We're Not Liable, We're the Assignee!
by BOL Guru Sam Ott
That's what the bank argued when it was sued by the lessee of an automobile whose lease had been assigned to the bank. Read what the Court decided and what a financial institution can do to protect itself from similar claims in the recent California case of
Bescos v. Bank of America, Court of Appeal, State of California, Second Appellate District, Division Two.
The plaintiff, Bescos, leased an automobile from a dealer who immediately assigned the lease to the bank. The plaintiff's suit alleged that the dealer misrepresented the transaction and was liable for damages. The plaintiff also contended that the bank should be considered a "lessor" under state and federal statutes and should be liable for the misrepresentations even if they were unknown to the bank at the time the assignment was made. The suit sought the rescission of the lease agreement, restitution of all consideration paid by the plaintiff and penalties from both the dealer and the bank.
The case was settled between the plaintiff and the dealer. The claims against the bank were heard. The trial court found the bank had no liability and granted the bank's motion for summary judgment. The plaintiff appealed.
The Appellate Court reviewed the arguments presented to the lower court. It noted the bank contended that it was not responsible because it had no knowledge of the misrepresentations and they were not apparent on the face of the instrument. The Court observed that the bank was not involved in the negotiation of the lease agreement and had no contact with the plaintiff prior to the assignment of the lease. The lease agreement was submitted by the dealer to the bank for review and the bank agreed to accept the assignment. The bank then sent a welcome letter and regular monthly statements to the plaintiff.
The plaintiff agreed that the bank's view of the facts was correct, but argued that the bank was not a holder in due course of the lease agreement and stood in the shoes of the assignor (the dealer). It was also contended that the assignment was a delegation of duties and the bank's acceptance was a promise to perform under the terms of the agreement. In addition, the plaintiff alleged that under federal and state law, the holder of a lease agreement is liable for the lessee's claims against the lessor up to the amount owed at the time of the assignment. The plaintiff also contended the bank was liable because it furnished the lease forms to the dealer and the forms omitted a notice required by the federal law. In addition, the lease agreement stated that the consumer lease disclosures were being made on behalf of a subsidiary of the bank to which the lease would be assigned upon the lessee's signature.
The Court noted that if the bank was considered a lessor rather than an assignee, its liability would include any dealer misstatements which were in violation of disclosure requirements. Such a determination would result in the bank being jointly and severally liable with the dealer for actual damages, as well as costs and attorney fees.
The Court determined the Regulation M was the applicable regulation which determined whether the bank was simply an assignee or a lessor. The Commentary to Regulation M provides at section 213.2(h) (3) that "an assignee may be a lessor for the purposes of the regulation in circumstances where the assignee has substantial involvement in the lease transaction". The Court noted it was undisputed that the bank provided the credit application and the lease forms to the dealer, which were completed by the dealer and the plaintiff without any involvement from the bank. The Court held that the additional fact that the bank reviewed the completed application and lease agreement did not amount to "substantial involvement in the lease transaction". The provisions of Regulation M did not apply and the decision of the lower court that the bank was not a lessor was upheld.
In addition, the Court considered the allegations that lease agreement was in violation of the Federal Trade Commission Act (FTCA) due the lack of the following notice which is required to be provided in connection with any sale or lease of goods or services to consumers, in or affecting commerce as defined in the FTCA.
Notice
Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of the goods or services obtained pursuant hereto or with the proceeds hereof, recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.
The Court held that the FTCA defines "commerce" as interstate commerce. The lease transaction and the assignment to the bank occurred entirely in California. The fact the vehicle that was the subject of the lease agreement may have been manufactured outside California was irrelevant. The lease did not therefore qualify as a "consumer credit contract" and the FTCA did not apply. The notice was not required.
The Appellate Court therefore affirmed the summary judgment granted to the bank and judgment of dismissal.
Summary
In the case discussed above, the bank was not held liable as a "lessor" due to the fact the bank did not have "substantial involvement" in the lease transaction.
Let's review the bank's involvement. It provided the credit application and the lease agreement to the dealer. The lease agreement disclosed that the lease, if signed by the lessee, would be assigned to a subsidiary of the bank. The bank sent a welcome letter and monthly statements to the lessee. In short, the bank had no involvement in the transaction until it had been agreed to by the parties (the lessee and the dealer). The Court seemed to indicate that any involvement at all in the negotiation process could have made the bank potentially jointly and severally liable with the debtor.
If your financial institution takes assignments of lease agreements, you may want to review your policies and procedures regarding your actions, if any, in the negotiation process. Based on the decision in this case, financial institution personnel should refrain from any discussions with a potential lessee regarding a lease agreement which may be later assigned to the institution.
In addition, the Court determined the failure to provide the FTC notice was not a violation because the lease transaction, including the assignment to the bank, took place entirely in one state. By inference, if one or more of the parties are located in different states, the failure to provide the notice would have been a violation of the FTCA. So, in addition to reviewing your assignment procedures, check your assignment file to see if there are out of state parties involved in the transactions and if the notice was provided.
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