarly dangerous in its operation to be used by another on a public highway, is liable in damages for injuries to third persona caused by the negligent operation of such instrumentality on the highway by one so authorized by the owner. Southern Cotton Oil Co. v Anderson, 86 So. 629 (1920). The fact the vehicle was insured to the limits as required by Fla Stat 324.021 (9) (b), and the lessee was insured according to those limits, was sufficient to exempt leasing company from the Dangerous Instrumentality Doctrine. The lessor, under a agreement to lease a motor vehicle for 1 year or longer which requires the lessee to obtain insurance acceptable to the lessor which contains limits not less then $100,000/$300,000 bodily injury liability and $50,000 property damage liability or not less than $500,000 combined property damage liability and bodily injury liability, shall not be deemed the owner of said motor vehicle for the purpose of determining financial responsibility for the operation of said motor vehicle or for the acts of the operator in connection therewith; further this subparagraph shall be applicable so long as the insurance meeting these requirements is in effect. The insurance meeting such requirements may be obtained by the lessor or lessee, provided, if such insurance is obtained by the lessor, the combined coverage for bodily injury liability and property damage liability shall contain limits of not less then $1 Million and may be provided by a lessor’s blanket policy. Fla 324 (9)(b)(2).

Late Charges Contractual late charges on overdue commercial accounts are not subject to the usury law because they do not constitute payment for the loan or forbearance of money and often are authorized by a specific statute (mortgage loan, car loan, installment loan, etc).

Warehouseman’s Liens Florida statute 677.209 provides a lien for warehouseman against the bailor of the goods covered by a warehouse receipt in his possession for charges for storage or transportation. Insurance, labor or charges for present or future in relation to the goods, and for expenses necessary for the preservation of the goods. The lien can be enforced by a public or private sale of the goods in a block or in parcels at any time or place and any terms that are commercially reasonable after notifying all persons known to claim an interest in the goods. FS 677.210. The required notification must be sent by


registered or certified letter to the last known address of the person to be notified or delivered in person. More details regarding the requirement and manner for a proper sale are reflected in FS677.210(2) (a)through (f)

Landlord’s Liens Florida provides authority for a landlords to have a lien for rent FS 83.08. The landlord will have the lien for rent upon the property found upon or off the premises leased or rented, and in possession of any person upon all other property of the lessee …usually kept on the premises. The lien shall be superior to any liens acquired subsequent to the bringing of the property to the premises leased. The landlords statutory lien is not required to be filed or recorded in order to be perfected, attached at commencement of the tenancy or as soon as property is brought onto the premises. Robie v. Port Douglas, 662 So2d. 1389 (Fla 4th DCA 1995).

Artisan’s and Service Liens

Florida provides for a lien for labor or services on personal property and it is unlawful for any person to knowingly remove the property upon which the lien is accrued without first making full payment. FS 713.58. A violation is a misdemeanor and upon conviction shall be punished by a fine of not more then $500.00 or imprisonment in county jail for not more then three months. FS713.58


Forum selection clauses are generally enforceable as would other contractual terms. They are subject to attack on allegations of fraud in the inducement Holder v. Burger King Corporation, 576 So2d 973 (Fla 2nd DCA 1991) and a clause which would contravene the strong public policy of the State of Florida will not be enforced. First Pacific Corporation v Sociedad, 566 So2d 3 (Fla 3rd DCA 1990). The general rule is the choice of the law which governs the transaction will be enforceable provided (a) there exists a reasonable basis for the parties choice of the chosen state (b) the chosen state has a significant connection to the transaction and (c) the chosen law is not contrary to a fundamental public policy of the state with the greater interest in the transaction than the chosen state.

Foreign Corporations Capacity to Sue in Florida

A foreign corporation transacting business in this state without a certificate of authority may not maintain a proceeding in any court until it obtains a certificate. FS 607.1502(1). A nonresident corporation has the right to demand and enforce payment by court action for goods sold in interstate commerce, the fact the non-resident corporation may procure orders for the purchase of the products through the services of a resident agent working within the state does not divest the corporations business as interstate in character. KAR Products v Acker, 217 So2d 595 (Fla 1st DCA 595). FS 607.1501 provides that a foreign corporation cannot transact business in the State until it has obtained a Certificate of Authority from the Department of State. However, activities which do not constitute transacting business, include, ie: (a) maintain, defending or settling any proceeding; (b) holding meetings of the board of directors or shareholders…(c) maintaining bank accounts …(e) selling through independent


contractors; (f) soliciting or obtaining orders, by mail or through employees, agents or otherwise if the orders require acceptance outside the state before they become contracts; (g) creating or acquiring indebtedness, mortgages, security interests in real or personal property…. The list is not designed to be exhaustive. FS 607.354(1)

Homestead Exemption Article X Section 4 of the Florida Constitution exempts a residence from forced sale under process of any court, and no judgment, decree or execution shall be alien upon thereon except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty. The homestead if located outside a municipality is protected to the extent of 160 contiguous acres of land…or if located within a municipality to the extent of one-half acre of contiguous land …limited to the residence of the family. A debtor who is head of household residing the state may claim a homestead. Decottes v Clarkson, 29 So. 442 (1901). Debtor can claim the homestead prior to levy by recording a written statement with the circuit court claiming an exemption from forced sale to the residence. FS 222.01. A notice of homestead shall be sent to the judgment lien holder who has 45 days to contest the affidavit or the lien on the property shall not be deemed to attach. FS 222.11 provides that disposable earnings of a head of family which are in excess of $500 a week may not be attached or garnished unless such a person has agreed otherwise in writing. 222.11(2) (b). In no event shall the amount garnished exceed the amount allowed under the Consumer Credit Protection Act. 15 USC 1673.

Attorney’s Fees In an action on a contract, which expressly provides for the award of attorney’s fees to either party, the prevailing party is entitled to them, whether or not the prevailing party is the party specified in the contract. This provision cannot be waived. Florida Statute 57.105.

Waiver of Jury Trial The fundamental right to trial by jury is guaranteed in the State by the Constitution, but may be waived in civil cases by litigants. However, waiver of that right to a jury trial is to be strictly construed and not lightly interfered. See Puller v, First Virginia Mortgage and Real estate Investment Trust, 471 So2d. 104 (Fla 3rd DCA 1985).

Writ of Attachment Pre judgment writs of attachment are available on the posting of a bond for two times the amount of the balance due. FS 76.12 Non exempt goods, chattels., land, tenements and corporate stock are all subject to attachment. FS 76.01

Replevin Florida provides for a pre judgment writ of replevin to be issued under two types of procedures. The first requires the posting of a replevin bond for the benefit of the debtor in the amount of two times the value of the collateral or the debt whichever is less. Upon the posting of the bond the writ shall issue and the property must be stored until a final judgment of possession is issued. FS 78. 065 Alternatively, a Court may enter a Order to Show Cause as to which party shall retain possession of the personal property during the pendency of the lawsuit. FS 78.067.



A provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

Documentary Stamp Tax

Florida Statute 201.08 provides that there is a tax on promissory …notes, written obligations to pay money, which shall be 35 cents on each $100 or fraction thereof. If a lease does not contain a “hell or high water clause” on its face or in the documents that are expressly incorporated in the lease, it is not an unconditional promise to pay and is not subject to the doc stamps.

Lawrence F. Flick, II Working Draft – Subject to Revision BLANK ROME LLP One Logan Square Philadelphia, Pennsylvania 19103-6998 215-569-5500 www.BlankRome.com

DELAWARE


900200.00001/21140034v1

Licensing Requirements:

Are there special licensing requirements for lenders and leasing companies in Delaware and, if so, what are the consequences for failure to comply?

Yes. Every person desiring to transact the business of lending money is required to obtain a license; provided, however, that a person that makes not more than 5 loans within any 12-month period shall be deemed not to be transacting the business of lending money. Del. Code Ann. tit. 5, § 2202. Persons lending money without a license are fined not less than $50 nor more than $200 for each offense, or imprisoned not more than 3 months, or both. Del. Code Ann. tit. 5, § 2240.


Must a Foreign Corporation qualify to do business in California before it has the right to sue for breach of a lease or loan agreement?

No. The failure of a foreign corporation to obtain authority to do business in Delaware does not impair the validity of any contract or act of the foreign corporation or the right of any other party to the contract to maintain any action or special proceeding, and does not prevent the foreign corporation from defending any action. Del. Code Ann. tit. 8, § 383 No foreign corporation is permitted to do any business in Delaware, until it has paid to the Secretary of State, $80, and filed in the office of the Secretary of State a certificate issued by an authorized officer of the jurisdiction of its


DELAWARE


900200.00001/21140034v1

incorporation evidencing its corporate existence. If such certificate is in a foreign language, a translation thereof, under oath of the translator, must be attached. The certificate must include a statement executed by an authorized officer of each corporation setting forth (i) the name and address of its registered agent, which agent shall be either an individual resident when appointed or another corporation authorized to transact business, (ii) a statement, as of a date not earlier than 6 months prior to the filing date, of the assets and liabilities of the corporation, and (iii) the business it proposes to do in Delaware, and a statement that it is authorized to do that business in the jurisdiction of its incorporation. Del. Code Ann. tit. 8, § 371.

Usury: Are lenders and leasing companies subject to Delaware Usury Law?

Yes. Delaware’s restrictions on interest apply to lenders and leasing companies, but, note the exceptions below. Any licensed lender may charge and collect from a borrower interest at any rate agreed upon in writing not in excess of 5% over the Federal Reserve discount rate


DELAWARE


900200.00001/21140034v1

including any surcharge. Del. Code Ann. tit. 6, § 2301. Judgments shall bear interest at the rate in the contract sued upon. Id. Where there is no expressed contract rate, the legal rate of interest shall be 5% over the Federal Reserve discount rate including any surcharge as of the time from which interest is due. Id. There is no limitation on the rate of interest which may be legally charged for the loan or use of money, where the amount of money loaned or used exceeds $100,000, and where repayment thereof is not secured by a mortgage against the principal residence of any borrower. Id.

A licensed lender may charge and collect interest under a revolving credit plan on outstanding unpaid indebtedness in the borrower's account under the plan at such daily, weekly, monthly, annual or other periodic percentage rate or rates as the agreement governing the plan provides or as established in the manner provided in the agreement governing the plan. Del. Code Ann. tit. 5, § 2216. Periodic interest


DELAWARE


900200.00001/21140034v1

may be calculated using an average daily balance, 2-cycle average daily balance, adjusted balance or previous balance method or using any other balance computation method provided for in the agreement governing the plan. Id. Periodic billing cycles may be established in such manner and shall have such duration as may be specified in the agreement governing the plan. Id. Del. Code Ann. tit. 5, § 2216.


No. There is no direct prohibition or restriction on late charges. However, a court may consider a late charge as a penalty, and assess its validity according to the same reasonableness standard applied to liquidated damages See infra liquidated damages


Delaware allows a lessor a lien for a full years rent for goods and property on the premises seized by execution or attachment. See Petition of Hoopes et al, 5 A.2d 655 (Del. 1939). However, Del. Code Ann. tit. 25, § 5120 states that no lien on behalf of the landlord in the personal property and possessions of the tenant is enforceable.

This right of the landlord to accruing rent and to a lien, charge or preference for it is, without action on the landlord's part or any resort by the landlord to judicial proceedings, created and protected by the law. In re Mitchell, 116 F. 87 (D. Del. 1902).


DELAWARE


900200.00001/21140034v1

Artisans and Service Liens:

Do Artisan and Service Liens take priority over the liens of a secured lender or lessor?

Under common law, an artisan or mechanic having repaired or improved property thereby adding to its value, under a contract express or implied with the owner or his agent, while the property remained in mechanic's possession, had a lien upon such property for the value of labor and material expended in such repair. All garage liens are superior to any lien, title or interest of any person who has a security interest by virtue of a conditional sales contract or a prior perfected security interest. Del. Code Ann. tit. 25, § 3907.


Are Forum Selection Clauses upheld under California law?

The parties to any contract, agreement or other undertaking, contingent or otherwise, may agree in writing that the contract, agreement or other undertaking is governed by or construed under the laws of Delaware, without regard to principles of conflict of laws, or that the laws of Delaware govern. Del. Code Ann. tit. 6 § 2708.

Choice of Law Clauses

Are Choice of Law Clauses recognized in California?

Under Delaware law the parties' choice of law governing their contract should be respected as long as the law of that state and the parties have some relation to that state. Wilmington Trust Co. v. Wilmington Trust Co., 24 A.2d 309, 313


DELAWARE


900200.00001/21140034v1

(Del.1942). Attorney’s Fees Clauses

To what extent are attorney’s fees clauses enforceable in Delaware?

Delaware permits, “in all causes of action, suits, matters or proceedings brought for the enforcement of . . . . an instrument of writing if the plaintiff or lien holder in the action, suit or proceeding recovers judgment in any sum, may also recover reasonable counsel fees, which shall be entered as a part of the judgment in the action, suit or proceeding. Such counsel fees may not exceed 20 percent of the amount adjudged for principal and interest. “ However, the Delaware Supreme Court has ruled that allowing attorneys fees to be awarded only to the successful plaintiff is unconstitutional. Gaster v. Coldiron, 297 A.2d 384 (Del. 1972).

Jury Waiver Clauses

Are Jury Waiver Clauses enforceable?

There is no dispute that parties to a contract may waive their right to a jury trial, and as long as there is a clear, unambiguous waiver to a jury trial, the Court will enforce it. Cantor Fitzgerald, Inc. v. Cantor Fitzgerald, L.P., 2001 WL 589028, *2 (Del.Super.)


Are there restrictions to the enforceability of liquidated damage clauses in California?

Damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to lessor's residual interest, may be

In enforcing a liquidated damages provision, the Court must distinguish between a valid liquidated damages provision and an invalid penalty clause. "Where the damages are uncertain and the amount


DELAWARE


900200.00001/21140034v1

liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission. Del. Code Ann. tit. 6, § 2A-504.

agreed upon is reasonable, such an agreement will not be disturbed." Lee Builders, Inc. v. Wells, 103 A.2d 918, 919 (Del. Ch.1954). In a finance lease, the lessee, before signing the lease contract, must receives an accurate and complete statement covering liquidated damages, including those of a third party, such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods. Del. Code Ann. tit. 6, § 2A-103.

Replevin: How does a creditor recover its leased equipment or collateral under Delaware law?

In Delaware, replevin is a form of action which is employed to recover possession of personal chattels that have been unlawfully taken or detained from their owner. Hitch v. Riggin, 26 Del. 84, 80 A. 975 (1911). Justices of the peace have jurisdiction in replevin concurrent with that of Superior Court. In re Gould, 31 Del. 218, 113 A. 900 (Del. 1921). A lessee has a right of replevin, for goods identified to the lease contract if after reasonable effort the lessee is unable to effect


DELAWARE


900200.00001/21140034v1

cover for those goods or the circumstances reasonably indicate that the effort will be unavailing. Del. Code Ann. tit. 6, § 2A-521. In replevin actions, the plaintiff must file a written statement setting forth all the necessary averments which the plaintiff claims to constitute the right of action. Such statement of claim must be filed before the summons is issued. Del. Code Ann. tit. 10, § 9634. The summons and the certified letter must both contain a provision instructing the defendant not to intentionally destroy, damage, sell or secrete the item in question with the further proviso that the violation could result in a civil contempt violation Del. Code Ann. tit. 10, § 9633.

Writs of Attachment:

Is a creditor entitled to seize assets of an obligor or guarantor pending trial?

A writ of attachment requires an affidavit must be filed, stating that the defendant is justly indebted to the plaintiff in an amount less than $15,000 and has absconded, or is as that person believes, about to remove the defendant's person or property out of Delaware with intent to defraud the defendant's creditors, or intentionally conceals himself or herself so that process of summons cannot be served on him or her, or is a nonresident. The issuance requires a bond in the amount of the

Attachment is an action at law enabling a creditor to reach the property of his or her debtor and to apply such property as is susceptible to process in satisfaction of the debt. John Julian Constr. Co. v. Monarch Bldrs., Inc., Del. Super. Ct., 306 A.2d 29 (1973); Del. Supr., 324 A.2d 208 (1974).


DELAWARE


900200.00001/21140034v1

attachment to be issued by the plaintiff. Del. ST JP CIV Rule 4 The writ must bear the date of its issuance, be signed by a clerk or a judge, be under the seal of the Court, contain the name of the Court and the names of the parties, state the name of the official or other person to whom it is directed, the name and address of the plaintiff's attorney, if any, otherwise the plaintiff's address, and the time within the defendant must appear and defend, and must notify the defendant that in case of the failure to do so, judgment by default will be rendered against the defendant for the relief demanded in the complaint. The writ must also inform the defendant as to how the attachment may be dissolved.

Homestead Law: Is it true in Delaware that an owner of property who resides on the premises has an automatic homestead exemption, and if so, for how much?

The Delaware homestead exemption applies in any federal bankruptcy or state insolvency proceeding, in which an individual debtor domiciled in Delaware is authorized to exempt from the bankruptcy or insolvency estate property having an aggregate fair market value of not more than $5,000. Del. Code Ann. tit. 10, § 4914(b).


DELAWARE


900200.00001/21140034v1

Terese L. Arenth, Esq. Marc L. Hamroff, Esq. MORITT HOCK HAMROFF & HOROWITZ LLP 400 Garden City Plaza Garden City, New York 11530 (516) 873-2000 Fax (516) 873-2010 NEW YORK www.mhhlaw.com

© 2003 Moritt Hock Hamroff & Horowitz LLP


What constitutes an accord and satisfaction in NY?

"An accord is a contract, not merely a revocable offer, between creditor and debtor for the settlement of a claim by some performance other than that which is due, and satisfaction takes place when the accord is performed." 19 N.Y. Jur. 2d, Compromise, Accord, and Release, §1, pp. 296-97. See also General Obligations Law §§ 15-501 (discussing executory accord) and 15-503 (discussing offers of accord followed by tender). "Essential elements of an accord and satisfaction are dispute as to the amount due and knowing acceptance by the creditor of a lesser amount." Consolidated Edison Co. v. Jet Asphalt Corp., 132 A.D.2d 296, 522 N.Y.S.2d 124, 129 (1st Dep't 1987). "The payment of an admitted liability is not a payment of or a consideration for an alleged accord and satisfaction of another and independent liability." Manley v. Pandick Press, Inc., 72 A.D.2d 452, 424 N.Y.S.2d 902, 905 (1st Dep't 1980). Accordingly, an accord and satisfaction cannot arise where there is no dispute as to the amount due. Con Ed v. Jet, 522 N.Y.S.2d at 129.

Accord and satisfaction is an affirmative defense. Young v. Zwack, Inc., 98 A.D.2d 913, 471 N.Y.S.2d 175 (3d Dep't 1983).


Pursuant to UCC § 1-207, “a party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as ‘without prejudice’, ‘under protest’ or the like are sufficient”. NY courts interpreting this statute have determined that it altered the common law rule in cases in which the Code is applicable. (Under common law in NY, negotiation of a check for less than the amount owed, regardless of any conditional endorsements, would constitute an accord and satisfaction). As a result, if a check is received for less

Some jurisdictions have held that the adoption of UCC § 1-207 does not abrogate the common law rule of that state. See e.g., Chancellor, Inc. v. Hamilton Appliance Co., 175 N.J.Super. 345, 351, 418 A.2d 1326, 1330 (1980)(“[T]he acceptance by the creditor of a check offered by the debtor in full payment of a disputed debt is an accord and satisfaction of the debt and no condition of protest or attempted reservation of rights can affect the legal



TOPIC ISSUE STATUTES/CASES COMMENTS satisfaction). As a result, if a check is received for less than the amount owed but purports to be in “full settlement”, providing that the recipient indicates that he is reserving his rights, he may negotiate the check without waiving those rights. See e.g., Braun v. C.E.P.C. Distributors, Inc., 77 A.D.2d 358, 433 N.Y.S.2d 447 (1st Dep’t 1980)(where seller received check from buyer containing an endorsement stating that “check constitutes payment in full of all claims” and seller indicated on check, prior to cashing it, that it was accepting “payment without prejudice and with full reservation of rights”, seller was permitted to seek balance of payment owed).

reservation of rights can affect the legal quality of the action. I hold that N.J.S.A. 12A1-207 has not altered the common-law rule of accord and satisfaction.”).

Attorneys' Fees Are fees in excess of the amount involved in litigation recoverable in NY?

NY Courts have held that although "it is the exception rather than the rule to make an award of attorneys' fees which exceeds the amount of the underlying claim, there are instances where the very nature of the underlying claim itself makes such an award not only reasonable but proper." Simmons v. Gov't Employees Ins. Co., 59 A.D.2d 468, 472, 400 N.Y.S.2d 99 (2d Dep't 1977). Criteria taken into consideration to determine an appropriate award of fees include the nature and extent of the services, the actual time spent, the necessity therefor, the nature of the issues involved, the professional standing of counsel and the results achieved. Id.; see also Blue Cross and Blue Shield of NJ, Inc. v. Philip Morris, Inc., 190 F.Supp.2d 407 (E.D.N.Y. 2002)(discussing reasonableness of fee request for statutory fees to be awarded under General Business Law § 349 claim). As noted by the court in Colon v. Automatic Retailers Assn. Serv., 74 Misc.2d 478, 343 N.Y.S.2d 874 (Civ.Ct., NY Co. 1972), rev'd on other grounds 74 Misc.2d 665, 347

As a general rule in NY, attorneys' fees and disbursements are deemed incidents of litigation and the prevailing party may not collect them from the losing party unless authorized by agreement between the parties or by statute or court rule. A.G. Ship Maintenance Corp. v. Lezak, 69 N.Y.2d 1, 511 N.Y.S.2d 216 (1986).



TOPIC ISSUE STATUTES/CASES COMMENTS Co. 1972), rev'd on other grounds 74 Misc.2d 665, 347 N.Y.S.2d 312 (App. Term 1st Dep't 1973), there are cases involving "transcending principles" which reasonably warrant payment of fees in excess of the amount involved in the litigation, citing "an action to recover rent or other payment under a lease which would be determinative of the validity of the policy", as one exception to the general rule against fees exceeding the amount in dispute.

Can attorneys' fees be recovered if incurred in defense of a counterclaim?

NY courts have held that attorneys' fees may be properly awarded to include fees incurred in defending a counterclaim where the defense of the counterclaim and the prosecution of plaintiff's claim were "inextricably intertwined". Binghamton Precase & Supply v. A. Servidone, 257 A.D.2d 731, 682 N.Y.S.2d 719 (3d Dep't 1999).

Dissolved/De facto corporations

Can corporations plead dissolution as a defense to their contractual obligations in NY?

Corporations dissolved by proclamation of the NY Department of State for failure to pay franchise taxes (Tax Law 203-a(3) and 217) are deemed to be "de facto" corporations and are estopped from pleading dissolution to avoid contractual obligations if the corporation fails to cease its business activities and continues to hold itself out of the public as an ongoing corporate enterprise, exercising the powers and functions of a corporation, but without the lawful authority to do so. H.E.G. Development & Mgt. Corp. v. Blumberg, 171 Misc.2d 740, 656 N.Y.S.2d 127, 128 (N.Y. Sup. 1997) ("A corporation is a legal entity created by the state and may be dissolved by the state, under Tax Law 203-a(3) and 217, and yet continue to act as a de facto corporation");



TOPIC ISSUE STATUTES/CASES COMMENTS D&W Central Station Alarm Co. v. Copymasters, Inc., 122 Misc.2d 453, 471 N.Y.S.2d 464 (N.Y. City Civ. Ct. Queens Cty. 1983)(de facto corporation estopped from pleading dissolution to avoid its obligations since it continued its operations, operated its premises and held itself out as a corporation, notwithstanding its alleged dissolution). See also Ludlum Corp. Pension Plan Trust v. Matty's Superservice, Inc., 156 A.D.2d 339, 548 N.Y.S.2d 292 (2d Dep't 1989)(where dissolved corporation carried on as if incorporated and procured loan which it then defaulted in repaying, it was deemed to be a de facto corporation and could not avoid its obligations under the loan in an action to foreclose on mortgage given as security for the defaulted loan).

Can officers/directors of a dissolved corporation be held personally liable for actions taken by the corporation?

NY law is split regarding the personal liability of officers/directors for actions taken by a dissolved corporation. There is a line of authority emanating from Poritzky v. Wachtel, 176 Misc. 633, 27 N.Y.S.2d 316 (Sup. Ct. Put. Co. 1941) which holds that officers and directors are liable, based upon a two-fold public policy rationale. See e.g., Animazing Enter., Inc. v. Louis Lofredo Assocs., Inc. 88 F.Supp.2d 265, 271 (S.D.N.Y. 2000); Brandes Meat Corp. v. Cromer, 146 A.D.2d 666, 537 N.Y.S.2d 177 (2d Dep't 1989); Lorisa Capital Corp. v. Gallo, 119 A.D.2d 99, 506 N.Y.S.2d 62, 70-71 (2d Dep't 1986). First, in most cases involving this issue, dissolution was statutory as the result of the corporation's failure to pay NYS franchise taxes. Effectuating statutory dissolution and imposing personal liability on the dissolved corporation's officers and directors for actions taken by the corporation while dissolved, is believed to

Reinstatement of the corporation's status by the payment of delinquent franchise taxes after an action is filed, has been held not to relieve the officers, directors or shareholders from personal liability for actions taken during dissolution and sued upon. WorldCom, Inc. v. Sandoval, 182 Misc.2d 1021, 701 N.Y.S.2d 834 (Sup. Ct. N.Y. Co. 1999).



TOPIC ISSUE STATUTES/CASES COMMENTS taken by the corporation while dissolved, is believed to encourage the voluntary payment of franchise taxes. See Lorisa, 506 N.Y.S.2d at 70-72. Second, holding the officers and directors personally liable is intended to discourage fraud and bad faith. Animazing, 88 F. Supp.2d at 271; Poritzky, 27 N.Y.S.2d at 318. There is a contrary line of authority which expressly distinguishes the first and finds no personal liability. L-Tec Elec. Corp. v. Cougar Elec. Org., Inc., 198 F.3d 85, 86-87 (2d Cir. 1999); Prentice Corp. v. Martin, 624 F. Supp. 1114, 1115-16 (E.D.N.Y. 1986); Bedford Hills Supply, Inc. v. Hubert, 251 A.D.2d 438, 674 N.Y.S.2d 404, 405 (2d Dep't 1998)(individuals not personally liable where they did not have actual knowledge of the dissolution); Department 56, Inc. v. Bloom, 186 Misc.2d 901, 720 N.Y.S.2d 920, 922-23 (Sup. Ct. Rich. Co. 2001) ("Seductive though it may be, the Poritzky rationale is fallacious, and I respectfully choose not to follow it. Neither Poritzky nor the cases adopting its holding explain why such fraud and abuse would be encouraged").

"Evergreen" provisions

Are automatic lease renewal provisions enforceable in NY?

Many leases of personal property typically contain an automatic renewal provision that provides, in effect, that the lease or contract will automatically renew for a specified term unless the lessee sends notice of its intention not to renew prior to the lease expiration. In NY, such provisions are not enforceable unless the lessor sends by certified mail, or serves personally, written notice of the renewal provision to the lessee which must be received at least 15, but no more than 30, days prior to the time the lessee is required to give notice of its

The same rule applies in NY for automatic renewal provisions of contracts for service, maintenance or repair. General Obligations Law § 5-903



TOPIC ISSUE STATUTES/CASES COMMENTS the time the lessee is required to give notice of its intention not to renew (unless the renewal period is one month or less). General Obligations Law § 5-901

Foreign corporations capacity to sue in NY

Do foreign corporations have the capacity to sue in NY if the corporation is unauthorized to do business in NY?

A foreign corporation that is "doing business" in NY but is unauthorized, is barred from maintaining an action in NY unless and until it has been authorized to do business in NY and made payment of the requisite taxes and fees. Business Corporation Law § 1312 (NY's so-called "door closing" statute). However, in order to be considered to be "doing business" within the state, a foreign corporation's activities must be more than just casual or occasional and, rather, must be "systematic and regular" so as to manifest continuity of activity in NY. Alicanto S.A. v. Woolverton, 129 A.D.2d 601, 514 N.Y.S.2d 96, 97 (2d Dep't 1987). See e.g., Uribe v. Merchants Bank of New York, 266 A.D.2d 21, 697 N.Y.S.2d 279 (1st Dep't 1999)(foreign corporation not deemed to be "doing business in NY where it does not maintain an office or telephone listing in NY, does not own property or have employees within the state, does not advertise or maintain any bank accounts in NY); Reese v. Harper Surface Finishing Systems, 129 A.D.2d 159, 517 N.Y.S.2d 522 (2d Dep't 1987)(Connecticut corporation that did not have offices, bank accounts, property, telephone listings or employees in New York and derived only 1% to 6% of its sales from New York customers was not doing business in New York as contemplated by BCL § 1312); Colonial Mortgage Co. v. First Federal Savings & Loan Ass'n, 57 A.D.2d 1046, 395 N.Y.S.2d 798 (4th Dep't 1977)(foreign corporation not "doing business" in NY where it did not

A foreign corporation's noncompliance with NY's "door closing" statute is an affirmative defense and the defendant bears the burden of proving the foreign corporate plaintiff's noncompliance. Domino Media, Inc. v. Kranis, 9 F. Supp.2d 374 (S.D.N.Y. 1998), aff'd 173 F.3d 843 (2d Cir. 1999); Alicanto S.A. v. Woolverton, 129 A.D.2d 601, 514 N.Y.S.2d 96, 97 (2d Dep't 1987). CPLR § 302(a)(1), which requires that a non-domiciliary merely "transacts any business within the state or contracts anywhere to supply goods or services in the state" in order to serve as a basis for the exercise of personal jurisdiction, has been consistently held by the courts to require a far less level of business activity within the State than the requirements of BCL § 1312. See Colonial Mortgage Co. v. First Federal Savings & Loan Ass'n, 57 A.D.2d 1046, 395 N.Y.S.2d 798 (4th Dep't 1977)("the incidents of business transacted in New York by a foreign corporation may be sufficient to subject it to service of New



TOPIC ISSUE STATUTES/CASES COMMENTS maintain a bank account, own real property, maintain an inventory of securities, or an office for the purpose of transacting business, nor did it have a telephone listing, advertise for the sale of securities or employ any New York resident, even though its volume of sales in NY was over $40 million and the contract in question was made in NY).

York process (CPLR 302) and yet insufficient to require it to take out a certificate authorizing it to do business in New York); Reese v. Harper Surface Finishing Systems, 129 A.D.2d 159, 517 N.Y.S.2d 522 (2d Dep't 1987)(same).

Foreign judgments Can foreign judgments be "domesticated" in NY?

Judgments obtained outside the state of NY are entitled to full faith and credit in NY and may be "domesticated" by filing the judgment with the appropriate county clerk of the court unless the judgment was obtained by default or confession of judgment. NY Civil Practice Law and Rules § 5401 et seq.

If a foreign judgment was obtained by default or confession of judgment, an action must be commenced in NY to "sue on the judgment". In that situation, it is generally recommended that claims arising under the breached agreement also be asserted to protect against the possibility of the judgment debtor appearing in the NY action and successfully asserting jurisdictional defenses to the foreign judgment.

Forum Selection Clauses

Does NY enforce contractual forum selection clauses?

NY courts will assume jurisdiction over commercial disputes involving more than $1 million where the contract in dispute designates both NY law and NY as the forum. General Obligations Law § 5-1402. A party challenging the designated jurisdiction in a forum selection clause must show that a trial in the contractual forum will be so gravely difficult and inconvenient that he will for all purposes be deprived of his day in court. Credit Francais Intern., S.A. v. Sociedad Financiera De Comercio, C.A., 128 Misc.2d 564, 490 N.Y.S.2d 670 (NY County Sup. Ct. 1985)

Under NY law, there is a clear distinction between permissive and mandatory clauses and only a mandatory clause should prevent a court from ordering a change of venue absent a strong countervailing consideration. Orix Credit Alliance, Inc. v. Mid-South Materials Corp., 816 F. Supp. 230 (S.D.N.Y. 1993)




Governing Law Clauses

Does NY enforce contractual choice of law clauses

NY law will apply to commercial contracts valued in excess of $250,000 that contain a NY choice-of-law clause, even when neither the contract nor any of the parties to it has any relationship to NY. General Obligations Law § 5-1401. While labor and personal services contracts are exempt from this rule, NY does not otherwise recognize a public policy exception to its application regardless of whether the application of NY substantive law may offend the public policy of another jurisdiction. Supply & Bldg. Co. v. Estee Lauder Int'l Inc., 2000 WL 223838 (S.D.N.Y. Feb. 25, 2000). While 5-1401 establishes a mandatory choice-of-law rule when a contract designates NY law, when a choice-of-law provision designates the law of another jurisdiction, NY will follow the traditional rule honoring the parties' choice of law unless the chosen jurisdiction bears "no substantial relationship" with the parties or the transaction and there is "no other reasonable basis" for the choice (nexus test), or unless application of the law would offend a "fundamental policy" of a state with an interest in the transaction materially greater than that of the chosen jurisdiction and whose law would apply in the absence of an effective choice of law by the parties (fundamental policy test). Radioactive J.V. v. Manson, 153 F. Supp.2d 462, 469-470 (S.D.N.Y.2001).

It has been noted by some federal courts, however, that while General Obligations Law § 5-1401 supersedes common-law conflicts principles, it is not without its limits and must still remain within the constitutional bounds of due process and the Full Faith and Credit Clause. See Lehman Bro. Comm'l Corp. v. Minmetals Internat'l Non-Ferrous Metals Trading Co., 2000 WL 1702039 (S.D.N.Y. Nov. 13, 2000)


What is the maximum interest rate in NY?

In the absence of a statutory exemption or federal preemption, a lender in NY cannot charge interest higher than 16% per annum. General Obligations Law ("GOL")

Usury laws apply only to a loan or forbearance of money. Imposition of late fees is not subject to the usury laws,



TOPIC ISSUE STATUTES/CASES COMMENTS § 5-501(1)(maximum rate of interest is 6% unless otherwise provided in Banking Law § 14-a); Banking Law § 14-a (for purposes of GOL § 5-501(1), the maximum interest rate is 16%). Usurious loans are void, unless the lender is a savings bank, savings and loan association or federal savings and loan association, and the lender forfeits all principal and interest. GOL § 5-511(1); Pemper v. Reifer, 264 A.D.2d 625, 695 N.Y.S.2d 555 (1st Dep't 1999). The borrower can also recover the usurious portion of the interest already paid. GOL § 5-513. However, if the lender repays the excess interest paid, the lender is discharged from further forfeiture or penalty. GOL § 5-519. Where the lender is a savings bank, savings and loan association or federal savings and loan association, the lender forfeits all interest, but not principal, and may also be required to repay the borrower twice the amount of interest actually paid. GOL § 5-511(1). Corporations are prohibited from interposing a usury defense, excluding a defense of criminal usury. GOL § 5-521. Criminal usury occurs when nonexempt lenders charge interest rates exceeding 25% per annum. Penal Law § 190.40. The criminal usury law does not apply to banking institutions. See Flushing Nat'l Bank v. Pinetop Bldg. Corp., 54 A.D.2d 555, 387 N.Y.S.2d 8 (2d Dep't 1976). A defense of usury is likewise not available to an individual guarantor of a corporate obligation. Simoni v. Time-Line, Ltd., 272 A.D.2d 537, 708 N.Y.S.2d 142 (2d Dep’t 2000).

therefore, as late fees serve as a penalty to insure payment under a contract and are not a loan or forbearance of money. Protection Industries Corp. v. Kaskel, 262 A.D.2d 61, 691 N.Y.S.2d 457 (1st Dep't 1999); Waterbury v. City of Oswego, 251 A.D.2d 1060, 674 N.Y.S.2d 530 (4th Dep't 1998). Courts have held that a lease is not considered a loan or forbearance of money and is not subject to a usury defense. Orix Credit Alliance, Inc. v. Northeastern Tech Excavating Corp., 222 A.D.2d 796, 634 N.Y.S.2d 841 (3d Dep’t 1995)(holding that defaulting equipment lessee’s defense of criminal usury was negated by the fact that a lease does not constitute a loan or forbearance and did not, therefore, fall within the definition of usury); Citipostal, Inc. v. Unistar Leasing, 283 A.D.2d 916, 724 N.Y.S.2d 555 (4th Dep’t 2001)(neither a lease nor a sale on credit constitutes a loan or forbearance)(citing Orix Credit)




Licensed Lenders When must a lender be licensed in NY?

Banking Law § 340 requires that any person or entity engaged in the business of making business or commercial loans in a principal amount of $50,000 or less must be licensed by the Superintendent of Banks. For purposes of Banking Law § 340, a person or entity shall be considered as engaging in the business of making business or commercial loans and subject to the statutory licensing requirements if he solicits loans of $50,000 or less within the state and, in connection with such solicitation, makes loans to NY residents, excluding isolated, incidental or occasional transactions. Id.

Possessory Liens What types of possessory liens exist in NY?

In NY, a person who makes, alters, repairs or performs work or services of any nature and description upon, or in any way enhances the value of an article of personal property, at the request or with the consent of the owner, has an "artisans'" lien on such property for his reasonable charges for the work done and materials furnished and may retain possession of such property until the charges are paid. Lien Law § 180. A person who keeps a garage, hangar or place for the storage, maintenance, keeping or repair of motor vehicles, motor boats or aircraft, and who in connection therewith tows, stores, maintains, keeps or repairs any motor vehicle, motor boat or aircraft or furnishes gasoline or other supplies therefor at the request or with the consent of the owner, has a "bailee's" lien on such property for the sum due for such towing, storage, maintenance, keep or repair until such sum is paid. Lien Law § 184(1). The



TOPIC ISSUE STATUTES/CASES COMMENTS bailee's lien in such property shall become void, however, as against all security interests, whether or not perfected, which were executed prior to the bailee's lien, if the lienor allows the property out of his actual possession subsequent to thirty days from accrual of the lien. Id. In addition, if a bailee furnished a written estimate of the cost of the towing, storage, maintenance, service, repair or any other service with respect to the property, any lien sought by such bailee for such service may not be in an amount exceeding the estimate. Id.

Security Deposits What is NY law regarding security deposits?

Monies deposited or advanced on a contract for the use or rental of personal property as security for performance of the contract, or to be applied to payments upon such contract when due, continues to remain the money of the person making the deposit or advance. The person to whom the deposit or advance is made shall hold the money in trust and deposited in a bank or trust company, where it may not be comingled except with other such funds that have been deposited or advanced to the trustee as security for the performance of a like contract. General Obligations Law ("GOL"), § 7-101(1). If the funds so deposited equal $750.00 or more and are for the use or rental of personal property or a period of 120 days or more, the funds shall be deposited in an account bearing interest at the prevailing rate. GOL § 7-101(1-a).

Contract provisions purporting to waive any provision of General Obligations Law § 7-101 are absolutely void. GOL § 7-101(2).

Vicarious liability Can lessors be held vicariously liable for acts of

In NY, the owner of a vehicle is vicariously liable for the negligent acts of a permissive operator of the vehicle,

Aside from NY, the only other states with lessor vicarious liability statutes



TOPIC ISSUE STATUTES/CASES COMMENTS the lessee? which includes both the lessee, as the "registered" owner,

as well as the lessor, as the "title" owner. Vehicle and Traffic Law, § 388. While NY is one of the few states that imposes vicarious liability on lessors, out-of-state lessors may still feel its impact due to principles of conflicts of law if, for example, a vehicle is leased in a state that does not impose lessor vicarious liability but the vehicle is then operated in NY and involved in an accident causing injury in this state. See e.g., DeTellis v. Avis Rent-A-Car System, Inc., 273 A.D.2d 268, 708 N.Y.S.2d 703 (2d Dep't 2000).

are Rhode Island, Connecticut, Washington, D.C. and Maine.

Lawrence F. Flick, II Working Draft - Subject to Revision BLANK ROME LLP One Logan Square Philadelphia, Pennsylvania 19103-6998 215-569-5500 www.BlankRome.com

PENNSYLVANIA


900200.00001/21138649v1

Licensing Requirements:

Are there special licensing requirements for lenders and leasing companies in Pennsylvania and, if so, what are the consequences for failure to comply?

There are no licensing requirements for commercial leasing agencies in Pennsylvania

There are licensing requirements for real estate brokers and salespeople, cemetery salespeople, builder owner salespeople or rental listing referral agents under 63 Pa.C.S.A. § 455.101 et seq. A license is also required for mortgage bankers and lenders. 63 Pa.C.S.A. § 456.01 et seq.


Must a Foreign Corporation qualify to do business in Pennsylvania before it has the right to sue for breach of a lease or loan agreement?

A foreign corporation must obtain a certificate of authority to transact business in Pennsylvania. 15 Pa.C.S.A. § 4121. A foreign corporation, which does business in Pennsylvania without a certificate of authority, may not bring an action in any Pennsylvania court. 15 Pa.C.S.A. § 4141. The failure of a foreign corporation to obtain a certificate of authority, however, will not impair the validity of any contract of the corporation, will not prevent the corporation from defending any action in any court in the Commonwealth and will not render any of the corporation’s property escheatable. Id.

Applications for a certificate of authority must include the name of the corporation, its state of incorporation, the address of its principal place of business, the address of its proposed registered office in Pennsylvania and a statement that it is a corporation organized for pecuniary profit. 15 Pa. C.S.A. § 4124. The applicant also must officially publish the same information. Id. The statute of limitations for a claim accruing outside Pennsylvania will be the shorter of the law governing the place where the claim accrued or the applicable Pennsylvania statute of limitations. 42 Pa.C.S.A. § 5521.

Usury: Are lenders and leasing companies subject to Pennsylvania Usury Law?

As a general rule, the maximum rate of interest for loans under $50,000 is 6%. 41 Pa.C.S.A. § 201. If a contract does not specify the rate of interest or refers to interest “at the legal rate,” the 6% rate will apply. 41 Pa.C.S.A. § 202. This interest rate

At least one Pennsylvania court has held that Pennsylvania corporate code section 1510 bars corporations from both using usury as a defense to a payment obligation as well as prohibiting the corporation from bringing suit to recover payments


PENNSYLVANIA


900200.00001/21138649v1

cap, however, appears to be inapplicable to transactions between corporations because corporations may not plead or set up usury as a defense to any action brought against it to enforce any payment obligations of the corporation. 15 Pa.C.S.A. § 1510.

made by the corporation in excess of the otherwise applicable maximum rate of interest. Raby v. Commercial Banking Corp., 220 A.2d 659 (Pa. Super. 1966).


Since Pennsylvania’s usury laws are inapplicable to transactions between corporations, the usury statutes are also inapplicable to late fees charged in such transactions.


Personal property located on leased real property is subject to distress by the landlord or the landlord’s agent for any rent reserved and due. 68 P.S. § 250.302. There are, however, several exemptions to the property subject to distraint. See 68 P.S. §§ 250.401 to 250.404. In order to perfect its lien, a landlord must provide the tenant with written notice of the distraint. 68 P.S. § 250.302. The notice must include the cause for the distress, the date of the levy, the property being distrained and the amount of past-due rent. Id. The notice may be mailed or personally delivered to the tenant. Id. Generally, all goods and chattels found on the


PENNSYLVANIA


900200.00001/21138649v1

demised premises, even though they belong to a third party, are subject to distraint and have priority over previously perfected Article 9 security interests. Matter of Einhorn Bros., Inc., 272 F.2d 434 (3d Cir. 1959). See also In re Quaker City Uniform Co., 238 F.2d 155 (3d Cir. 1956), cert. denied 352 U.S. 1030 (1957). There are twelve specific classes of leased property to which this principle is inapplicable, provided the lessor provides the landlord with written notice of its interest in the property within 10 days of the property being installed on the leased premises. 68 P.S. § 250.403. If properly distrained property is sold pursuant to a levy executed by the sheriff, however, the landlord will be paid first out of the proceeds of any such sale. 68 P.S. § 322. The landlord’s recovery under a sale of distrained property is limited to the unpaid rent up to one year’s rent. 68 P.S. § 321.

Artisans and Service Liens:

Do Artisan and Service Liens take priority over the liens of a secured lender or lessor?

Pennsylvania statutes recognize the artisan’s lien created under common law. 6 P.S. § 11. The artisan must provide the property owner with written notice of the amount of indebtedness. Id. If the bill is not paid within 30 days, the artisan


PENNSYLVANIA


900200.00001/21138649v1

may sell the property and apply the proceeds of the sale against the bill. Id. The excess of sale proceeds over the amount of the bill must be turned over to the original owner. 6 P.S. § 13. The Third Circuit, however, has held the conduct of such a sale violates the original owners federal Due Process rights. Parks v. “Mr. Ford”, 556 F.2d 132 (3d Cir. 1977). Under the Mechanic’s Lien Act of 1963, a mechanic’s lien will have priority as of the date of visible commencement of construction regarding liens for the erection of an improvement. 49 P.S. § 1508. Priority runs from the date the claim is filed for liens relating to the alteration or repair of an improvement. Id.


Are Forum Selection Clauses upheld under Pennsylvania law?

It is well settled that parties to a contract may stipulate in advance to submit to the jurisdiction of a particular court to settle disputes arising from the contract. Continental Bank v. Brodsky, 311 A.2d 676 (Pa. Super. 1974) (citing Nat’l Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311 (1964)). The Pennsylvania Supreme Court has established a two part test to determine whether a forum selection clause is enforceable. Central Contracting Co. v. C.E. Youngdahl & Co., 209

A forum selection clause is unreasonable only if, at the time of litigation, its enforcement would “seriously impair” the litigant’s ability to pursue a claim or defense. Central Contracting Co. v. C.E. Youngdahl & Co., 209 A.2d 810 (Pa. 1965). Mere inconvenience or some added expense for a litigant does not rise to the level of unreasonableness. Id. Added expense, however, may become unreasonable where the chosen forum is so remote that maintaining an action is cost-prohibitive for a


PENNSYLVANIA


900200.00001/21138649v1

A.2d 810 (Pa. 1965). First, the clause must be freely agreed upon by the parties. Id. Second, enforcement of the clause must not be unreasonable at the time of litigation. Id. See also Morgan Trailer Mfg. v. Hydraroll, Ltd., 759 A.2d 962 (Pa. Super. 2000) (applying two part test).

party. Churchill Corp. v. Third Century, Inc., 578 A.2d 532 (Pa. Super. 1990).

Choice of Law Clauses

Are Choice of Law Clauses recognized in Pennsylvania?

As a general rule, when a transaction bears a reasonable relation to more than one jurisdiction, the parties may agree to which jurisdiction’s law will govern the transaction. 13 Pa.C.S.A. § 1105. Leases of property subject to a certificate of title, however, will be governed by the law of the jurisdiction issuing the certificate of title. 13 Pa.C.S.A. § 2A105. The law of the issuing jurisdiction will be applicable until the earlier of surrender of the certificate or the issuance of a new certificate. Id.

Attorney’s Fees Clauses

To what extent are attorney’s fees clauses enforceable in Pennsylvania?

As a general rule in Pennsylvania, each party to a contract is responsible for its own attorney’s incurred in resolving a dispute, absent a statute or contractual provision to the contrary. Purdy v. Purdy, 715 A.2d 473 (Pa. Super. 1999). Pennsylvania courts will enforce one party’s obligation to pay the other party’s attorney’s fees


PENNSYLVANIA


900200.00001/21138649v1

if the underlying contract provides for such payment. Putt v. Yates-American Mach. Co., 722 A.2d 217 (Pa. Super. 1998).

Jury Waiver Clauses

Are Jury Waiver Clauses enforceable?

In Pennsylvania, the right to a jury trial may be waived by conduct or by express statement. 773 A.2d 1248 (Pa. Super. 2001). The ability of parties to a contract to waive their right to a jury trial was deemed constitutional under the Pennsylvania constitution as early as 1874 and remains the rule today. Krugh v. Lycoming Fire Ins. Co., 77 Pa. 15, 1874 WL 13231 (Pa. 1874).


Are there restrictions to the enforceability of liquidated damage clauses in Pennsylvania?

Parties to a lease agreement are free to limit or alter the amount of damages recoverable under such a contract. 13 Pa.C.S.A. § 2A503. A liquidated damages provision in a lease, however, may only limit damages to an amount or based on a formula that is reasonable in relation to the anticipated harm sought to be remedied. 13 Pa.C.S.A. § 2A504. Failure of a liquidated damages clause to meet the reasonableness requirement relegates the parties to damages available under the Pennsylvania Commercial Code. Id.

Replevin: How does a creditor recover its If the lessor is in default under the lease, the lessor The lessor also has the right to render the leased


PENNSYLVANIA


900200.00001/21138649v1

leased equipment or collateral under Pennsylvania law?

may reduce its claim to a judgment and recover the leased property through judicial process. 13 Pa.C.S.A. § 2A501. Also, the lessor, in the event of default by the lessee, may enforce the lease agreement through self-help. Id. The lessor’s may only exercise its right to self-help if that right is exercised without a breach of the peace. 13 Pa.C.S.A. § 2A525. If the lease so provides, the lessor may require the lessee to assemble the goods at a mutually convenient location. Id.

goods unusable or to dispose of the goods on the lessee’s premises if the lessor does not exercise its removal rights. 13 Pa.C.S.A. § 2A525.

Writs of Attachment:

Is a creditor entitled to seize assets of an obligor or guarantor pending trial?

In Pennsylvania, property may be attached prior to judgment in the manner and to the extent that attachment is otherwise allowed under law. 42 Pa.C.S.A. § 7501. Property exempt from attachment or execution upon a judgment will also be exempt from attachment prior to judgment. Id. See also 42 Pa.C.S.A. § 6321 et seq. (exemptions from execution).

Homestead Law: Is it true in Pennsylvania that an owner of property who resides on the premises has an automatic homestead exemption, and if so, for how much?

No, Pennsylvania law does not contain a homestead exemption.

TEXAS

Glen Nordt COATS, ROSE, YALE, RYMAN & LEE, P.C.

1001 Fannin # 800 Houston, Texas 77002 713-653-7359 (office) 713-651-0220 (fax)

[email protected]

TOPIC ISSUES STATUTES/CASES COMMENTS Agency Disclaimer

Texas law does hold that a party asserting apparent agency cannot do so as a matter of law if the party asserting agency had written notice that the purported agent was not the agent of the purported principal. Thus, such agency disclaimer language should preclude a lessee from successfully asserting a vendor is the agent of the leasing company, absent anything else.

“AS IS WHERE IS”

Texas Courts will enforce this language. At least one Texas Supreme Court case has held that a Plaintiff cannot assert claims predicated upon the Plaintiff’s dissatisfaction with the purchased property, if the contract contains an AS IS WHERE IS clause. Such language, along with standard Article 2 warranty disclaimers, should always be contained in a lease. See Prudential Ins. V Jefferson Associates, Ltd. 896 S.W. 2d 156 (Tex. 1995).

Jury Waiver Texas state courts will NOT enforce a jury waiver provision, as same is unconstitutional under the Texas Constitution. In fact, since such waivers are unconstitutional, a lessee will sometimes argue that the provision is unconscionable along with the rest of the lease contract. Note, however, that Federal Courts in Texas WILL enforce the jury waiver provision.

Key Judgment Enforcement Laws In Texas

A judgment creditor is handicapped by many of the Texas collection laws (which explains why many Texas lawyers are reluctant to take cases on a contingency fee basis). For example, a judgment creditor CANNOT garnish wages, though the same wages can be garnished once they are deposited into the judgment debtor’s bank account (note a creditor can be held liable for the Bank’s attorneys’ fees if there is insufficient funds of the debtor in the debtor’s bank account to cover the Bank’s attorneys’ fees).

In addition, a judgment creditor CANNOT foreclose on a judgment debtor’s homestead, though any second piece of realty, such as investment property, weekend home, etc., is subject to seizure.

Tools of the trade for an individual also are exempt from seizure. Note a business entity, such as a corporation, cannot assert a

TEXAS



[email protected]

homestead exemption, tools of the trade exemption, etc. See Chapter 41.001 et. seq. of the Texas Property Code for a discussion on Texas exemption laws.

Texas law does allow for a receiver to be appointed to take over judgment debtor’s business to varying degrees. The receiver may not take all of the gross income of a debtor to give to the judgment creditor, but can recover some monies. For example, monies that otherwise might have gone to the principals as profit for the month can be seized, but payroll to lessee employees generally would not be.

True Lease v. Sales Device USURY

An entire paper could be devoted to this issue, which goes beyond the scope of this Article. Suffice it to say that under Texas law, if there is a nominal purchase option (a dollar purchase option being the most common type), any lease will probably be held to be a disguised loan. If there is no purchase option, the lease will be construed as a true lease. If the purchase option is a fair market value purchase option, the lease has a much better chance of being held to be a true lease, whereas with a 10% purchase option, the lease may or may not be held to constitute a true lease. At that point, the useful life of the leased equipment becomes a very important factor.

The bottom line is that in order to maximize the chances of having a lease be construed as a true lease in Texas, one should either avoid a purchase option altogether, or only use a fair market value purchase option.

LATE CHARGES: Contractual late charges for overdue payment are generally not held to be usurious, as said late charges do not constitute payment for loan or forbearance of money.

USURIOUS ACCELERATION CLAUSES: It is very easy to have a lease or loan contract be otherwise proper in every respect, only to have the contract held to be usurious due to the acceleration clause. If the acceleration clause effectively would require unearned interest being charged, said clause is usurious.

Example of acceleration clauses held to be usurious: “all payments become immediately due and payable

TEXAS



[email protected]

upon default”; “all payments required under the lease become

immediately due and payable”. Point being, if an acceleration clause requires the lessee/maker

to pay unearned interest, it will be usurious. A poorly worded acceleration clause almost always invokes the more severe penalties under the Texas usury laws, so great care should be taken in drafting said clauses.

Acceleration clauses which Texas Courts have held to be non-usurious include:

“Upon default, the holder may “collect all payments due thereunder”;

“the note calls for “acceleration of all sums herein to be paid”.

That type of language has been held to be lawful in acceleration clauses. See Sinclair v. Mack Truck, Inc. 355 S.W.2d 563 (Tex. Civ. App.-Fort Worth 1962, writ ref’d); Davis v. Volunteer State Life. Ins. Co., 135 S.W. 2d 588 (Tex. Civ. App.-Texarkana 1989, writ ref’d n.r.e.).

Usury continued

The applicable Texas statutes in the Texas Finance Code utilize a very complicated sliding schedule to calculate the maximum lawful interest rate than can be contracted for in a commercial loan. See Section 301.001 et., Seq.Tex,.Fin.Code. . As a practical matter, however, the maximum lawful interest rate in a commercial loan is 18% per annum, IF (and that is a very important “if”) the said interest rate is agreed to in writing. If the interest rate is not agreed to in writing in the four corners of the instrument, then the maximum lawful rate of interest which can be charged is 6% per annum. If a loan is going to be over 6%, it is critical that the interest rate be disclosed in the loan documents, or a lender can be subject to the very harsh penalties found in the Texas usury laws (see below). See Section 302.002 et.seq. of the TexasFinance Code. There are different lawful ways to set forth the actual interest rate in a loan (or a lease held to be a disguised loan). The most simple of

TEXAS



[email protected]

these is to simply disclose the interest rate in the loan or lease document. Many lenders do not wish to do so, for fear the potential borrower will decline to go forward with the loan if the borrower realizes just how high the interest rate will be. The lender can also use time price differential information (see attached sample). This method is the safest means of disclosing the interest rate and/or allowing the borrower to calculate the interest rate himself. Finally, there are Texas appellate court decisions which hold that if the interest rate can be calculated from the information contained in the loan document, then that has the same legal effect as if the interest rate had been specifically set forth. For example, if a commercial lease contract set forth the number of equal consecutive monthly payments, the amount of each payment, and the amount being financed (such as the cost of the leased equipment), then anyone can calculate the interest rate. Texas case law holds that in such a situation, the contract has the same legal effect as if the interest rate had been expressly set forth. See Dunham v. Burns, 901 S.W. 2d 628 (Tex. App. –El Paso 1995, no writ); Preston Farm and Ranch Supply, Inc. v. Biozyme Enterprises, 625 S.W.2d. 295 (Tex.1981). Insuring a creditor meets the guidelines is important, as the Texas Finance Code provides for severe penalties if a usurious rate of interest is charged or contracted for. Penalties for contracting or charging for interest more than double the lawful rate, for example, can result in the entire debt being voided, the creditor can be held liable for the excessive interest charged to the borrower, plus the borrower’s attorneys’ fees. What creditor wants to make a large loan of money, only to then find out the borrower no longer has to pay the loan back, and the creditor has to reimburse the borrower for the excessive interest rate charged, and the borrower’s attorneys’ fees? To avoid this problem, the lender must make certain it discloses the interest rate, and that it is agreed to in writing, if said rate exceeds 6% per annum. If the rate exceeds 18% per annum, the creditor should prepare to be the recipient

TEXAS



[email protected]

of a usury claim. Ways to help avoid a usury claim in Texas include the use of a usury savings clause, especially if accompanied by “spreading” language. See Groseclose v. Rum 860 S.W. 2d 554 (Tex. App. Dallas 1993, no writ); and Pentico v. Mad-Wayler, Inc. et al 974 S.W.2d 708 (Tex. App.-Corpus Christi 1998, pet. Denied). Texas Courts recognize the validity of a usury savings clause. See Woodcrest Assocs., Ltd. v. Commonwealth Mortgage Corp. 775 S.W.2d 434 (Tex. App.-Dallas 1989, writ denied). Note this case contains an excellent recital of Texas usury law. Also, note that Texas law assumes a contract is NOT usurious, and any contract will be strictly construed in the favor of the party defending the usury claim. See Smart V. Tower Land & Investment Co.,597 S.W.2d 333, 340-41 (Tex. 1980). See also Steves Sash Door Co., Inc., v . Ceco Corp. 751 S.W. 2d 473 (Tex. 1988), and Hatzenbuehler v. Call 898 S.W. 2d 68 (Tex. Civ. App.-San Antonio 1995, writ denied). Most importantly, however, is the use of a clause invoking the law of the lender’s state. This tactic assumes that the law of the lender’s state has usury laws more favorable to a lender than those of Texas. Please note that for a loan of $50,000.00 or less, the choice of law provision must be in bold, conspicuous print, or it will not be enforceable. Further, the actual language itself must be in bold, conspicuous print, and not just the subtitle heading up the paragraph such a provision may be in. Frankly, better practice is to always have a choice of law provision in bold, conspicuous print. See Section35.53 of the Texas Business & Commerce Code. In addition, the law of the state being invoked must have sufficient contacts to the transaction. Consider the following scenario. The lessee is in Texas, as is the vendor. The lessor is in Iowa, the lessor makes the credit review and decision to fund the lease in Iowa, the payment to the vendor is funded out of Iowa, and the lessor invoices the lessee each month from Iowa. In that situation, the state of Iowa would almost certainly be found to have sufficient contacts to the underlying

TEXAS



[email protected]

transaction, so that Iowa law would be held to be controlling. On the other hand, if the lease merely stated that the law of the state of any lessor or lessor assignee would be controlling, and a lessor in New Jersey purchased the lease from the Iowa lessor, the choice of law provision would probably NOT be enforceable. In that event, Texas law would control.

Waiver of Consequential Damages

Texas Courts will also enforce a contract clause waiving and/or limiting consequential or special damages. This type of language is very helpful in limiting the damages being asserted by a borrower in any sort of lender liability type of claim or defense.

Waiver of Notices Texas law specifically requires each notice being waived, such as notice of demand, notice of intent to accelerate, etc., actually be set forth in the contract as being waived. The Texas Supreme Court has held that a clause which waives all notices to be required under Texas law are hereby waived, as being overbroad and is insufficient.

Warehouseman’s Liens

As in many states, a warehouseman will generally have a priority lien. The warehouseman must, however, notify any party with an interest in the property that he has same within certain specific time periods. Should he fail to do so, a secured creditor, for example, would be able to argue said creditor should not be liable for storage for any period of time beyond the notice date.

C. Richard McQueen GREENE, BUCKLEY, JONES & MCQUEEN 2970 Clairmont Road, Suite 1010 Atlanta, GA 30329 Tel: 404-420-5913 Fax: 404-522-3677 Email: [email protected]

James H. Mobley, Jr.MOBLEY & MOBLEY

5040 Roswell Road, Suite 200Atlanta, GA 30342Tel: 404-255-1666Fax: 404-257-1248

Email: [email protected]

© 2003, C. Richard McQueen & James H. Mobley, Jr., Atlanta, GA. All rights reserved.

L:\309-Legal Forum\2003\Conversion\50 State Compendium - A Sneak Preview 14.doc

-1-

TOPIC ISSUE STATUTES/CASES COMMENTS Alternative Dispute Resolution

Is an agreement to arbitrate disputes enforceable?

The Georgia Arbitration Code provides that a provision in a written contract to submit any controversy thereafter arising to arbitration is enforceable and confers jurisdiction on the courts of Georgia to enforce it and to enter judgment on any award. O.C.G.A. § 9 9-3. See also Saturna v. Bickley Construction Co., 252 Ga. App. 140, 555 S.E. 2d 825 (2001). This general rule does not apply to certain agreements, including agreements relating to medical malpractice claims, collective bargaining between employers and labor unions, contracts of insurance, consumer financing in which the amount of the indebtedness is $25,000 or less at the time of execution, the purchase of consumer goods (as defined by the Uniform Commercial Code), contracts involving consumer transactions, and personal injury or death claims based on a tort. O.C.G.A. § 9-9-2.

Attorney Fees

When are attorney fees recoverable?

An obligation to pay attorneys’ fees in any note or other evidence of indebtedness is valid and enforceable and can be collected as part of such debt if it is collected “by or through an attorney” after maturity, but subject to the following provisions: (1) the amount cannot exceed 15% of the principal and interest owing; (2) reasonable attorneys’ fees is construed to mean 15% of the first $500 of principal and interest and 10% of the balance; (3) written notice must be given to the obligated party stating that the provisions concerning the payment of attorneys’ fees in addition to the principal and interest will be enforced and that the obligated party has ten days from the receipt of the notice to pay the debt without being required to pay the attorneys’ fees and if such obligation is paid within the ten days, then the obligation to pay the attorneys’ fees shall be null and void. O.C.G.A. § 13-1-11. See also Trust Associates v. Snead, 253 Ga. App. 475, 559 S.E. 2d 502 (2002), where the Georgia Court of Appeals held that the purpose of a demand notice is to notify the holder or his agent who may receive payment







-2-

TOPIC ISSUE STATUTES/CASES COMMENTS for the specific indebtedness past due, which must be paid during the ten day period to avoid the imposition of liability for attorneys’ fees.

Foreign Corporations

Is qualification required for a valid suit in Georgia?

A foreign corporation transacting business in this state without a certificate of authority (i.e., without qualifying by filing the necessary applications with the Georgia Secretary of State) may not maintain a proceeding in any court in this state until it obtains a certificate of authority. O.C.G.A. § 14-2-1502(a). See also: Manufacturers Nat. Bank of Detroit v. Tri-State Glass, Inc.., 201 Ga. App. 253, 410 S.E. 2d 808 (1991). The same rule applies to the successor to a foreign corporation that transacted business in Georgia without a certificate of authority, and also the assignee with a cause of action arising out of that business, unless before the commencement of the proceeding the foreign corporation or its successor obtains a certificate of authority. O.C.G.A. §14-2-1502(c). Even though a foreign corporation may not have obtained a certificate of authority, such failure does not impair the validity of its corporate acts or prevent it from defending any proceeding in the state of Georgia. O.C.G.A. § 14-2-1502(d). If a foreign corporation does not obtain a certificate of authority within thirty calendar days after the first day it transacts business in the state of Georgia, the foreign corporation is liable for a civil penalty payable to the Georgia Secretary of State in the amount of $500 for transacting business in Georgia without a certificate of authority. O.C.G.A. § 14-2-1502(b).

The distinction between “maintaining” a proceeding under O.C.G.A. § 14-2-1502(a) and “defending any proceeding” under O.C.G.A. § 14-2-1502(c) is determined upon the basis of whether affirmative relief is sought. A non-qualified corporation may interpose any defense or permissive or mandatory counterclaim to defeat a claimed recovery, but may not obtain an affirmative judgment or decree based on the counter-claim unless it has obtained a certificate of authority.

Forum Selection

Can the parties agree to subject matter jurisdiction by a Georgia court?

Parties may not give jurisdiction to a court by consent, express or implied, as to the person or subject matter of the action. However, lack of jurisdiction of the person may be waived insofar as the rights of the party are concerned, but not so as to prejudice third persons. O.C.G.A. § 15-1-2. See also: In interest of A.D.B., 232 Ga. App.

The legislative intent behind the statute preventing parties from giving jurisdiction to a Georgia court is to prohibit parties from conferring personal or







-3-

TOPIC ISSUE STATUTES/CASES COMMENTS 697, 503 S.E. 2d 596 (1998), where the Georgia Court of Appeals held that the consent of the parties cannot confer subject matter jurisdiction upon a Georgia court; and also Bradley v. British Fitting Group, PLC, 221 Ga. App. 621, 472 S.E. 2d 146 (1996), where the Georgia Court of Appeals held that parties cannot determine a Georgia court’s subject matter jurisdiction by contract.

subject matter jurisdiction if none existed by law, but the statute does not prevent a party from waiving personal jurisdiction and consensually bringing itself within the territorial limits of a particular Georgia court through the use of a forum selection clause.

Interest & Usury

What is the legal rate of interest in Georgia?

The legal rate of interest is 7% per annum simple interest where the percentage rate is not established by a written contract. However, where the principal amount involved is more than $3,000 but less than $250,000, the parties may establish by written contract any rate of interest expressed in simple interest terms subject to certain limitations for a refund of unearned interest upon acceleration. O.C.G.A. § 7-4-2(a)(1)(A). Where the principal amount is $250,000 or more, the parties may establish by written contract any rate of interest expressed in simple interest terms. O.C.G.A. § 7-4-2(a)(1)(B). Where the principal amount involved is $3,000 or less, the rate of interest cannot exceed 16% per annum simple interest on any loan. O.C.G.A. § 7-4-2(a)(2). In connection with any retail installment contract concerning a manufactured home with a cash sale price of more than $3,000, or a motor vehicle where the amount financed is $5,000 or more, the parties may agree in writing to a payment of a finance charge. O.C.G.A. § 7-4-3(a). The rate of interest on commercial accounts cannot exceed 1½ % per month, calculated from the due date until paid. “Commercial Account” is defined as an obligation arising out of a transaction concerning goods or services other than a “retail installment transaction.” O.C.G.A.







-4-

TOPIC ISSUE STATUTES/CASES COMMENTS § 7-4-16. All judgments in the state of Georgia bear interest upon the principal amount recovered at the rate of 12% per annum unless the judgment is rendered on a written contract or obligation providing for interest at a specified rate, and if so, the judgment shall bear interest at the rate specified in such contract. O.C.G.A. § 7-4-12. If any person charges more than the legal rate of interest in Georgia the entire interest shall be forfeited. O.C.G.A. § 7-4-10(a). See also Aikens v. Wagner, 231 Ga. App. 178, 498 S.E. 2d 766 (1998), where the Georgia Court of Appeals held that where a promissory note clearly and unequivocally calls for payment of interest at an unlawful rate, such interest rate is usurious and all interest charged must be forfeited; and also, Cornelius v. Auto Analyst, Inc., 222 Ga. App. 759, 476 S.E. 2d 9 (1996), where the Georgia Court of Appeals held that the penalty for charging a usurious rate of interest is not the forfeiture of principal, but rather the forfeiture of interest.

Liens on Personal Property

When does a possessory lien arise against personal property?

All mechanics have a special lien on personal property for work done and materials furnished in manufacturing or repairing personal property, and also for storage of the personal property beginning thirty days after written notice to the owner that storage charges are accruing and the daily dollar amount of such charges. These special liens may be asserted by retention of the personal property and shall be superior to all liens except liens for taxes and such other liens as the mechanic may have had actual notice of before the work was done, or material furnished. O.C.G.A. § 44-14-363(a). If possession of the personal property is surrendered to the debtor, the mechanic must record his claim of lien within 90 days after the work is done and the material is furnished except that in the case of repairs to aircraft or farm machinery, the claim of lien must be







-5-

TOPIC ISSUE STATUTES/CASES COMMENTS recorded within 180 days after the work is done and the material is furnished. The lien must be recorded in the office of the superior court of the county where the owner of the property resides. O.C.G.A. § 4-14-363(c)(1). Although the statute providing for a mechanics’ lien upon personal property gives such lien priority over other liens, such lien does not have priority over legal title in another. See Manchester Motors v. Farmers & Merchants Bank of Manchester, 91 Ga. App. 811, 87 S.E. 2d 342 (1955). See also Nations Bank of Tennessee, N.A. v. Hardwick Carpets Intern Inc., 233 Ga. App. 894, 506 S.E. 2d 174 (1998), where the Georgia Court of Appeals held that the bank’s perfected security interest in inventory of a carpet manufacturer had priority over a third party’s later-acquired mechanics’ lien.

50 State Compendium-A Sneak Preview - Equipment … State Compendium-A Sneak Preview Marshall F....

Documents

Transcript of 50 State Compendium-A Sneak Preview - Equipment … State Compendium-A Sneak Preview Marshall F....