I'd like to expand on my earlier post regarding equipment leasing agreements.
On Monday, May 2, 2005, Honorable Jonathan N. Harris of the Superior Court of New Jersey, Law Division, Bergen County issued two opinions which should be carefully reviewed by companies leasing goods in the Garden State.
New York Career Guidance Services, Inc. v. Wells Fargo Financial Leasing Systems, Inc., et. al.
In this matter, the trial court provided guidance as to when a late payment is permissible and when it is not. In this important case the Plaintiff leased a Gateway computer from the defendant for $53.64 per month. The written lease agreement set forth that the Plaintiff would have to pay a $50.00 penalty for each late lease payment. The trial court set forth a test to determine when a penalty provision was an unconscionable business practice in violation of the New Jersey Consumer Fraud Act. The trial court stated, "in New Jersey, liquidated damages, such as late fees, default interest rates, and prepayment premiums are subject to the test of reasonableness, this is , whether the stipulated damage clause is reasonable under the totality of the circumstances." The circumstances a court should examine in determining whether or not a liquidated damage clause is reasonable are: (1) if a statute governs the relationship, what does that statute say with regard to liquidated damage clauses; (2) what is the common practice in the industry; (3) the penalty compared to the monthly lease payment.
Although the New York Career Guidance Services' Court stated that liquidated damage clauses are presumably reasonable when they are between sophisticated parties it reviewed the totality of the circumstances and found that a $50.00 penalty clause for a $53.64 monthly lease payment was unreasonable. The trial court's holding was based upon the mathematics of the case alone. The trial court appeared offended that the penalty was ninety-plus percent higher than the monthly installment. As a result of the same and because the trial court found that the Plaintiff met its burden of satisfying the requirements for class certification (numerosity, commonality, typicality, adequacy of representation, predomerance of common issues, and superiority) the trial court certified a class action against the defendant.
Leasing companies who engage in business in the State of New Jersey need to make sure that their liquidated damage clauses are not considered penalty provisions. If the leasing company is doing business with the run of the mill consumer they must be more careful to make sure that the liquidated damage clause is clearly set forth in a conspicuous place in the lease and that it be reasonable. This case also illustrates that leasing companies need to be cautious when requested liquidated damage clauses from sophisticated businesses. Those clauses must be reasonable under the circumstance. If they are not your company may be exposed to damages pursuant to the New Jersey Consumer Fraud Act.
Bradstreet Personal Group, et. al. v. Wells Fargo Financial Leasing, et. al.
In this matter, the trial court considered whether or not a leasing company engaged in the process of "evergreening" had violated the New Jersey Consumer Fraud Act. This case involved a lawsuit by a number of companies who leased commercial equipment. Each of the written lease agreements contained clauses which automatically renewed the equipment leases if the lessees failed to provide timely notice of intent to purchase the equipment or return it to the lessor.
Although the trial court concluded that businesses leasing commercial equipment are consumers under the New Jersey Consumer Fraud Act, it held that the Plaintiffs could not maintain that cause of action against the lessor. The reason for the same was that the Plaintiffs admitted that they never reviewed the lease agreement which set forth that the lease would automatically renew if the lessor did not give exactly 90 days notice. One important element to maintain an action of Consumer Fraud is to be able to prove that the defendant mislead the Plaintiff. In this case, the Plaintiff could not show that they were mislead because the unread portions of the leasing agreement would have revealed the existence of the clauses the Plaintiffs claim are in violation of the Act.
Despite the fact that the trial court found that the practice of evergreening is not a per se violation of the New Jersey Consumer Fraud Act, leasing companies should be weary before they engage in such practices. It is strongly recommended that the leasing contract set forth in bold, large type print that the lease will automatically renew if the lessee does not notify the lessee by a date certain. It is also recommenced that the lessee initial that clause.
In the May 20th edition of the Philadelphia Business Journal Timothy Duggan, Chair of Stark & Stark's Bankruptcy & Creditor's Rights group, discussed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In the article, Mr. Duggan questions how the state of the economy will factor into the passage of this new law and predicts an initial downturn in the credit-card industry as a result of a spike in consumer filings prior to the new law's effective date.
