Lessor Under a Finance Lease Liable for Fraud in Procuring the Finance Lease by Misrepresentation
May 16, 2005
Michael Weissman - Chicago
In Eureka Broadband Corporation v. Wentworth Leasing Corporation, 400 F.3d 62 (1st Cir. 2005) an equipment lessee, Eureka Broadband Corporation (Eureka), sued a finance lease lessor, Wentworth Leasing Corporation (Wentworth), for fraud, breach of contract and unjust enrichment. Eureka prevailed.
Eureka, an installer of fiber optic systems in large office buildings, needed to purchase equipment for its business and Wentworth offered to facilitate acquisition of the equipment through a finance lease. After Eureka identified what it needed in one lease transaction, Wentworth agreed to purchase it from CopperCom, Inc. (CopperCom) for $841,000 and lease it to Eureka for a rental of $22,486 for 48 months. At lease termination, Eureka had an option to purchase the equipment.
In order to activate this first of two leasing transactions, Wentworth required Eureka to pay a commitment fee of $22,486 and to pay a security deposit of $88,472.
A second lease transaction was initiated in which some of the equipment was provided by CopperCom and some by Marconi Communications, Inc. (Marconi). In this case, the monthly rental was $17,057 and the security deposit was $51,171.
In each instance Eureka accepted delivery of the equipment.
On December 22, 2001, CopperCom billed Wentworth for the equipment it delivered to Eureka in connection with the first lease and seven days later it billed Wentworth for the equipment it delivered to Eureka in connection with the second lease. Marconi, on the other hand, did not bill Wentworth but, rather, billed Eureka.
Eureka began making monthly lease payments to Wentworth but soon was being dunned by both CopperCom and Marconi because Wentworth had not paid either of them. Eventually, Eureka ceased making lease payments to Wentworth.
When Marconi sued Eureka for the purchase price of the equipment, Eureka settled by returning the equipment and paying $180,000. Eureka also settled with CopperCom returning CopperCom’s equipment and making a small additional payment. Thereafter, Eureka sued Wentworth demanding the return of all rental payments it had made.
Wentworth did not challenge Eureka’s claims with respect to the Marconi equipment. Because Marconi had never invoiced Wentworth, there was no sale of equipment to Wentworth and no equipment for which rental charges could be made. As to this equipment, Eureka was declared entitled to a refund of all rentals paid to Wentworth.
As to the CopperCom equipment, Wentworth contended that it could not be sued for common law fraud because the Uniform Commercial Code preempted common law actions for fraudulent inducement to enter into a contract. The court quickly disposed of that assertion saying that nothing in the Code preempts common law actions for fraudulent misrepresentation.
And as to availability of a remedy under state common law, the court found that all the necessary elements, i.e., a false representation of a material fact made to induce the other party to act upon it, reasonable reliance on it and damages sustained as a result, were present in this case. The court also made this observation: “… in the context of a finance lease transaction, a finance lessor implicitly represents both its ability and its intention to pay for the goods to be leased.”
Insofar as Eureka’s remedy was concerned, the court rejected Wentworth’s argument that Eureka could not withhold rent payments because of the “hell or high water” clause in the lease. Although recognizing the impact of the “hell or high water” clause, the court noted that there is an exception for cases of fraud wherein one of the available remedies is cancellation of the lease. The court stated that when Eureka elected to cancel the leases, it “… discharged all remaining executory obligations of both parties, including any obligation to pay rent.”
And finally, the court held that the damages recoverable by Eureka ($168,669) were the aggregate amount of the rent paid to Wentworth ($163,601) plus some incidental damages. Even this did not make Eureka whole since it had incurred litigation costs and paid Marconi $180,000 to settle the Marconi lawsuit.
What’s the point?
Equipment lessors in finance leases implicitly warrant their ability to acquire and pay for the leased goods. Fraud by such lessors
permits lessees to cease making lease payments and cancel their leases.
For more information, e-mail Michael L. Weissman at
michael.weissman@hklaw.com or call toll free, 1-888-688-8500.