“Hell or High Water” Obligations of Lessees in Finance Leases
By In Walker v. Frontier Leasing Corp., 2010 WL 1221413 (Tenn. Ct. App. Mar. 30, 2010), the Court held that it could not rescind a finance lease based solely on fraud on the part of the supplier, even if the supplier fraudulently induced the lessee to sign the Finance Lease, because lessees must perform finance leases “come hell or high water.” This ruling was based on “unique law applicable to finance leases,” as defined in T.C.A. § 47-2A-103(g). This result encourages entities to acquire and finance machinery and equipment without worrying that the lessee will be able to stop paying and blame it on the equipment.
According to the Court, the “hell or high water” obligation comes from a part of the UCC, codified at T.C.A. § 47-2A-407 (2001), which states, in pertinent part, as follows:
(1) In the case of a finance lease that is not a consumer lease the lessee’s promises under the lease contract become irrevocable and independent upon the lessee’s acceptance of the goods.
(2) A promise that has become irrevocable and independent under subsection (1):
(a) is effective and enforceable between the parties, and by or against third parties including assignees of the parties; and
(b) is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.
The court observed that while, upon acceptance of the goods, the lessee is irrevocably bound to make the payments, the lessee is not without remedy. The lessee retains the right to proceed against a supplier for any defects in the goods or wrongdoing on the part of the supplier. This opinion is also of interest for its discussion of pleading standards for both fraud and agency, which, while it does not break new ground, contains a concise recapitulation of the state of the law.
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