CLFP EXAM - Leasing Law

1. What is Statutory Law?: Answer- Includes law enacted by legislative bodies such
as state legislatures and US Congress. The Uniform Commercial Code or "UCC" is a body
of the state statutory law.
2. What is Regulatory Law?: Answer- Consists of regulations adopted by public
bodies. Examples of regulatory law are regulations issued by the Internal Revenue Service
(IRS) or the Securities Exchange Commission (SEC). Generally regulatory laws are not
binding up the courts in the manner or statutory laws, but may be subject to broader
interpretation
3. What is Federal Law?: Answer- Encompasses laws adopted by the US Congress
such as the IRS and Bankruptcy Code. Although federal case precedent may be important
in interpreting these and other statutory laws, federal common law generally has little
application to equipment leasing and finance transactions
4. What is State Law?: Answer- General more relevant to the day to day leasing
operations. State law include the UCC and cases interpreting it. Particular sate statutory
tax laws are also important in leasing consideration
5. What is Conflicts of Law?: Answer- Refers to inconsistencies in laws from state
to state. Because state laws are not uniform, the concept of "conflict of laws" often comes
into play. This is the concept under which a court chooses to apply the law of one state
over another. For example,, the usury law of a given sate my hold a lease unenforceable,
while the law of another state will allow it to be enforced as written
1/6
6. What is "choice of law" provision?: language added to lease documents in which
the lease states that the law of a particular state will be applied in any dispute regarding the
lease. Generally speaking the courts uphold the choice of law if the overall transaction
bear some "reasonable" relation" to the states law is chosen
7. What is Contract Law?: Generally a matter of state law. Although certain statues are
important to contract enforcement, case law plays a major role in each state.

Requirements for a "valid enforceable contract" include "an offer and acceptance
evidencing a mutual agreement on principal terms and consideration, or something of
value, given or promised by each party."
8. What is Capacity?: Each party must be legally able to enter into a contract.
9. What is Legality?: A requirement often used to prohibit enforcements of secured
financings that exceed the legal usury limit, but also available to prohibit leases of
equipment used in illegal activity, such as gambling where it is not permitted by applicable
law
10. What is Statute of Frauds?: Provides that certain types of contracts are not
enforceable unless in writing. Example under UCC, a lease contract with payments in
excess of $1,000 are not enforceable unless written.

2/6
11. What is Bundle of Rights Concept?: the parties have identified specific rights
listed in the contract each of which is legally enforceable. It is not uncommon for each
party's rights to conflict in some respect with others - thus legal analysis/litigation results
12. Where is the legal definition of a lease found?: UCC Article 1-201. Article 2A
for true lease. Article 9 for secured loan
13. When is the first a transaction create a security interest?: If the considera-
tion 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

1.) the term of the lease is equal to or greater than the remaining economic life of the
goods
2) the lessee is bound to renew for economic life or own the property
3.) the lessee has the option to renew the lease for no or nominal consideration upon
compliance with the lease
4.) the lessee has the option to own the goods for no or nominal consideration upon
compliance of the lease
14. A transaction does not create a security interest merely because of
what?-
: 1.) the present value of the consideration the lessee is obligated to pay the lessor for the
right of possession and use is substantially equal to or greater than the FMV at the time the
lease was entered
2.) the lessee assumes the risk of loss of the goods or agrees to pay taxes, insurance,
filings, maintenance etc related to the property
3.) the lessee has the option to renew or own
4.) The lessee has the option to renew for a fixed rent equal to or greater then the FMV at
the time of the option
3/6
5.) The lessee has an option to become the owner of the goods at a price >= FMV at the
time of the option
15. When is a lease renewal not nominal?: 1.) when the option to renew is granted
the rent is stated to be fair market rent determined at the time of the option
2.) when the option to renew is granted the price is stated to be fair market value at the
time of the option
16. How are "reasonably predictable" and "useful economic life"
determined?-
: with reference to the facts and circumstances at the time the transaction is entered.
17. What is Present Value?: the amount as of the date of one or more future payments
discounted to the certain date. If not specified by the contract, the discount rate is
determined by the courts as a commercially reasonable at the time the transaction was
entered.

4/6
18. How is "residual position" used by courts to designate lease vs. loan?: If
the lease allows the lessee to purchase the asset for substantially less than the FMV, the
lease will be deemed a secured loan
19. What are other consideration the courts use in determining lease vs.
loan treatment?: 1.) length of term vs. economic useful life
2.) responsibility to pay state and local tax, 3.)
operating expenses and insurance
4.) benefit and burden of ownership
20. Contrast True Lease/Secured Loan - Bankruptcy: Generally, a lessor under a
true lease has better rights to recover equipment in a bk.
21. Contrast True Lease/Secured Loan - Interest/Usury: Interest is charged on a
secured loan, but not on a lease. Therefore a true lease may avoid usury laws. True lease
has rent payments whereas a secured loan has interest/principal payments.
22. Contrast True Lease/Secured Loan - Collateral: It is incorrect to referred to
leased equipment as collateral but it is appropriate for a secured loan. Both require good
maintenance of the equipment. Lease has return provisions
23. Contrast True Lease/Secured Loan - Liability: Generally speaking their is
more exposure to the lessor on a true lease for liability
24. Contrast True Lease/Secured Loan - UCC Rights: UCC distinguishes true
lease and loans in several ways. True Lease = UCC 2A. Secured Loan = UCC 9. In a
lease, lessor owns equipment. In a loan, the lessee owns the equipment and the lender
has security interest
25. Contrast True Lease/Secured Loan - Filing/Title: It is not required for a lessor
to file a UCC for a true lease. Leases are not governed by UCC Article 9 and there is not
filing requirement under article 2A.

5/6
26. Contrast True Lease/Secured Loan - Residual: With respect to vehicles, air-
craft and other titled equipment true leases require the lessor to be shown as the owner.
Whereas secured loans require notation on certificate of title of the lender's interest.
27. What rights does a lessee enjoy in a True Lease?: Use and enjoyment of the
leased equipment free from interference of the lessor as long as the lessee has not
defaulted.
28. What rights does the lessor enjoy in a True Lease?: The rights of ownership
including tax benefits and the right to increase in value
29. What rights does a lessee enjoy in a Secured Loan?: Right to purchase
the equipment at the end of the lease. The lessee also has rights to the asset
appreciation
30. What rights does a lessor enjoy in Secured Loan?: Rights to rents, indemni-
fication and other benefits stated in the lease document.

6/6
31. What is the UCC?: A body of laws proposed by the National Conference of
Commissioners on Uniform State Laws and the American Law Institute
32. What is significant about UCC Article 2?: Deals with the sale of goods which
are generally described as tangible personal property. Article 2 is relevant when the lessor
may be the supplier or vendor of the equipment. Article 2 offers "implied warranties"
where the goods are assumed fit for use for ordinary purposes.
33. What is significant about UCC Article 9?: Deals exclusively with the creation
of security interest in personal property. It has not impact on leases, just secured loans.
34. What is a Financing Statement?: With Secured Loans, lending files a UCC -1
financing statement with the SOS publicly demonstrate a lenders security interest in the
asset. Includes name and address of the lender and debtor and a description of the
equipment.
35. What are some key points in dealing with Article 9.: 1.) Article 9 does not
apply to True Lease
2.) There is a good reason to file a UCC on a true lease as the filing itself may avoid an
examination of whether or not the lease is actually a secured loan. This helps in BK
proceedings. Helps avoid unsecured status.
3.) Purchase Money Security Interest are given 20 days to file UCC
4.) UCC do no supersede all types of claims including states, mechanic and landlord liens.
5.) UCC are not used for aircraft or motor vehicles covered by certificates of title unless
held in inventory.
6.) UCC vary state to state so local laws need be examined. 7.)
Secured party = lender. Debtor = borrower.
36. What is significant about Article 2A?: Article 2A deals only with true leases.
Similar to 2, includes implied warranty.

7/6
37. How does Article 2A define Fiance Lease?: Refers to a lease which is 1.) a true
lease in which 2.) lessor is not the manufacturer or vendor of the property. 3.) the lessor
does not select the equipment or lease it from inventory 4.) lessor makes sure lessee is
apprised of its rights with the supplier
38. Why is Finance Lease significant to the lessor?: 1.) all warranties offered
by the supplier are deemed to pass to the lessee automatically 2.) hell or higher water
clause which indicates the lessee must pay the payments regardless of the performance
of the equipment.
39. What is bankruptcy?: Protection offered to individuals, corporations and other
legal entities giving them time to reorganize their debts. May be either "liquidating" or
"reorganizing"

8/6
40. What is Chapter 7 Bankruptcy?: A liquidating bankruptcy in which the entity
will stop operating and it assets will be sold to pay creditors.
41. What is Chapter 11 Bankruptcy?: A re organizational bankruptcy in which the
debtor has hopes continuing to do business and returning to profitability. May propose
"plan for reorganization" that provides for a liquidation of business.
42. What is Chapter 9 Bankruptcy?: Applies to government bankruptcies.
43. What is Chapter 12 Bankruptcy?: Applies to family farm bankruptcies.
44. What is Chapter 13 Bankruptcy?: Applies to individual bankruptcies.
45. What is Debtor in Possession?: In Chapter 11 bk, debtor stays in control of its
business
46. Describe the Bankruptcy Procedure.: 1.) filing petition (voluntary or involun-
tary)
2.) Automatic Stay - prohibit action against debtor other than through the court.
3.) If Chapter 11, prepare Plan of Reorganization which outlines repayment of debt. 4.)
Assumption/Rejection of debt. Submitted prior to Plan of Reorganization, if accepted must
be paid by debtor per agreement. If rejected, lessor can recover equipment;
47. What is a Relief from Automatic Stay?: During the Automatic Stay portion of
bankruptcy proceedings, a Relief from Automatic Stay must be filed and approved by the
court in order to take action on a asset.
48. What is a Proof of Claim?: Claim for back rent and other charges due before the
petition date should be made via a Proof of Claim. Must be made prior to "bar date"
49. What are Preferences in Bankruptcy?: Payments made within 90 days prior to
filing bankruptcy petition (one year if payments made to debtor owner). Such payments
may need to be returned to bankruptcy estate for apportionment among creditors.

Timely payments made in ordinary course of business are not considered prefer- ences
9/6
50. What are the requirements of a Foreign Corporation: Corporations formed
under other states (foreign corporation) must register and pay taxes within the state.
Generally modest filing fee (based on the amount transacted annually) and annual report is
required.
51. What is a Certificate of Authority?: For Foreign Corporations (incorporated in a
different state), a Certificate of Authority is often required to be obtained from the local
state SOS authorizing them to do business in the state.

10 /
52. What is a Registered Agent?: When filing to do business in a particular state, a
"registered agent" is typically required - perhaps a local lawyer or third party service to
receive services of law suites against the foreign corporation.
53. What are some key concerns in determining "doing business" in a
partic- ular state?: 1.) the presence of an office or place of business;
2.) the presence of an agent employed by the foreign corporation
3.) Foreign corp representatives routinely visit the sate renting hotel rooms etc.
4.) the value of the property owned by the foreign corporation and the volume of the
business transacted.
54. What are a Lessor's disadvantages for failing to "qualifying to do
busi- ness" in a state?: 1.) potential penalty
2.) may not sue or use courts within the state
3.) both can be cured by retroactively filing to do business (and pay retroactive fees) in the
state
55. What are a Lessee's disadvantages for failing to "qualifying to do
busi- ness" in a state?: 1.) cannot obtain written confirmation for teh state that it
has legal right to transaction business in the state, has not dissolved or failed to pay
taxes
2.) certain legal rights in a foreign foreign jurisdiction may be impaired
56. What tax consideration must be made in multi state operations?: 1.) Prop-
erty tax is property is located regardless of whether the owner is registered to do business
2.) Sale & Use tax are payable on equipment purchased in the state
3.) Income tax are generally payable whenever a lessor's business is generated
57. What is unique about California licensing requirements?: 1.) California Fi-
nance Lender Law (CFLL) contains Division 9 of the California Finance Code which

11 /
requires lenders to be licensed for transaction business and defines finance lender as "any
person who is engaged in the business of making consumer loans or making commercial
loans"
58. Who is covered by CFLL requirements?: Brokers and originators defined as
"any person engaged in the business of negotiating or performing an act as a broker in
connection with loans made by a finance lender
59. What are the requirements to qualify CFLL licnese?: 1.) net worth of $25,000
2.) maintain $25,000 surety bond
3.) lack of criminal history
4.) lack of a record of non-compliance with regulatory requirements.

12 /